The State Strikes Back: The End of Economic Reform in China.

The State Strikes Back: The End of Economic Reform in China?

Nicholas R. Lardy

Washington, D.C., Peterson Institute for International Economics, 2019, 172 pp.

The fast-paced, uncertain relationship between the United States and China makes it difficult for anyone to write a book depicting how that relationship will evolve, even in the short run. In 2014, Nicholas Lardy, one of America's top experts on China's economic liberalization since 1978, was optimistic about the rise of China's private sector; today he is less so.

In his 2014 book, Markets over Mao: The Rise of Private Business in China, Lardy saw a vibrant private sector gaining on a largely stagnant state sector, especially in terms of returns on capital. The market, not the state, was on the rise. Consequently, private-sector firms accounted for nearly 70 percent of GDP by 2012.

That picture changed dramatically after Xi Jinping took power in late 2012 as head of the Chinese Communist Party (CCP) and became president in 2013. While preaching reform, Xi has consolidated his authority by being crowned "president for life," promoted industrial policies under the banner of "Made in China 2025," and energized the CCP in the task of "building socialism with Chinese characteristics." This drift away from economic liberalization is reflected in the title of Lardy's new book, The State Strikes Back: The End of Economic Reform in China?

No one knows the Chinese economic data better than Lardy. So when he concludes that, "absent significant further economic reform ... China's growth is likely to slow, casting a shadow over its future prospects," one should take his prediction seriously.

The book is divided into five chapters, each filled with extensive data to support the author's arguments. Chapter 1 explores the reasons for China's slowing economic growth since the 2008-09 global financial crisis. One key reason, as Lardy explains, is that President Xi failed to implement the pro-market reform agenda introduced in the Third Plenum of the 18th CCP Congress, which was held in the fall of 2013. As such, market-led development has given way to state-led development, economic life has become more politicized and state-owned enterprises (SOEs) more protected, while resource allocation has become less efficient. Indeed, Lardy notes that, "beginning in 2012, [state-owned] banks directed a larger share of credit to state firms, essentially crowding out private investment," which was "a stark...