Is Xi a Failure? Plus: Older Gentlemen Autocrat Tendencies, Odds of Taiwan Invasion, and What's the Point of Liberal Governance Anyways?

Dan Rosen and Jude Blanchette recap the Xi Era with aplomb!

Why does Xi govern like he's running out of time?

To discuss, last week on ChinaTalk I had on Dan Rosen, a founding partner and my boss at the Rhodium Group as well as Jude Blanchtte, a fellow at CSIS, the author of the fantastic China’s New Red Guards and author of the “After Xi” report, which I discussed with Richard McGregor on the podcast a few weeks back. We're going to be talking about Jude and Dan's recent pieces that were published earlier this month in Foreign Affairs, which nicely echo each other.

But before we start, I’m going to be in Italy in late August! Likely Rome Aug 13-17, some cities yet to be determined, and then Milan 22 to the 26th. I’d love to do some meetups! If you live in Rome, Milan, somewhere between Rome and Milan, or have travel recs for places between Rome and Milan, please just respond to this email!

Was Xi Set Up for Success?

Jordan: Dan, why was 1978 to the mid-2000s the easy part for Chinese reform?

Dan Rosen: Well step one to make yourself look great is to spend thirty years immiserating and impoverishing your country down to the point where in 1978, Chinese per capita income was about a quarter of Nicaragua's. Profoundly bad things were being done to the economy at that time.

So really step one they just had to stop doing the wrong things and, for example, let peasants make the decisions about what would grow in their part of the country and not be told by political officials what they should be planting, even if it made no sense for their province.

That was a huge tailwind. There was zero capital deployed anywhere in the country, so any money invested was going to have a high return. The demographic dividend was at its peak—the number of people in the workforce was getting higher and higher relative to the total, and there was then the one-child policy kicking in 1978,  with fewer mouths to be fed and unproductive folks in the population structure. All those things really worked and trying to advantage for decades.


Jordan Schneider: Jude, let's fast forward to 2013: Why did Xi feel like he had to govern like he was running out of time?

Jude Blanchette: If I can rephrase the question slightly, I would say, “Why did Xi govern with a sense of urgency?” which is distinct from running out of time. I think that's the clear thread, especially in retrospect now we can see that right out of the gate starting in 2012 and what he assumed the presidency in 2013, he moved with a speed and aggressiveness, which caught many by surprise and really took us four or five years to figure out the direction.

You had some early indications that Xi was moving aggressively in a pro-market reform direction, with the third-plenum decision that Dan talks about in his piece. But also on the international stage, you had moves like the creation of AIIB, the announcement of the One Belt, One Road Initiative. This wasn't clearly at the time an individual who is going to be pushing a much more statist approach.

The heart of your question, though, is why urgency. I think there's a few reasons for this.

The CCP was not in great shape when Xi Jinping came to power in late 2012.

You had a whole host of internal, organizational, disciplinary pathologies that had been accumulating over the previous decade, which by the time Xi came to power felt like if not existential, at least significant cancers in the body party that needed to be removed.

Critically it wasn’t just about rectifying the party. I think Xi Jinping saw an important moment for China in the international order that needed to be taken advantage of. And this was being provoked by observable changes in the United States coming off of the global financial crisis.

I think Xi assessed the global situation and determined that the twenty-first-century global order built around critical and emerging technologies, and the opportunity to shape standards and digital infrastructure, offered an important opportunity for China, and they needed to be taken advantage of.

It wasn't just a crouching posture of defeating existential concerns in the party—it was also an offensive move to start rebuilding China's aggregate global power.

Jordan Schneider: Dan, can you talk about the macroeconomic situation and what drove the really aggressive agenda that was laid out in the third plenum.

Dan Rosen: I loved Jude’s list of motivating factors, though there was one factor that didn’t make it. I remember John Garnaut, back in the early days of evaluating Xi’s behavior, claiming to have gotten access to an internal speech where Xi said something like, “Guys, if we don’t push back on these hostile foreign forces and the Jasmine Revolution and all this stuff, then we’re going to end up like Mubarak in a cage in our courtroom.” That was motivating. They didn't want to be Gaddafi in a ditch.

With regards to economics, I don’t think Xi felt like he was running out of time in the early days. I think he thought he had time, but that there was much to do. The 2013 Sixty Decisions Program struck me as confident—not someone who’s desperate about the economic situation, but someone who felt like they understood the laundry list of things that needed to be done, and with surprising coherence and boldness laid it all out in black and white and said, read my lips: we’re going to do this stuff by 2020.

So I would first set the scene by saying that while there was maybe politically a sense of panic—remember Bo Xilai and the craziness that period—on the economic side, I was struck by the confidence and decisiveness. “Making the market more decisive” was their language in fact.

We can get into some of the specifics of what was prioritized from 2013 forward, but I think it's interesting to note that at a higher level, on the economic side they felt like time was on their side and they were going to be able to get things on track.

Xi’s Failed Reform Attempts

Jordan Schneider: Dan, you argue that in fact, Xi is a failed reformer. What were some of the instances where you saw him going two steps forward only to fall two steps back.

Dan Rosen: Aristotle asks, “Can you call a man happy before he dies, because you never know what's going to happen?” And so with Xi, maybe it’s early days in his tenure and he still has fifteen years left, who knows. So maybe it's too soon to say he's a failed reformer, just bad first couple of innings. I'll leave that to Jude to talk about his political lifespan.

So many things that were clearly laid out in black and white just didn’t work out the way that was hoped. Starting right in 2013: the counter-cyclical stimulus, a classic Keynesian response. Nick Lardy called it the gold standard of response to a financial crisis from the global financial crisis. China had been throwing so much credit at the problem from 2009 forward, that was continuing to be thrown at the economy in 2013 as Xi took command, and he and Liu He understood that had to stop. Otherwise, it was going to squander some of China's credibility as a sound financial system.

So, right from 2013, they set their sights on the risky interbank market, and they instruct the People’s Bank to start withholding credit from these riskier financial institutions—not the banks themselves, but the non-banks.

They do that starting in May 2013, and it almost instantly causes short-term interest rates to go from 2 percent up to as high as 30 percent in a matter of days the stock market falls by 10 percent. They lose their stomach for this fight, they realize they're not entirely prepared to follow through, and they fall back to allowing credit to keep flowing. That's one example.

Another example: by early 2014 Lou Jiwei—then head of the Finance Ministry—is given approval for his proposal to do a broad program of tax reform that would see the introduction of property taxes, that would both better fund what the government needed to be spending money on, but happily would also disincentivize overinvestment in property, which up to today has become a very acute problem. They were supposed to get that plan done by 2016; it's 2021-and-a-half and it's not even out of the starting gates. Lou Jiwei, now retired, flagged that as a major problem hanging over China.

And third, given DiDi’s in the news this week, one of the signature 2013 reforms was to tell the China Securities Regulatory Commission (CSRC) to stop holding up listing applications and let companies go to IPO. If we're going to tell the banks and the non-banks to stop throwing credit around like there's no tomorrow, then we have to give companies an alternative way to raise capital. And that was to be the stock market, which is an attribute of modernism. It's like a comparator for how caught up China is with the West today.

And they did. They had forty-eight IPOs in less than a year and another twenty-eight queued up to go. But along with that came a bubble in the equity market. Too many Pollyanna-ish ideas about letting people borrow money on margins, at their brokerages. “Throw it into the stock market. You can never lose.”

And this created bubble conditions which reversed and caused the government to panic about the equity market reforms in 2015. And even today in 2021, the stock market has not reattained 2015 levels.

Xi’s Corruption Sweep

Jordan Schneider: Jude, it seems like the sort of two steps forward, two steps back framework doesn't necessarily apply as directly to, say, the anti-corruption right.

Jude Blanchette: Good question. As I was just listening to Dan, I was thinking about the importance here of clear definitions of success for measuring sticks. When you get into the political realm, I can almost imagine parallel measuring sticks where things are successful in Xi's own terms, but have actually set China back in important ways.

And so you could take something like the anti-corruption campaign, which undoubtedly on a certain set of metrics has cleaned up the more overt forms of corruption that were engendering significant amounts of frustration and hostility among the Chinese people. It didn't eradicate it, but certainly cracked down on some of the more egregious examples of it.

But on the other hand, even by the reckoning of China's own internal discipline watchdog, CCDI, it has led to a number of pathologies in the incentive structure for cadres. Then the answer is Xi Jinping’s version of “more cowbell:” you go out and do another round of discipline inspections, looking behavior that is trying to circumvent previous disciplinary investigations.

If we’re looking at the yardstick, it's more difficult to do in the political realm or the economic round, but I think there's a parallel story here in the governance realm.

Without a doubt, many of Xi's campaigns have moved the needle as he would have wanted them to, especially if you're thinking about the personalization of power.

But if you're thinking about the effectiveness and the functionality of China's overall governance system, I think most people who watch this are pretty concerned that the secret sauce on the governance side, matching Dan's story on the economic side over three or four decades, was an imperfect but decently aligned incentive structure wherein cadres were certainly getting corrupt, but were experimental, were flexible, were open to foreign capital, would take risks. All of that is not gone away, but if you listen carefully you don’t hear that sound as much. The sky’s still high, the emperor’s still far away. I don't want to pretend like Xi Jinping is Sauron. But certainly, that is something I think we need to be watching for.

So I have a mixed diagnosis similar to Dan’s. I think in ways Xi Jinping is a failed governance reformer, despite his three volumes of collected works being about governance in China. 

Dan Rosen: One of the follow-up questions that naturally comes to me is, “Did Xi fail at reform?” And if so, does that cause an economic crisis? And I'd say the party, up until mid-Xi years, was most notable for embracing crises.

Another name for crisis is adjustment. It’s what happens when the old way of doing something no longer works, and you go through a difficult phase change where things that were previously productive no longer are, and it’s a mess for a while as you make the jump to doing things differently.

It’s precisely because Deng Xiaoping (and many others) embraced crisis and went with it, rather than trying to fight against it, that China was able to unleash so much productivity and growth over the past fifty years. The stability fetish is a very new phenomenon.

Is China’s Pollution Turnaround an Exception to the Rule?

Jordan Schneider: I want to talk about one of the exceptions to the narrative: environmental reform. If we can chalk up anything to decisive Beijing-driven leadership, the changes you’ve seen in the past ten years in pollution across the country are really dramatic. Why did these policy areas prove to be the exception to the general rule here?

Jude Blanchette: Certainly I'm not arguing that I'm China under Xi has stopped doing anything right and has been a complete failure. Indeed, as Dan noted on the economic front, it’s not as if you had these six or seven pushes of reform and then it stops. I think there are important areas under financial services where China is making smart, tactical moves to try to open up sectors to foreign capital.

And I think even in what I would call economic macro policy, like supply-side structural reform, did it eradicate overcapacity? No. But do we see a step down from the levels of rampant debt accumulation and overcapacity that were existing prior to 2015. Debt deleveraging isn’t a runaway success story, but I think it’s notable. I would have expected a massive of the credit spigots in response to Covid-19 that I think Beijing was trying to hold the line on.

My point being, it’s not as if everything was a failure, and the environment stands out. My second point is if you look at some of the aggregate PM 2.5 data across the country, there are important innovations. And indeed, if you just look at where China is targeting a lot of this state capital right now, it's in green tech, which I think, waste aside, is a promising use of capital.

But to not fight the scenario and give a quick answer here, I think this does get to this interesting idea of where the party is responsive to demands of the people outside of the normal democratic feedback mechanisms we have.

I think there's an assumption that the party can just give the middle finger to most Chinese people and use elements of coercion and control as a way of reaching escape velocity from popular demands. But, of course, the reality is the party is always balancing those two, and there are a few areas that have provoked as much intense and very narrow public frustration than on this group of issues about health and the ecosystem that sustains it: water, food, air pollution. These are all issues that over the past ten to twelve years have become acute areas focus for Chinese citizens, as you would naturally expect. I think the level of frustration there has been so channeled and so specific.

The final point is there are also contingent provocations outside the more structural story here. It’s not often I pat the US government on the back, but if the embassy hadn’t made this really ad hoc decision to start blasting out PM 2.5 readings on its Weibo and Twitter accounts, I'm not sure we would have had that same early level of urgency.

So there are some contingent factors here in addition to the increasing severity and awareness aided by ICT. Of course, you had a few of these very pronounced, big scandals surrounding food and infant formula, which pushed the party to recognize that in addition to corruption, base levels of growth that provide qualitative improvements are necessary. 

Dan Rosen: I'd add two things to this part of the conversation. Number one, over the past ten years—2010 to 2020—there has been a tremendous growth of the services sector of the Chinese economy. It's part of being at middle-income level. Just thanks to that, environmental impact over GDP as a ratio is getting less bad just because the less carbon-intensive, pollution-intensive parts of an economy are the things that are growing more at the margin compared to the very industrial growth of the 2000s.

Just looking at it from the numbers, you can tell a story that says that the marginal environmental nastiness of the Chinese economic system is getting less bad. That is true. However, can we really audit the actual absolute levels of pollution impact in China? Is it permissible for supply chain auditors to be looking at even environmental impacts, let alone other things that are more sensitive today? If China is having this great environmental success, they should allow more liberal interrogation of that story to help prove the point. But data is not as easy to come by today as it was ten years ago, and just on the face of it that leaves me a little bit skeptical about the environmental story that we tell.

What are the Returns to More Liberal Governance?

Jordan Schneider: Dan, you write that “at some point, China's leaders must confront this trade-off: sustainable economic efficiency and political omnipotence do not go hand in hand.”

Why? Really? How would more liberal governance have saved the banking system or some of those financial reforms that you were pointing out earlier, which Xi had such a hard time implementing over the past ten years?

Dan Rosen: I guess the simplest answer is because unproductive choices are recognized and reversed sooner. That's just what happens in a non-authoritarian environment. Jordan, a lot of your podcast focuses on, for example, DARPA and how should the US government be more productive in how they support innovation and stuff like that.

Doesn't it all come down to fail fast? Take lots of chances, but if they're not working out have some mechanism that you just shut down the things that aren't working so that those resources can be moved over to something that still has a chance.

Those mechanisms don't really exist in more authoritarian systems, because they require admitting mistakes along the way, accepting that you're fallible, accepting that political authorities are not necessarily particularly good at allocating resources and that you need some other mechanisms to decide when it's time to pull the plug on the life-support system.

And that's just not happening. We talk about zombie companies, we talk about the amount of rolled-over debt that is evergreened, and that's a problem for productivity and growth.

Is Xi Feeling Pressure to Act Fast on Taiwan?

Jordan Schneider: Jude, is Xi running out of time on Taiwan?

Jude Blanchette: I think we need to unpack that a little bit: How might Xi feel running out of time? You can imagine a few different scenarios: One would be looking at trend lines. Beijing has long thought that time is on its side and it can afford to be patient, because ultimately it felt the trend lines were moving in its direction on Taiwan. And that story I think was largely true until about 2016, when you had the election of DPP President Tsai Ing-wen.

But you had increased economic integration between Taiwan and China—China has always understood that one of its greatest geopolitical assets is its market and access to it. You also had the KMT in power for a good chunk of time, and that's when you saw the warming of relations. But—and maybe there's a theme here in our discussion about snatching victory from the jaws of defeat, or the other way around—but Xi Jinping own-goaled himself by essentially misstepping and creating the prerequisites for his own future failure.

Undoubtedly with events of the past year and a half—first with the swift and irreversible move against Hong Kong with the National Security Law, and second the recent electorial-system gutting—Xi Jinping has just gone and squeezed out the last breath of any already-dwindling support in Taiwan for any vision of reunification. This of course creates a self-fulfilling prophecy.

Poll numbers in Taiwan show vanishing support for any kind of reunification. Tsai before the January election last year was not doing well in the election polling until China really made that move against Hong Kong. So you’ve now helped marginalize the KMT, further entrench the DPP, and alienate public opinion.

You can imagine that scenario where Xi Jinping feels time is running out. In all of these analyses that China or Xi Jinping is getting an itchy trigger finger, or even frankly comments coming out of the outgoing head of INDOPACOM Phil Davidson that there was a six-year period ... all of that analysis has had this kind of fill-in-the-blanks component of how the Xi administration would be considering this really extraordinary action of launching a military campaign to take its hold Taiwan.

Although I may think Xi Jinping has a sense of urgency, I don't think he's suicidal.

You'd have to have a full-spectrum analysis of how XI Jinping would be thinking about an invasion against Taiwan relative to all of the other goals that Xi has for China.

That includes diplomatic goals, economic goals, domestic economic goals ... all of that would be at risk if China were going to launch an invasion. And, although we call it strategic ambiguity, I think most military planners in Beijing assume that the United States would likely have involvement.

Although I think Xi Jinping has a very, very high risk tolerance, a motivating factor of a lot of his governance (and a reason he’s pulled back from economic reform time and time again) is preservation of power for Xi and the Communist Party. I don't think he forgets all of that and launches an invasion a hundred miles off his shore.

Jordan Schneider: It’s interesting comparing this to Donald Rumsfeld, who passed away recently, and thinking about the Pentagon not thinking through what was going to happen in Iraq after Baghdad fell. And if you think that's bad, not doing the second-order consequences of invading a country where Japan and the United States very well may intervene in their favor is malpractice that I don’t think Xi misplays.

Jude Blanchette: To add to that, folly is not uncommon when thinking of the military adventures of war planners and political planners. As a counterargument, if Xi gets more consolidated and ensconced, there could be more and more isolation and poorer and poorer information going up the ladder to Xi. So miscalculations are certainly going to be possible, and over time you can begin to imagine that military adventurism is going to become a possibility with an isolated Xi Jinping.

I thought you were going that way, and I was going to say it’s one thing for the Pentagon to plan a misadventure several thousand miles away in an area where they understand that the repercussion for the homeland are going to be minimal. It’s quite another thing when you’re a hundred miles up your shore. And you would have seen the Pentagon going through very different exercises if it was thinking about invading Canada.

Jordan Schneider: Yeah. It also comes back to what motivated Japan in 1941. Hitler felt like the clock was running out on him and he was being encircled and the end was neigh. The amount of “encirclement” that China feels when there are a few sanctions on Huawei and semiconductor exports is so far beyond what was facing Tokyo in 1941 when they were about to be cut off from oil.

And there is a strain of paranoia within the CCP. But we are still a very long way from Beijing feeling so cornered that it has to reach out beyond its borders to secure resources or regain prestige. 

Oil well in the Shengli field, 2017 [Source]

Dan Rosen: Let me put an asterisk on that. Since 1994, China has been a net crude oil importer. When Deng Xiaoping set out on reform in 1977 and ‘78 and made those plans, he honestly believed that China was going to be the next Saudi Arabia because some oil majors had convinced him of that thanks to the Shengli and Daqing fields and their potential. This is a fascinating part of the reform history: he truly believed that he was going to be able to finance the entirety of China’s technology modernization with oil revenues.

And it didn’t work out quite that way. It made a big contribution to the national coffers, but by the early 1990s that had turned a corner and China started becoming a net importer. Fast forward to today, other than brown coal, rare earths, and zinc (and a few other things), China is net dependent on global sources of supply for virtually every other hard and soft commodity. It is a net calorie importer for feeding itself (and also for feeding livestock, seeds, etc.). And that’s never going to change given China’s endowment of arable lands and China’s demographics. China—whether or not it manages to export consumer electronics to the world—will always need its bauxite and its met coal and its calories from the world.

Considering a slowing growth rate and the consequences of them not getting the economics right ... they’re not quite as in the catbird seat, in terms of their needs from the world, as some people seem to think. Maybe as you seem to think.

Jordan Schneider: Dan, can you jump on the solar and vertical farming hype train? 

this is actually going to be a thing in Shanghai! Solarpunk will save us all.

Dan Rosen: You can do that for your kilowatts, but not as a feedstock to make plastics and all sorts of other industrial things. You still need oil for those purposes. Fair point, but we’ll see.

Jude Blanchette: Adding on Dan's point, I think this is another frustration I have with how we're thinking about China. I don't feel like many us have a really dynamic view, that is thinking about ten years from now. Just for some epistemological humility here, I don't think any of us on the eve of Xi Jinping coming to power were in a good position to say where China was going to be ten years out. And gosh is it different. Really really significantly different. Not only the orientation of economic policymakers, but the relationship between the Communist Party and society and the relationship between China and the world.

I liked living in Beijing because I didn't feel like there was a political angle to discussions on China. It was usually just empirical discussions, where maybe you’d agree, maybe you disagree, but you weren't in a camp. Here in DC I feel there's an underlying agenda or something you're trying to push back against, in terms of how you accumulate facts or interpret them. So it leads to this sorting mechanism.

Trying to split the difference on that, I think Dan gets to some really great questions and putting these pieces together. Let's imagine six, seven, eight years out ... we’ve had not a crash in growth, but the kind of long soft fall continues. Let's imagine that some of these massive investments in what they're hoping to be TFP-boosting technologies don't quite pay the dividend they want, and so they're still in this search for productivity-led growth. And Xi Jinping has maybe wasted a good chunk of scarce state capital on the projects that happen to be a few good Sputniks, but more waste than not.

So you now have Xi well into his third, maybe fourth term, exhibiting some sort of late-age dictator behaviors, which we've seen again and again. I don't feel so sure that things are just going to be a normal linear trajectory from our mental map of where China has been over the past four decades. While I don't pretend to say China’s going to go gallivanting to invade Russia to go get their oil, I also think the fairly flat linear trajectory narrative we have of, “This last decade will be a little bit like this decade” doesn't fit that reality.

I don't pretend to have the answers, but maybe this is a CSIS-Rhodium project: I feel like there's a really good “China 2030” or “China 2035” project to be done of scenario planning on bringing in all these elements of the elite political, the structural and contingency, economic factors, the geopolitical environment and technology trends, and pulling these together and imagining where China could be in ten years. It’s just a massive question mark to me, in a way that it’s not with the United States. I feel much much better now and can imagine the kind of muddle-through path we'll have to get us through 2030. But China is now kind of the Bitcoin of political systems.

Jordan Schneider: Are you a funder with a high five- or six-figure dollar count interested in reading that report? If so, reach out to me, Dan, or Jude and we’ll make it happen! [sorta joking but also not!]

I wanted to say I thought the Sputnik analogy was actually interesting. I've been spending a lot of time reading about space in the past few months, and Sputnik freaked out America and was a big propaganda success, but ultimately the Soviet Union lost the space race, and Sputnik was created doing all these technological shortcuts that ultimately ended up really handicapping the Soviet Union’s space efforts.

So the analogy may be more apt than you were initially intending, Jude, in that when Xi tells Liu He, “your job is to figure out third-generation semiconductor technology and you have three years to do it,” that is not necessarily creating the type of incentive structure where Liu He can come back and say, “No, this is a twenty-year project and we need to get high schoolers more Raspberry Pi boards” as opposed to, “We're going to swing for the moon and almost certainly fail.”

Jude Blanchette: To add to that, Jordan, again, this is where politics and economic policy come together. My old boss at the conference board, David Hoffman, used to say under Xi, China was moving towards this grandiosity trap, where every initiative has to be bigger than the last one. When you were talking about the Liu He project on semiconductors, I think that's a good example. There's a fine line between the push needed to channel resources and attention to get big breakthroughs and the delusional beliefs that you can take a Vice Premier who, by the way, already has a lot of things on his plate.

His only thing is not being the semiconductors czar ... he's managing the economic relationship with the United States, and if you track who travels with Xi Jinping, he's on inspection tours every other day with Xi. 

Jordan Schneider: It is very Trumpian, the “We’re just going to have one guy and he’s going to be our fixer, and he’s not my family but I’m going to trust him.” They’ve been working together for a long time now.

Jude Blanchette: I guess the point I want to make to piggyback on Dan's insights is, what I think is likely going to happen is big-push mobilizational campaigns and expectations that technology is going to be the new fix, instead of the hard institutional reforms that China needs to make.

So I think there's going to be lots of issues where Xi is going to say, “Liu you're in charge of this, go get me this.” Or we’re going to see him hope that robots are going to solve demographic or workforce challenges, because I think that is easy to do. Xi has shown himself clearly listening to some of his economic planners about what needs to be done, but then very quick reverse course when it feels like the reform is starting to undermine political stability. And so he's going to look for workarounds to institutional fixes, when we all know these issues aren't going to get a robotic bandaid to fix them; it's going to take deep structural fixtures.

If folks haven't read Natalie Hell and Scott Rozelle's work Invisible China about the human capital environment, you start to see how it is hard unsexy stuff that is going to be required about primary school education, job training. And I fear that's not alluring or quick enough for Xi Jinping, and that just leads you to more of the same. More muddling.

Dan Rosen: There's been a tussle over whether China should be embracing reform in the way we mean it when we talk about it here. Because at this point it seems as if it would be a capitulation to American preferences. But reform, precisely as we mean it, is China's modern birthright as well. No country really can claim a more admirable, bold, and prodigious productive track record of getting major liberalization done than China between 1978 and ... 2015. Even into the Xi years.

I think this is the main thrust that I was trying to convey in the piece: Xi was not resistant to the idea that there needed to be corporate governance reform on state-owned enterprises. That independent boards of directors needed to replace the role that party committees were playing right up until about midway through his tenure.

And it wasn't that he necessarily changed his mind, maybe he didn’t, but we can see that his attempts to put those new systems in place for a new era were not working the way they were advertised to him by his economic team. No doubt. And he was frustrated, annoyed, and probably disconcerted to observe how much potential social instability was being introduced by these imperfectly executed reform initiatives.

When Xi finally comes back to it, he will be able to point to his own record of putting down a fairly clear and bold call to arms to get liberalization work done in the economic lane. And he can ultimately work with that. Let’s just hope he doesn’t evince those older gentlemen autocrat tendencies Jude was referring to.

2015-2016: The Twelve Months that Made Modern China?

Dan Rosen: I was going to say, I wonder if there’s a book to be written ten years from now on how the twelve months from end-of-summer 2015 to December 2016  was the kind of decisive year in the Xi administration, where you saw a real important inflection shift and the real Xi model emerged. As you were talking about tolerance for corporate governance in state-owned enterprises, 2015 and 2016 that suddenly you saw companies coming to us at the conference board in Beijing and saying, “Hey, our Chinese JV partner just handed us this note requesting we revise our articles of association to give the party committee a de jure role in the corporate governance structure.”

That's when you started to see state-owned enterprises doing the same thing, revising their articles of association down in Hong Kong if they were listed down there. So the governance inflection point was 2016.

Meg Rithmire at the Harvard Business School is doing awesome work on evolutions in Chinese state capitalism. She paints this picture of a real fundamental shift of state capital after the equity-market meltdown in 2015, where the national champions who stepped up never stepped back and just evolved their role to now becoming investors in everything. So taking little equity nibbles across the entire economy, oftentimes just single percentage points, but nonetheless, now you have Central Huijin and others with investments everywhere.

Twenty-sixteen was also the year that Xi Jinping was chosen as the core. And I remember being in Beijing the night that came out, and I remember being at a table with a bunch of business executives and it was the moment they (and I think myself as well) realized this is who we're dealing with now.

Of course, 2016 you have Brexit and finally Trump, but that sort of one-year period feels significant. I think the equity-market meltdown had such enduring long-tail impacts on regulatory policy. You also had these critical political shifts domestically. I don't know, the timing may not quite be scientific on that, but I feel like you have periods before late 2015, then 2016, then after. And everything that happens after you can really trace back to that important twelve- or thirteen-month period.

Dan Rosen:  I'll read the book! Write it. There’s a lot of raw material available to put that thesis together. At the same time, there are many elements of that thread that had begun to twist together before then. There were external factors in the mix—the exhausting of the WTO phase-in period that allowed for a grace period. And also the peer competitor aspect of how far China had gotten in terms of its technological advancement had now reached a point where it was going to be treated differently.

Jude Blanchette: I’m now fixated on this idea of the twelve months that made modern China. There is a direct Rhodium connection here: 2016 was the year you had that massive spike in outbound investment, which had pretty significant ricochet effects domestically in China. The subsequent crackdown on the big conglomerates like HNA, That's also the year of some of those major transactions ... Syngenta, ChemChina, etc. That's what really started Europe's wake-up on China.

So there's a kind of geopolitical element as well, that were it not for that very overt surge in outbound foreign direct investment—especially into some of these critical and emerging national security technologies, it would have taken longer on the European side. Right after that, they started talking about the need an EU investment screening mechanism.

And then here in the United States, there was this vibe in America that you now have these Chinese companies buying bowling alleys and hotels and AMC. There was a kind of a spook.

And finally, that was the year the China Shock papers came out, which really galvanized the China discussion here in the United States.