Digital & Social Media

When Markets Rule in China

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The most consequential so-called Third Plenum in modern Chinese history to date was held in 1978, three years after Mao Tse Tung died. At that meeting of the Chinese Communist Party’s Central Committee, Deng Xiaoping set China on a course toward a more market-oriented economy that would enable it today to become the second largest economy on the planet and moving its way into first place.

Not all Third Plenums are that momentous, and it’s only in hindsight that the magnitude of the change coming out of the 1978 meeting was apparent. Yet, the most recent Third Plenum, held this November, already shows many indications that it too may rank among the most influential—and it all may come down to the change of one adjective.

China President Xi Jinping

China President Xi Jinping

At the 2013 plenum, the Central Committee changed its description of the role markets play in the allocation of resources from “basic” to “decisive.” In a society that has always kept one foot in socialist tradition, this elevation of the function of markets is likely to have far-reaching consequences, affecting everything from trade policy to land reform to the status of state-owned enterprises. In each instance, central planning will be diminished and the impact of market forces, both domestic and international, will be enhanced.

What does this mean for Chinese businesses and consumers? To the degree this policy change is implemented, Chinese companies will need to contend, to a far greater extent, with public opinion rather than the disposition of the government as the arbiter of their fate. Unlike the government, the public usually demands a degree of transparency many Chinese ventures may not be comfortable with at first, although many have already had a taste when dealing with the investment community. While their lives may become more complex, they will be potentially more prosperous as economic power is likely to be better distributed as consumers anoint the winners.

Of course, markets are famously unforgiving, and companies that do not respond effectively to this new competition, openness and need to communicate effectively will fail. It remains to be seen whether the Chinese government has the discipline to endure the “creative destruction” of a true marketplace. Companies like Lenovo, Wanda and Huawei—among the fastest growing Chinese enterprises—have already ventured into the competitive global marketplace and have been successful. For those who haven’t operated outside China, the new rules may prove more daunting. No different than it is outside of China, the winners will be those companies that are able to develop lasting relationships with their customers and that provide value and effectively communicate that value to the market.

The proposed policy of making the market “decisive” in resource allocation will fall to Chinese President Xi Jinping, whose authority and unrivaled power also were among other clearly established outcomes of the Third Plenum. Few Chinese leaders have consolidated power so quickly and so effectively as Xi. While other Chinese presidents have opted to add various leadership titles, such as General Secretary of the Communist Party and Chairman of the Central Military Commission, over time, Xi claimed them immediately upon taking office.

Thus, by all indications, President Xi has both the commitment and the power to implement the policy changes outlined in the plenum’s report. While nothing is completely as it seems in China, one fact seems pretty clear: Big changes lie ahead, and while Chinese companies may enjoy more freedom than ever to manage their businesses as markets dictate, they also are likely to face new prospects of increased transparency and competition that many may find themselves ill-prepared to handle.