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Of all the reporting trips I made in my Washington days, flying with Lawrence Summers to Beijing so he could kiss Zhu Rongji’s ring ranks among the most fascinating.
Anyone who has spent inside of five minutes with Summers knows he’s not the grovelling type. But this was in January 1998, when Summers was deputy secretary of the US Treasury, and Bill Clinton’s White House feared China would devalue the yuan and toss more fuel onto Asia’s already blazing crisis. Zhu, China’s reformist premier-in-waiting, was the man to see. Summers won pledges from Zhu not to weaken China’s currency and to keep Hong Kong’s dollar pegged to the US’s.
I’m reminded of the experience because the economic challenges China faced then are eerily similar to those it faces today. Looking at the problems, you might imagine the 15 years separating Zhu’s inauguration as premier in March 1998 and Li Keqiang’s last March never happened.
In the late 1990s, Zhu was the first visit of every foreign policymaker for a reason. He was the face of “new China” – a boisterous, confident, English-speaking technocrat who understood free-market language and was beyond reproach as a reformer. Summers said he viewed Zhu as China’s answer to Paul Volcker. And he’d be proved right. Like the former Federal Reserve chairman who defeated inflation of the late 1970s with harsh monetary medicine, Zhu threw out more than 40 million workers to trim the influence of state-owned companies.
Zhu saw China’s 2001 entry into the World Trade Organisation as a Trojan horse. Joining meant opening the economy and financial industry to foreign investment and, to an extent, international conventions of trade, intellectual property and environmental management. He didn’t view the internationalisation of the currency as a tool of financial hegemony but as a means of forcing change.
Everything changed when Zhu and his boss, President Jiang Zemin, retired in 2003. Their respective successors, Wen Jiabao and Hu Jintao, feared modernisation would jeopardise growth and fan social unrest. Where Zhu was a protege of Deng Xiaoping, who opened the economy in the 1970s and 1980s, Hu and Wen were more from the Mao Zedong mould. Reform died, free speech was curtailed, and state-owned enterprises reasserted their dominance over the economy. If Zhu had been marooned on a desert island during the Wen-Hu years and returned to Beijing today, he’d be excused for thinking little had changed. He’d find things worse off.
China is the second-biggest economy, has $3.5 trillion (R35.8 trillion) in currency reserves and spreads its largesse to win energy contracts and friends. But over the past 10 years, the economy has regressed as the state companies Zhu tried to tame used cheap capital to expand their grip and now impose a significant drag on growth.
So far, Li has displayed only one flash of Zhu-like bravado: a clampdown on credit in June that drove the benchmark interest rate to a record 12.45 percent.
The target was a shadow banking sector that has seen phenomenal growth and escapes supervision. The sector has encouraged an explosion of debt among state companies and local governments, while a plethora of wealth management products obscures the true level of liabilities.
Since then, Li has acted far more conservatively. Vested interests have grown as rapidly as debt over the past 15 years. Things were corrupt in Zhu’s day, but there were fewer Communist Party millionaires and billionaires defending the status quo. The bigger difference may be nerve. Zhu developed a reputation as a risk-taker during his days as mayor of Shanghai, where he made it easier for foreigners to start businesses. And, as the world is learning from his new book, Zhu’s pragmatism kept the Tiananmen Square protests in Beijing from spreading to China’s biggest city.
On the flight back, Summers recounted something Zhu had told him. The crisis slamming Indonesia, Malaysia, South Korea and Thailand had educated China about the dangers of economic models that didn’t work. Fifteen years on, Chinese leaders seem to have forgotten those lessons. Li might want to pick up Zhu’s book and refresh his memory – fast.
William Pesek is a Bloomberg columnist.