Analysis: Careful but comprehensive reforms will help make China stronger

China has once again reached a crossroads on its journey toward inclusive, sustainable prosperity. At the Chinese Communist Party’s congress in November, the new leadership was given the task of plotting the country’s path for the next ten years.

The agenda is ambitious. China’s leaders must design and implement reforms to combat corruption; support migration to cities; promote technological innovation; rebalance sources of economic growth; raise environmental and labour standards, and build the country’s social welfare system.

Recently, scholar Nassim N Taleb coined the term “anti-fragile” to describe a system that benefits from inherent uncertainty, volatility, and disorder. He pointed out that, while rigid systems may seem more stable, they are not equipped to cope with unexpected shocks, making them fragile in the long run.

“Anti-fragility” is crucial in large economies like China, where administration is largely centralised, but activities are dispersed among families, civil society, markets, and the various levels of government.

China has been struggling to balance centralisation and fragmentation – that is, control and uncertainty – throughout its long history.

While the open, meritocratic selection of “scholar-officials” helped to sustain China’s closed dynastic governance structure for more than 2,000 years, it could not offset the system’s growing fragility under the Qing Dynasty, as territorial gains increased the population from 150 million to 450 million. Rampant corruption, rising social unrest, and the inability to resist modern Western powers ultimately caused the dynasty to crumble in 1912.

By enforcing property rights and implementing national policy, the Chinese Communist Party became the institutional mechanism that bridged the divide between the elites (the Party) and the masses. But, in 1958-1961, excessive central planning to support the Mao Zedong’s Great Leap Forward generated systemic fragility.

The situation began to improve in 1978, when Deng Xiaoping began to implement market-oriented reforms and open up the economy, giving China access to new opportunities for economic growth and employment.

At the same time, China was slow to open up its financial system. As a result, when the Asian financial crisis struck in 1997, it was insulated from the volatility that ravaged its neighbours. In fact, the crisis became an opportunity, prompting China to join the World Trade Organisation and implement reforms of its financial system.

China’s leaders now must ensure that reforms are comprehensive, but they also must avoid attempting too much, too fast, which could trigger resistance from deeply entrenched players or unintentionally trigger dangerous chain reactions.

• Andrew Sheng, president of think-tank the Fung Global Institute, is a former chairman of the Hong Kong Securities & Futures Commission.