Xi’s Dilemma; OFDI, financial sector reform and the limitations of socialism with Chinese characteristics

Abstract

Xi Jinping is the most powerful man in China, but does he have the ability to lead China through the next stage of economic development to become a sophisticated, ‘innovative’ thriving economy? Although China’s economic ‘miracle’ is the source of much admiration, an examination of financial sector reform reveals both the markets weakness, and the limitations of the government to effectively intervene. Since China opened her borders, the Chinese Communist Party has attempted to steer Outward Foreign Direct Investment (OFDI) through strict regulatory intervention of varying degrees of intensity. This paper will examine the extent to which the Chinese government has been able to effectively drive OFDI in relation to particular policy objectives over time. Adopting a process-tracing approach, it is argued that 4 major factors can be used to consider the efficacy of financial sector reform. These factors address the ability of the government to effectively implement reform, the depth of this impact and considers; the complementarity of reform with private interests; the degree to which reform was centrally-led; the level of commitment to reform; and whether or not the reform places political considerations above economic motivations. These findings have direct relevance for those seeking to secure Chinese investment and for those scholars conserved with the theoretical and practical consequences of developmental path theory and the China ‘Model’. These four factors themselves reveal the key dilemma facing Xi Jinping – how to balance the clashing forces of centralised power and decentralised economy.