China had good government -- once Ironically, China was the first state to establish well-run governments, way back in the day. Emperors could be criticized to their faces -- sometimes. The official Confucian ideology provided for an official governing class; competitive exams were open to all classes. Officials were monitored and regularly transferred to reduce corruption. As a result, China prospered: feudalism scarcely existed, technology advanced, farmers owned their own land, a superb system of roads and canals was built, crop yields outpaced Europe, and there was famine relief, cheap loans and low taxes. Then Europe caught up. While the Chinese system was finally degenerating into corruption and feudalism, European warfare and competition drove taxes and then government institutions; long-distance warrior-traders needed to form companies and use banks; the technology race began. The demand for Chinese goods created a trade imbalance with Europe; Britain forced the Chinese to buy opium, and the humiliations continued as one European power after another came in and carved China up. The despised Qing dynasty faced the Boxer rebellion and then the forced abdication of Pu Yi, immortalized in The Last Emperor. The collapse of the Qings left it all up to local barons, like feudal Europe: poverty, violence, corruption, oppression. They had under-the-table business deals and finance instead of banks and companies; no industry or modern infrastructure. Sun Yat Sen got nowhere in solving Chinas problems. Chiang succeeded only in uniting the warlords; and then the Japanese showed up and trashed the whole place. The Chinese Communist party The Communist party sold itself for years as a permanent revolution against capitalist oppressors, class warfare, and the aim of devolving into a stateless utopia. The premise looked sillier and sillier as the years dragged on. Deng came along and opened the door an inch: a smidge of capitalism heavily clogged up with state-run enterprises, mild criticism of Mao, preaching socialism instead of Communism, bare-bones institutions, welcoming businessmen, and no democracy but the underlying dogma of party control is the same, and it is totally useless for China in the 21st century. They are trying to shift their sheet music away from communism to nationalism. But even 30 years after Maos death, Hu needs the party hardliners, who think reform has gone too far and dont want to go further for them it is no longer about standing up for communism, it is about retaining control. Their only political pitch is in 25 years we built a $2 trillion economy, so why is anyone complaining? To respond to this, let me refer to a long-dead theatre critic, who once wrote a scathing review that went something like this: I have seen your play, and there are parts that are good, and there are parts that are original. But the good parts are not original, and the original parts are not good. The modern geopolitical version would go like this: You have an economy that is mostly state-run and very vibrant. But the vibrant part isnt state-run, and the state-run part isnt vibrant. The growth is happening in spite of the party, which has no clue. They are textbook communists looking on, bewildered, as capitalist progress happens in front of them, like the family dog watching a ten-year-old doing arithmetic. They are not leading China: they are the biggest threat to Chinas future, a malignant parasite. They will preach reform and use corrupt officials and leaders of state-run enterprises as scapegoats, but that will only get them so far. If they insist on vise-tight control of the country, they must take responsibility for the thing that do not work. Corruption in China The official Chinese media actually talks about political reform, but it wont happen without a struggle. There is virtually no oversight of local governors or businesses, particularly in rural areas, although government tried to tighten the reins in 1993. The spread of corruption interferes with both public and private firms. Corruption costs perhaps 14 percent of the GDP by one estimate. For this reason, a lot of things which are essential to fuller integration into the international economy are lacking. The legal system is expanding the number of cases it hears, but it is also broken and completely politicized. They made some progress in cleaning things up in the 1990s but backslid at the turn of the century. The head of the judiciary, a reformer, was replaced with a party hack. In one year almost 800 judges went on trial for corruption, so you can imagine how many got away with it, and half of the decisions of provincial courts are not even enforced. The unprotected are mistreated, with arbitrary detentions, and arrests and beatings of lawyers who defend politically unpopular clients. They made progress on commercial and administrative law, but not much. Some say as much as an eighth of the GDP comes from counterfeit goods; there is also trouble with quality control, and efforts to deceive inspectors. Food contamination is a growing problem. There are big problems in the pharma sector, where western firms get precursors and ingredients; it may reach the point where U.S. and European drugmakers, fearing lawsuits, regulators and bad press, will begin to reject ingredients from China. Without the rule of law, problems such as product safety and intellectual property rights cannot be solved. Next, modern (lets not call them western) business practices: sensible corporate management, anti-trust rules, real competition, financial oversight with independent auditing. This would also help government itself, with sensible investment and development, avoiding overcapacity etc. The banking sector may be an important bellwether in this regard. During the Asian financial crisis it emerged that Chinese banks had huge amounts of non-performing loans on the street, perhaps $600 billion worth, as banking and accounting rules were set aside. China began tightening controls, putting regulators through more testing. But now with a recession on, pressure is mounting to loosen the reins again and use the banks to finance the stimulus effort; China could eliminate the CBRC regulations or even the whole CBRC. That of course is exactly how the U.S. found itself in its own dilemma. Next, consumers and investors: they need property rights so they can borrow on the collateral and stop worrying about illegal land seizures, and they need to be able to buy enough stock to have a real voice in how firms are run. It cant all go to the party poobahs. Next, there are issues which the government absolutely will resist: free speech, free media, free debate, freedom of association, free election, and trade unions. You could also put improvements in education in this category. Next, there are other aspects which we have addressed elsewhere: the need for a pension system, and sound trade and environmental policies. Ground zero for Chinas corruption problems is in their state-owned enterprises (SOEs), which make up half the national GDP. In the 1990s they tried SOE reform but millions lost their jobs so the effort was curtailed. In 1997 China loosened controls on the SOEs and funnelled a lot of their saved money into them; most of Chinese lending goes to the SOEs. This happens even though the firms have proved themselves to be inefficient, unprofitable and corrupt; the government conceals the number of SOE insolvencies. The corruption only gets worse when party members get involved the SOEs, and the businessmen join the party: until 1998 the army and other government organs also ran businesses with little oversight. Instead of shutting down all the SOEs, the government has chosen to build a real economy around them rather than shut them down or reform them, possibly with the aim of aging out the SOEs by attrition, but that could take an awfully long time.