China’s Harvard alumni vice-premier Liu He faces uphill task with state-owned sector reform

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Liu He, a newly appointed vice-premier of China and also vice-chairman of the National Development and Reform Commission, at the Great Hall of the People, in Beijing last May. Photo: Reuters

Published: 10:03am, 31 Mar 2018Updated: 12:36pm, 15 Oct 2020

I had the opportunity to meet Liu He, the newly appointed vice-premier of China and a 1995 graduate of Harvard Kennedy School, when he returned to campus for a series of meetings to discuss the 2008 global financial meltdown, after having been tasked with writing a report for the premier on the crisis’ impact on the US.

He was sharp and focused, seeing the threats of a financial system that was not under effective control and regulation, while concluding that the US economy was resilient. This was important because, at the time, some voices in China were seeing the crisis as marking the inevitable decline of the US. By all accounts, the report was influential in policy circles within China and within the office of the premier.

We know that Liu is a critic of the debt-fuelled programme that China adopted following the financial crisis, or at least feels that it has continued for too long and that government stimulus cannot be the main driver of growth.

Liu’s view is that debt-driven growth carries financial and broader risks, possibly even of a systemic financial crisis. In 2016, Liu is credited with having written an important editorial for the People’s Daily, in which he warned against maintaining economic growth with loose monetary policy. The Chinese have referred to the policy package as their own version of “supply-side economics”.

The two main drivers of China’s economic growth have been state investment and exports. These two elements will remain important but can’t be relied upon to maintain stable growth in the future. As a result, Liu supports the moves in recent years to maintain slower growth, rather than the heady days of double-digit growth, and supports the preference for a more sustainable consumption-based growth.

One of the major challenges that remains is how to deal with the state-owned sector of the economy, which needs to be reformed to use resources more efficiently, but which is home to strong vested interests that have roots deep in the Communist Party. On that front, Liu certainly has his work cut out for him.