Category Archives: Politics & Society

Lessons Of Kunming Station

THE SINGULARITY OF the knife attack at Kunming station makes this Bystander wary of extrapolating its impact on both the public and authorities — and in particular whether it represents an escalation of Uighur dissent against Beijing that will require an escalation of the authorities’ efforts to suppress it.

Twenty-nine people were reportedly killed and more than 130 wounded, 20 still critically so, when a group of masked assailants wielding long knives hacked at the crowd of train travelers on Saturday evening. Police shot dead four and took one suspected assailant, reportedly an injured woman, into custody. The remainder, said at the time to number five, fled. Authorities now say it was three and that they have all been captured.

The attack was blamed in short order on separatists from Xinjiang. No evidence has been offered so far to support that claim. Equally there is nothing to discount it.

Beijing has been fighting a low-level but increasingly violent insurgency in its natural-resources-rich western reaches for decades. The 8.4 million-strong Uighur minority in Xinjiang, mostly Turkic Sunni Muslims, though far from universally supportive of the tiny separatist groups, resents the growing Han dominance of the province. It feels its culture and economic prospects being increasingly diminished. Anti-Han riots in Xinjiang’s capital, Urumqi, left some 200 dead in 2009, and ushered in another crack-down by Beijing as well as the installation of 40,000 riot-proof cameras on the streets of the city.

The Kunming station attack set several precedents, if it indeed was by Uighur separatists. First, the casualty toll was far greater than in previous attacks. Second, the attack was against the public rather than police or officials. Third, it took place in Kunming, capital of southwestern Yunnan and more than 1,000 miles from Xinjiang, though there was a suicide car bombing in Tiananmen Square late last year, said to have been carried out by Uighurs.

State media are being made to walk a fine line between reporting a deadly act of terror that has shocked China and keeping questions from being raised about why the authorities didn’t prevent it happening in the first place and why Uighurs are so resentful of Han Chinese. Staging the attack in the openness of a large railway station makes it more difficult for officials to control the information flow; the first pictures of the event were posted widely on social media, and bloody. The most gruesome have been taken down. Online comment has been curtailed.

The openness of the attack also makes it more difficult to control the public narrative about the event. Hitherto, the state narrative has portrayed ethnic-religious violence in the country as terrorism originating outside China. The finger has been readily pointed at places such as Pakistan, Turkey and, more recently, Syria. The point being made is that it is not home-grown. This has proved an effective tactic for making it more difficult for dissenting ethnic minorities within China to make common cause.

Early comments in state media about the attack being “China’s 9/11” have been toned down. Such remarks misunderstand both the 9/11 attacks in the U.S. and the one in Kunming station. Washington has, however, changed its description of the Kunming station attack from an act of violence to an act of terror. Beijing will welcome that as an aid to its portmanteau crack down on dissent — and to its continuing struggle with Washington over the issues of human rights. That may turn out to be the Kunming station attack’s most lasting impact.

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Xi Jinping’s Fast First Year

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Xi Jinping

AS THE NEW YEAR festivities wind down, this Bystander is looking ahead to the first anniversary next month of Xi Jinping assuming the presidency of China.

In effect, Xi has been China’s leader since taking over as Party general-secretary 14 months ago. He has since consolidated his power far faster than most expected and centralized his control over the parts of the body politic and economic he most intends to change. He is a throwback, in that respect, to the strongman leadership of yore after the decade of consensual leadership of his predecessor, Hu Jintao. It is, perhaps, what China needs if it is to steer itself through what will be a critical decade of transformation for both the country and the Party that has exercised monopoly rule over it for more than 60 years.

Xi  moved quickly and decisively to take charge of the tiller. He has set his course for rebalancing the economy in the way necessary if China is to reach the next level of economic development. What is unknown is the extent to which factional political resistance will cause him trouble along the way regardless of his tightening of control over the bureaucracy and Party officials. Indeed, that very tightening could cause a troublesome backlash. One reason for Li Keqiang’s diminished role in managing the economy compared to his predecessor Wen Jiabao is that his principal role now seems to be managing coordination throughout government to ensure the successful implementation of Xi’s reform program.

More clear, though equally unquantifiable, is the risk of foreign affairs blowing Xi unexpectedly off course. The South and East China Seas are the obvious cases of troubled waters. Yet Xi is encouraging the modernization of China’s military and the concomitant extension of the People’s Liberation Army’s global reach. It is part of the price, willingly paid by Xi, it should be said, to secure the military’s support. However, the PLA has national ambitions of its own, and what is seen domestically as the improvement of the PLA’s technological and operational capabilities is readily seen elsewhere as an assertive flexing of military muscle. That is never without risk, and especially in a region that contains a long-standing rival in Japan, an unflinching one in Vietnam and an unpredictable one in North Korea.

Xi has been able to play the dangers of an unexpected economic blow-up to his immediate advantage. The local government debt bomb puts in harm’s way big state owned financial institutions and local governments — to which are attached many of the vested interests that would be potential losers from economic reform. That has let Xi start to tackle the broader fragilities of the banking system and its shadow by expanding financial services and making interest rates more market-driven. That, in turn, is the gateway to the structural reforms needed to address the economy’s distorted price incentives and capital misallocations, and to give the private sector a bigger role.

It will not be plain sailing. There will be defaults and failures with political fallouts to navigate. The global economy will provide squalls. Xi’s rapid centralization of power will make it easier for him to drive the recalcitrant at home into line. His new leading group to coordinate the rebalancing of the economy along with his anti-corruption campaign reaching into even the most powerful state-owned enterprises sends strong signals of top-down political intent to officials, while the new National Security Commission is intended to stifle any bottom-up activism or popular unrest that threatens to compete with Xi’s course of reform.

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Is The Committee For ‘Comprehensively Deepening Reform’ Forming?

Is this the committee for ‘comprehensively deepening reform’ that came out of the Third Party Plenum? Or at least its vanguard? A group of 28 senior officials, including ministers, vice-ministers, and provincial party bosses has met under the chairmanship of propaganda chief and Politburo Standing Committee member Liu Yunshan. State media say the committee is charged with promoting the reform plan put forward at the plenum, and will start a tour of the country to that end at the end of the week. It comprises a lot of heavyweights just for a PR push.

Liu is a protege of former President Hu Jintao and similarly comes out of the Party’s Youth League, the faction of its career officials. That should aid him in coordinating reforms, if that indeed is his role, across the many agencies of government at national, provincial and local level, all of which have great scope to be obstructionist where they feel their interests are at risk. Liu’s team appears to be reporting to President Xi Jinping. If this is indeed going to be steering committee for reform, putting of it under direct presidential report is another example of how Xi is centralizing power and thus tightening his political control.

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China’s Starts To Detail Its Long-Term Economic Reforms

The first steps in the long, hard slog to implement giving markets a “decisive” role in China’s economy have been taken with the publication of a raft of detailed measures that flesh out the communique issued after the Third Party Plenum. While easing the one-child policy and ending labor camps are grabbing the international headlines, the overwhelming majority of the measures directly affect the economy. These include:

  • moving ahead with interest rate liberalization, establishing a bond market and further opening capital markets;
  • speeding up moves towards full capital-account convertibility;
  • allowing privately-owned small- and medium-sized banks to open up the banking system and bring some of the shadow banking system into the mainstream;
  • moving towards market-pricing of water, oil, natural gas, electricity, telecoms and transport;
  • raising the remittance of profits from state-owned enterprises to central government to 30% from the current zero-15%;
  • requiring state-owned enterprises to diversify their ownership and allowing private investment in joint ventures with state-owned enterprises and letting employees of mixed-ownership enterprises hold shares in those companies;
  • strengthening protection of intellectual property rights (IPR), including possibly setting up an IPR court;
  • property tax reform;
  • giving farmers more property rights and hastening the loosening of  “hukou” or residency permit system by scrapping it in small cities and townships and then gradually eliminating it middle-sized cities.

These are all areas where the party leadership has forged a broad political consensus, though within each there are still considerable differences between reformers and conservatives to resolve. The dual mandate that came out of the plenum — giving markets a decisive role and strengthening the role of state enterprises — gives both sides a rallying call for their cause. There is plenty of scope for backsliding as those various ideological and political struggles are fought out. Such a transformative economic to-do list carries political risks for President Xi Jinping and Prime Minister Li Keqiang. They will move cautiously, and the various fronts of the reforms will move at different paces.

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China’s Blueprint For Reform Kicked To Sub-Committee

China’s leaders resorted to the old management technique for dealing with broad and deep differences: kick the issue to a sub-committee. The Party’s Third Plenum agreed to set up a working group to co-ordinate “comprehensively deepening reform” — which had, after all, been the meeting’s main agenda item. The questions now are  who will comprise this working group, and how much power it will have within the sprawling network of Party and government organizations to knock heads together to ensure consensus over setting policy and getting it implemented at state and local levels.

As the communique issued after the plenum pointed out, “the core issue is to straighten out the relationship between government and the market”. The task is double complicated by the plenum’s dual mandate of giving markets a “decisive” role in the economy while “unceasingly increasing the energy, control, and influence of the state economy” — that mandate serving as a proxy for the balance of power between the reformers and the conservatives.

Upgrading markets’ role from a “basic” to a “decisive” one is a significant advance by the reformers, but the lack of a more detailed, let alone bold plans for reforming the public sector is a marker of the entrenched power of the big state-owned enterprises including the banks. The areas that were highlighted for reform — fiscal and tax reform,  unified land markets, a sustainable social security system, and rural property rights — are all more directly functions of government and thus more directly amenable to Party and central government discipline.

Elsewhere in the economy, President Xi Jinping and Prime Minister Li Keqiang will have to open up cracks for private and foreign firms to let markets be more decisive in the hope that that will chip away at state monopolies. One place to start is financial services. Loosen state-owned enterprises’ grip over domestic financing and give international markets more power though opening up the capital account and the rest — eventually — will follow.

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Party’s Third Plenum Gets Underway, But How Far Will It Get?

The four-day behind-closed-doors Third Party Plenum has got underway. The agenda is known well-enough: the next phase of China’s economic reform to put growth on a more sustainable path— “unprecedented” changes, according to Yu Zhengsheng. The desired outlines have been sketched in the State Council’s Development Research Center blueprint known as the the 383 plan.

The first three is the actors — market, government and corporations — the eight is eight sectors that will be center stage — finance, taxation, land, state assets, social welfare, innovation, foreign investment and governance — and the final three is three bundles of high-priority policies, notably lowering entry barriers to financial markets, providing basic social security services to citizens, and allowing collective lands to be bought and sold, which implies a big change in ownership rights. (Caixin provides the summary appended below.)

Some of the 383 plan is specific and detailed, such as ending government-set prices for oil products. Other parts are broader brush, such as turning some state-owned enterprises into sovereign investment funds to pay for public services.

The big unknowns are first how much the leadership can get agreement on, and against what timeline; and second what degree of resistance both during the meeting and after will be put up by the vested interests in local government and state-owned corporations and banks that potentially stand to lose the most from moving away from the infrastructure investment-driven state capitalism of the past three decades.

We don’t expect much by way of detail to emerge during the meeting, or necessarily at the end of it. We do expect an end-of-meeting declaration of unity and a rallying cry to deepen reforms comprehensively. The loftier the rhetoric probably the less the agreement of detail.

383 Plan:

Reform Trinity

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Eight Key Sectors

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Three Breakthroughs

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Ten Questions About November’s Third Party Plenum

What is a Party plenum?

It is a high-level meeting of the broad leadership of the Chinese Communist Party. In attendance are the Politburo’s Standing Committee, the inner sanctum of Chinese power, currently seven strong, plus the some 200 members of the Central Committee, which is the level of power one rung below the Politburo. Committee members will also be the occupants of the most important state and government positions.

How often are plenums held?

Typically for four days every year in October during a Politburo’s five-year cycle, though they tend to be front loaded, which effects the timing. The current Politburo took over in November 2012, when its first plenum elected the key Party leaders; Xi Jinping was named as Party general secretary  and chairman of the Central Military Commission then. He and Li Keqiang were appointed to the lesser state posts of president and prime minister at the second plenum in February this year.

What is significant of third plenums?

These are the big policy setting meetings for a Politburo’s term. Deng Xiaoping announced China’s opening to the world at a third plenum in 1978 and Zhu Rongji introduced the idea of a socialist market economy at a third plenum in 1993 — as state media have been reminding their audiences incessantly. That is setting up this one to be of the same scale of importance. Xi and Li are expected to advance a sweeping proposal for economic reform to rebalance the economy, starting with financial markets reform and boosting the private sector.

Anything to be read into a November rather than October date for this third plenum?

Nothing beyond the complexity of preparing a reform package on the scale being mooted, squaring away vested interests, and the need to consult more widely than usual on how to implement it as the reforms will touch on such widely disparate areas of the economy.

How detailed will be the action plan coming out of the plenum?

The plenum sets Party policy. The government then has to come up with the detailed policies and priorities that puts the broad strategy into practice.  That is somewhat similar to the five-year plans. It is also a somewhat deductive process. The plenum is unlikely to produce either a blueprint for reform or a timeline. It more sets the overall direction and indicates what broad reforms have had political sign-off.

What are the key signposts to that direction?

  • Get the private sector out from under the shadow of the big state-owned enterprises;
  • Accelerate financial reform, particularly interest-rate liberalization, regulation of shadow banking, and greater internationalization of the currency;
  • Open up hitherto largely protected sectors such as energy, finance and telecoms to more international investment in order to improve their innovation and international competitiveness.
  • Lessen market distorting subsidies for power and other resources;
  • Reform local government financing to make it less dependent on land sales, and the corruption-plagued market distorting investment they encourage;
  • Relax the hukou system of household registrations to support the policy of urbanization, which is seen as critical to rebalancing the economy towards domestic consumption.

These are all  interconnected. For example, reform of local government finance will mean developing a municipal-bond market which will require financial-markets and foreign-exchange reforms to be fully effective.

Any chance of political reforms.

No. The new leadership is making a point of positioning its reforms as a continuation of those of its predecessors. Even though political reform seems to many to be the inevitable consequence of the economic reform path China is taking, the Party is kicking dealing with that day as far down the road as it can. Xi has been talking of the Chinese dream as an echo of the American Dream  and creating a moderately prosperous society. All is being kept within an economic  frame of creating a better standard of living for Chinese. That is the premise the Party’s claim to a monopoly on political power rests.

Where are the points of resistance to economic reform?

Xi has interwoven his anti-corruption campaign and strictures against official extravagance with his message of the need for deep economic reforms. That has mostly gone down well with the broad public and put local and provincial officials and some in the big state owned enterprises who could be expected to be resistant to change on the defensive. That is not to say there doesn’t remain substantial pockets of resistance to change from those who would potentially lose out. The leadership is hammering a message of both the necessity and inevitably of reform. At the recent World Economic Forum meeting in Dalian Li said, “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”

How quickly will reform happen?

Some big (and profitable) state owned industries and provinces and municipalities are powerful commercial players now in their own right. They have the potential to be roadblocks to reform. Xi recognizes the risks of reforming them from the top down so seems to be pushing changes from the bottom up and side in that will require them to adapt to a new economic environment, but to be able to prosper by doing so. The internationalization of the yuan is an example of that process at work. But it also an example of how Xi’s approach will take many years of incremental change to take effect. But that might prove more effective in the long-term than hammering through change using political clout.

Who are now the key figures in pushing reform?

Xi and Li, who as prime minister is in charge of the economy, are the political prime movers. There has been a consensus among the very highest levels of the leadership for some years that China’s economy will need to move in the direction being advocated. Xi and Li would not have been able to assume the leadership had that not been the case. Among the key technocrats backing them up are central bank governor Zhou Xiaochuan, long-time proponent of reform, and Liu He, the new deputy director of the National Development and Reform Commission. Liu was a central figure behind the publication of the report the World Bank issued last year calling for the reform of state-owned monopolies and warning of China’s risk of being caught in the ‘middle income’ trap which would leave it unable to make a Japan and South Korea-like transition to being a developed economy. Liu has drafted the economic reform speech Xi give at the Plenum.

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What Incentive Is There For China’s Elite To Reform?

As the Party heads towards its November plenum on deepening economic reforms the question that comes to the fore is whether China’s elites can benefit from rebalancing the economy in the way they have done from the three decades that followed the opening up of the economy after 1978.

High levels of Party/state/government controlled investment, access to cheap credit, and soaring asset prices, particularly real estate, created fortunes for the politically powerful. And not just for the political leadership but also, crucially, for the military. The focus of the next wave of reforms, which includes eliminating unproductive investment through the more efficient allocation of capital, providing more opportunity to not especially well connected small and medium sized businesses, and favouring the consumer interest over that of the (typically state-owned) producer  is not obviously to the existing elite’s personal advantage — even if the rebalancing collectively enhances their long-term chances of retaining their grip on power.

That trade-off is certainly understood — and accepted as essential—at the very top of the leadership — and has been for some years; remember Wen Jiabao wittering on about it to anyone who would listen in the last half of his prime ministership. How far down the pecking order that understanding now goes is moot.

Yet even assuming that the need for reform is widely accepted, how it is implemented is something else again. Who among the elite gets to bear the costs of change and in what proportion? The reality is that the state-owned pie than can be shared out to buy off opposition to reform is going to shrink because state-owned enterprises are going to have to bear the brunt of the adjustment. Ally that with a natural instinct of elites to be fearful of change, particularly institutional and technological change that threatens the status quo, and the potential brake on reform could be powerful.

That is not to say that either institutional and technological change won’t force political change, or that change won’t be imposed from the top assuming the power is there to do it — vaulting China into the ranks of rich countries is a powerful motivation for the new leadership for so many reasons — or, on the other side of the ledger, that there is even common cause among the ‘vested interests’ that are at risk of losing out when it comes to blocking particular pieces of reform. The process could be ugly, especially when viewed from outside the country, or even from outside the narrow confines that the various overlapping factions of China’s elite inhabit.

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Tiger Hunting A Boost For China’s Economic Reformers

The corruption investigation into Jiang Jiemin, who has just been removed from his job in charge of the State-Owned Assets Supervision and Administration Commission (Sasac), the agency that controls China’s state-owned enterprises, could prove a big boost for the country’s economic reformers on two fronts.

First, state-owned enterprises have been notable obstacles to the pace of reform as any switch to a more market-oriented economy would diminish the easy access to capital, customers and connections that they have long enjoyed and which provide a large part of their competitive advantage. The corruption probe into the princely China National Petroleum Corp (CNPC), of which Jiang was formerly chairman and from which four senior executives have been removed, shows that President Xi Jinping’s administration considers no state-owned enterprise sacrosanct. If any executive or senior party official in any other SOE needs any convincing of the seriousness of Xi’s intent they should note that Jiang is the first ministerial level official to be taken down in this anti-corruption drive. Xi is making good on his promise to root out the corrupt “tigers” as well as the “flies.”

Second Jiang is close to Zhou Yongkang, who, until his retirement with the change of leadership earlier this year, was the Politburo member in charge of the China’s internal security and intelligence services. These have business tentacles that reach deep into the economy. There is already widespread speculation that Zhou is himself under investigation. Zhou, who rose up through CNPC before coming Party boss in Sichuan (see this illustration of the nexus of political power of “the petroleum faction“), was also close to disgraced politician Bo Xilai. So Xi would be getting a “twofer” here, cracking down on political opponents and opening the way for more economic reform.

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Carmakers Get A Taste Of China’s Changing Business Climate

Another foreign industry pining its hopes of future growth on the Chinese market has fallen under the beady eye of the National Development and Reform Commission (NDRC), the country’s top economic planner. This Bystander reads reports that the NDRC has put the China Automobile Dealers Association (CADA) to work researching the price of foreign cars sold in China, both those imported and those locally produced. This is not attention carmakers will relish.

The nominal issue at hand is whether foreign carmakers are setting a minimum retail price for their vehicles, which could break the 2008 anti-monopoly law. Last month, state media accused foreign luxury carmaker carmakers of reaping what they said were exorbitant profits in China and should face an anti-trust investigation. It now seems that they knew of what they wrote.

The NDRC has already been successful in getting foreign milk-powder producers to pay fines and lower their prices. It recently fined five of them, including Mead Johnson Nutrition, Danone and Fonterra, and one local firm a total of $110 million for anti-competitive behaviour in effectively setting prices for retailers. Earlier this week, five Shanghai-based jewelry firms were fined $1.7 million for price fixing. Foreign drug makers are also feeling the pressure for making payments to doctors to use their drugs. Some three score of foreign and local pharma firms are under investigation for possible price manipulation.

That a mix of foreign and local companies are being punished is significant, even if foreign firms are bearing the brunt. Authorities have never been above targeting foreign companies for an abuse when they want to send a message to local firms that it is equally unacceptable from them. Tackling corruption within the Party and the government has become a core policy for the new leadership, but it also needs to break a similar culture in business that companies, if sufficiently well connected, can be above the law, too.

If China is to have the better corporate governance that it will need as it develops and rebalances its economy, the grey areas in which many firms now operate will shrink. Carmakers are only the latest to be given an indication of that.

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