Category Archives: Politics & Society

Party Plenum Indicates Limits To Xi Jinping’s Power

THIS BYSTANDER DRAWS two points of note from the recently concluded Fourth Party Plenum, the four-day annual meeting of China’s 350 most powerful officials. The first is that President Xi Jinping has not centralized power as comprehensively as has been supposed. The second is that there is a distinction between the rule of law and rule by law.

Both points are significant in their separate ways. Xi needs to centralize power if he is to remove the obstacles that the most entrenched vested interests pose to his economic reforms outlined at the previous Party plenum. Xi wants to switch the economy from investment- and export-led growth to domestic consumption. It is a change to a no longer sustainable credit fueled model of growth that powered the past three decades of China’s rise as transformative as the policies of Deng Xiaoping that initiated it.

Xi sees his legacy as being on the same historic scale. Yet there are many powerful Party, state and military elites who have benefited in privilege and pocket book from the old economic model, and will not readily give it up. While Xi has extended his power to coerce them to do so faster than many had expected before he became China’s pre-eminent leader, this plenum has shown that his drive to centralize power is not yet complete.

The PLA is a case in point. It holds a special place in the country’s politics for the obvious historical reasons and has considerable policy autonomy. With China taking on a greater global role, such autonomy gives it more opportunity to calibrate China’s “assertiveness” than may always be comfortable for Beijing. It also has extensive industrial and commercial interests from which senior members of its old guard profit

The plenum had been expected to approve a reshuffling of the Central Military Commission to promote allies of the president. On the basis of the communique issued after the meeting, that did not happen.

Nor was any light shed on the fate that is to befall Zhou Yongkang, the former Politburo Standing Committee member who is the biggest tiger to fall prey to Xi’s anti-corruption drive and the highest ranking Party member be investigated for corruption in many a year.

On both scores, that suggests divisions of view at the top. At the very least, there are still obstructions that Xi feels he cannot yet move.

The communique’s main point of commission as opposed to omission was changes to the judicial system, the plenum’s headline issue. The Party remains firmly in control of the legal process; a democratic separation of powers was never on the agenda, even though many believe that China will not be able to make the economic transition Xi desires without commensurate institutional political, social and legal changes.

For any foreseeable future, the judiciary remains subordinate to the leadership of the party and national security. Top leadership will still be able to control cases at the provincial or national level in which it has a pressing political interest. Rule by law; not rule of law.

That has tempted some commentators to suggest that nothing is changing. There are significant changes at the lower levels, however. Local judges will no longer be appointed and funded by local officials but by provincial or national authorities. That should break the commonly cosy relationship between local officials and local courts. It would then be more difficult for corrupt local officials to remain immune from accountability, a widespread popular grievance.

That in itself won’t shift for Xi any of the big obstacles blocking his economic reforms. It will, however, help to break up the endemic institutionalized corruption at the level that has the most impact on most people’s daily life. If he is still not able to move all the big rocks at the top that he would like, he can still remove a mass of little obstacles at the bottom.

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Facing A Slower Chinese Economy, Xi Needs A Winning Party Plenum

THE INTERNATIONAL MONETARY FUND held its forecasts for China’s GDP growth this year and next unchanged in its latest quarterly economic outlook even as it trimmed those for the world economy. It is still expecting 7.4% GDP growth this year, slowing to 7.1% in 2015, down from 7.7% in both 2012 and 2013. “China is sustaining high growth, but slightly lower growth in the future is seen to be a healthy development,” the Fund says.

For this year, the IMF is projecting that the economy will come up just short of the official growth target of 7.5%. After a slower than expected first-quarter, Beijing launched a number of stimulative measures to get the economy back on track for hitting that target. These included tax relief for small and medium businesses, accelerated fiscal and infrastructure spending, and selective cuts in banks’ required reserve ratios.

But with the  property market still weighing on the broader economy, GDP in the third quarter, due to be announced on October 21st, is likely to confirm that growth continues gently gliding downwards, somewhere in the 7-7.5% range is this Bystander’s best guess. We expect some more if modest stimulus in the fourth quarter to make sure the full-year number comes out as close to the higher end of that range as possible. Prime Minister Li Keqiang is only the latest official to blur what counts as 7.5%; about 7.5% will be close enough.

It is likely that next year’s official target will be lowered to a more realistic 7% as the economy makes the transition to more sustainable long-term growth through rebalancing demand away from investment toward consumption, and the property market, especially residential investment, remains sluggish. However, infrastructure investment and credit will remain the main drivers of growth next year.

Excess industrial capacity and the dark shadow of provincial and municipal debt remain the main risks to the growth forecast along with the deflation of the property market getting out of hand. While the government has great capacity to absorb such a hard landing, that capacity isn’t infinite, and the policy challenge is exacerbated by the two-tier property market that has emerged in China. Bubble prices persist in large cities while small cities are experiencing a property recession thanks to overbuilding spurred by local governments desperate to spur growth.

A too-fast slowdown in property prices would work through to the banking and shadow banking system in short order. The IMF rightly notes in its report the importance of reforms to buttress financial sector stability:

It is crucial to implement key elements of the authorities’ structural reform that aim to strengthen the regulation and supervision of the financial sector, reduce implicit guarantees, liberalize the deposit rate, and use interest rates instead of quantitative targets for the implementation of monetary policy, thus encouraging market-based pricing of risks. Further expansion of the social safety net, by reducing the current high rate of social security contribution, and better health care benefits would help reduce household saving rates and raise domestic consumption.

More broadly, China needs to structural reforms to its education, labor and product markets to raise firms’ competitiveness and productivity while lowering credit growth and local government borrowing. All that touches just about every vested interest. That is meat for the forthcoming Fourth Party Plenum.

Last year’s Third Party plenum announced the need for reforms to strengthen social safety nets and the social security system as part of a 60-point blueprint sketched out for President Xi Jinping’s plan to rebalance the economy. This year’s plenum, due to start on October 20th, has as its first objective the consolidation of Xi’s rule of law cum anti-corruption drive — which will be a proxy for the jockeying for power and influence between Xi and his predecessors Jiang Zemin and Hu Jintao.

While Xi has moved faster to consolidate his power base than might have been expected, his ability to advance his economic-reforms agenda will require the backing of Jiang and Hu and their respective Shanghai and Communist Youth League factions. The appearances at National Day celebrations of some senior figures in the Party and army thought to be the subject of anti-graft investigations and who have not been seen in public recently suggests Xi may be rallying unity in the ranks to that end.

Xi may well feel his best next tactical move for economic reform will be to revamp the 100-or so central-government controlled state-owned enterprises to improve their business performance and governance. These are the big dogs in the economy, and entrenched obstacles to reform in their various sectors. Making them over would have the added bonus for him of weakening some of the power bases of those not aligned with him.

The trick for Xi remains aligning the political realities he faces with the underlying structural slowing of economic growth, but without getting too close to the feared hard landing of the economy that would undermine his political position. As we have noted before, every mini-stimulus ratchets up a notch the difficulty of introducing the policies needed for rebalancing because they don’t address the underlying causes of unsustainable booms and the vested interests that benefit from them. And that needs a political solution before it can get an economic one.

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Hong Kong’s Umbrella Protest: Tanks For The Memory

PRESIDENT XI JINPING will not want a photograph of even a single Hongkonger facing down a line of PLA tanks to be the iconic image to emerge from the current Umbrella protest in the city. However, sending in the tanks, whether metaphorically or not, remains an option for the Party leadership in Beijing which has to suppress this protest against its monopoly on political power in short order.

While Hong Kong in 2014 is in a different time and place to Beijing in 1989, Beijing’s combination of cajoling condemning and cudgeling hasn’t yet done it. Xi may be prepared to wait out matters in the hope that the internal divisions among the demonstrators will eventually break their protest apart. Yet, as our man in Tiananmen Square in 1989 pointed out to us, there is a terrible symmetry taking shape: a tidy protest (demonstrators street sweeping in 1989; plastic bottle recycling in 2014) turning violent and unruly before being brought to a forceful end by the authorities.

The Party has to weigh the internal and external costs of shutting the protest down forcefully. One external consideration is the international sanctions it would bring. Beijing has been carefully following the response of the U.S. and Europe to Russia’s military intervention in Ukraine. It may conclude from that that those are the least of its worries. More concerning would be the effect of international confidence in Hong Kong as a place where China business can be done with Western legal safeguards. That would be shot, at least for a while, but there are internal municipal constituencies within China that would be happy for Hong Kong to be taken down a peg or two.

All of that pales against the internal calculation. Hong Kong is both a part of China and apart from it. One country; two systems. If its 50-year post-colonial assimilation agreement was seen from the south side of the Sham Chun River as prologue to the future — a chance for Beijing to experiment along the well-trodden development path of industrializing nations, letting the Party learn how to handle a growing middle class developing expectations of a greater voice in how they are governed and more say over their economic interests — then from the other side of the river that has just become to look like an existential threat. The further north you go, the acuter that threat seems.

The tinder that sparked the current demonstrations is Beijing’s requirement that no candidate may run in a Hong Kong election who has not in effect been nominated by the Party. Protesting Hongkongers want anyone to be allowed to stand. That is a long way from demanding reform to the elections themselves, which are a limited expression of popular democratic will at best. But it is a direct challenge to the Party’s notions of tight political control. And Hong Kong provides a beacon for the millions of urban middle class Chinese on the mainland where there is widespread dissatisfaction about the way they are governed, especially by local and municipal officials.

That, in turn, is a long way from saying that there is a groundswell of support for U.S. or European style democracy in China. There is not on any great scale, anymore than there was in Japan and South Korea at a similar stage of their economic development, even if democracy becomes shorthand for political reform, and a shorthand that is often misread in the West. But the bargain of rising economic prosperity in turn for docile political compliance no longer looks as attractive to many Chinese as it once did when they were poor.

The experience of industrialization has always been harsh for those living through it. For most, it is a hard daily slog in large, crowded cities with all the accompanying quality of life issues from adulterated food to killingly dirty air. Officials living high on the hog from corruption and cronyism sits ill with that. For Party bureaucrats the change is no less unsettling as they lose control of their economic levers of command and control.

Attempts by authorities to censor news of what is happening in Hong Kong are being only partially successful at best. How Xi settles his current Hong Kong issue will reverberate in the mainland for years to come, and especially if it is with tanks.

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Zhou Anti-Graft Probe Tests Limits of Xi’s Power

IT COMES AS little surprise to this Bystander – or to most others – that former security chief Zhou Yongkang is under investigation. The announcement that Zhou is suspected of serious Party disciplinary violations – for which read, serious corruption – only formally confirms rumours that have been circulating for months – rumours that were informally confirmed by Zhou’s disappearance from public view since last October and investigations of his family and dozens of associates in the oil industry and security circles.

As tigers go, Zhou is the biggest to be brought down by an anti-corruption campaign since the time of the Gang of Four; he headed the Ministry of Public Security until his retirement in 2012, oversaw the state oil sector, and was a member of the Politburo standing committee.

By disgracing such a senior powerbroker, albeit one past the zenith of his political power, President Xi Jinping is sending a clear signal to both his political adversaries and to the public: his anti-corruption campaign will be wide-ranging and no mere exercise in frightening off political rivals, though it is certainly that, too. Zhou was a supporter of Bo Xilai, the former mayor of Chongqing who was given a life sentence last year for corruption and abuse of power after challenging Xi for the leadership. He also remained a powerful figure in the state oil industry, and thus an obstacle to Xi’s economic reforms.

Zhou’s investigation will also be seen as Xi signaling that he believes he has consolidated his power sufficiently that no official or politician is beyond the reach of his anti-corruption campaign. That is a message that will play well with most Chinese, who are at the sharp end of petty official corruption day-in, day-out. Yet popularity is one thing and political power another. Whether a Party investigation of Zhou turns into court proceedings will indicate how absolute Xi’s political control over the Party has become.

Party discipline means expulsion and house arrest without public prosecution. Zhou’s case indicates that Xi isn’t yet in a position to antagonize all the high-level power brokers and elders in the Party, notably former President Jiang Zemin, by initiating court proceedings that could lead to lengthy jail terms or the death penalty – and the lid being publicly pulled back on the multimillion dollar business enterprises of many of the ruling elite and their families. For now, suffice it to say that the long-standing understanding that serving or former Politburo standing committee members will not be incriminated in anti-graft probes clearly no longer holds.

That is a more startling message for the political elite than the one to lower level officials have had to swallow, that the days of flaunting their perks and privileges and expecting expensive gifts as a right of office are over. So far, according to statement’s by various judicial officials, 51,306 officials were investigated for corruption and related economic crimes in 2013, a twelfth more than in the previous year. That number included 20 ministerial- and vice ministerial-level officials, about half of whom can be considered associates of Zhou.

Xi advocates that corruption threatens the Party’s long-term viability. One common facet of industrializing countries that successfully move up the economic development ladder is that they reform and strengthen their institutions. In China, the Party remains the paramount institution, so reforming that is Xi’s priority. For now though he is emphasizing clean governance over the rule of law, by using top-down political power to set the Party on what he believes is the correct course. The fine line he has to walk is between cleaning up the Party and tearing it down in the process of tearing down his political opponents.

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Gauging Hong Kong

THE TURNOUT FOR Hong Kong’s annual July 1st rally in support of the territory’s continuing autonomy was the largest in a decade.

This year’s protest had added appeal as a way for Hong Kongers to show their distaste for Beijing’s recent white paper on the former British colony. This was read as foreshadowing tighter political control from Beijing and a less independent judiciary in a more-rapid-than-expected convergence of the two systems in the “one country, two systems” arrangements that now prevail.

Such proposals do not suggest that Beijing has a sure feel for Hong Kong’s political pulse. Hong Kong’s ultimate destiny is to be just another big city in southern China. Getting there will be bumpy unless Beijing demonstrates a more deft political touch.

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Xi Jinping’s High-Stakes Tiger Hunt

GEN. XU CAIHOU, one of the PLA’s most senior officers, is not the first “tiger” to be trapped by President Xi Jinping’s anti-corruption drive. He joins Wang Yongchun, deputy head of state energy giant China National Petroleum Company (CNPC), and Jiang Jiemin, former head of the state asset regulator, in being newly expelled from the Communist Party for corruption and abuse of power — a fate also expected to befall former Politburo Standing Committee-member Zhou Yongkang, who once presided over the state’s security apparatus. Were Zhou to be put on trial for corruption he would be most senior leader to face such charges since the Communists took power in 1949, and a significant escalation from last year’s prosecution of former Chongqing Party chief Bo Xilai who was merely a Politburo member.

Nor is Xi’s anti-corruption drive the first to be undertaken by a new leader. His appears to have more legs to it it than those of his predecessors. There have by this Bystander’s best count been some 180,000 cases of actions against officials, military officers and state-sector corporate executives big (“tigers”) and small (“flies”).

Not only has Xi to consolidate his power and make his mark in the  faction-riddled internecine warfare of China’s internal politics, but he also is determined to clean up the image of the Party and to push ahead with economic reform. He believes the first is necessary if the Party is to retain the fast-evaporating trust of ordinary Chinese, on which the Party’s claim to monopoly rule hinges, and the second is necessary to deliver the continuing rise in living standards that are also an essential part of the bargain that allows no political competition to the Party.

There are lots of powerful people in the three most important and tightly interlocked strands of Chinese political life, the Party and the government, the military and the state-owned enterprises whose wealth is far from clean and who have a vested interest in retaining the economic status quo that has provided the opportunities for them to gather that wealth. Xi is both taking out highly symbolic kingpins as well as their underlings who are fast losing the political patronage that has hitherto protected them.

Xi needs to do this if he is to be serious about regenerating trust in the Party and pushing through economic reform. He has to create large breaches in the old guard through which he can drive the forces of change. But he faces three risks. First, he has broken the taboo against going after the families and wealth of the inner circle of China’s leadership; that may provoke a backlash against him. Second, there is a question of how much damage the Party’s reputation can sustain; how many bad apples can be thrown out before the whole crop is considered rotten? Third, he fails to put in place in the Party, government, the military and the state corporate sector systemic mechanisms to regularly detect and prevent corruption in the first place, backed up by an independent judiciary and a free press.

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This Day In History

This Bystander is reminded today not so much, as the former British prime minister Winston Churchill said, that history is written by the victors as that the victors get to choose whether it is written at all.

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