Category Archives: Politics & Society

China’s Collectivisation of Capital

THERE IS A vacuum in the state’s control of the economy. The combination of powerful private companies arising in new areas of economic activity from which state was absent, such as within the tech industry, and the breaking up of the patronage networks within state-owned enterprises (SOEs) as a consequence of President Xi Jinping’s anti-corruption campaign has created it.

The Party abhors a vacuum and has stepped in to assert its control as the state’s wanes. Under Xi, the People’s Daily opined in June, the Party has sought to address the “weakening, watering down, hollowing out and marginalisation” of party leadership at state enterprises.

Two months ago a government statement made it clear that private-sector business should follow Party guidance, including ‘patriotism’, ‘observing discipline’ and ‘serving society’ within its definition of entrepreneurship.

The mechanism for exercising Party control is the Party branch within companies. These have long existed within SOE’s (they are present in 93% of the 147,000 SOEs big and small) and have become prevalent in the private sector. Qi Yu, deputy head of the Central Organisation Department, said in October that 68% of 2.73 million private businesses had Party branches as of the end of last year.

Party cells are also becoming more common in joint ventures with foreign firms, and are being pushed on foreign firms with wholly owned local operations as part of the ‘new era’. Qi said 70% of foreign-funded firms in China – or 750,000 – have set up Party branches and 106,000 foreign-invested companies, against 47,000 in 2011.

Samsung and Nokia are two foreign companies who have acknowledged publicly that they have set up Party branches in their local operations; The medical systems division of Japan’s Toshiba has had a branch since 2007. The US chemicals multinational DuPont had one when it set up in Shanghai in the 1990.

The influence of Party cells varies greatly between companies and industries. At their best, or at least as portrayed by authorities, they promote goodwill and communication between the company and the Party. They run companies’ internal labour unions and be a source of labour through the agencies that coordinate them.

Some are little more than a cost irritant (the company foots the bill for Party branches’ activities). In joint ventures, especially with SOEs, they can make operational decision making more opaque and cumbersome. At the other end of the spectrum, they can seek to determine strategic and operational investment and business decisions.

Some SOEs listed in Hong Kong have gone as far as changing their articles of association so as to give the party a leading role in management decisions. And there are reports circulating of joint ventures being pressed to rewrite their terms of agreement to give the Party a more formal say in operations and management, including a final say over investment decisions.

It is that direction of travel — expanding the party’s presence in areas where it has previously had a limited role, such as in private and foreign joint-venture companies and the boards of listed firms, that is exercising foreign multinationals operating in China.

In late July, executives from more than a dozen top European companies in China met quietly in Beijing under the aegis of the EU Chamber of Commerce in China to discuss their concerns about the Party’s growing role in the local operations firms like theirs. Last month, the Delegations of German Industry and Commerce in China, representing German chambers of commerce, also raised their concerns and said some German companies might consider withdrawing from the market if the Party’s influence on their local operations grew.

Part of their argument was that companies from multi-party democracies should not be bound to promote a particular party, especially one that claims a monopoly on political power. However, the concern is that once Party presence is written into governance, commercial management autonomy is lost for good. In addition, Party members are subject to the Party’s disciplinary procedures, which, of course, is beyond any internal policies a company may have.

A statement from the State Council Information Office earlier this year, saying that “company party organisations generally carry out activities that revolve around operations management, can help companies promptly understand relevant national guiding principles and policies, coordinate all parties’ interests, resolve internal disputes, introduce and develop talent, guide the corporate culture, and build harmonious labour relations” is less reassuring to foreign investors than the Office probably intended.

The other end of the telescope is that the Party should intervene to assert the collective interest of the whole over the that of the part, the whole, in this case, being the state capitalist class.

An old-school Marxist ideologue might describe the presence of Party units in companies, and the guidance and discipline they would provide, as a precursor to the collectivisation of capital, in which individual companies become units of a state corporate whole.

In these more pragmatic days, this Bystander sees it just as the Party extending an strengthening its presence and control over all sectors of society, even in areas where it has previously had a limited role, which might be much the same thing.

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No Change At The Top

Members of the Politburo standing committee elected October 2017

THE QUINQUENNIAL CONGRESS of the Chinese Communist Party has, by recent convention, set the course of the Party’s future leadership. The 19th, just concluded, is no exception. The future leadership of the Party is for the foreseeable future, general secretary Xi Jinping.

Two signs of Xi’s sway are, first, that his ‘Thought’ has been written into the Party’s constitution by name. That not only elevates him to the level of Mao Zedong but makes any challenge to his authority a challenge to the Party as a whole. Second, he has been able to avoid installing a Politburo Standing Committee — the seven men (and it is all men, as seen above) at the apex of Chinese affairs — that contains any obvious successor.

That may be his most important achievement of all at the Congress. It avoids him being seen as a lame duck during the second of his two five-year terms as president, and leaves him the most flexibility in putting in place whatever arrangements he wishes for when that five years are up.

His options then are:

  • to hand over the presidency to a loyalist who would perform the role as a ceremonial head of state (like a queen in a constitutional monarchy) while he exercises executive power from a post such as Party general secretary or head of the military commission (as Jiang Zemin did);
  • to ensure that a hand-picked successor takes over the presidency and general secretary positions while he exercises control for behind the scenes as ‘core leader’ (as Deng Xiaoping did as ‘paramount leader’). That successor would be promoted from the Politburo without the customary five-year preparation period of being on the standing committee, though, as that is meant to be a time for the successor to establish his authority, that would not be needed as the authority would stay with Xi anyway;
  • or he could baldly amend the national constitution to allow himself to continue as President for a third term.

In the meantime, Xi will embark on his second term with a Politburo standing committee that contains some allies but no fierce opponents, and all of an age at which they can have no expectation of taking the top job before they retire.

Five of the seven members of the previous standing committee have retired, leaving Xi and prime minister Li Keqiang as the only two carryovers. Among the newcomers, the two most important factions within the Party, Jiang’s Shanghai faction and the Communist Youth League of Xi’s predecessor Hu Jintao, have got places at that highest of high tables, notably Han Zheng for the Shanghai group and Wang Yang for the Youth League, which can also count Li. But both factions have been considerably weakened by Xi’s anti-corruption-cum-political-purge campaign.

To say that Xi has established his own faction may be over egging the pudding. If he is at the centre of one it is the amorphous group known as princelings, which has many cross-overs with other groupings.

However, jockeying for power is part of the warp and weft of China’s elite politics. Xi now has two firm allies. One is his former chief of staff and long-standing associate, Li Zhanshu, who will head the rubberstamp parliament, the National People’s Congress, in which role he would be critical if Xi did want to amend the natonal constitution to permit a third term as president. The other is the former head of the Party’s Organisation Department, Zhao Leji, who will head the Central Discipline Inspection Commission in succession to Wang Qishan, who led the anti-corruption operations that were instrumental in consolidating Xi’s power.

Yet, apart from supporting Xi, the overriding characteristics of the new standing committee, however, is experience and competence. These are people who know how to run a large operations as well as operate at the highest levels of the Party.

Xi also knows the importance of snuffing out factional struggles. In Hu’s last term, Xi and Hu spared over how quickly the outgoing president would successively yield his Party, state and military offices as he attempted to cement his legacy and power behind the throne.

Below the standing committee, the 25-member Politburo is broadly pro-Xi. The same can be said for the 200-member Central Committee beneath them.

Perhaps most critically, Xi loyalists now control all the key provinces and provincial-level municipalities that matter — Beijing, Shanghai, Guangdong, Chongqing and Tianjin, for example, and those where the could be unrest, notably Xinjiang. The mountains may be high and the emperor far away, as the old proverb has it, but Xi has his loyalists in place to ensure there is no repeat of city bosses like the disgraced Bo Xilai and his recently purged successor Sun Zhengcai getting uppity.

Our man in Davos sent word of how he remembered seeing a somewhat hesitant Xi being unveiled to the world at a World Economic Forum meeting a decade or so back and contrasted that with the assured, commanding figure that was seen at the 19th Party Congress. This Bystander also remembers some words penned here about Xi back in 2012 just ahead of the 18th Party Congress that would bring him to power:

Cunning, calculating and ambitious Xi plays politics like a chameleon playing poker.

He has played a winning hand, and still holds most of the aces.

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Xi Sets Out What He Is Thinking

Screengrab from a live television broadcast of Xi Jinping presenting his work report to the 19th Party Congress in Beijing, October 18, 2017

MAO TRANSFORMED CHINA. Deng Xiaoping transformed China.

Xi Jinping?

Xi has placed his marker at the 19th Party Congress — ‘socialism with Chinese characteristics for a new era’. Significantly, state media are starting to report it appended to his name: ‘Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’. Xi’s formal induction into the pantheon of Party ideology alongside Mao Zedong Thought and Deng Xiaoping Theory cannot be far behind.

Xi Jinping Thought comprises 14 bullets points that, in short, reiterate that the Party leads everything. However, the sense of marking an epoch is as palpable as it is deliberate.

Xi portrays his China as one that will have become a global leader with international influence, a modern economy, advanced culture and world-class armed forces.

This future will come in two 15-year phases, 2020-2035 and 2035-2050.

The first phase will focus on turning fast growth into high-quality development, the deliverance of a ‘moderately prosperous society’. The second will turn China, by then likely the world’s largest economy, into Beautiful China, some nirvana-like flowering of a great modern socialist country-cum-superpower, and to do so, conveniently, in time for the 2049 centenary of the revolution that brought Mao and the Party to power. (Poverty is to be eradicated by the centenary of the Party’s founding, 2021.)

The first phase involves moving ahead with the rebalancing of the economy towards consumption-led growth that has been haltingly underway for some time. The financial system will become more market-based, and state-owned enterprises will be turned into world-class, globally competitive firm. China will become more open to foreign investors. Rule by law will be enhanced. Greater environmental protections introduced. The modernization of the PLA will be completed by 2035, giving China a world-class military, for which read on par with or better than the United States’.

Diplomatically, China will pursue global development in partnership with other countries, though it will create an alternative (and Beijing-led) global order architecture to be the framework for that. Alongside that, it will seek to strengthen its cultural soft power. Meanwhile, internally the anti-corruption campaign will continue to ensure the Party does not rot from the inside. And loyalty to the party and central leadership group must be absolute.

If this sounds like a political laundry list drawn up by a committee that is because, at heart, it is. Nor does it contain any new initiatives. Though delivered by Xi as his ‘work report’ and bearing his indelible stamp, the three and a half hour speech and its underlying text is the result of a year of consensus building involving thousands of officials.

Its purpose is to show the Party’s rank and file the signposts to the long-term actions expected from them by the leadership in all policy areas. That leadership, though, is now firmly Xi’s. The next question is how long he will feel he needs to exercise it.

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Xi Jinping: Two Eyes To The Future

xi-jinping

Xi Jinping

THE CRITICAL 19th Party Congress is due to get underway on October 18. A three-day preparatory meeting of the Party’s top leadership wrapped up today in Beijing.

It is commonly held that President Xi Jinping will emerge from the forthcoming Party congress with an even greater grip on power.  That may well be true; Xi will certainly be reappointed to the Party’s top post, general secretary, and might well be able to prevent Politburo Standing Committee promotions that indicate a designated successor in five years time — suggesting that Xi might stay beyond the now customary two terms.

An extension for Prime Minister Li Keqiang is less likely, with Hu Chunhua, Party boss in Guangdong (a post Xi’s father once held), being lined up to succeed him.

However, Xi’s enhanced power will not be as absolute as the personality cult building up around him might suggest. He will still have to horse trade with nodes of power and influence within the Party that have been diminished but not extinguished by his anti-corruption campaign.

The outcome of those compromises will offer a measure of the willingness of China’s elite to accept another five years of Xi’s tightening and highly personalised political control.

Little of that horse trading will be on public view at the Party Congress. Instead, there will be much play given to the ‘great rejuvenation of the Chinese nation’ and the ‘Chinese dream’, two somewhat ill-defined distillations of Xi’s “four identifications” that he believes all Chinese should make (with the motherland, the Chinese race, Chinese culture and the Chinese socialist road).

Part of that, also likely to be prominently presented is China-centric alternatives to the US-dominated Western international order, if not couched in quite such confrontational terms. Ambitious attempts to redraw the global geostrategic map, such as Xi’s pet ‘One Belt One Road’ project, will be presented not in terms of Chinese assertiveness and expansionism on the global stage but ‘win-win’ partnership and cooperation. China will also be presented as the rational counterpoint to US President Donald Trump that the world needs now, with Xi himself as its embodiment.

Meanwhile, much of the backroom dealing will already have been done.

Xi’s goals are twofold. First, he will wish to drive forward his self-appointed mission of reinventing both party and country so that the Party retains its monopolistic grip on power, which history suggests is at risk as China becomes richer.

Five years ago, managed economic reform was at the forefront of Xi’s agenda, but has been thwarted by vested interests, which have had to be systematically removed, mostly through the anti-corruption purge. Economic reform needs to be restarted, and before the country’s debt problem causes political problems. He still does not have the control over the economy that he does over the state security apparatus, military and, increasingly, the Party.

Second, he will want to put in place people who can carry forward that mission if and when he is gone, and to make sure they do not suffer the purges that Xi has used to decimate his rivals.

We use the verb deliberately. Roughly one in ten officials have been warned, put on probation, demoted or expelled from the Party since the crackdown started. According to Central Commission for Discipline Inspection figures published earlier this month, 1.34 million township-level and 648,000 Party members and officials in rural areas have been punished in the five years of the campaign, as well as more than 70,000 officials at or above the county-head level. More than 35,000 officials have been prosecuted.

That is a lot of ‘flies’, but several ‘tigers’ were tamed, too, including Sun Zhengcai, a Politburo member seen as a potential successor to Xi, and Wu Aiying, 65,  justice minister from 2005 until this February past and one of only a handful of senior female officials in China. The flies represent, as this Bystander noted before Xi ascended to power, how he is driven by a sense of a loss of the Party’s traditional moral values of honesty, dignity and self-respect; the tigers reveal his political ruthlessness.

This crackdown consolidated Xi’s control but also broke the implicit post-Mao pact that effectively banned large-scale purges within the elite. Xi’s followers no longer have that self-preservation guarantee, either. Xi needs to gather more power to himself now to protect them, and thus his legacy, in the future.

There are risks. The anti-corruption campaign has had a chilling effect on officialdom and morale is low. The security apparatus and military can be kept onside through expanded missions, new toys and reorganisations that elevate Xi loyalists. But the civil administration is a different matter.

Xi will need China’s massive administrative apparatus to implement his economic reforms. Their disciplined enthusiasm for doing so will be critical, especially as they will no longer be able to skim off their piece of economic progress. The anti-corruption campaign appears to have eased back on the Communist Youth League, the faction that draws heavily from cadres and government officials.

Xi’s leadership is likely to be more openly challenged within ruling circles should the economy run into serious problems, perhaps as a result of the debt crisis being mishandled or from an external shock, such as a trade war with the United States, although the state security apparatus would likely prevent either from triggering social unrest. Similarly, failures connected with his signature international projects, notably One Belt One Road, could undermine him domestically.

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VAT And China’s Other Taxing Problems

CHINA STARTED TO replace its Business Tax with a value-added tax (VAT) in 2012 when a pilot scheme was launched in Shanghai. VAT has since been steadily expanded, both geographically and sectorally.

Earlier this month, following an executive meeting of the State Council, chaired by Prime Minister Li Keqiang, plans were announced for streamlining the administration of VAT and acknowledging that it has become a universal national tax.

The service sector first saw the tax in May last year when it was applied to property, financial and consumer services sectors. At the same time, VAT was extended fully nationwide.

Authorities say that between then and June, the switch to VAT has saved businesses 85 billion yuan ($12.8 billion) in taxes, providing an important boost to the ‘rebalancing’ of the economy towards consumption. Total tax savings since the pilot scheme started is put at 1.6 trillion yuan.

In July, the four VAT brackets (17%, 13%, 11% and 6%) were reduced to three with the elimination of the 13% bracket. Agricultural products, tap water, publications and several other ‘13%’ goods were moved down to the 11% bracket, though that still leaves more VAT tiers than the international average.

The new plans foresee digitization of the tax system, simplifying procedures for tax filing and switching from physical to electronic versions of the invoices-cum-receipts (fapiao) that serve as legal proof of purchase for goods and services. Fapiao are a key component of enforced compliance with China’s tax law as they compel companies to pay tax in advance on future sales.

The VAT fapiao is also used for tax deduction purposes within VAT, so digitising the whole process should streamline the accounting.

The tax is still referred to as “the VAT reform pilot program” though that status as a pilot looks like ending de jure as well as de facto; the State Council executive meeting also indicated that more detailed national VAT legislation would be forthcoming.

There is more work to be done on standardising it as a national tax. There are still inconsistencies between sectors in the rates applied to the same goods and services. Also, some tax payers are not able to make full VAT deductions. A further issue to address is compliance costs for taxpayers with multiple business locations.

One major issue that a national VAT does not address is how the tax take is shared at the provincial level. (Germany and Japan, for example, use allocation rules based on population and aggregate consumption, respectively.)

However, China has a bigger problem of fiscal redistribution to tackle. The country has the largest share of local government spending in the world, largely because public services and the social safety net (health, education, welfare, etc.) are centrally mandated but delivered and paid for at the local level. Many federal countries decentralise their social insurance system, but China is a rarity in having both its public pension system and unemployment insurance managed at the local level.

Yet, since the fiscal reforms of 1994, provinces and municipalities have negligible revenue raising powers of their own. Further, although 60% of taxes are collected by local government, those taxes are handed over to central government with some to be returned via revenue-sharing and other transfer schemes through rules that are still not completely transparent.

Transfers from the central government were supposed fully to finance local-government deficits since provinces and municipalities were barred from issuing debt.  In practice, however, local governments were given increasingly large unfunded mandates. Because of the prohibition on issuing debt, they resorted to selling land and using off-budget special-purpose vehicles to borrow and spend on infrastructure, starting the infamous local-government debt bomb ticking.

Local governments debt had reached the equivalent of around 40% of GDP by 2015.

A fiscal reform plan was announced in 2016 to address the misalignment, but it will take a comprehensive imposition of taxes such a market-value-based property tax, local surcharges to personal income tax and maybe even an additional provincial-level VAT — though that is difficult technically to administer; few if any countries have pulled it off.

It will also mean converting the pilot scheme for issuing and trading municipal debt started in 2014 when back door borrowing through special-purpose vehicles was banned, into a national muni-bond market. That, in turn, will require broader financial-system reforms.

Those are proceeding at a cautious, measured pace. Short-term stability and state-centric control is the current leadership’s instinctive approach. That may change after the forthcoming Party congress, but, more likely, it will not. In that context, streamlining VAT to puts greater taxation capacity in Beijing’s hands makes political as well as economic sense.

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China’s Press On Academic Freedom

Cambridge University Press, a leading academic publisher whose China Quarterly is one of the leading English-language social science journals devoted to China has reversed its decision to comply with the demands of China’s censors to block sensitive content.

The university press had initially removed some 300 China Quarterly articles on politically sensitive topics from its website in China on the instruction of the media regulator on penalty of not being allowed to publish at all in China.  The press changed its mind following protests, including a petition published by academics from around the world, condemning restrictions on academic freedom of thought.

It was a dilemma that many foreign businesses have faced: the choice between being shut out of the Chinese market for refusing to comply with authorities’ controls of markets or suffer reputational risk outside China by knuckling under. In information markets, the reputational risk of complying with controls on freedom of expression is potentially a higher cost for an academic institution that it would be for a commercial technology or media company. Online content providers,

Chinese and foreign, have been a particular focus of the censors’ attention this year, as online content, previously more laxly regulated than offline media, has been brought under the same control regime as traditional print and broadcast media.

Tech groups and media companies have bowed to government demands to close down hundreds of mobile video platforms and promised to work more closely with state media. Under the new cyber security law that came into force on June 1, only those online content creators who have been issued with a media licence are permitted to upload videos featuring news or political commentary.

This has reinforced Chinese firms’ pre-emptive self-censorship, and more foreign firms to accept specific demands.

Beijing has to tread a careful line with foreign academic publishers. While censoring politically sensitive material is one thing — and social scientists in Chinese universities, once an important source of policy advice to government, have come under greater freedom of expression constraints since President Xi Jinping took over in 2012 — it is another cutting off the country’s scientists and technologists from the latest foreign academic research in those fields.

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China Systematically Cracks Down On The Internet

IT IS EASY to assume that the Cyberspace Administration of China (CAC)’s investigations into three of the country’s leading social media platforms are just a tightening of censorship typically to be expected ahead of the forthcoming Party congress.

Tencent Holdings’ messaging app WeChat, Sina’s Twitter-like service Weibo, and Baidu’s communication forum Tieba face complaints that they have allowed their users to spread terror-related material, rumours and obscenities, breaches of the law that “endangered national security, public security and social order”.

But there is a more systematic effort to control information in play.

The new cybersecurity law that took effect on June 1 and of which the social media platforms have fallen foul as it makes online platforms responsible for the content they carry, is the third piece of recent legislation codifying China’s doctrine of cyber-sovereignty.  The National Security Law and the Anti-Terrorism Law, both passed in 2015, are the other two.

Collectively they form the basis of Beijing’s intended state control of the internet, which, in turn, is part of the greater crackdown on incipient dissent.

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