Tag Archives: Li Keqiang

China Sets A Fudgable 2014 Growth Target

CHINA HAS SET its official growth target for the year at 7.5%. There is no great surprise to Primer Minister Li Keqiang’s announcement of the number at the National People’s Congress, or in the target inflation figure of 3.5%. The growth target would mark a slight slowing from 2013’s 7.7%.

Finance minister Lou Jiwei (below), no stranger to public slips of the tongue, says GDP growth of 7.2% or 7.3% would achieve the target, confirming the risks are on the downside, and that suggestions that credit expansion incompatible with rebalancing will be necessary to support 7.5% growth may be misguided. But Lou also highlighted the critical importance of job creation, saying that that rather than the exact growth number is key.

That, in turn, suggests the link between unemployment and social instability is uppermost in the leadership’s mind. GDP growth will become an increasingly unreliable proxy for the Party’s objectives of maintaining public order in the face of growing popular concern about social and environmental issues and of sustaining the legitimacy of its monopoly political rule. The upside is that that could make the number more accurate as there would be less need to massage it to meet political goals.

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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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Li Holds Fast To Financial Reform

Prime Minister Li Keqiang gave a boosterish speech on the new leadership’s commitment to economic reform to the World Economic Forum meeting in Dalian. There wasn’t much if anything new to the broad-brush proposals or to the timetable — gradual. The weight of the speech was more in that he made it than in its detail, and in his declaration that “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”

That is a message that he and President Xi Jinping will be carrying into the Party’s Third Plenum to be held in November though there it may be less universally well received than it was by the WEF audience. In Dalian, Li did, though, make clear that financial-sector reform was central to the progress. He also held out some hope that foreign financial firms would be allowed a bigger slice of ownership of Chinese firms.

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Reading The Runes Of China’s Economic Reform

After 10 years managing China’s economy, prime minister Wen Jiabao has become a dab hand at under promising and over delivering. As a parting gift for his successor, Li Keqiang, he has passed on the first half of that formula, a GDP growth target of 7.5% for this year, and put a bow on it by saying it will be hard to attain.

Up to a point. China’s growth rate has stabilized after last year’s slowdown. GDP growth should come in closer to 8% than 7.5% for 2012 and edge above 8% this year. The IMF, for one, is estimating 7.8% growth in 2012 and projects 8.2% growth for 2013.

What Wen is also signaling, and has been for some years, is that China’s three decades of double-digit annual growth is over. As with Japan and South Korea before it, the country’s rapid-growth industrialization has run its course. Sustaining growth over its next phase of development demands market-oriented structural reforms and a rebalancing of the economy away from state-driven investment and more towards private consumption.

In the immediate future, investment will continue to power growth. It is policymakers’ fall back position when the economy needs stimulating, and can be done without having to take on deeply entrenched vested interests as both structural reform and rebalancing require.

How far and fast the new leadership can push ahead with those longer-term changes depends on the factional balance of power at the top of the Party. The outcome of the National People’s Congress currently being held in Beijing should provide clues via new government appointments. ministry realignments  and policy pronouncements as to how that falls, and thus the scale of the changes the new leadership feels able to take on.

The policy program will doubtless be ambitious, but it is the timetable that is critical. So is the policy effort that will be devoted to issues such as corruption, urbanization, local government governance, pollution and food and product safety. They all have economic consequences, but even more importantly potential impact on the Party’s legitimacy to rule.

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China’s Party Factions Prep For The 2022 Leadership Succession

The Jiang Zemin-led Shanghai faction’s predominance among the members of China’s new Politburo standing committee at the expense of outgoing President Hu Jintao’s has been widely noted, including by this Bystander. It seems a throw back to an earlier generation of Party leadership. In a sense it is. Elite, conservative state capitalists again dominate the inner sanctum of power. But the change is by no means permanent, to our eye. Hu’s faction, rooted in the Communist Youth League, is much more prevalent among the Politburo’s 25 members, a de facto layer below the standing committee, and, a rung of power below that, among the 376 members of the Central Committee, which has also taken on a distinctly younger look.

We count at least nine Politburo members in or aligned with the Hu faction, a number Jiang’s faction cannot muster. The disparity in the Central Committee is even greater. Hu’s  proteges are also well represented on the Party’s Central Military Commission, which oversees the PLA. Such influence is likely to have been the price Hu extracted for giving up the committee’s chairmanship at the same time as he relinquished his Party post. It may also have given him some surety that that would make it more difficult for hardline, dissident elements of the military to move against either the people or the Party in the event of some breakdown of social order.

Hu’s proteges are also more broadly represented in the so-called sixth generation of leaders coming along behind those being ushered in as China’s fifth generation under new Party general secretary and President assumptive Xi Jinping. Five of the seven members of the Politburo standing committee hit retirement age at or around the time of the next Party Congress in five years time. Jiang himself is already 86. Prominent Hu loyalists and proteges such as Li Yuancho, the head of the Party’s organization department and  Wang Yang, the 57-year old Guangdong party boss, both of whom failed to get promoted to the standing committee this time but retained Politburo membership, may feel their time will come again then, especially as the sixth generation of leaders will be starting to stake out their ground then for 2022 leadership transition.

It is early days, but Inner Mongolia party boss Hu Chunhua and Sun Zhengcai, newly appointed as party boss in disgraced Bo Xilai’s old stamping ground, Chongqing, are being marked out to succeed Xi and prime minister assumptive Li Keqiang, respectively, in 2022. Hu Chunhua is a Hu Jintao protege and Sun is allied to outgoing prime minister Wen Jiabao.  To our mind, that means that the factional in-fighting that marked the run-up to the leadership transition now underway will continue, if not as virulently as earlier this year. Factional jockeying for power is part of the warp and weft of China’s elite politics. Xi will need to move decisively to establish his authority, impose unity, and, perhaps, establish his own faction in the vacuum that Jiang’s looks likely to leave.

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China’s Reform, The World Bank And Vested Interests

The World Bank’s report on China in 2030 is a political manifesto disguised as an economic blueprint. Even the title, Building a Modern, Harmonious, and Creative High-Income Society, hits political not economic buttons. Not that the Bank casts it in that light, but it does provides China’s reformers with both strong arguments and influential backing to press ahead with reviving the economic reform. That has slowed to a glacial place now it has hit the hardest rocks of vested interest.

The World Bank gives the document intellectual and international heft. The participation of the State Council’s Development Research Centre, a prestigious government think tank, and with that the involvement of some of the most prominent technocrats who drafted the current five-year plan, lets the report avoid criticism leveled at recent International Monetary Fund recommendations for stepping up economic reform. That was castigated for being being an outside view that didn’t understand the realities of China. That can’t be said of the Bank’s report. It also gives it the implicit imprimatur of Li Keqiang, the man expected to take over from Wen Jiabao as prime minister in the current leadership transition and thus the Politburo member in charge of the economy. He signed off on the current five-year plan. He also told World Bank president Robert Zoellick, in Beijing to present the report, that China has “a long way to go before realizing modernization”.

Li is being realistic about the challenge ahead for China’s reformers. The World Bank report offers them a strategic description of the way forward rather than policy prescription. Its six strategic directions for China’s future are:

  • Completing the transition to a market economy;
  • Accelerating the pace of open innovation;
  • Going “green” to transform environmental stresses into green growth as a driver for development;
  • Expanding opportunities and services such as health, education and access to jobs for all people;
  • Modernizing and strengthening its domestic fiscal system;
  • Seeking mutually beneficial relations with the world by connecting China’s structural reforms to the changing international economy.

They are goals familiar to anyone who has read China’s current-five year plan, even if that couches them in terms that give more prominence to reductions in income inequality, universal social services, greater environmental protection and more energy efficiency. The Bank’s overarching message, though, lays out the unstated sub-text behind the five-year plan: structural reform is needed to promote a market-based economy, redefine the role of government, lessen the power of state enterprises and develop the private sector.

There is no doubt that China’s economy has reached the point in its development at which the dirigiste methods that have delivered 30 years of double digit growth need to change. Growth will inevitably slow in the coming years. All industrializing nations run into the law of large numbers. The exports and fixed asset investment that have driven growth cannot be sustained at that pace. Growing a $6 trillion economy by 10% in a year is a far greater task than growing a $350 billion one that much. That latter number is, best guess, roughly the size China’s economy was in 1981 in nominal terms. That is was 30 years of 10% growth does to $350 billion economy: turn it into $6 trillion one.

It is a remarkable achievement. Yet the arc of China’s development is not that different from the rapid industrialization phase of countries such as South Korea, Japan or even, much earlier, western Europe and the U.S., even if the magnitude of China’s arc is on an unprecedented scale. The country’s well of cheap labor, transferred from farm to factory, is starting to run low. Demographics, too, are working against growth. The value of foreign-developed technologies diminish as they age. Most of all, the economy needs to move up the value chain if it is to clear the barrier at which so many developing economies fall, that point where per capita income reaches at $10,000-12,000 a year. Vault it, and a nation becomes a middle income country on the road to being a rich one. Fail, and the country ends up stuck on a plateau of disappointed expectation.

China needs to do all that is recommended in the World Bank report if it is to clear that so-called middle-income trap, or economic Great Wall. The report doesn’t put it in these exact terms, but its message is that without reforms, growth will slow to the point where there isn’t the momentum to make the leap. This in not about whether there will be a hard or soft landing in the near term, though the Bank warns that responses to short term problems could undermine long-term strategy.

It is the politics that is the quagmire. There are clear implications for the Party in adopting market reforms. No country has done so successfully and remained a one party state. Even Japan’s Liberal Democratic Party, the closest approximation any democracy outside a city-state has had to one-party government, was eventually put into opposition at the ballot box. There is a difference between political rights and civil liberties, and the Party may find a seam in that distinction in which to work. But it would be a brave Bystander that bets on it.

The Bank does not push an overtly political agenda of what elsewhere in the world would be seen as neoliberal reforms. It hopes instead to push on an open door, offering practical steps to further an agenda China’s economic policymakers, if not all its leaders, have frequently endorsed. It does, though, call for the government “to redefine its role to focus more on systems, rules and laws” and for “redefining the roles of state-owned enterprises (SOEs) and breaking up monopolies in certain industries, diversifying ownership, lowering entry barriers to private firms, and easing access to finance for small and medium enterprises.” Those are all overtly political acts. The Bank recognizes the extent of the political opposition from vested interests to its proposed reforms. Even getting to this point with its report has been a political to and fro. The text is still a “conference edition”, i.e. subject to further revision, for which read political to and fro. State media’s reports on the report are low key (you’ll have to read to the final paragraph to find mention on it).

Reining in the power of the SOEs provides a particular challenge to the reformers. SOEs, like the military, are a source of power, money and influence for the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy. Xi Jinping, the assumed successor to Hu Jintao as president, is one of their number. The princelings are neither a monolithic block nor are all opposed to reform. But modernizing the governance of the PLA to make China’s military internationally competitive is an easier sell for the reformers, and a creates more winners among the incumbents, than modernizing the state-owned enterprises and banks to the same end.

Yet without removing the structural distortions that the increasing sway of the of SOEs and banks hold over the economy, the sustainability of China’s growth remains in doubt. The double challenge is that the side effects of the twin forces of untrammeled infrastructure investment driven by SEOs and local governments that are little more than property developers–high energy consumption, inefficient capital allocation, unfettered real estate development and environmental degradation–also put economic growth at risk and threaten greater social unrest and thus the Party’s political legitimacy. Breaking the vested interests will be extremely hard for the reformers. Where they are not corrupt, they are systemic. Or both. That is one reason that reform has slowed to the extent it has.

Development of the private sector, giving more freedom to businesses to be innovative, changing the deeply rooted attitude of officials at the lower levels of the Party and government that quantity of economic growth matters more than quality of growth, more transparency to local government finances and governance, are all big changes from the way officials have done things for 30 years, 30 years that from inside China look immensely successful. China’s resilience to the post-2008 global financial crisis, and the authorities response to it, has, if anything, only further set back the case for structural reform.

That changes that China needs to rebalance its economy and go to the next phase of development go the nub of the nexus of government, Party and state, don’t make them any less necessary. How the new leadership handles it will be the measure of its success as custodian of the Party, state and government for the next ten years. The Bank is being politically adroit in casting its timetable for reform to well into the leadership term of those now about to assume the reins of power. Yet how, and whether, President Xi resolves the inevitable factional infighting between the inevitable winners and losers from reform, will determine the cast of his successors long before then.

If there is one thing a state-planned economy should be good at it is producing plans. Beijing has so many accomplished technocrats, and especially among its economic policymakers, that producing really good blueprints for change isn’t a problem for it. Implementing them is the challenge. For all the World Bank’s backing, an institution that may well be led by a Chinese before 2030, these are going to need strong domestic political leadership to be brought to fruition. That means the emergence of a modern-day Deng Xiaoping figure, singly or collectively, or, what no one wants, wrenching crisis. Otherwise China’s economy will stall, and wrenching crisis of another kind ensue. China will then look very different in 2030 from what anyone now is planning for.

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Mr Xi Visits America Again

Xi Jinping, the Chinese vice-president the rest of the world is taking to be China’s next president, visits the U.S. this week. It is a land he knows better than apparently the U.S. knows him. Xi is seen above (center, with plastic cup) at a picnic in Muscatine, Iowa 27  years ago with a visiting Hebei provincial agricultural delegation. He will be returning there with great PR fanfare during his latest trip. This Bystander thought it timely to republish a piece we first published last July  looking at Xi and China’s most important leadership transition in the three decades since Deng Xioaping set the party and country on the road of economic reform.

China’s next top leaders will, for the first time, be men born after the Party seized power in 1949. With their ascendancy, modern China will cross a political and demographic Rubicon. Their generation is the great, great grandchild of Mao’s first generation of leaders. Their youth occurred during the Cultural Revolution, when many of their families were purged, but they embraced the Party nevertheless, and many advanced through its ranks by being “redder than red”. They are more worldly than their predecessors, mostly educated at top Chinese universities, more likely than their predecessors to have social science rather than engineering degrees, and be more likely to send their own children to top U.S. and European universities. Their working political life has only known China transforming itself as a rising political and economic power, yet they are as pragmatically committed as their predecessors to the Party’s monopoly on power, if divided over whether the basis for that should be ideological or economic.

The distinction matters. China is at a critical stage of its economic development. It has, self-evidently, developed at great pace through the initial phases of industrialization and urbanization over the past 30 years. Now it must kick on and leap the great wall that has stopped other developing nations completing the transformation to a developed economy.

When per capita income reaches $10,000-12,000 a year (in 2007 dollars), developing economies tend to stop developing without institutional change. China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade–the watch of the new leadership–before it hits the wall. It will need to make deep structural reforms, both economic and political, if it is going to be able to vault it. Regardless of the fact that even if it does clear the wall, China will still be a middle-income country–absolute size of the economy is irrelevant in this respect, even if China passes the U.S. to become the world’s largest economy–no country has yet managed to be both developed and a single-party state.

That sets up a dilemma. If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, on the other hand, the Party’s legitimacy to monopolistic rule rests on an ideology of the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and be unable to escape the fact that economic growth cannot continue beyond a certain point without institutional reform to support its move up the arc of development and prevent the ossifying of incumbent interests. So, again, managing the role of government in the economy and arbitrating between state-owned vested interests becomes the new leadership’s most important concern.

China is not only self-evidently non-Western, but it has a self-consciously distinct history, culture and political system, so it could develop a distinct economic system. Chinese exceptionalism is not anymore unreasonable than American exceptionalism. But in that event, the Party will still have to operate and against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism and rising power and status. Though unlikely, that could make China turn inward and neo-isolationist, relying on its growing internal market and a demographic bias to becoming a deficit country over the next decade, to drive the next stage in its economic development.

For now, there is every indication that China will continue on its present course. Indeed, there is a plan for that. The new leadership will come into position midway though the current five-year plan. Yet what looks from the outside to be a seamless transfer of power from one generation of leadership to the next belies the factional infighting that occurs out of public view.

So far, it is the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy, that are coming out on top. One of their own, Xi Jinping, born 1953, is emerging as Hu Jintao’s successor as paramount leader, successively taking over from Hu the positions of Party general secretary in 2012, president in 2013 and chairman of the Central Military Commission in 2014. By then the top Party, state and military jobs will again be united in one man, if Xi successfully consolidates over the course of the two-year transition his position as the first ranked in the Politburo’s standing committee, the small group of men, currently nine, that constitute the inner sanctum of the Party’s–and China’s–power.

Xi has outflanked Li Keqiang, the only other post-49er to make it to the Politburo’s standing committee, where he ranks seventh out of nine, one place below Xi, and who was Hu’s protege until Hu bowed to political realities and switched his support to Xi. Li, like Hu rose through the Party’s other leading faction, the Communist Youth League (YCL) whose power base is the party’s grassroots. Princelings dismissively refer to the leaders who come up through the YCL as “sons of shopkeepers.”

Xi rise from provincial official to national leader has been rapid. Cunning, calculating and ambitious Xi plays politics like a chameleon playing poker. He has worked in the countryside and in cities, north and south, in villages and in big cities, giving him a broad network of connections. He is a student of Marxism but not known to be ideological. Though never in the army, he has strong links with the armed forces. His father, General Xi Zhongxun, was a founding father of Mao’s revolution and his wife, Peng Liyuan, is both a celebrity folk singer and a major general in the PLA. He has a reputation for being pro-business (his father was purged by Mao for promoting economic opening and became one of Deng Xiaoping’s key mentors and lieutenants in instituting economic reform, particularly the early experiments in Guangdong and Shenzhen) but he is also famous for being ‘clean’, having cleared up corruption in Fujian in the 1990s and Shanghai in the 2000s, and is disdainful of China’s nouveau riche. He is calm and cautious, and above all seen as a team player–while all the while skillfully climbing a ladder of political patrons.

Though scarcely charismatic, Xi will be a more imposing figure on the world stage than his predecessors (though Hu set a low bar). Physically, he is tall and stocky so photo shoots with other world leaders will play well at home. With a sister in Canada, a brother in Taiwan and a daughter at Harvard in the U.S., to which he has been a visitor since the 1970s, he knows more about the world than the world knows about this plain- if rarely outspoken man who plays his political cards close to his chest–or about what he and his fellow new leaders want to do once they reach the apex of power they have scrabbled so hard to ascend.

As already noted, they will take over half way through the current five-year plan, so their initial path is set. But the next Politburo’s composition (all of its nine members save for Xi and Li are expected to retire in 2012) will also reflect the balance of power between those who believe that maintaining economic growth is necessary to legitimize the Party’s right to monopoly rule, in short the economic reformers, and those who think that legitimacy should be based on ideology, a group for whom the current Maoist nostalgia stands proxy. Many other currents–political, nationalistic, regional and demographic–cut across that divide. Even the princelings are not a monolithic bloc. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; those harderliner economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; and the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions.

Who gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how those divides lie and thus how China develops over the next decisive decade. But all are united in preserving the Party’s grip on power.

Footnote: State media have published the transcript of written answers Xi gave to questions from the Washington Post on the eve of his visit to the U.S. His comments on Sino-American relations were mostly pro-forma, including a note of warning sounded to the U.S. over its military stance in the Pacific.

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The Battle Behind The Birthday For A Billion

China's top leaders mark the 90th anniversary of the Communist Party of China in Beijing, July 1, 2011.

China’s Communist Party is celebrating the 90th anniversary of its founding on July 1, 1921 with even more pomp and pageantry than it exhibited two years ago on the 60th anniversary of its coming to power in 1949. But behind the “birthday party for a billion” (though the Party has only 80 million members) is its most important leadership transition in the three decades since Deng Xioaping set the party and country on the road of economic reform.

China’s next top leaders will, for the first time, be men born after the Party seized power in 1949. With their ascendancy from next year, modern China will cross a political and demographic Rubicon. Their generation is the great, great grandchild of Mao’s first generation of leaders. Their youth occurred during the Cultural Revolution, when many of their families were purged, but they embraced the Party nevertheless, and many advanced through its ranks by being “redder than red”. They are more worldly than their predecessors, mostly educated at top Chinese universities, more likely than their predecessors to have social science rather than engineering degrees, and be more likely to send their own children to top U.S. and European universities. Their working political life has only known China transforming itself as a rising political and economic power, yet they are as pragmatically committed as their predecessors to the Party’s monopoly on power, if divided over whether the basis for that should be ideological or economic.

The distinction matters. China is at a critical stage of its economic development. It has, self-evidently, developed at great pace through the initial phases of industrialization and urbanization over the past 30 years. Now it must kick on and leap the great wall that has stopped other developing nations completing the transformation to a developed economy.

When per capita income reaches $10,000-12,000 a year (in 2007 dollars), developing economies tend to stop developing without institutional change. China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade–the watch of the new leadership–before it hits the wall. It will need to make deep structural reforms, both economic and political, if it is going to be able to vault it. Regardless of the fact that even if it does clear the wall, China will still be a middle-income country–absolute size of the economy is irrelevant in this respect, even if China passes the U.S. to become the world’s largest economy–no country has yet managed to be both developed and a single-party state.

That sets up a dilemma. If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, on the other hand, the Party’s legitimacy to monopolistic rule rests on an ideology of the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and be unable to escape the fact that economic growth cannot continue beyond a certain point without institutional reform to support its move up the arc of development and prevent the ossifying of incumbent interests. So, again, managing the role of government in the economy and arbitrating between state-owned vested interests becomes the new leadership’s most important concern.

China is not only self-evidently non-Western, but it has a self-consciously distinct history, culture and political system, so it could develop a distinct economic system. Chinese exceptionalism is not anymore unreasonable than American exceptionalism. But in that event, the Party will still have to operate and against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism and rising power and status. Though unlikely, that could make China turn inward and neo-isolationist, relying on its growing internal market and a demographic bias to becoming a deficit country over the next decade, to drive the next stage in its economic development.

For now, there is every indication that China will continue on its present course. Indeed, there is a plan for that. The new leadership will come into position midway though the current five-year plan. Yet what looks from the outside to be a seamless transfer of power from one generation of leadership to the next belies the factional infighting that occurs out of public view.

So far, it is the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy, that are coming out on top. One of their own, Xi Jinping (second from the right in the picture above), born 1953, is emerging as Hu Jintao’s successor as paramount leader, successively taking over from Hu the positions of Party general secretary in 2012, president in 2013 and chairman of the Central Military Commission in 2014. By then the top Party, state and military jobs will again be united in one man, if Xi successfully consolidates over the course of the two-year transition his position as the first ranked in the Politburo’s standing committee, the small group of men, currently nine, that constitute the inner sanctum of the Party’s–and China’s–power.

Xi has outflanked Li Keqiang (second from left in the picture above), the only other post-49er to make it to the Politburo’s standing committee, where he ranks seventh out of nine, one place below Xi, and who was Hu’s protege until Hu bowed to political realities and switched his support to Xi. Li, like Hu rose through the Party’s other leading faction, the Communist Youth League (YCL) whose power base is the party’s grassroots. Princelings dismissively refer to the leaders who come up through the YCL as “sons of shopkeepers.”

Xi rise from provincial official to national leader has been rapid. Cunning, calculating and ambitious Xi plays politics like a chameleon playing poker. He has worked in the countryside and in cities, north and south, in villages and in big cities, giving him a broad network of connections. He is a student of Marxism but not known to be ideological. Though never in the army, he has strong links with the armed forces. His father, General Xi Zhongxun, was a founding father of Mao’s revolution and his wife, Peng Liyuan, is both a celebrity folk singer and a major general in the PLA. He has a reputation for being pro-business (his father was purged by Mao for promoting economic opening and became one of Deng Xiaoping’s key mentors and lieutenants in instituting economic reform, particularly the early experiments in Guangdong and Shenzhen) but he is also famous for being ‘clean’, having cleared up corruption in Fujian in the 1990s and Shanghai in the 2000s, and is disdainful of China’s nouveau riche. He is calm, cautious, and above all seen as a “team player”–while all the while skillfully climbing a ladder of political patrons.

Though scarcely charismatic, Xi will be a more imposing figure on the world stage than his predecessors (though Hu set a low bar). Physically, he is tall and stocky so photo shoots with other world leaders will play well at home. With a sister in Canada, a brother in Taiwan and a daughter at Harvard in the U.S., to which he has been a visitor since the 1970s, he knows more about the world than the world knows about this plain- if rarely outspoken man who plays his political cards close to his chest–or about what he and his fellow new leaders want to do once they reach the apex of power they have scrabbled so hard to ascend.

As already noted, they will take over half way through the current five-year plan, so their initial path is set. But the next Politburo’s composition (all of its nine members save for Xi and Li are expected to retire in 2012) will also reflect the balance of power between those who believe that maintaining economic growth is necessary to legitimize the Party’s right to monopoly rule, in short the economic reformers, and those who think that legitimacy should be based on ideology, a group for whom the current Maoist nostalgia stands proxy.  Many other currents–political, nationalistic, regional and demographic–cut across that divide. Even the princelings are not a monolithic bloc. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; those harderliner economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; and the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions.

Who gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how those divides lie and thus how China develops over the next decisive decade. But all are united in preserving the Party’s grip on power.

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We Are Shocked, Shocked To Find Dodgy Data Here

More from the latest bunch of leaked U.S. diplomatic cables published by WikiLeaks telling us what we already knew but which get piquancy from the detail. In this case, it is a suggestion that provincial GDP data is inflated. Well, hold the phone. The spice comes from the comment being made by Li Keqiang, who at the time, 2007, was Party secretary in Liaoning. He is now a vice-premier in line to succeed Wen Jiabao as prime minister and thus become the man in charge of economic policy.

Like the fictional town of Lake Woebegon created by the American satirist Garrison Keillor where all the children are above average, it has long been a curious fact that no province has let its reported GDP fall below the national average. Local officials’ promotions depend on measures of local economic development. It is no surprise that they add up the numbers in a way that reflects the best possible light on themselves. Nor is that a uniquely Chinese trait.

China’s national GDP figures are more solid, though no economist would pretend they are perfect in either their accuracy or consistency despite efforts to improve them in recent years, many led by Li as it happens. You just can’t manage an economy the size of China’s without accurate data. Nor can China play the bigger role it seeks in multilateral organizations to which it has to report standardized data.

Li, who made his reported comments to the U.S. ambassador at a dinner in Beijing, was talking specifically about his own province but said he got a better sense of its pace of economic growth from monitoring economic activity that could be metered free of a political filter, such as electricity consumption, rail freight volumes and loan disbursements.

 

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China’s Visible Vs Invisible Hand

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All seems to be going to plan as the Party’s annual meeting draws to its close. Vice-Premier Xi Jinping (left) has been appointed as vice-chairman of the Central Military Commission, seen as an essential way station on his path to the presidency in succession to Hu Jintao who steps down as head of the Party in 2012 and as president the year after. Though Xi didn’t get the expected CMC vice-chairmanship last year, the top job is now his to lose.

Hu is also currently head of the commission, as is customary for China’s top leader. Control of the military underpins the Party’s hold on power while its ability to continue delivering economic growth for all underpins its legitimacy to govern. The new five year economic plan for 2011-15 takes continuing growth as a given and will concentrate on closing the social stability threatening wealth gaps that have opened up between rich and poor and between coastal and inland areas.

The ever strengthening ties between the Party, state and officials and the policy of promoting national champions in strategically important industries (129 companies who now account for two-thirds of GDP) will give Xi and his likely prime minister, Li Keqiang, a means to do that: a visible hand on the tiller of economic development rather than the invisible hand of the market. The princeling Xi’s reported pro-business sentiments may be better regarded as being supportive of a cosy relationship between Party and state officials and big business. Indeed, the industrial champions have a formal role under the new five-year plan to ensure its smooth fulfillment. An unintended but inevitable consequence may be growing friction between the means of implementing the goals of the economic plan of the new leadership and the aspirations of countries like the U.S. and the E.U. who want China to become a full market economy.

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