Fri, Dec 20, 2013 - Page 8 News List

The limits to Chinese authority

By William Overholt

Before China’s leadership transition earlier this year, experts said that the Chinese Communist Party (CCP) was intent on preventing a larger-than-life personality from assuming power. The CCP, it was argued, wanted someone more like the bureaucratic former Chinese president Hu Jintao (胡錦濤) rather than a charismatic successor like, say, former Chongqing provincial governor Bo Xilai (薄熙來).

Yet the new president and CCP leader, Xi Jinping (習近平), is hardly dull. He began his term by paying homage to former Chinese president Deng Xiaoping (鄧小平) at a statue in Shenzhen, where, more than three decades ago, the former CCP leader had launched the campaign to convert a reluctant party to free-market reforms. In a top-level meeting last month, Xi set out the details of a fundamental change in economic direction, overshadowing his colleagues.

Xi now leads a new economic group that will coordinate and impose his reforms on fractious colleagues. Unlike Hu, he immediately became head of the military and now runs a parallel national security council. At first glance, a new “paramount leader” appears to be emerging.

Recent history explains this reconcentration of power. In 1993, central-government leaders enjoyed relatively limited powers: They did not control the money supply and had difficulty firing provincial governors or relocating top generals. Central government revenue was low indeed, proportionately smaller than that of central governments in any other major economy.

This changed when then-CCP leader Jiang Zemin (江澤民) and his prime minister, Zhu Rongji (朱鎔基), centralized authority to stave off economic crisis at a time of growing risk to China’s banks. In the process, the labor force of China’s state enterprises declined by 50 million, China lost 25 million manufacturing jobs, and central-government employment was slashed. These measures saved China’s economy, but at the price of widespread social stress, which made Zhu widely disliked by the time he left office.

Popular reaction against the cosmopolitan, coastal and market-oriented reforms of Zhu and Jiang brought to power leaders whose formative experiences were in the inland provinces of Gansu and Tibet. Riding a wave of resentment against inequality and social tensions, Hu and his prime minister, Wen Jiabao (溫家寶), promised a “harmonious society,” without the stresses of Zhu’s agenda. They slowed economic reform and ceased political reforms. The bureaucracy expanded from 40 million to 70 million, and power devolved to provinces, bureaucracies and state-owned enterprises (SOEs).

Fortunately, the somnolent Hu/Wen era did not dampen the economic growth triggered by the earlier reforms undertaken by Jiang and Zhu. However, the economic growth model that those reforms created was running out of steam. Low-cost exports were struggling as labor costs rose. Investment in infrastructure was shifting from growth-enhancing projects, such as intercity highways, to less productive shopping malls in second and third-tier cities. Productivity plummeted in SOEs, whose privileged access to financing crowded out private-sector investment. Local-government funding, through the seizure and resale of property, was reaching its limits.

Thus, it became essential to launch a new wave of far-reaching reforms, including liberalization of interest rates, securities markets and foreign-exchange controls, to fund the more productive private sector and reduce excess capacity in SOEs. In particular, the reforms were needed to deflate an emerging property bubble resulting from huge savings and foreign capital inflows that had no other profitable investment outlet.

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