China expert and business consultant, Asahi Shimbun
Four major changes have occurred in China since President Xi Jinping took power: the concentration of power in the hands of Xi, an iron-handed war against corruption, the bold “Third Plenary Session reforms” and much tighter controls on speech and thought.
All of the changes originate from one cause: the deterioration in governance over the 10 years of the previous administration of President Hu Jintao that led to grave problems for the economy, politics and society and threatens the Chinese Communist Party (CPC) regime.
People in China now are hurling an endless amount of abuse, particularly at Hu and former Premier Wen Jiabao, the ones who “caused these problems,” but the results would have been much the same no matter who the leaders were. That is because what lies at the root of the serious regression of this decade is that change has come slowly for China’s economy and society over a decade-long period.
LATE 1990s-EARLY 2000s: DESPERATE REFORMS
During this period the CPC, which was confronted with a stagnant economy and a financial drought in the midst of the country’s transition to a market economy system, enacted desperate reforms. The party, suppressing resistance from the conservatives clinging to Marxism and nationalism, acceded to the WTO and implemented the “minjin guotui” (private enterprises fade in, state enterprises fade out) reforms to allow the private sector to manage more of the economy. That wisdom and courage was admirable, and the dividend was the explosive economic growth that followed.
However, these reforms were a major “rightward” diversion from the CPC’s traditional political gravity center. In the mid-2000s, when the regime had escaped a crisis through dramatic growth and wealth flowed into the coffers of the government and the state-owned economy, a leftward turn to bring the party back to its original center of gravity began. The vested interests within the government that had been forced into austerity started to bulge.
Furthermore, the governing system, too, in fact, needed an update at this time when the economy was growing and society was transitioning into a new stage of development. The economy and society, which had become enormous, advanced and complex, were ungovernable without decentralization, and the dispersed authority needed ad hoc checks placed upon it. Even without “separation of powers in the Western manner,” China needed to strengthen checks by the legislature and judiciary at every level of government and strengthen the social checks by the public that had finally started to develop. However, the CPC had sealed political reform due to the Tiananmen Square incident of 1989, and an outdated system of governance has been maintained without update, in which the CPC holds all power, and the only mechanisms for checks are one-way and “bottom-down.”
LATE 2000s-EARLY 2010s: THE INVESTMENT BUBBLE
The reformists sounded the alarm over the reform reversals that began in the early-2000s, but the global financial crisis that ensued after the collapse of Lehman Brothers in 2008 squelched their voices. The investment growth and unbridled monetary easing that began with Beijing’s 4 trillion yuan (65.777 trillion yen, or $644.5 billion) stimulus package abruptly expanded Chinese debt and assets (investments). Due to this investment bubble, China’s growth rate got a big yet temporary boost and its economy was the only one in the world to make a dramatic recovery, providing a mirror image to the still sluggish Western economies.
That contrast sent China and its people into a state of euphoria and fostered arrogance among them over “the West’s fall and China’s restoration as a great power.” All at once, China’s attitude toward the outside world turned assertive. And simultaneously there was corruption on an unbelievable scale, while the large dividends paid out in the prior decade were squandered and appropriated. The outdated system of governance was unable to stop this relentless sequence of events. The two former leaders who have now stepped down were like the leaves of a tree at the mercy of this great wave.
PAYING THE TAB FOR EXTRAVAGANCE
Now the big, extravagant party is over, and China has to pay the tab for the last decade of indulgence.
Although the potential growth rate of the Chinese economy may still be around 5 percent, that does not mean it will continue to grow at this rate. The Chinese economy’s balance sheet has more than doubled in size over the past five years. Yet the accumulated assets (investments) have very poor yields and many seem incapable of repaying the debts incurred. The result is widening damage to the balance sheet.
At this time, investment and borrowing should naturally slow down; such a stabilizing measure is built into a market economy. The repercussions lead to a shortfall of effective demand and growth temporarily falls significantly, but this is a necessary process so that the balance sheet does not go bust. The CPC, however, fearing that “slower growth will destabilize party rule,” is suffering from its inability to halt the harm to China’s balance sheet.
The problems the Chinese economy faces are not confined to the after-effects of the investment bubble. The key to sustaining growth into the future for China, which has a falling birthrate, is to raise productivity. However, the “guojin mintui” (state enterprises fade in, private enterprises fade out) setback that occurred over the past decade and expanded the state-owned sector are hindering an increase in factor productivity. This is more than problematic because China, like Japan today, will have any productivity improvements it makes offset by a falling influx of labor and hindered real growth awaits the country in the next 10 years.
Politically there is a mountain of problems, brought on by the delayed governance reforms (i.e., the lack of effective checks on power), that need work: corruption, human rights violations, environmental destruction and social instability.
Two years ago, when Xi inherited the post of CPC general secretary, it was not quite certain how much he recognized the gravity of the situation awaiting him. However, at the beginning of 2013 not only Xi, but also many people inside the regime, must have felt a serious sense of crisis that “if nothing changes, then the CPC’s rule will fall apart.”
There were bold reform proposals made at the Third Plenary Session last November covering the economy as well as state affairs in general, but much of the content of those proposals were what the reformists, over the past decade, had been saying China needed, while the mainstream faction had consistently disregarded them. Why were proposals for reform that had been ignored for 10 years suddenly adopted last year? The answer is nothing other than the CPC’s heightened sense of crisis.
The traditional policy of the CPC has been “group leadership” among the state’s leaders. However, after Xi took office there has been a concentration of power unseen in China for more than 20 years. That is because of “the need for strong leadership to overcome our difficulties.” The systemic sense of crisis has, in a manner of speaking, pushed Xi into a powerful and fearsome “single top” position.
The anti-corruption drive continues to exceed people’s expectations in its breadth, severity and duration. A strict order to enforce discipline has come down to throw a bucket of cold water on party officials from the top down, including those who do nothing but engage in extravagant behavior. Unless it does so, the party will not be able to explain itself to the people.
When Xi assumed office, people once hoped he would usher in democracy, but what actually happened was much stronger suppression of speech and greater thought control. Xi must foresee that circumstances in the economy and society will both get even worse. He seems, so to speak, like a captain of a ship in distress who is hardening his resolve to deny his passengers the liberty to act on their own. To put it another way, it is like he has covertly instituted martial law.
All these major changes that have occurred over the past two years can be consistently explained by the dawn of a new decade when China is confronting the unprecedented difficulties after the investment bubble that began in 2009, and by the presumption that the CPC regime, with Xi at its top, is viewing these difficulties with a sense of crisis that the party’s survival is at stake.
SLOW PACE OF REFORM
“Create a setting for economic growth in which the state will step back, and in its place the market will be the deciding factor.” You could say this is an update to the conventional policies of “reform and opening up,” but the decisions taken at the Third Plenary Session touched on more than just the economy. These decisions also called for an arrangement under which the judiciary and legislature check the government’s power. If this arrangement were fully introduced in China, a country where there is no mechanism for a change of administration, then these checks on power would be more than a change of administration — they would spell regime change. Some might explain it away as a “socialist” governance system “with Chinese characteristics,” but it is equivalent to aiming for a “CPC 2.0” by largely rewriting the “four cardinal principles”* formulated by Deng Xiaoping.
However, the pace of reform for now is slow even though half a year has already passed since the Third Plenary Session. The party officials seem to either stay put to weather the storm of the anti-corruption and official discipline drives or to wait and see whether Xi can rise above Deng to become a leader “on the level of Mao Tse-tung” under whom no one can object.
Deng was also a strong leader, but his hand was burned by resistance among the party’s elders. In comparison, Mao was almighty. Those officials waiting to see how things play out see Xi’s reforms encountering resistance from party elders.
Xi’s anti-corruption attack against party elders is becoming more and more harsh and decisive, and even the ex-top military man who is a well-known “homme de confiance” of an ex-party top was recently found corrupted and decided to be sent to criminal court. Nonetheless, those fears of awaiting officials may turn out to be well-founded.
In that case Xi, who would have become a strong leader only momentarily, will then be suddenly forced into being a lame duck, and sooner or later, China will be forced into making a hard landing–not only economically, but politically as well.
Xi, who is taking on the massive resistance against regime change, may also be forming a “united front” among disparate party factions with various interests and values in order to oppose his strong political enemies. The fact that the job of placing controls on speech and thought are assigned to horribly obstinate and stubborn conservatives may be proof of this. They share in the sense of crisis that they have to “save the party and its dynasty,” but perhaps they do not share in the “CPC 2.0” idea.
Xi must hold authority in the manner of Mao now in order to arrange for new economic growth where “the market will be the deciding factor” and in order to introduce a new system of checks on power “with Chinese characteristics.” Oh, the irony! We in the West are skeptical of such contradictory methods, and we feel disgusted with the suppression of speech occurring now.
However, this does not mean that “if we pull the weeds of the autocratic regime, the flowers of a democratic regime will naturally sprout.” Now, after learning this from Iraq, Afghanistan and the Arab Spring, can we still lecture the Chinese to “study Western ways” with the same confidence we have had before?
In the end it is only the Chinese people who can decide which way China will go. But it is certain that the conclusion of this battle of Xi’s will have an enormous effect on those of us outside China.
* Deng proposed the “four cardinal principles” in 1979, and they are one of the political tenets the CPC has held fast to ever since. They state that the party must uphold the “socialist path,” the “dictatorship of the proletariat,” “the leadership of the Communist Party of China” and “Marxist-Leninism and Mao Tse-tung thought.”