China’s coronavirus problem is one more complication for a leadership that is struggling, not always successfully, with the complexities of a very difficult transition. Covid-19 affects both the politics and the economics of this transition.
Like the other Asian miracle economies, most notably South Korea and Taiwan, China started out as an agricultural society whose relatively simple structure could be managed through tight central control. With success, an economy becomes far too complex to be managed that way. Likewise, society becomes highly differentiated; demonstrations and powerful interest groups multiply. I call this China’s crisis of success. The current leaders faced the need to restart economic reform and restore central authority.
On economics, they worked with the World Bank, American Nobel Prize winners and many others to develop a plan based on market allocation of resources. The basics were published in China 2030, a joint effort with the World Bank, not long before Xi was chosen as top leader.
Politically, these leaders saw the challenges as requiring drastic centralisation. They cut the Politburo Standing Committee from nine members to seven and, to make consensus easier, excluded the most extreme views (represented by Bo Xilai and Wang Yang). They created a new National Security Council and small leading groups to manage things like military reform, economic reform and Taiwan policy, and put one new leader in charge of all of them. They gave the new leader immediate control of the military and told the older leaders to stop interfering. These were consensus decisions, separate from the decision to choose Xi Jinping as the new leader.
Immediately the problems began. Market allocation of resources implied squeezes on the state enterprises and therefore on the banks, upsetting both. If the market was making decisions, then discomfited party and government groups were losing power. Simultaneous military reforms added the military to the groups pushing back. Above all, reforms put local governments in a terrible squeeze. In short, the reform plans threatened all major power groups in China. There is no more dangerous strategy for a leader than one that threatens all major power groups simultaneously.
But Xi Jinping had a hammer to employ against resistance: the anti-corruption campaign. Not surprisingly, the first tiger brought down was Zhou Yongkang, head of the powerful Petroleum Faction, followed quickly by top military leaders. But the breadth of the anti-corruption campaign meant that the interests of all major power groups in Chinese society were doubly threatened — meaning double trouble for Xi.
Xi Jinping’s team came to power worried about a suspected coup plot. Their threat to so many groups’ power led to spectacular infighting. One top executive told me, “Bill, the game in Beijing is, you die or I die.” This is not the image we get in our media.
Adding injury to injury, the anti-corruption campaign, intended to be the hammer of reform, scared and immobilised the officials responsible for reform. Any reform stepped on someone’s toes, attracting an accusation, “You’re corrupt!” Most reformers were vulnerable to this accusation and were therefore immobilised.
Because of this political warfare, Xi Jinping’s first term had to be devoted to subduing rivals. This he accomplished superbly. The second term, begun two years ago, was designated for implementation of reforms. But some leaders realised the risk of reversals — just as Donald Trump had reversed Barack Obama’s key achievements — and of reprisals, and rushed through the ill-considered possibility of a third term for Xi.
How is reform doing? Leaving aside military reform, the leadership has responded to any fundamental choice by announcing that the regime will have its cake and eat it too.
• They had a choice: fast reform with slow growth or fast growth with slow reform. They announced that they would have both. The reality has been slow reform. Slow growth is coming.
• They will move to market allocation of resources, but they will provide US$1.7 trillion in subsidies to state enterprises.
• They will marketise the state enterprises, but in every state and private enterprise they will strengthen the party committee’s control of strategic business decisions.
• They will create a level playing field, but they will consolidate national champions and exempt state enterprises from the competition law.
• They will emphasise the rule of law, but they will strengthen the party commission that tells the courts what to decide.
• They will obtain public input on corruption and environment problems, but they will crack down on even limited public complaints.
This determination to have one’s cake and eat it too is not leadership that Mao Zedong or Deng Xiaoping would recognise. The indecision is more like Theresa May explaining that Britain will have both Brexit and a gloriously prosperous future.
But the indecision is not completely indecisive. Whenever there is a tension between market reform and political control, this leadership leans mainly toward government control. Mao Zedong’s era was Politics in Command. Deng Xiaoping’s era and Jiang Zemin’s were Economics in Command. Hu Jintao’s was Patronage in Command, expanding the already vast party-government bureaucracy to eighty million people and ballooning corruption. Xi’s era is Politics Mostly in Command. That is ominous for the economy.
A recognition of this strategic indecision illuminates the role of Xi Jinping. Our media, and many specialists, describe Xi as the omnipotent President for Life, as China’s Putin. That image is totally misleading.
Xi is powerful. He has eliminated his adversaries. He has many titles and roles. He is enshrined in the constitution. He has abolished his term limit. He is promoting movies and speeches that attribute China’s new greatness mainly to himself and his father, and not so much to Deng Xiaoping.
But the important test of any leader is whether he or she can achieve the agreed policy goals. Xi is hardly all-powerful on that dimension. He faces universal pushback, together with personal political priorities that overshadow economic reform.
Xi is not China’s Putin. Xi is a creature of the Communist Party, an executive given a job to do and ultimately accountable for performance. Putin’s party is a creature of Putin, engineered just to enhance Putin’s wealth and power. This contrast is entirely in China’s favour but it belies the image of Xi as the all-powerful dictator for life.
The sober reality is that Xi has a job to do and he is not doing that job. He is not reforming the economy.
Now I want to offer two complementary perspectives. On one hand, China faces severe political problems. On the other hand, because the government has built a solid social foundation it is not at risk of revolution.
A key lesson of the earlier Asian miracles is that the pressures of political complexity are inexorable. The current Chinese administration has chosen a strategy of sitting on the lid of the boiling political kettle. The result is a vicious circle of repression, pushback, more repression, more pushback.
The tides are shifting. Groups that strongly supported the government are becoming alienated. Five years ago China was one of the few developing countries where academics supported the government — on the reasonable view that, while there was repression they didn’t like, the party had done so much for the Chinese people that the costs of repression were quite tolerable. No more. China’s professionals, academics, journalists, lawyers, the leading edge of society, today express helpless but emphatic alienation from the administration.
Of decisive importance is the business community. State enterprise executives have lost more than half their previous compensation. They’re not happy. Virtually all growth and all job creation comes from the private sector, but the private sector is being squeezed financially and devoured by subsidised state enterprises. Private sector investment growth has fallen by two-thirds. Every private company is vulnerable to the local party secretary, who calls up and says, “I have a new project downtown. I need your million dollar contribution by next Tuesday.”
Today local party secretaries find themselves squeezed by the national campaign of financial deleveraging. China’s localities have a disproportionately large share of social responsibilities and a disproportionately small share of revenues. With deleveraging, now there will be three new projects requiring donations. The economic and political costs are going to be severe.
Add together the discontents of all modern professions, local governments, powerful central party and government groups, state business, local business, and the most salient religious groups, and you have a tidal shift. Covid-19 feeds this shift, magnifying complaints that excessive controls are harmful because they inhibit information flows and delay action.
Western media and politicians look at Xi’s many titles and see a stable dictator for life. The Chinese people look at the same facts and see leadership fear and potential instability. It’s almost impossible to find an upper-class or middle-class Chinese family that does not wish to get its money and its children out of China. The pressure for capital flight has forced strong capital controls and a reversal of the government’s efforts to make the Chinese currency important globally.
On the other hand, this shift of power groups against the administration does not mean that Xi’s position is in jeopardy. Like Trump, indeed even more than Trump, Xi has a highly resilient nationalistic, populist base that offsets elite criticism.
Still less do these problems mean that China is headed for revolution. The fundamentals of the governance system created by China’s Communist Party are as strong as the ones created by its Leninist predecessors in South Korea and Taiwan. The party has provided jobs, education, housing and benefits for women. It is tackling environmental problems with much vigour. Despite great inequality, it has lifted all social groups and addressed inequalities in a rolling fashion. Nearby democracies have accomplished nothing comparable, except where authoritarian regimes provided these benefits before democratising.
What does all this mean for the economy? Growth, while still relatively high, has been declining for years and will continue to decline. Growth is already less than the official statistics show, and is being sustained by unproductive investment paid for by rapidly increasing debt. Political officials are being given final authority over business strategy in all enterprises. Foreign investors have been alienated. China will not have a great financial crisis. But rising debt, the squeezed private sector, and the increasing emphasis on subsidies, protections and consolidations for big state enterprises threaten China with a slide into Japanese-style stagnation.
Covid-19 will accelerate foreign investors’ diversification away from China — not departure but diversification. It will illuminate the number of companies that have pushed their finances to the edge of danger. It may heighten tensions between top business managers and their party overseers.
Three decades when Chinese government revenues grew twice as fast as a fast-growing economy have created a bull market mentality where success seems inevitable and all things seem affordable, but that era is ending. Socialist politicians think that direct control of huge companies will enhance the political leadership’s power, but the lesson of history is that the big companies end up owning the politicians. That leads to protectionism and stagnation.
The shock of the end of the bull market mentality was coming. Covid-19 will bring it forward.
Finally, China faces a very fundamental political problem, one that is not much remarked in Western commentary, namely the evolution of the Chinese Communist Party from a vanguard party into an interest group.
China’s early reformers took extraordinary risks to save their country. In a population of peasants, communist political power was ensured by absolute control over the life of every citizen through a system of communes that gave the party control of job, income, location, marriage, clothing and even haircuts. But when farmers in Anhui Province started seizing their land back, threatening communist levers of power, Deng Xiaoping noticed that the economy grew much faster and the farmers were much happier. He decided to take an extraordinary risk: surrendering the most important lever of communist power in the hope that more prosperous people would support the party. Looking back through an economist’s lens that decision seems straightforward. At the time, through a political lens, it was a terrifying risk. But it worked.
Later, Zhu Rongji and Jiang Zemin did the same things with urban industry. Their bet also worked.
That kind of behaviour, taking great political risks in the belief that improving society will ultimately enhance support for the regime, is the essence of a successful vanguard party. It is the political core of the Chinese miracle.
The counterparts today would be party decisions to step back from direct control of big enterprises and from direct control of the courts, accepting a diminution of political control in return for the gratitude induced by improved livelihoods and a more secure sense of justice. But today the policy is to grasp every lever of power, however small. This transforms the Communist Party from a vanguard to an interest group. Consciousness that the party’s claim to be a revolutionary vanguard has become hollow will emerge quite gradually but will ultimately undermine party authority.
As with the economy, Covid-19 will heighten the problem. It will accelerate perceptions that the interests of the party and the interests of the people are more divergent than previously.
What does all this mean for the future? China does not risk sudden financial or political collapse. Its problem is a gradual accumulation of economic and political sand in the gears.
As discontent rises, almost nobody acts, because everyone is afraid. But famous professors do speak out. Students, knowing they will be incarcerated, create “Marxist societies” to help organise workers. Local officials ignore Xi’s repeated environmental edicts. Party leaders murmur their dissent loudly enough to create echoes abroad. Millions of families quietly seek to send their money and their children abroad.
Government morale has been deeply affected. The sense of being able to do great things for their country has evaporated and high officials fear being held responsible for the consequences of leadership policies. An increasingly common slogan is “I promote you because I hate you,” expressing the fear of being held responsible for the consequences of key policies. To discourage officials from resigning, the government has imposed a three-year period of garden leave that renders officials unable to use their expertise to earn a living outside the government.
China today is like a supersaturated liquid. Hold up the glass and it looks like clear water. Tap the glass and suddenly a lot of stuff precipitates out. What will precipitate is impossible to predict. What is predictable is that it will either get much better or much worse. It cannot remain the same. Covid-19 is not decisive. But it makes an extremely complicated political and economic situation just that much more complicated. •