newzealandinc.com Informed. Influential. Indispensable.
By David Mahon
In Beijing, as evening temperatures hover around zero degrees Celsius, the heating has been turned on two weeks earlier than usual so that Chinese Communist Party officials attending the 18th National Congress will not suffer too much discomfort. Security has been increased. Vehicles from other provinces cannot enter the city without permits and, in an edict only an opaque, inward-looking bureaucracy could issue, remote-controlled toy helicopters may not be purchased by anyone without a Beijing resident’s permit. Journalists are preparing to analyse party pronouncements to detect shifts in economic policy and rifts within the senior leadership. But they will struggle to find controversy as most political bargains have been struck and major policy announcements already made.
The change of leadership of the Chinese Communist Party this year has appeared bumpier than any of the last 30 years. China is vastly more sophisticated and complex than it was in the 1990s or 1980s, presenting the government with challenges that previous administrations did not face. This transition is, however, not as volatile as the slow transfer of power that took place in Deng Xiaoping’s final years from 1989 to 1992, when, in semi-retirement, he struggled to keep the principles of economic reform alive. Today’s more open media and ever-evolving social networks enable increased scrutiny of the economy and senior leaders’ conflicts over personal economic interests, giving China’s transition an appearance of greater instability than actually exists.
“The congress is a demonstration to the country that the party is unified. The senior leaders have already been chosen. Policy direction has been set. Granted, there has been more internal conflict leading up to the appointment of senior leaders this year than in any of the last decade, but the crises appear to be over. The expulsion of former Chongqing Party Secretary Bo Xilai on grounds of corruption was a warning to the wider party that political factionalism will not be tolerated, and an indication that the economic reformers in the party are in control. I am more interested to see what changes to the economy will be evident by the last quarter of next year than how the country will look next month. ” – Chinese businessman
Powerful interest groups vie for control of the many lucrative sectors of the country’s economy. The families of government officials — from senior leaders in Beijing and provincial governors to city mayors and even the party secretaries of China’s smallest counties and villages — often benefit inappropriately from business deals and infrastructure projects. When Xi Jinping strives to restructure the economy after becoming president in March next year, he and his new administration will face the inertia that comes from the currently high levels of corruption and nepotism to which China’s years of rapid economic expansion have given rise. Xi also faces the unique challenge of becoming China’s first president to take lead of the country while two former presidents still live. Those who accumulated power under former president Jiang Zemin and outgoing president Hu Jintao will work to retain their power, and both men will do all they can to defend their legacies, casting vague but long shadows over the Xi administration.
Lacking charisma and having failed to create an impression of empathy with ordinary Chinese people, President Hu Jintao has been judged harshly at the end of his tenure. His swift and largely effective response to the global financial crisis has been all but forgotten. Forgotten too are his effectual actions in response to the SARS epidemic and the Sichuan Earthquake, his implementation of reforms to rural taxation, and the initiation of rural health insurance and other minutiae of government under his leadership. By mid-2012, President Hu became concerned that his legacy was at risk of being seriously tarnished by more recent problems. His administration had failed the previous year to loosen its excessive credit restrictions fast enough. There were a few extreme manifestations of social unrest, for example the protests in Ningbo last month and at a Foxconn factory in Taiyuan in September. The government’s manoeuvres to bring down Bo Xilai, his family and the loosely-connected leftist faction that has gathered around him were apparently successful, but triggered unwelcome exposés of the staggering wealth of other senior leaders’ families. Hu felt he needed to make a grand gesture that would redefine his legacy, and made the mistake of fanning nationalist sentiments sparked by the Diaoyu Islands dispute. Hu hoped that attention would be diverted from his more recent perceived failures, and that he would be seen by the people as a heroic advocate of China’s national interests. In fact, disturbances that were intended to be nationalistic protests against Japan threatened to become a storm of wider protests against social injustice and inequity, and corruption in the party.
“Usually these protests can be somewhat contained. Despite speculation by foreigners that they are elaborately orchestrated, when it comes to anti-Japanese sentiment, there is a high degree of spontaneity behind demonstrations. We watched recently with alarm as demonstrators outside the Japanese Embassy in Beijing began carrying large pictures of Chairman Mao. Given the extent to which Mao is still revered in China, that may sound ironic, but for many underprivileged Chinese people, Mao’s image has become a symbol of dissent. What concerns us most is that discontent regarding a single issue will become the catalyst for a number of grievances and coalesce into widespread anti-government protests. Nostalgia for a simpler, more just society under the old Communist model risks strengthening factions within society and even the party. Due in part to the manner in which history is taught, most people under 40 have little real understanding of the chaos and suffering of the 1960s and 1970s, and that life in China is demonstrably better now.” – Chinese security official
The Chinese Communist Party will manage a relatively stable transition, but now it must utilise this relative political unity to reform the economy.
A new era of reform
China’s social problems and the competition among senior leaders for position and influence will not be the new administration’s greatest challenges. Xi Jinping must now implement firm economic reforms. Over the last ten years, China has been consolidating and enjoying the benefits of the deep and often painful reforms of the late 1990s. The country is now on the threshold of a new era of economic reforms that will be as challenging and arduous as those of the 1990s. The Chinese Government has no choice but to embrace this new era. In the face of entrenched weak global demand there is a significant need to create a more open domestic market, managed with greater discipline and deftness. The Eurozone and the United States, under their current conflicted leadership, risk a decade of economic stagnation during which they will drift in and out of recession and grapple with the resulting social instability. China’s economy is strong, despite the fluctuating and anxious forecasts of foreign financial institutions and media. China will record 7.5% GDP growth this year and probably return to at least 8% next year. The government has the resources and the insight to make the necessary adjustments, but it must first change itself to bring about real change. Credit reform that favours the crucial private sector is one way to help stimulate domestic demand and stem increases in unemployment.
A significant number of Chinese entrepreneurs flourished because their ingenuity and capacity for risk enabled them to take advantage of the fast-growing economy. It did not matter that some lacked management and accounting skills. Encouraged by their city governments, they diversified into a range of business outside their sectors. Banks are now not only too cautious when lending to the private sector but also do not work closely with their clients, unlike banks in more developed economies which advise companies on how to grow while managing risk. Deposit rates need to be increased to offer conservative but secure returns to citizens, while the price of lending should be lowered.
“We are a major exporter in our province. To some extent we have benefited from the demise of weaker competitors and have expanded our market share. But as our clients in Europe and the USA pass on the effects of their weaker markets, we must focus on maintaining our position by taking lower margins. The boom at the end of the 1990s and the first eight years of the following decade left us in good shape. But smaller and essentially good export businesses in other sectors in our city are struggling to survive. Five years ago, at the beginning of the recession, 3O enterprises in our city formed a fund based on the principles of a credit union to assist each other in the event that domestic credit became difficult to secure. As receivables increased and domestic banks became increasingly reluctant to support private companies, the credit union became crucial for smaller, less well-capitalised members. We maintained a reserve of about RMB 10 million which was lent to members, interest free, for periods of 30 to 60 days. This gave banks more confidence to grant working capital loans but, as the terms of trade became worse in the West and the Chinese banks grew even more risk averse, a number of our participants became insolvent. There is now almost nothing left in the credit union. Added to this, many of the members were guarantors of each other’s bank loans, forcing them into bankruptcy. I know that there is growth in the economy but, until it is better governed, I will take my chances in export markets.” – Chinese appliance manufacturer
Tax reform is fundamental in ensuring not only a more balanced and reliable income for the state but an increase in public confidence in the system and a change in the corrosive culture of dishonesty. Individuals and companies are skilled at avoiding tax in China partly because tax policies are so poorly defined. At 17%, China’s total tax revenue as a percentage of GDP is acceptable for a developing country. However, China’s State Administration of Taxation (‘SAT’) places an inordinate burden on companies to make up for the paltry revenue generated from personal income tax (1.3% of GDP). Companies face the cost of local rent-seeking officials who ask for a bewildering array of arbitrary fees and tariffs each year. The SAT needs to simplify corporate tax laws and variegate the personal income tax regime. It needs also to bring more rigour to tax collection, reducing the influence of local governments that allow rent-seeking among some and then provide unsanctioned tax breaks to favoured industries.
Chinese legal reform still lags behind the needs of the country’s commercial sector and the demands of its rapidly evolving society. Laws related to property have improved in many areas but civil law can still be arbitrary. Law is a tool of the state: although petitions against injustices are allowed, this right may be swiftly withdrawn if those petitions are perceived to be too challenging to the state. The evolution of China’s legal system over the past 30 years has, nevertheless, been staggering and unprecedented in the development of any society in modern history. Despite systemic improvements such as those in the Second Five Year Reform Program for the People’s Courts (2004-2008) — which cautiously identified the need for a more independent and professional judiciary and recommended that judges should be guided increasingly by precedent — changes to the justice system must now be accelerated. Witnesses need to present evidence in court rather than through written statements often attained by dubious means, and cross-examination, fundamental to the clarity and credibility of any legal system, should be allowed.
High expectations
The current conflicts between interest groups within the economy share some of the features of those in previous decades, but this time the resistance to change will come not from Communist ideologues but from individual politicians with entrenched interests, large private monopolies and state-owned industries — many of which are also monopolies and operate relatively free of government restraint. These SOEs are able to borrow at low interest rates from state-owned banks and enjoy access to land and other resources that are unavailable to privately owned companies. They list subsidiaries freely on the domestic stock exchanges
“How would I know what the new president will be like? People like us don’t count. We live our lives in spite of politics and the party. But we want strong leadership. My friends and I expect that this man Xi Jinping, who is actually unknown to us, will stand up to the corruption in the party and ensure that we can work and bring increasingly better life security to our families. The popular view is that he is strong, so our expectations are high.” – Beijing driver
Xi Jinping will settle into his new role, marshal his supporters within the government and, 12 to 18 months into his tenure, begin to roll out substantial reforms. The delegates to the 18th National Congress of the Communist Party should not become overly reliant on the fact that, for the time being, it will be business as usual within their centrally-heated halls. In their relative comfort and complacency, they must also know that China is a nation driven by farmers and workers, who struggle for better lives and expect for themselves or at least their children that which the middle class already enjoys. In a nation such as this, constant change is inevitable. In an environment of more economic flexibility, better regulation, less government intervention and greater industrial and agricultural efficiency, the combination of common aspiration and the forces of urbanisation have the potential to drive China for the next two to three decades through a period of solid progress and stability, albeit with lower GDP growth.