The China Track 与中国接轨

China's new leadership: Econ reform yes, political reform no

Today's unveiling of the new Chinese leadership reveals a system that generates balances, however, fragile, involving factions, policies, and process. 

We tend to over-emphasize the significance of personal factions and princelings, since neither tells us much about the policy preferences of individuals or the likely policy direction of the leadership overall. But to the extent that we do, there is factional balance in this group. Jiang Zemin apparently was able to insert more allies in positions on the Politburo Standing Committee (PBSC) than Hu Jintao, but Hu's man, Li Keqiang is #2, a spot higher than usual for Premier, and ahead of supposed Jiang ally, Zhang Dejiang. But the wider Politburo has several folks who served in the Communist Youth League or are from Anhui and could be considered allies of Hu, most importantly, Hu Chunhua (Party secretary of Inner Mongolia) and Wang Yang (Party secretary of Guangdong). And some have worked closely with both Jiang and Hu, such as Wang Huning, who was originally brought to Party center by Jiang, but has served as head of Party's policy research office under Hu. And although Xi is surrounded by supposed Jiang and Hu accolytes, he is the top dog, and he immediately got Hu's seat as Chair of the Central Military Commission. Hu looks like the loser, but it wasn't a blow-out.

Whatever we think about any one individual or factional ties, we are seeing some interesting broad trends in the group. The average age of Poliburo members is unchanged, but the trend of growing diversity in educational backgrounds has continued. Engineering technocrats no longer dominate the body. Even majoring in Chinese literature isn't an obstacle to getting to the top.

 

Some of the disappointment I've heard about the new group is that the two most likely advocates of serious political reform, Li Yuanchao and Wang Yang, didn't make it to the PBSC. But you'd have to beyond optimistic to believe the CPC top leadership is at all serious about democratization. That is not in the cards no matter who is in the PB. There's not a Gorbachev among them. We'll see a range of reforms to improve how this system works (budget transparency, income reporting, more efforts to rein in corruption), but all of these tactics are being done to make this system work better, not prepare China to move toward another (multi-party democratic) one. If you're skeptical they can make this system work better, they're going to try and prove everyone wrong. Either they'll succeed, or there will be a political meltdown. 

There has been some talk about "institutionalization" of the succession process and elite politics. Yes, if this means efforts to secretly negotiate an outcome minimally acceptable to all powerbrokers, and forcing anyone 68 or older into official retirement. But beyond that, things appear much more fluid. Bo Xilai was brought down with a sledge hammer for apparently covering up a murder and being corrupt, and it is certainly possible opponents of Wen used the foreign media (NYT) to tar him for having a wealthy family. Negotiations were not neat and orderly and appear to have lasted through October. And many of the final decisions are inconsistent with recent practice: 1) The PBSC went from 9 to 7 members; 2) The premier's rank was raised from #3 to #2 in the Party hierarchy; 3) Xi assumed the Central Military Commission chair immediately rather than at a future plenum a year or two later (as Jiang and Hu did in 1994 and 2004); and 4) The number of women on the Politburo rose from 1 to 2, a positive but unprecendented development. 

I suppose someone could say all of this is consistent with "flexible" institutionalization, but that would be an excellent example of "conceptual stretching."

Despite the Party's likely continued tight control on the political wheel and the lack of institutionalization, I expect more balance between encouraging market mechanisms and industrial policy. We should see sustained, though incremental economic reforms, which would be an expansion of trends begun over the past year: liberalization of interest rates, continued bond market and stock market reforms, gradually opening the capital account, loosening prices for commodities and energy, and reducing monopolies for SOEs. At the same time, we should be under no illusion that industrial policy's days are numbered. To the contrary, we will continue to see extensive intervention in most areas of the economy, particularly for "strategic emerging industries (SEI), particularly for SEIs, as the government is not about to have faith that the market alone will push firms to invest in R&D and focus on moving up value-added chains. 

Most refreshing, though far from Obama-like, is Xi Jinping's style. When he addressed the media, he spoke in non-Marxist terms about how he views the country and what his goals are. He made zero reference to his predecessors -- Mao Hua, Deng, Jiang, or Hu, and he only mentioned "Socialism with Chinese Characteristics" once. There was even some varying intonation in his voice, and he had a genuine smile. Goodbye Robot Hu!

Obama's Victory and US-China Relations: The West Wind Blows

The winds are blowing West, and this is good for US-China relations and addressing global problems.

Why am I more than cautiously optimistic? 

• The "feeling out" period often associated with new administrations will be much shorter and less bumpy than had Romney prevailed. Secretary Clinton and perhaps some other cabinet secretaries will likely step down in the Spring, but there should be substantial continuity in personnel. More change will come on the Chinese side, but most of the new leaders have already been on the scene and engaged with the US and international affairs for some time. The main adjustments will be adapting to Xi Jinping's style and the new slate of members on the Central Military Commission. 

• The victory allows Obama to carry out his domestic policies with renewed vigor. Although Obama did not win a clear policy mandate, and the House of Representatives is still in Republican hands, he and the Democrats performed impressively. The economic recovery is likely to continue and improve, and the US's long-term demographic transition is likely to benefit the Democratic Party. There will be tremendous pressure on the Republican Party to give up its strategy of opposing Obama at every turn. Hence, we should see a rollback of the Bush tax cuts, full implementation of Obamacare, and greater attention to US industrial competitiveness. 

• Obama's policies toward China and East Asia will continue along the same trajectory developed over the past few years. Aside from token criticism of Obama's weakness vis-a-vis the Chinese curency, Romney and the Republicans had very limited critiques of Obama's foreign policy (see the second debate). The 60-plus official bilateral fora for dialogue and cooperation will continue. At the same time, the US will proceed with using the WTO and bilateral antidumping and counterveiling duty investigations as a way to push Chinese economic policies to be less harmful to US business interests. Efforts to adopt a Trans-Pacific Partnership will continue apace and perhaps with a greater PR campaign. The US will continue to highlight the importance of freedom of transit and the peaceful solution of territorial disputes in the South China Sea and expand cooperation with countries on China's periphery. And without the specter of another election, Obama may be more willing to engage multilaterally for a mini-Doha package and a substantive deal on climate change through the UN process. 

• China could be on the defensive for the next few years. In early 2009, because of the global financial crisis, Obama began his presidency in a weakened position, and China's star seemed to be rising quickly. Now things look different. It is the US that is resurgent, and there are serious concerns about China's economy, in the short term due to substantial growth in debt, and in the medium/long term due to the difficulties of shifting toward a more efficient economic growth model. Although there are understandable concerns about a flair-up with Japan, I don't expect China to assume a nationalistic defensive crouch during this period. That is because the likely new Politburo Standing Committee will be relatively reformist in character, closer in temperment to the group in power in the 1990's (not surprisingly, Jiang Zemin has had a big hand in shaping the incoming group). I expect the new Chinese administration to adopt policies that help China gradually overcome many of its economic challenges (although I don't see democratic reform on the horizon). In the near term, these problems may be serious enough to constrain China's assertiveness. 

In March 2012, Kenneth Lieberthal and Wang Jisi issued an important report highlighting the strategic distrust that has seeped into the relationship. I do not see that distrust dissapating easily and replaced by a straightfoward, uanbashed partnership. However, I do think the continuity of leadership on the US side, the potential greater US confidence domestically and internationally, combined with serious challenges in a China headed by a more reformist leadership may create an environment for greater cooperation. The US may be more ready to compromise on some aspects of the Doha Round and climate change, and China may need a more stable periphery and explicit support in a way it hasn't shown of late. 

Thus, in multiple ways, there is a chance to re-live the 1990's all over again, but this time get it right. When the Clinton Administration came into office, the US had vanquished the Soviets and Iraq. It took over a year for the president to drop the "Butchers of Beijing" rhetoric and extend MFN to China without condition. The relationship improved somewhat, but was still hit by the Taiwan Straits crisis and the mistaken bombing of the Chinese embassy in Belgrade.

More broadly, although the Clinton Administration got the US economy rolling again (or at least supported trends eminating from Silicon Valley and elsewhere), signed NAFTA, and got the WTO launched, more could have been done in terms of addressing climate change, limiting nuclear proliferation, enhancing mechanisms of cooperative security, and adopting policies that really fostered economic development and state-building in developing countries. That agenda was cut short by the Bush victory in 2000 and 9/11. We can't erase those 8 years, but it's possible the Bush era could be seen as an interregnum, a pause taken to deal with immediate threats that pushed back addressing deep-seated, long-term global challenges.

And if China is entering a period where they recognize a new wave of domestic reform is needed, then we really could be back in a similar situation. Of course, we cannot unwind the 2000's -- the threat of Middle East terrorism, the damage to the US economy, and China's emergence -- but with Obama repeating Clinton's successful re-election bid, it does feel a little like 1996. 

And if you listen, you can hear Celine Dion singing her hit of the year, "Because You Loved Me."

The Leadership Transition and SOEs

Conventional wisdom has it that we are unlikely to see a highly aggressive economic reform agenda adopted by the new leadership that comes to power in a couple weeks. One of the main reasons given is the lobbying power of state-owned enterprises (SOE). Commentators highlight the strong ties between the leadership and SOEs, for example, highlighting that Zhou Yongkang spent so much time at China National Petroleum Corp. that he is essentially the oil industry's advocate on the Politburo Standing Committee. And once he retires, he could be replaced on the Politburo by Su Shulin, formerly a general manager at Sinopec and now governor of Fujian.

Certainly these ties are not insignificant, but we ought not make too much of them. The trend, in fact, is a decline in direct ties between leaders and SOEs. I collected data on all of the Politburo members for the 15th Central Committee (1997-2002), 16th (2002-2007), and 17th (2007-2012), and then made my best guess on the likely composition of the upcoming Politburo. I then culled their bios for work experience in SOEs. The data are surprising:

The biggest reason for the decline in SOE experience is the larger number of Politburo members who have worked their entire careers in the Communist Party and government. This is particularly true for those who have worked their way up through the Communist Youth League. They, of course, owe their rise to Hu Jintao. 

SOEs are not well represented anywhere in the official political system. Here is how things break down on the current National People's Congress, China's legislature: 

SOEs are certainly over-represented relative to private companies, of which there are far more, but a 9% share of seats is quite small. The NPC is dominated by government and Communist Party officials, not SOE executives. 

The Central Committee data show the same results. There are a very small number (less than 10) of SOE managers who are alternate members of the Central Committee, but none are regular members. 

This situation may change, but those looking for SOE influence don't make that argument. 

So where does SOE power likely come from? 

1) The government's ownership and control of SOEs, which gives offiicaldom a stake in making sure SOEs do well. If the financial sector is liberalized and administrative monopolies shrunk, that will hurt SOEs. 

2) The above data only focuses on officials themselves and not their family members. It is likely that just about every single member of the Politburo and Politburo Standing Committee has at least one family member who works in an SOE. 

3) Even if officials don't overly care about SOEs or have family members in SOEs, it is likely they have friends and colleagues who work in SOEs. Officials are socialized to believe that SOEs are natural and important parts of China's social fabric, and they shouldn't be penalized. 

4) SOE senior executives share the same administrative rank or have an even high rank than many of the bureaucrats who are supposed to regulate them. That makes SOEs difficult to control. 

The above discussion shows reasons why we shouldn't overstate SOE influence but why we should expect them to still have significant power. My own view is that despite being highly influential in a variety of ways, if the leadership wants to institute substantial reforms that hurt SOE interests, they could, and they would not pay a steep political price for doing so. There are a variety of ways the leadership could manage this kind of opposition, including rotating or firing SOE managers, implementing changes gradually, and compensating SOEs with other kinds of benefits. The question is, does the leadership want to do this? We'll find out soon.