The China Track 与中国接轨

From Nouns to Adjectives: The 3rd Plenum Communique

Since Party plenums are closed-door events with nothing emerging except what the leadership wants us to hear, we are still reduced to tea-leaf reading and old-school Zhongnanhai-ology. And although Xi Jinping has been praised for using more flowerly language and shows genuine emotion, the communique issued at the end of the 3rd Plenum of th 18th Party Congress is a bland document. This is the kind of thing you would introduce your students or family to if you wanted them to never be interested in Chinese politics and leave you alone. 

I drank some strong coffee, pulled out my highlighter, and opened my dictionary. What did I find? A document that potentially heralds substantial reforms, but leaves a lot, perhaps too much, to the imagination.  

Communiques from previous Party plenums that signaled major policy changes introduced new nouns to the ideological lexicon. The "commodity economy," "socialist market economy," etc. Perhaps the key word from yesterday's communique is "decisive," as in having "the market place the decisive role in resource allocation." That is not as big a change in direction as was ushered in at the 3rd Plenums of the 11th, 13th, or 14th Party Congresses. By focusing on an adjective and not a noun, the Party is now trying to clarify and sharpen the direction it wants China to go, not set a fundamental new course.

I say "perhaps the key word" because the summary provided by Xinhua at the end of the text did not focus on that point at all. It definitely is significant because it goes beyond previous statements of markets playing a "basic" role in allocating resources. But is it the most important thing in the document? No one can say for sure.

There were other significant elements.

On the positive side of the ledger:

1. It looks like we will see a lot of experiments and new national policies in a wide variety of areas, including general government administration, further price liberalization, central and local government finances and budgets, cadre assessment, property rights and land ownership, taxes, environmental protection, the judicial system, household registration, greater access to capital and industries for private and foreign industry, and ensuring competitive markets.

 2. There was a clear sense on the need to nationalize and unify policies, including reducing inter-regional barriers and standardizing government administration across the country. 

 3. The word innovation was used several times, including with regard to science and technology, but the adjective "indigenous" (自主) never appeared. This continues Li Keqiang's pattern of never saying "indigenous innovation," in contrast to Wen Jiabao and Hu Jintao, and portends a more liberal approach to sci-tech policy.

 4. There will be a creation of a national security council. It's unclear precisely what its job will be, but it could potentially operate like the US's NSC and help coordinate foreign and security policy across the ministries. This could help alleviate inconsistent signals and bickering we see between the PLA, Ministry of Foreign Affairs, MOFCOM, the PBOC, and other ministries.

 5. There was no mention of border disputes, the South China Sea, the island dispute with Japan, or cybersecurity. Any emphasis on a threatening external environment could be used to justify greater defense spending or a more aggressive international posture. We did not see that. 

On the negative or unclear side of the ledger:  

1. There could have been more details about specific kinds of reforms. Instead, there were lots of hints -- and hints are often critical -- but the more detail would have provided less wiggle room to opponents.

 2. There was a strong emphasis on the continued importance of the public, state-owned economy. Not only are SOEs important in "pillar" (支柱) sectors, but they are supposed to raise their overall competitiveness in the entire economy. That may be the politically safe thing to say, but it suggests genuine constraints on reforms in these sectors and walling off SOEs to standard rules regarding competition policy, market access, and financial markets. On the other hand, it is possible that this means SOEs will be pushed to be much more efficient, to hand over a much larger percentage of their earnings, to standardize their internal governance, and to compete more head-to-head with private and foreign companies. We just don't know, but the vagueness is not reassuring. 

 3. The creation of a Leading Small Group to Deepen Reform could be a way to get around the gridlock that exists in the standard policymaking process and the special interests within the Party, government, and SOEs that oppose change. This could help speed up adoption and make implementation go more smoothly. But its creation may also signal that there is significant opposition and making headway will be quite difficult.

4. Aside from emphasizing the need for judicial reform and genuflections toward democracy, human rights, and other standard elements of the constitution, there was very little new that would give one confidence the Party is willing to accept systematic constraints on its authority, either rules governing how it operates or ways it and the government can be held accountable. For those who think greater political space is needed for markets to work well and for state-society relations to be genuinely stable, this document does not openly provide a lot of hope. 

5. There was no mention of family planning policy despite signals it would be an important reform. Just the day before the state press ran stories to this effect. We will need to wait to see if the one-child policy is adapted further into an essentially two-child policy. 

Getting Government-Business Relations Right

How can government-business relations be structured to most likely generate good economic policies? A huge question with perhaps no good answer. In the late fall I gave an interview to a reporter from the China Enterprise News (CEN) on this question. My answer, published a couple days ago, borrowed from Peter Evans' 1995 book, Embedded Autonomy. In a nutshell, businesses need to have access to government to collect information and provide ideas, but at the same time not be too closely enmeshed with their regulators and politicians. 

CEN was kind of enough to publish an extensive transcript of the interview in which I compared governmen-business relations in the United States and China. America certainly has huge problems with powerful lobbyists, but more and more Chinese I meet are confounded by the increasingly unbreakable ties that bind business and the state in China. And it's not just SOEs. Private companies, in order to survive economically have had to come to terms with the system politically. In most cases, they now go along to get along. China appears to be moving further and further away from the reasonable ideal that Peter Evans described. 

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.

 

Chinese bookstores: nothing going on this year

One would think from visiting bookstores in China that nothing important is occuring in China this year. Of course, later this year the Chinese Communist Party will hold its 18th Party Congress and select a new slate of leaders to take up positions in the Politburo Standing Committe, Politburo, Central Committee, and its top offices, such as the Organization Department, United Front, etc. The same transition occurs first at the provincial level and before that at the county and city levels. The replacement of Party leaders will be followed by replacement of government officials up and down the system. Probably around 20,000 officials will gain and lose posts through this transition. 

This is a huge deal, more important than anything else going on in China this year. And it is being absolutely, 100% ignored by Chinese scholars and the media. There is not a single scholar in all of the Chinese mainland who has made a career out of analyzing Chinese elite politics. I've met academics who are quite knowledgeable about the leadership, and if they chose, could write impressive articles. But they write barely anything, at least within publications available in China. 

Imagine if in United States the media and scholars didn't pay any attention to American elections and the political class. Of course, that seems like absolute nonsense. There are experts on American elections, the presidency, Congress, and lobbying. Then there are all the news stories, Sunday talk shows, blogging, and twittering, day and night, 365. All absent in China. 

Except in Hong Kong. In this little tiny exception of a place, the 18th Party Congress is a huge topic for experts and the media. Go to any Hong Kong bookstore or newspaper stand on the side of the road and you will encounter dozens and dozens of books about China's leadership, their families, and potential developments in policy. In one store, I found a shelf with about 12 books.  

It took me a while to sift through these, and I thought I had a good treasure trove. But then I turned around a found a whole other set of shelves, all with books about the leadership. A few steps away even more titles awaited me. If I had wanted, I could have bought 60-70 titles. I must admit that after looking through many of these books, I was not extremely impressed. The books had some basic info about the leaders, and made assertions of about so-and-so being part of Hu's faction and other so-and-so's part of Jiang Zemin's faction, and on and on. And the more I read, the less convinced I became in the accuracy of the claims. But at least there were claims and a discussion. 

Back in Beijing? Zilch. I went to one of the city's best bookstores, Wansheng Shuyuan (万圣书院), just outside the south entrance to Tsinghua University. Overall not a bad bookstore, with lots of books on a host of subjects. But nothing on elite Chinese politics save the selected works of various leaders. The bookstore listed its Top Ten Sellers for May, and they were mainly about Chinese history and philosophy, not politics.  

The window display of new and suggested titles was equally anodine. Nothing remotely related to the country's politics. 

I was curious if I had missed something. So I asked a sales clerk if they had any books on the 18th Party Congress. Her reply, a simple, "no." I asked about books regarding elite politics, and she pointed me to the Politics section of the bookstore. What did I find? A lot of books on Chinese international relations and diplomacy, but nothing on elite politics. 

I asked other sales clerks if anyone else had asked for books about the 18th Party Congress, and they answered either, "I don't know," or "it's unclear" (which means, "no, stop bothering me"). 

In one last attempt, I looked at the magazine rack to see what I could find. Again, nada. One magazine had what could only be described as an extremely boring story on Li Keqiang's recent tour of Europe. 

The silence in China is deafening. The contrast with Hong Kong and other places with more open political discussion is stunning. Of course, there are tons of private conversations and gossip-trading going on, but nothing is occuring out in the open.  

One is left to ask: Is this a healthy state of affairs for a political community and a country going not only through a political transition but through rapid economic and social development? 

 

 

My own southern tour

In January 1992, Deng Xiaoping famously set out on his Southern Tour with the aim of kick-starting economic reforms, which had languished over the previous 3 years. His trip included a visit to the electronics maker Xianke, whose manager was the son of one of Deng's fighting comrades in the 1930's in Jiangxi province. A decade later, despite the best of connections, Xianke went down in flames. Neither Deng nor any of the other top leaders who paid homage to Xianke could force Chinese consumers to buy Xianke's stereos or DVD players. 

My trips to Guangdong have never been so consequential. The first visit was in early 1988, when I arrived by overnight boat. I started in Guilin on a rickity bus that went up and down over horribly scary roads (I occasionally read about them going over cliffs with 20 passengers on board), and then took at boat from Wuzhou down the Pearl River to Guangzhou. I had a small open birth with many people on both sides of me. There were photos near a door showing the results of what happens when you smoke or light a fire on board. Grusome! When I arrived the following morning, I found Guangzhou difficult to navigate compared to Beijing because its roads were not straight and no one spoke Mandarin. I stayed at a nondescript hostel not far from the US consulate and the Swan Hotel. I had three-cat soup and some snake at a restaurant written up in the Lonely Planet guide. When I visited the restroom, I walked by cages stacked to the ceiling of meowing meals. 

24 years after my first trip and two decades after Deng's trip to Guangdong, I decided to make my own treck south in late May to see how things were going. Deng and Xianke are now both long gone, and I didn't bother to look for the snake restaurant. My main goal was to take stock of economic reforms and how well Guangdong's leader, Wang Yang, is making out. 

My efforts were helped tremendously by Sun Yat-sen University's Edward Wang, who introduced me to many of his friends (including some folks who visited IU before) and helped arrange some excellent interviews.

School of Asia-Pacific Studies, SYSU

Sun Yat-sen University has a gorgeous campus. Its northern border sits along the Pearl River. The buildings are not overly large (like some on the campus of Renmin University in Beijing), and there are trees and quiet paths everywhere. 

School of Management, SYSU

What did I find out about Guangdong and Wang Yang? In short, I was pretty impressed by both. Guangdong's economy grew rapidly in the 1990's and 2000's as the core of China's export machine, but as production costs there have risen and global markets have shrunk, everyone knows Guangdong needs to move up the value-added chain and focus more on serving domestic demand. Wang Yang has been forcefully pushing this transition. He's run into some serious opposition from manufacturers who just want to squeeze more and more out of their workforce, but he's also managed to induce some companies to move to northern Guangdong or other provinces and push firms that remain in the Pearl River Delta to upgrade. I'm currently searching for confirming stats, but this is my general impression. 

Guangdong has also been relatively proactive on the political front as well, encouraging governance that gives a greater voice to the grassroots, such as through NGO's and village elections. Guangdong is also experimenting with open budgeting so that citizens can have a better (though not perfect) understanding of where their taxes go. On all scores, Guangdong looks very different from the recent approach of Chongqing. And we know what happened there. 

One of the highlights of my time in Guangzhou was a visit to a provincial advisory body known as the Canshishi (参事室). This official advisory body is composed of scholars and experts who serve at the pleasure of the Party Secretary and governor, giving their frank opinions about all sorts of policies. I was only marginally aware of these advisory bodies before, which serve the leadership of every province and the central government's State Council. I think they deserve much more attention.  

Outside the Guangdong Provincial Canshishi, Guangzhou

During the visit I was able to meet the office director, Mr. Zhou, and received a briefing about the office's history and the evolution of their responsibilties. 

From left to right: Mo Xianchun (advisory group's staffer), Wang Xinsheng (Deputy Dean, SYSU School of Asia-Pacific Studies), Zhou Yi (director of the advisory group office), and Edward Wang (SYSU professor and a great guy)

After having my most productive visit ever to Guangzhou, I made the short trip by train to Hong Kong and tried to measure the temperature from the other end of the Pearl River. My first visit to Hong Kong (in 1991) was worse than my first to Guangzhou. It involved a very heated argument with a sales clerk on Nathan Road; I ended up with a bloody lip soothed only by some ice from a nearby McDonald's and then a few hours of rest on the beaches near Stanley. Don't ask my what I said to provoke the clerk's ire!

Downtown Hong Kong (no one dares to jaywalk)

Nothing like that happened on this visit. I had a good time bunking in with a buddy who just moved down from Beijing, and over the course of a few days meeting with analysts of all sorts and shapes. Your average person on the street may not be paying much attention to Beijing, but Hong Kong's newspapers and analyst class are going gangbusters trying to determine which direction China and its leadership are headed in. Needless to say, there's a wide array of views about Guangdong and the future of China's economy and politics. I visited a bookstore and was overwhelmed by the number of books and sensationalistic titles and covers. Digesting that stuff could take months, and it'd leave you with serious stomach pains.

Book covers at a Hong Kong boostore

Having finished my interviews, I went over and took the Star Ferry from Central to Kowloon and enjoyed the views. There's nothing like quietly drifting across the harbour while at the same time gazing at Hong Kong island's towering buildings on one side, the bustling streets of Kowloon on the other, and tug boats and steamers passing through the middle. 

 

   View of Central in Hong Kong from the Star Ferry

 

Happy birthday CUPL

The Chinese University of Political Science and Law (政法大学) celebrated its 60th birthday last week. I was fortunate enough to attend the opening ceremony. Although it was a real hike to get out to the campus, which is around 20 km to the north of the downtown Beijing -- it took over an hour in snarled traffic -- it was worth it. 

It was an amazing performance. I always underestimate how fancy things like this will be. I did wear a suit, which was smart. But while I was in green, everyone else had dark blue suits. I arrived thinking this would be an event for a couple hundred people, but we went into a big theatre, and I guess there were at least 800 people packed in there. And the stage was decked out like the annual meeting of the National People's Congress, with the most important speakers and guests up there looking very important and sipping from their nice tea cups. They were surrounded by lights, a TV crew, a host with a well groomed voice, and dainty young Chinese girls in uniform keeping tea cups full and escorting speakers from their chairs to the microphone.

Down in the audience, I was led to the "foreign guests" section, and I felt like a prop in a play -- the happy foreigners giving greater legitimacy to the accomplishments of the university, but kept apart from everyone else because we were not Chinese. If they really wanted to show they have an international university, we would have been encouraged to mix and mingle amongst everyone else. 

I looked at the program, and there were 13 speeches listed. The current president's took over 20 minutes, and I thought we'd never finish. Luckily, speeches are arranged in order of length, with the longest first and the shorter ones following. Speakers did a great job of staying within their appointed times, all well practiced at turning their thoughts into one hour or one minute. One of the funnest parts of Chinese major public speeches are the cues to let you know they are making a big point and want applause. This happens at the end of sentences such as, "To all our guests, classmates, teachers, let's give them a greAT WARM WELCOOMMEE!!!!!" By the time they say "welcome" (huanying, 欢迎), they are almost yelling. Learning how to speak like this is something foreigners have not mastered, but I plan to find some chances to try out my "speechified" Chinese. 

The electronics were cool. They had 2 large screens on either side of the stage that switched between the audience and the speaker. I was worried when cameras pointed at me because I was in green and a little tired. I didn't want everyone looking at me with my eyes momentarily closed or me taking a deep yawn. The host began by reading letters of congratulations to the university, and I was impressed by one from Zhou Yongkang. Not that Zhou's letter was any better than Li Tieying's, but from what I've read in the foreign media, Zhou seems to have recently taken a vacation from his official duties. To dispell this, Zhou is going to need to show up at a meeting or visit some sick people in a hospital or something. 

One of the nice moments of the program came when about 10 students from CUPL's first class (actually, it wasn't called CUPL until the 1980's), in 1952, came up on stage and each received a plaque. They were, of course, quite old and moved slowly, but they walked with a great deal of pride and smiled widely out at all of us. It was actually moving. 

The speeches mostly made the same points, and everyone got plenty of applause. CUPL has made a huge contribution toward building rule of law in society and government, and there is still much more work to be done. But two speakers got more applause than anyone else: Cheng Siwei, a member of the standing committee of the National People's Congress, and Jiang Ping, CUPL's president during the late 1980's. Both had nice things to say about CUPL, but they took decidedly negative swipes at the overall progress toward rule of law and education. Jiang said China needs to have genuinely indpendent universities with genuine academic freedom, else innovation and rule of law will never materialize. 

I was impressed that they were invited to speak, and that they said things that reflect relatively negatively on China's educational and political systems. And no one stuffed a sock in their mouth. As I said, the crowd gave them the largest applause, and they didn't even raise their voices as well as others. I didn'y see the TV news that evening, and so don't know if their comments made it beyond the room. 

When the festivities ended just after 11:00 am, I made a beeline for the exits and the campus's main gate. CUPL was nice enough to assign a student volunteer to help me the whole way. She escorted me in, and she escorted me out, and then she made a call and a car showed up to take me all the way back into the city to my next appointment. How cool! As I waited a minute for my car, about 100 black Audis with licenses plates of all sorts, including from the miltary, zoomed by me out the campus gates and on to their next destination. 

Mega financial reform, drop by drop

Yesterday the National Development and Reform Commission announced that foreign banks would be allowed to bring in $24 billion in borrowed funds into China in 2012. This helps address a potential short-run problem of concerns about capital outflows, but it is part of a much larger trend of substantial financial reforms visible over the past 5 months. In the Fall, the top leadership of the China's securities, banking, and insurance regulators were changed. The most important personnel switch was to replace CSRC commisioner Shang Fulin with Guo Shuqing. Shang was moved over to head the banking regulatory commission, replacing retiring Liu Mingkang. Zhou Xiaochuan, who will likely conclude his tenure as Governor of the People's Bank of China next March, has also continued to sound reformist.

Since last Fall, a long list of financial reforms have been issued; each is individually minor, but together they are pretty substantial.

• Allowing further experiments with issuance of municipal government bonds.
• Liberalizing the issue process for corporate bonds.
• Create a common over-the-counter (OTC) trading platform.
• Expand the quotas for Qualified Foreign Institutional Investors (QFII).
• Permit greater private lending to small- and medium-sized enterprises in Wenzhou, as well as make it easier for Wenzhou businesses to invest overseas.
• Further gradual appreciation of the Renminbi.

Drop by drop, the growing list of individual financial reforms has gotten folks thinking that even bigger and more important reforms are on the horizon, namely a liberalization of interest rates and a more complete opening of the capital account. Authorities are at once discussing these possible measures and tamping down expectations.In the past, announcements of major financial reforms have always been sudden, for example, with the scrapping of Foreign Exchange Certificates in 1994 and unpegging the Renminbi from the dollar in 2005.

Nick Lardy, in his new book, Sustaining China's Economic Growth after the Global Financial Crisis, argues that interest rate liberalization is the cornerstone of any serious economic reform plan going forward. Determining when interest rates will be reformed involves a lot of guess work. Reforms would force the gap between deposit and loan rates to narrow, putting pressure on banks. Also, the country's overall debt levels are still high, and interest rate reform could add to the debt obligations of banks. However, Chinese banks currently are enjoying record profits and perhaps could endure the shift to more liberalized interest-rate environment.

The spate of financial reforms also is pushing people to wonder whether we are on the eve of broader economic and political reforms. Usually, such reforms do not come at the end of a Central Committee's term, particularly when many of the members of the Politburo will be replaced. In the past new leaders have taken 1-2 years to get settled before implementing substantial changes. But there are already signs that a list of reforms is being contemplated, including: greater support for the private sector and reduction of state-owned enterprises' administrative monopolies, greater autonomy for business associations, hukou reform, liberalization of the education system, and government restructuring.

Are we on the precipice of major reforms or will the tinkering of the last few months lead to...more tinkering? At this point, it is still anyone's guess.

Upcoming IPO's: Facebook vs. People's Daily Online

Facebook may raise $5 billion in its IPO, and the company may reach an estimated value of $75 billion. Today I read that People's Daily Online has recently filed for an IPO in Shanghai. Their IPO looks a little different. They only plan to raise about RMB 560 million (~$87 million), and their IPO will only be available to Chinese domestic investors, save those few qualified foreign institutional investors who have received special permission to play in China's financial sandbox. 

One neat thing Caixin notes in its report, People's Daily Online gets more than 20% of its income through government contracts. Given that this is the flagship publication of the Chinese Communist Party Central Committee, one might expect that Party involvement in the organization goes beyond such contracts.

We've all heard of Mark Zuckerberg. Good looking dude, had a flick made about him, has a huge effect on the planet's social landscape.

Have you heard of Liu Yunshan, Director of the CCP's Propaganda Department? He may be good at overseeing the publicity machine of the Party, but he ain't no Mark Zuckerberg.

How does the publicity machine of the party prosper or even maintain its relevance in this day and age?

In 5 years, which stock do you think will have increased in value more?

High Speed Trains and Managing Risk

In April I wrote a relatively positive entry about my ride on the high-speed train from Hangzhou to Shanghai. I noted the worries of some on the train about what would happen in the event of an accident, but concluded an accident would be unlikely because the trains are on raised tracks and face no other traffic.

Except other trains. I didn't think of that, and it appears Chinese officials didn't think of it -- or at least plan for the various contingencies that could involve multiple trains.

The accident speaks volumes about how China manages risk, and reminds me of a terrific article (Download Suttmeier Risk AP 2008) from 2008 by Pete Suttmeier entitled, "The 'Sixth Modernization'?: China, Safety, and the Management of Risks," in the July 2008 issue of Asia Policy, published by the National Bureau of Asian Research. Pete concludes that China regularly fails to manage risk effectively because doing so requires a clear commitment to safety from the very top and complex systems, both of which encourage built-it system redundancy, a culture of safety, and mechanisms for operational learning.

China's airline system was originally wracked by poor safety and accidents, but high-level attention and foreign expertise helped promote change. Having airlines managed by a single bureaucracy, CAAC, also helped immensely. By contrast, there are over a dozen agencies that have a hand in regulating food and the environment, and that's just at the national level.

If Pete is correct, then the extent of attention from the leadership and the public and the existence of a single bureaucratic actor, the Ministry of Railways, should help lead to improved safety eventually. However, it is clear there is a long way to go. The Ministry of Railways has been focused on other priorities. No railway official would want an accident, but the desire to build out a super-modern train network that generates revenue and pride for the country seems to have taken front seat.

Attitude is as important as organization. The Chinese government often times seems to act as if it were an American 25-year old who believes they will not get sick and, hence, can forgo health insurance. Such young adults typically avoid preventative care, and when they do become sick, it is financially catostrophic. Of course, buying health insurance and making safety the number-one priority would be smart, but it is not the obvious choice for the young at heart. Time will tell if this country's government can mature.

Neat Reading: From smart phones to Huntsman's farewell address

I've been trying to catch up on reading and lately came across some interesting stuff:

1) David Wolf, writing in Silicon Hutong, has a nice piece analyzing the burgeoning standards war for smart-phone operating systems. Baidu just announced it will soon offer its own version in an already crowded field. There are at least seven globally relevant smart phone operating systems, and there are three others available in China, offered by China Mobile, China Unicom, and Kai-fu Lee's Innovation Works. Wolf notes that all this competition creates consumer confusion, but he points out that only 7% of mobile subscribers in China have a smart phone, and hence, in the Chinese context it makes sense for there to be a period of operating system competition.This contest over smart phones is similar to the old conflict over video player formats -- SVCD, CVD, EVD, etc. And at least from what we know, the initiative for the contest appears entirely commercial; there may be government subsidies lurking somewhere, but the inspiration seems to originate in the creative minds of business executives, not bureaucrats.

2) The US-China Economic and Security Review Commission (USCC) held a hearing on trends in Chinese foreign policy on April 8. The most interesting panel from my perspective was on "New Interest Groups in Chinese Foreign Policy." Although there's some debate about what constitutes a "real" interest group" as opposed to a branch of the Chinese regime, the three panelists collectively demonstrate that Chinese companies, banks, and bloggers are playing both a direct and indirect role in the policy process. This trend is driven by globalization, the spreading interests of Chinese industry around the world, and technological trends that make it easier for all of us to join the public sphere (my word, not theirs).

3) The USCC also just issued a report with its take on China's Indigenous Innovation policies. Although there are worries about China using a variety of policy levers to ply technology knowhow from foreign hands, the most interesting thing about the report is that it is quite skeptical that China's policies will lead to extensive innovation. If so, foreign firms need to grab hold tight of their IPR now, but this policy initiative is not the long-term threat many worry about.

This reminds me of an interview a few years ago. An executive from an American telecom firm told me that despite the headaches, some in his firm want China to continue its top-down policies to promote innovation because they are so unlikely to succeed; if the Chinese government were to actually be a much greater promoter of genuine innovation, through reducing barriers to market entry, encouraging non-state financing of product development, reforming the education system, etc., then Chinese industry would present a much greater challenge to his company.

4) Two different takes on Huawei and Chinese telecoms abroad: One is from Bloomberg, highlighting the importance of China Development Bank's $30 billion line of credit to Huawei. The second is a piece on the presence of Huawei and ZTE in the Middle East written by William Foster and Hannah Thoreson. Foster and Thoreson see Huawei and ZTE as commercially driven companies, but they highlight how their Internet filtering technology has been widely adopted across the Middle East. "Taking advantage of security tools and techniques developed in the Chinese market," they write, "Huawei and ZTE help their overseas partner telecom companies fashion networks that meet the information control needs of their domestic governments." Not surprisingly, the companies haven't run into the same kind of scrutiny they have faced in the United States and India.

5) On April 6th, American Ambassador to China Jon Huntsman gave what was billed as a "farewell speech" in Shanghai. It stands out for both his commitment to cooperative solutions to address thorny problems in the relationship, but also his frustration with the limits on civil liberties in China that has made it harder to have an open conversation between the two countries, which he suggests helps explain the continuing misunderstanding and distrust. I came across a thoughtful Chinese response to the speech in Wen Hui Pao penned by Guo Xuetang, a professor at the Shanghai University of Political Science and Law. Although Guo also wants the two countries to reduce misperceptions and find ways to peacefully co-exist and cooperation, he sees the burden for change as on the American side. Americans need to remember, he says, that China is recovering from over a century of mistreatment from the outside world; moreover, China is a larger powerful country that deserves America's respect, but it is still developing, and hence, its international responsibilities must remain limited. This certainly sounds self-serving from an American perspective, but it is not an uncommon view in China. The question is whether there is space for imagination in both countries to find common group: Can Chinese recognize that an American call for great liberalization in China is not part of a conspiracy to contain China but is actually suggested with China's interests at heart? And can Americans recognize that given China's history and American deep intervention in many countries around the globe that Chinese understandably might see the various elements of American policy toward China as part of a self-interested plan to keep the US on top?

Pssh, China Has a Civil Society

Apparently the Communist Party's Propaganda Department has issued an order banning domestic media from using the term "civil society" in their reporting. David Bandurski, writing for the China Media Project, shows that this order is being obeyed by the most official of official media, such as People's Daily, but is not by more independent outlets, such as the 21st Century Economic Herald. Scholars are also still using the term in academic papers.

One interesting aspect of this apparent ban is that it has focused on only one of the three different ways one can say civil society in Chinese, "gongmin shehui" (公民社会). Gongmin shehui could be translated as "citizen" society or, better, civic society. It refers to those members of society who are publicly engaged, often in the political process itself. But there are two other ways to say civil society in Chinese that haven't been banned. "Shimin shehui" (市民社会) literally means "urbanite society" (I'm sure there is a better translation that escapes me right now), and is most consistent with the notion of civil society being the product of capitalists and urban dwellers to create horizontal social ties and cooperative organizations to protect their interests, either against competitors or the state. Think industry associations, chambers of commerce, etc. Finally there is "minjian shehui" (民间社会), which most literally translates as "civilian society," that is, members of society collaborating with each other to form all types of organizations that are independent of state control. This would include anything from industry bodies to non-governmental organizations (NGO's) aimed to help those HIV or other marginalized groups.

If the reports are correct, this is a glass half-empty/half-full story. Propaganda officials are most worried about groups that are inherently politically oriented -- no duh -- but they are less concerned about business-related groups and other types of NGO's geared to address practical problems. If so, this effort at word control would actually imply some progress in terms of being more accommodating to the wide swath of NGO's that are the least politically threatening. Originally, it seemed the Party's view was that any group, even marble clubs and qigong groups, could potentially be threatening; but perhaps now there is a greater willingness to differentiate amongst organizations.

Reading between the lines more, this may mean China is getting ready to move on adopting new regulations related to at least industry associations and perhaps even to a broader group of NGO's. Now in the works for several years, a new set of regulations would be quite welcome and most likely represent a significant improvement over the current regulatory environment.

We'll just have to see whether the word games now being played are part of a larger policy shift, and if so, in which direction.

The Chinese Countryside: A Tempest or a Teapot?

For most observers it has become conventional wisdom that protest in China have been on the rise as a result of a growing gap between rich and poor, generated by corruption and the special privileges of China's elites. "Seething discontent," which occasionally boils over into huge protests involving thoustands, would be the picture many would draw. Scholars point to the growing assertiveness of China's labor movement as the latest sign that society is fighting back against oppression.

This view is particularly visible is portraits of the Chinese countryside. Pulitzer prize-winning author Ian Johnson's book, Wild Grass, details the rising assertiveness of Chinese villagers, who find a lawyer to represent them in cases where their land has been expropriated. The more academic, Taxation without Representation in Contemporary Rural China, by Tom Bernstein and Xiaobo Lü, details how peasants' incomes have been increasingly eaten away about by a money-hungry local state, and that these burdens have led to a growth in rural resistance. The current issue of the China Quarterly has an excellent article by Graeme Smith entitled, "The Hollow State." Smith shows that township governments, which sit just above the village level, have become hollow shells, losing authority to county and provincial governments above them and their officials being seconded to villages to perform work closer to the peasants or sent out of province to attract industrial investment. The result, in his eyes, is a weaker governance regime which can't address the needs of China's 750 million rural inhabitants.

Times, though, may be a changing. Earlier this year Indiana University sociologist Ethan Michelson, working with a team of Chinese scholars, conducted a survey of villager attitudes about the state and their quality of life. The survey sites were in five counties in very geographic and economic circumstances. Although not "nationally representative," the counties constituted a broad cross section of the country. Even more important, these counties had been surveyed eight years earlier about the same topics using almost identical questions. We'll have to wait for Michelson and his team to publish thei full findings, but he gave an initial taste during a colloquium presentation hosted by IU's Research Center for Chinese Politics & Business last month.

What did they find? In a word, things have gotten a lot, lot better. In 2002, when the first survey was completed, there was a great deal of mistrust of local government, especially village cadres, and villagers believed that social services -- roads, education, health care, etc. -- were not being provided for as they should be. At the time, the fees and taxes places on villagers was quite high, and they thought they were getting screwed. By contrast, in 2010, respondents had a more positive assessment of government, including village cadres, and they believed the provision of public goods was substantially improved over the past. 

What explains the changing perceptions? Changing national policies. In 2004-05, the central government passed new regulations banning agricultural taxes and began providing much greater funding for rural social services. The provision of these services expanded dramatically in the wake of the global financial crisis, as a substantial amount of China's stimulus plan was directed at rural areas.

One chart from Michelson's presentation, provided here with his permission, captures the heart of the issue.

Michelson was quick to point out that the data do not reveal placid contentment on the part of villagers. There are still things they are unhappy about, and some regions have more significant problems than others. But the gross change from 2002 is unmistakable.

There are many implications for these findings. I'll just mention one. Some argue that Chinese foreign policy has become more nationalistic because China's leaders are sitting on a domestic powder keg, and they need to keep the nationalist bona fides in tact or face the scorn of an upset public. At a minimum, it implies a less cooperative China on a range of foreign policy areas, from Taiwan to trade disputes. The most clear exposition of this view is Susan Shirk's Fragile Superpower.

If China's central leaders have the same data that Michelson has -- and they engage in extensive polling -- and believe their policies of the last 6 years are bearing fruit, then Chinese foreign policy should not be seen as a consequence of a jittery leadership; at least the trembling isn't originating in the countryside. China's national leadership is being more assertive on the global stage, expecting a higher standing in a range of international bodies and being more openly critical of the US military presence in Asia. This assertiveness is likely borne of greater confidence in China's domestic economic and political conditions, and not growing worries that their hold on power is more precarious.