Meet The New China - Same As The Old China?

Tyler Durden's picture

Just before the US election, we laid out the details and implications of the 'other' major 'election' occurring in the world - that of China's Supreme Leader of Awesomeness. Last night the details were announced of the makeup of the new Politburo Standing Committee. As Bloomberg notes, the panel - the most powerful decision-making body in China - was reduced from nine to seven members and will be led (unsurprisingly) by Xi Jinping. Perhaps, in a lesson for our own politicians, the 'new' committee is 'bipartisan' with five members from Xi Jinping's own Jiang Zemin faction and two members from Hu Jintao's faction (more a balance of reformers and reactionaries). But, in a similar vein to the US, as The Diplomat's David Cohen notes,"If Xi is to achieve even the economic policy goals that already appear to enjoy consensus support in Beijing, he will need to find ways of overcoming some of the largest entrenched interest groups in contemporary China.  To do so, he may have to set about creating new entrenched interest groups."

Adjusted from Goldman Sachs: The New Politburo...


Via The Diplomat's David Cohen: Xi Jinping's Economic Challenge,

For months, China watchers have been vying to predict whether reformers or reactionaries would prevail at this week's Party Congress – and now that it's here, analysts have had to begin debating what has actually happened.  Despite the importance of factional politics within the Party, what will determine whether major economic reforms are able to take place in the next year is not a contest of ideologies, but a test of political acumen – specifically, the power of China's top leaders to control the three vast machines of China's party, government, and state-owned enterprises (SOEs).  If Xi is to achieve even the economic policy goals that already appear to enjoy consensus support in Beijing, he will need to find ways of overcoming some of the largest entrenched interest groups in contemporary China.  To do so, he may have to set about creating new entrenched interest groups.


I'm ready to predict today that Xi's government will pursue policies intended to reduce corruption, allow more private competitors into sectors monopolized by the state, and rebalance the economy away from its focus on public investment.  This is, I think, a fairly safe projection – these policies have already been announced.  Reforming state-dominated industries to allow private-company market entry was the subject of March's “New 36 Clauses,” a series of fairly strong demands the State Council that the SOEs produce plans (which have been due for years) soon, and last week SASAC, the body that formally owns and regulates China's largest state-owned companies, announced plans to strengthen oversight in the interests of competition.  Barry Naughton discusses the rebalancing problem at length in the current issue of China Leadership Monitor and concludes, fairly convincingly, that Prime Minister Wen Jiabao's policies have widespread support among top leaders, who see them as critical for long-term growth, and, thus, their continued hold on power.


Corruption has been a hobbyhorse of the Hu-Wen administration – few major party events go by without President Hu Jintao warning that corruption threatens to undermine the legitimacy of the Communist Party, and the political report at this year's Party Congress was no exception.  But years of declarations that the Party must reckon with corruption have done nothing to stop local officials from enriching themselves with bribes – nor stopped the families of top leaders from accumulating fortunes measured in hundreds of millions or billions of dollars.


There is little question that China's top leaders see a need for a stronger private sector, and that they are uncomfortable with the extent to which the SOEs have come to dominate huge parts of the economy.  But unless changes reach deep into the structure of government, edicts from the top often have little effect in China.  I spoke a few weeks ago with James McGregor, a Senior Councilor at the public affairs consulting firm APCO Worldwide and author of a new book criticizing the growing dominance of the Chinese state sector, “No Ancient Wisdom, No Followers.”  He said that many in the Chinese government are worried about the shrinking role of private companies in the economy.  But, he said, the power of the SOEs may be enough to frustrate proposed reforms: “It's a game of power politics now. In China, it's not unlike the U.S and Europe – this place has a lot of big-money politics, a lot of vested interests that don't want change.”


Economic reform may meet the same fate as the reforms to local government of the Hu-Wen administration, intended to reduce corruption and deal with controversial land seizures: many announcements and little change.  Both Hu and Wen have talked about corruption in public venues for most of their term, and have proposed numerous laws to police officials, while other new laws have created a right to substantial compensation for people whose land is seized.


But what has not changed in the last ten years is the fundamental incentives that make corruption and land seizures inevitable.  Land sales made up around 40 percent of the annual funding of local governments in 2010, according to the China Real Estate Information Corp.– and it is therefore no surprise that local officials still participate in land seizures to fund programs of investment and development.  Provincial-level officials still have little reason to look too closely at the affairs of their subordinates – as the Bo Xilai case demonstrates, to do so risks driving them to expose your own hidden affairs.


Economic reform will face similar obstacles, and it is whether the new generation of leaders succeeds in overcoming these that will determine the shape of China's economy for the next ten years.


One major obstacle is the power of the state sector, still supercharged from China's immense stimulus package.  SOEs now serve Chinese officials at all levels as wellsprings of investment to boost local economies, avenues for promotion – a stint running a major SOE has become a common step on the ladder to the Party's highest ranks – and a source of income for leaders' families.


Their role as the main driver of growth during the past few years has made SOEs heroes, to a certain extent, or at least too important to threaten – and made them a powerful lobby group whose interests are strongly protected by high-level policy-making.  McGregor compared the chiefs of the SOEs to generals and provincial governors: “In a way, they're like the military – they report only to the Party, not the government.  They outrank the government people who are supposed to keep an eye on them.”


Equally strong is the resistance from lower-level officials, who depend heavily on SOE investments to support local economies.  Naughton's article in CLM has a good account of the problem: while China's top leaders fret about the collapse of Chinese growth model and the Party's legitimacy as the manager of the economy, ambitious officials at every other level of government have horizons limited to their district and term – thus, local governments constantly lobby SOEs and private companies to continue to build new factories and real estate developments.


Effective reforms will have to take on both of these interest groups – and, most likely, to find or create new ones with incentives to lobby for the private sector.  These challenges are similar to those faced by Deng Xiaoping's market reforms and the Jiang Zemin effort to streamline and privatize inefficient SOEs – and in order to overcome the resistance of local officials and SOE administrators in those cases both created new ways for them to get rich by reforming.  It was the success of these reforms that created the wealthy, profit-driven central SOEs that are now China's one of biggest economic headaches.


It will certainly be an uphill fight.  But it is one I think Xi may well seek out – to avoid it will be to accept that the President of China and the Politburo Standing Committee are bystanders in the making of China's economic policy.

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toomanyfakeconservatives's picture

No... worse. More backward, more authoritarian.

Zer0head's picture


this article is bout China not America

ACP's picture

Venezuela status quo - check.

US status quo - check.

China status quo - check.

All according to plan.

EnslavethechildrenforBen's picture

End the Fed here in America

Let the Chinese deal with  their own criminals

AldousHuxley's picture

Chinese put bad bankers into labor camps.

North Korea shot the central banker dead when they had to default and tried to pay Poland back with ginseng.

America gives bonuses.

toomanyfakeconservatives's picture

And the country itself? 40 cars per 1000 people... enuff said.

EnslavethechildrenforBen's picture

here we have 1000 cars for every 40 people, and we're dependant on a non existant fuel source.

now who's fucked?

Alhazred's picture

Glad I'm bearish on the global market.

I would hate to be a Bull in a China shop.


The world won't be safe for producers of capital until we stop this bull with fiat money and central banks.

End the fed

walküre's picture

How can you be bearish? Demand will soon outpace supply on every level. Who the fuck cares what money is worth or how it's getting paid anymore? If you have it, the world will want it.

infinity8's picture

"Politburo" is Chinese?


tickhound's picture

Yes.  It means "Goldman Sachs" in English.

plaspotje's picture

simple steps for China to keep its growth and people up and happy ,,  avoid at all cost making deals with goldman sucks  and any wallstreet banker ,,, buy gold and take care of the people of china , remember the western world does not even understand what it take to have close to 1.4 billion people ,,,   example  the average bus stop handles more people per day that new yorks grand central station.

fonzannoon's picture

 In China, it's not unlike the U.S and Europe – this place has a lot of big-money politics, a lot of vested interests that don't want change.”

Carlin spoke every language.

Bazza McKenzie's picture

And not a Mao suit to be seen.  For shame!

walküre's picture

The Chinese lifted their official one-child-per-family policy recently.

Will the ghost cities still be habitable in 20 years time when their population finally meets the supply of appartments?

There are currently 7+ billion people on the planet. Look at the extreme growth from 1 billion to 7 billion in about 100 years only.

Does anyone else get this itchy feeling that we just might not enjoy life as we know it for much longer?

fonzannoon's picture

It depends how high up the ladder you are.

Spastica Rex's picture


Business as usual, just for less and less people.

FOAD, everybody else.

chinaboy's picture

The good thing is that PBOC Chairman Zhou XiaoChuan was not even on the list of nomination to the central committee. His days are numbered. I hope him end up in the jail for the printing madness.

chump666's picture

Bets on China's new commie team shut up shop for awhile...y'know bring down the 'iron curtain'.  The country is a mess. is the rest of the world.

GoinFawr's picture

 Re: "China's Supreme Leader of Awesomeness"

Yeah, that's what keeps me coming back Tylers; sometimes you all just catch me absolutely off guard.

HurricaneSeason's picture

I read 25 million new jobs a year is their goal, I believe the goal used to be 10 million new jobs a year.

laomei's picture

Laff... same old spiel from the us, claiming that the SOEs are for some reason a "bad thing".  While claiming that privatization is anything but absolute crap.  I can state for a fact that every single SOE here that got spun off into private companies has resulted in a net DECREASE in quality, service, satisfaction, lower wages and more coruption... while the prices just go up.  SOE is really just megacorp with government support and control, and there really is nothing wrong with that at all.  

GoinFawr's picture

SOE's are keeping Norway's national balance sheet in the black, no doubt about it.

But that doesn't mean private businesses are all somehow 'lower grade'. Eg. it's entirely impossible to have a state administered speak easy; I wouldn't want to have a drink there, anyway.


laomei's picture

Here's a great solid example:

Internet providers in China.  There's Railcom and Unicom that are the biggies.  Unicom has/is upgrading pretty much everything to fiber, provides solid, stable and fast internet along with home phone service that basically never has outages.  Do a full year plan prepaid and it's about $21 a month, including 300 minutes phone time shared between the cell and home along with unlimited free minutes between all lines on the plan.  The government did a pricing analysis and determined that the rates were too high, which means next year, our same exact plan will be $18 a month for 20M fiber.


Here's an example of a private company:

They slap up ads and fliers everywhere offering the same speed that Unicom does, but no phone service.  By golly, if you prepay for 5 years up front, you can come out paying only $8 a month! Except after about day #31, your speed is cut to nothing, their blocking of sites is more restrictive than any official policy, they have zero customer service and whoops, no refunds, sorry.  They also jack up their rates every single opportunity they get.


Now, surely, the US would LOVE to see unicom broken up into small, nonsensical parts that result in higher costs and crappier service, afterall, just think of all the money to be made!  The other great hope of the us is to see China stop saving and spending like themselves.  Unfortunately, good health plans or not, this only applies to the young. The instant there is family in the picture, savings rates skyrocket regardless of previous habits.  It has nothing to do with safety nets and everything to do with ensuring total family security and opportunity.  Unlike the us, Chinese who spend everything they have tend to be fully aware of how screwed they are.

reader2010's picture

There's nothing new under the sun, and goldman's gonna completely control them sooner or later. 

Mr. Hudson's picture

Wailing Wall Street has had a hard time crackin' this one, eh? China has been a lot more difficult to control because they make "appointments" instead of "elections", and GS and Co. can't control the political process in China like they do in the U.S.

Arthur Borges's picture

One surprise is the reduction by two of the number of members on the Standing Committee; the second surprise is that ex-Pres Hu stepped down as chair of the Central Military Commission, a post he had been expected to keep for another year or two (as happened with Pres. Jiang).

Fighting corruption meets the same obstacles it faces anywhere: if you do a real clean-up, you lose too many experienced key people and demoralize your honest people who become ashamed of having anything to do with you. Finally, you risk organized backlash to topple you. The new government has therefore emphasized that policy will strive to create mechanisms and conditions that will prevent _future_ corruption.

More generally, you need a closer look at the definition of corruption. For example, if a murderer can secure forgiveness from his victim's family, it reduces his sentence and forgiveness is something you buy to compensate the victim's family for loss of a family member and that member's earning potential. Is that corruption or a traditional method of damage control?

The western analyses I read are implying that state-owned enterprise (SOE) is something to be dismantled and therefore keep looking for signs of how far the new government will go in that direction. This is the wrong way to look at it. The closest western equivalent would be Sweden up until 1986 and the killing of Prime Minister Olof Palme, or perhaps France under Pres. De Gaulle:  both found it desirable to have a strong central government because ultimately, only government will protect the citizen's rights whereas corporations only owe allegiance to their shareholders. In both cases, a vigorous private sector included both SOE and  private players. The issue is China is more about a viable balancing act between these two sorts of players rather than any fight to knock out the one or the other.

I realize it's humiliating for some folks to see a communist government running a capitalist economy better than any capitalist government in the world. Marx was supposed to be boring, right? However, government is the only player that is free to think strategically in economic planning and, when it can shape the direction and development of an economy both through its legislature and through the power of SOEs acting directly on the economy, then it can secure the sort of GDP growth has been seeing for the past few decades. The plain fact is that business-driven government is less efficient, a fact masked in the USA by the reserve currency status of the US dollar.

A final consideration is social: Chinese history shows grassroots revolt is what brings down dynasties and leaders always have to keep that angle in mind when creating new policy.

Ricky Bobby's picture

Hello Arthur Koolaid ..... "only government will protect the citizen's right" TSA FBI DEA ATF DOD FED DOE EPA IRS SEC DOJ NSA FEMA DHS CIA. Gee I am glad the government has created so many agencies just to protect my rights. Otherwise I would just be left with the "Bill of Rights".

Arthur Borges's picture

Ricky, you also have the Public Health Servie, Social Security Administration, your fire department and polices (pl.) and more. You were hoping Coca Cola & Pepsi or GM and Dupont would police your streets, put out your fires, pay your your pension and field epidemic control teams for you? 

The bottomline is that, however clumsy and inefficient you may find your government, ultimately it is the guarantor of your personal security.

Your gripe seems to be with the USA however, and you foist that template upon China where the fit is at best imperfect.

Have a nice day anyhow.

Urban Redneck's picture

Hu's departure from the military is a deviation from precedent, and gives Xi a "freer" hand, but to do what?

I am not generally impressed with GS analysis of anything going on in China, but their myopic analysis may be correct in the short term, if even for the wrong reasons.

For example, if buy into even their basic analysis who is in whose faction, a decrepit dinosaur is gaining influence, even while he is being evicted from his plush emeritus offcie space...

Venerability's picture

Huge news just out at Xinhua, which ZH can help get "into the Market."

Asian Currency Bloc may be formed by 2015.

Actually on the agenda for the ASEAN metings this weekend.

Mr. Hudson's picture

Having lived in Beijing, I have to laugh at America's obsession with China.