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For 35 years, the central issue confronting China’s leaders has been a primarily economic one: how to assure a continued run of rapid economic growth. Indeed, so important was China’s quest for growth that it became, in effect, the leadership’s default solution to a vast array of political and social challenges in the post-Mao era. Consider, for example, the challenge of forestalling revolt and maintaining political stability. Beijing’s apparent strategy to assure public support for an unelected ruling party was to deliver rapid growth, raise living standards for millions of Chinese, and thus co-opt potential sources of discontent. Or take foreign policy, where Beijing leveraged growth and sheer market power to build ties in Asia and around the world.
Yet if economic policy lies at the center of Beijing’s priorities, then one would logically expect China’s leaders to redouble their focus on it as growth slows. Over the past year, Beijing has faced a raft of bad economic news—weak indicators, stock market turbulence, and a serious loss of confidence in China’s presumed Midas touch at economic management. In a sea of such troubles, it would make sense for economics to be at the top of President Xi Jinping’s list of priorities. Paradoxically, however, it is politics that most preoccupies China’s leaders today. The central project of Xi’s first term in office (2012–17) has not been economic rebalancing but, rather, consolidating, rebuilding, and broadening the reach of the Chinese Communist Party (CCP).
Xi’s recent predecessors tended to view “getting the economy right” as the secret sauce to assure the party’s credibility and its political success. Xi has bet the reverse—that a rejuvenated and more credible CCP is the ticket to implement necessary economic reforms and shepherd China into the role of a great power in the twenty-first century. Indeed, from his first minutes as China’s top leader, when he stepped from behind a red curtain in Beijing’s Great Hall of the People in November 2012, the Chinese president’s priorities have been unambiguously clear: first, a cleaner CCP; second, a more disciplined CCP; and third, a stronger and more enduring CCP. As a result, politics and economics—always tightly intertwined in China—have become more deeply connected than at any time in perhaps a generation.
The leadership’s efforts to fix the party have come, in effect, at the expense of their predecessors’ long-standing and singular focus on near-term growth. But that is not all: Xi’s team is also choosing, as a direct consequence of this focus on rectifying and rebuilding the CCP, to constrain the government’s capacity for economic management, not least by pulling China’s technocratic bureaucracy into the whirlwind of elite politics.
At the very least, the emphasis on rescuing the party means that the Chinese economy is headed for a period of uncertainty and volatility in economic policymaking. But there is a method to Xi’s disorienting approach. Far from “mismanagement,” as some commentators have called it, the turmoil in China’s economic policy process seems instead to be the deliberate byproduct of the leadership’s emphasis on politics and party-building
POLITICS AND MARKETS, CHINESE-STYLE
For much of 2015, the Chinese economy struggled. A series of less than stellar economic figures, punctuated by a summer of stock market volatility and currency devaluation, rippled across the global economy, hitting commodity exporters and the Dow Jones alike. The world’s second-largest economy, a $10 trillion juggernaut that could once reliably be counted upon to deliver upward of eight percent growth per year, has found it hard to persuade investors that it is hitting even its more modest seven percent target.
Markets, however, have badly misunderstood the leadership’s changed priorities. For one thing, businesses and investors had grown accustomed to former Premier Wen Jiabao’s tendency to bolster investment and stimulate growth by pumping more money into the economy during down cycles, which some investors dubbed the Wen Jiabao Put. With the current down cycle not so readily reversed, many have argued that Xi’s team must be in a state of near panic about the economy. Yet Beijing seems comparatively relaxed, insisting that employment is healthy and market reforms are proceeding apace.
Of course, by withholding transparent and timely communication of its intent, Beijing has not strengthened its case. But few in positions of authority seem bothered by the narrative that they are no longer managing the economy with a deft hand. How can this disparity—between market panic, on the one hand, and a seemingly relaxed Chinese government, on the other—be reconciled? The answer lies squarely in the leadership’s changed priorities.
Barring an economic implosion (which is not on the horizon), the leadership is content to pursue its principal goal of rebuilding the CCP. And some important reforms are proceeding—for example, the September decision to liberalize dozens of prices and to rely on the market to set natural gas and power tariffs. More difficult and politically fraught reforms have been shelved or postponed while the party attempts to repair itself.
If it wants to reshape the party, Beijing will have to tolerate short-term economic pain, a great deal of uncertainty, and spillovers into the broader economy.
Once the CCP has “righted” itself as an effective governing institution, or so the belief seems to be, then it can turn more attention to piloting China through the arduous and complex terrain of economic reforms and management. A more unified, improved, “purified,” and “self-regulating” party could then execute reforms while lessening the political risk of drawing nepotistic benefits that only leech away even more popular support.
To put this a bit differently, the leadership aims to enhance party discipline at the same time it is attempting to execute significant economic reforms. But Xi and his confidantes seem to believe that without the political precondition of significantly reducing the crony capitalism now embedded in the party, economic performance will not improve and reforms will ultimately be ineffective in the long run.
But if it wants to reshape the party, Beijing will have to tolerate short-term economic pain, a great deal of uncertainty, and spillovers into the broader economy. These choices are risky and will define Xi’s ten years in power. If he is successful, they will cement his legacy.
The era of the Wen Jiabao Put is thus over, replaced by what could be characterized as the Xi Jinping Bet. Although it escaped wide attention at the time, Xi transparently telegraphed his priorities and Leninist proclivities in his maiden speech as the new party general secretary in November 2012. In hindsight, his words were a stark admission of the problems the party faces and a revealing glimpse into what has followed.
Xi diagnosed it bluntly:
Under new conditions, our party faces many severe challenges, and there are also many pressing problems within the party that need to be resolved, particularly corruption, being divorced from the people, [and] engaging in formalities and bureaucratism caused by some party officials …
Initial skepticism about the new leadership’s commitment to fighting internal corruption was probably warranted. Previous efforts to root out corruption had been short-lived and were usually centered on purging a few political enemies. But Xi’s campaign is different. “Forging iron” became a metaphorical rallying cry for what has been the most extensive and ferocious anticorruption campaign in recent memory. Xi’s diagnosis implied that corruption within the party was a cancer that was metastasizing. And so the Central Commission for Discipline Inspection (CCDI), the party’s own watchdog, was tasked with performing surgery on the party to remove it.
Once an obscure apparatus, the CCDI has risen to become perhaps China’s most feared and politically powerful entity, regularly warning party members that the Sword of Damocles hangs above their heads. Today, when a CCDI inspection team sweeps into a particular jurisdiction, local cadres shudder or, in some cases, run away. And CCDI aims to chase them across the world, through what it calls Operation Foxhunt.
CRONY CAPITALISM INTENSIFIED
The unexpected intensity of Xi’s battle against corruption has much to do with the changed context in China today. Although Chinese leaders have perennially feared that corruption could destroy their party, the People’s Republic has mostly been poor since its founding in 1949, so logically there was less to pilfer. But the post-1980s decades of reforms have created a windfall of opportunities to engage in corruption and rent seeking.
This trend was arguably made worse during the Jiang Zemin era (1989–2002), when the former president launched the Three Represents ideological campaign. One intention was to expand the CCP tent by bringing into it China’s most powerful businesses and private sector interests. By making the party a safe haven for capitalism, the party would, in effect, represent the entire Chinese establishment.
But an unintended consequence of Three Represents was to blur the line between party and business; party cadres at all levels wanted to capture the reform dividends from a booming economy awash in money. This corruption extended to their families—the infamous “princelings”—and their networks. Crony capitalism became endemic, worsening under the subsequent administrations of Hu Jintao and Wen, and the Chinese public took notice. Broad resentment percolated beneath the surface as the nominally communist party came to be seen as a venal establishment undermining the public interest. Top leaders at the time appeared either powerless or unwilling to prevent ostentatious corruption, and the party appeared undisciplined and out of control.
Into this inherited morass strode a confident Xi, apparently with the mandate to clean house and bolster the party’s waning public credibility. Guided by the underlying principle that the party is the only institution that can and should lead China, Xi’s approach—from restoring ideological campaigns to emphasizing discipline to the surgically precise anticorruption effort—appears aimed at unwinding crony capitalism.
By proxy, Xi is also rolling back Three Represents by injecting the party more firmly into private business and social groups, rather than the other way around. Jiang’s initiative made the party more representative of China’s establishment. For Xi, the party is the rightful establishment.
So Xi’s team aims to wrest back control and impose rigorous discipline. A centerpiece of the team’s strategy is to alter incentives so that party members are no longer so easily enticed to pursue profits and use political leverage to carve up wealth. The anticorruption campaign swept first into areas where Xi’s rivals and corruption intertwined, such as the energy sector, where he left behind a trail of fallen tigers.
The remarkable speed with which Xi’s team centralized decision-making has surprised many, even within the Chinese bureaucracy. The establishment of the numerous party-based leading groups likely took authority from government bureaucracies and put it squarely back into party channels at the highest levels. It is no secret that Xi has surrounded himself with a small circle of trusted advisers and confidantes.
Many proposed economic reforms would, in fact, undermine the interests of powerful bureaucracies, so this change has a certain political logic. Consider the September decision to liberalize prices and expand the role of the market. It cut the number of items subject to price restrictions from 100 to 20 and halved the number of categories of items for which the state controls prices. But, not coincidentally, the decision was preceded by CCDI investigators’ takedown of nearly the entire leadership of the pricing department of the state planning agency.
Xi’s one-two punch—a political purge followed by an economic reform—may explain, in part, why economic management is more inchoate than usual. Technocrats in the bureaucracy were typically on the frontline of coordinating and executing policies and making certain decisions. Some of these people are now being removed. Meanwhile, the rapid pace of centralization of decision-making in party bodies has also likely left government agencies more confused, sclerotic, and ineffective.
Ultimately, the capacity and energy Xi and his team are devoting to whipping the party into a leaner and meaner institution should not be underestimated. Constraints on capacity could yield more reactive than proactive attention to economic issues and developments. This is compounded by the need to manage reforms and a slowdown simultaneously. The scope of Xi’s political campaign is likely to suck the oxygen out of other policy matters.
FIGHTING FOR THE FUTURE
China’s leaders are Leninists who apparently have no illusions about the challenge now facing their party. Xi, in particular, clearly believes that the party’s monopoly on power is essential if Beijing is to execute necessary policy changes. But that can only mean fixing the party in order to “save” it, even if it risks reputational damage and could come at the cost of near-term economic growth.
But it is important to understand the dominant political prism in China today. Previously, “reform dividends” were too frequently and too easily captured by corrupt party elites. If Xi succeeds in his quest to clean up politics, today’s Chinese Leninists will still face the monumental challenge of distributing dividends more equitably across the economy and to the Chinese public. But Xi clearly seems to believe that cannot happen without first shaking up a party that has grown too comfortable with the status quo.