The Party wears the pants

There is a widespread misconception that China is actually a capitalist country that for some reason calls itself Communist. For example, Rupert Murdoch is said to have remarked (in the late 1990s) that he had yet to meet any communists during his trips to China.

Certainly, it’s easy to see how a tourist spending a week in an economic hub such as Shanghai or Shenzhen would get this impression, especially today:

But like many beliefs based on surface appearances, the idea that China is not really Communist is mostly false. As Australian journalist Richard McGregor argued in a 2011 article:

If Vladimir Lenin were reincarnated in 21st-century Beijing and managed to avert his eyes from the city’s glittering skyscrapers and conspicuous consumption, he would instantly recognize in the ruling Chinese Communist Party a replica of the system he designed nearly a century ago for the victors of the Bolshevik Revolution. One need only look at the party’s structure to see how communist — and Leninist — China’s political system remains.

Sure, China long ago dumped the core of the communist economic system, replacing rigid central planning with commercially minded state enterprises that coexist with a vigorous private sector. Yet for all their liberalization of the economy, Chinese leaders have been careful to keep control of the commanding heights of politics through the party’s grip on the “three Ps”: personnel, propaganda, and the People’s Liberation Army. […]

Perhaps most importantly, the party dictates all senior personnel appointments in ministries and companies, universities and the media, through a shadowy and little-known body called the Organization Department. Through the department, the party oversees just about every significant position in every field in the country. Clearly, the Chinese remember Stalin’s dictate that the cadres decide everything.

In his astonishing 2010 book The Party: The Secret World of China’s Communist Rulers, McGregor points to a study by emerging markets brokerage CLSA that estimated that China’s private sector contributes 70% of the country’s GDP and 75% of its workforce. As he notes:

A week later, a rival and equally respected China research unit at UBS, the Swiss bank, put out a rejoinder, saying the private sector ‘accounts for no more than 30 per cent of the economy, whichever indicator you use’. The report said: ‘In China, the big sectors are either 100 per cent or majority controlled by the state: oil, petrochemicals, mining, banks, insurance, telcos, steel, aluminum, electricity, aviation, airports, railways, ports, highways, autos, health care, education and the civil service.”

I believe that last sentence (the report was published in 2005) is still true today. The media is also state-controlled. The internet sector is ostensibly dominated by private firms, but the government keeps Alibaba, Tencent and Baidu on a fairly tight leash and is reportedly considering buying direct stakes in Tencent as well as Youku (the YouTube of China), which is owned by Alibaba.

Why is it so hard to nail down the size of China’s private sector? According to McGregor:

“The confusion about what is public and what is private is a deliberate result of the system’s lingering wariness about clarifying ownership. Ask any genuine entrepreneur whether their company is private, or ‘siying‘, literally ‘privately run’, it is striking how many still resit the description in favour of the more politically correct tag ‘minying‘, which means ‘run by the people’. […] Most economists now skirt the issue, by dividing companies into two categories, state and non-state, and leave it at that.

The issue gets murkier the closer you look at it. John Robb cut through the complexities most succinctly by describing China’s politico-economic system as “capitalism in a Leninist cage.”

Now it is certainly true that China has a large and wealthy entrepreneurial class, which was born out of the liberalizing reforms that began under Deng Xiaoping. That is the “capitalism” in the aforementioned “Leninist cage.” The Party realized it needed entrepreneurs to build China into the massive economic juggernaut it has become since the 1970s. The tycoons had their heyday after the mid ’90s and into the 21st century, as the Party unleashed private businesses to create jobs for the tens of millions of workers laid off by a shrinking state sector. Today, the private sector is reported to contribute over 60% of China’s GDP growth and over 90% of new jobs (take those figures with a grain of salt).

However, even while fostering the rapid growth of the private sector, the Party has also taken pains to infiltrate and co-opt it. This is where the Leninist cage comes in. China’s leaders have carefully studied the example of the former Soviet Union and in particular, the rise of a powerful class of corrupt oligarchs who carved up and destroyed Russia’s economy during the botched privatization of the ’90s. The Party is determined to avoid a repeat of the Russian oligarch scenario in China, and will not permit the country’s tycoons to challenge state power.

This message has been sent in recent years with the disappearance and detention under bizarre circumstances of a spate of Chinese billionaires, including Xiao Jianhua, the businessman who was abducted from Hong Kong by mainland authorities — whisked away from the Four Seasons hotel, reportedly in a wheelchair with a sheet over his head. The disappearance of Wu Xiaohui, who bought New York’s Waldorf Astoria hotel, in June of last year seemed to indicate that the Party was cracking down on the private sector in earnest.

The New York Times, in a story this week, finds further evidence that China is turning its back on free-market policies:

For 40 years, China has swung between authoritarian Communist control and a freewheeling capitalism where almost anything could happen — and some see the pendulum swinging back toward the government.

State-controlled companies increasingly account for growth in industrial production and profits, areas where private businesses once led. China has stepped up regulation of online commerce, real estate and video games. Companies could face higher taxes and employee benefit costs. Some intellectuals are calling for private enterprises to be abolished entirely.

The political winds are shifting, but the discontinuity is not as sharp as it may seem at first glance. China has never had “a freewheeling capitalism where almost anything could happen.” All that we’re really seeing here is that the cage around the private sector is getting smaller and more restrictive, but the cage was always there. The Party is simply reminding China’s entrepreneurs who wears the pants in this relationship.

Trade war drives CPC rifts

Reports are surfacing that the escalating trade conflict with the US is driving a wedge between elements of the Chinese leadership:

BEIJING (Reuters) – A growing trade war with the United States is causing rifts within China’s Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.

President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party.

A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources familiar with discussions in leadership circles.

A prominent and influential academic whose views have found favor in some party quarters has also come under attack for his strident views on Chinese power.

There are hints — which, given the totally opaque nature of elite Chinese politics, we should take with a dollop of salt — that the factional tensions could even be weakening the “core leader’s” grip on power:

China, for all its problems, seems set on an inexorable rise to superpower status to rival the US. On multiple benchmarks – economic, technological, military and diplomatic – Beijing is making rapid advances.

We are a long way, in other words, from peak China. But that begs another question which has been sweeping Beijing over the northern summer – whether we are now witnessing peak Xi Jinping.

In recent weeks, the signs of a nascent pushback against Xi’s absolute power have started to emerge. Some are cryptic, given the nature of Chinese politics, contained in coyly worded postings on social media. Some are the stuff of rumour, or back alley news, as the Chinese call such information, which flourishes in the absence of a free press.

More background on CPC factional disputes.