China's Fragile Evolution

By: STRATFOR

Rodger Baker and John Minnich write: Last week, China's anti-corruption campaign took a significant turn, though a largely overlooked one. The Supreme People's Court released a statement accusing former Politburo Standing Committee member Zhou Yongkang, the highest-ranked official thus far implicated in China's ongoing anti-corruption campaign, of having "trampled the law, damaged unity within the Communist Party, and conducted non-organizational political activities." In Chinese bureaucratic speak, this was only a few steps shy of confirming earlier rumors that Zhou and his former political ally and one-time rising star from Chongqing, Bo Xilai, had plotted a coup to pre-empt or repeal the ascension of Chinese President and Party General Secretary Xi Jinping. Thus, the court's statement marks a radical departure from the hitherto depoliticized official language of the anti-corruption campaign.

Of course, it has long been clear that the Xi administration's anti-corruption campaign is far more than just a fight against graft — it is also a political purge designed to tighten the new leadership's control over Party, government and military apparatuses. But up to now, official language on the anti-corruption campaign has been couched in terms of fighting graft and abuse of power "for personal gain." So far as we are aware, very few if any official statements have alluded to "political activities" by suspects — and certainly none concerning high-profile figures like Zhou, whose position at the top of the country's energy industry and domestic security apparatus made him one of the most powerful Chinese politicians of the 2000s. Whatever the court's precise intent, that it chose language even hinting at a coup by Bo and Zhou is extraordinary.

If we accept that the use of a phrase like "non-organizational political activities" is significant, then we have to ask what the decision to use that phrase at this time may signify. To our minds, two possible interpretations stand out. First, it could mark a nascent shift in the way Chinese authorities frame the anti-corruption campaign and imply that going forward the campaign will become more overtly political. Second, it could signal that Xi and his allies, confident of having fully eliminated any threat posed by Zhou and his associates, are acknowledging an end to one phase of the anti-corruption campaign — the elimination of competing factions — and are now embarking on the further consolidation of authority and control over the far reaches of the bureaucracy.

If the former interpretation is correct, the anti-corruption campaign is about to get more brutal and potentially more destabilizing, as it moves from a relatively focused purge and general cleansing of the Party to a full-on assault against those who have the strength to challenge Xi's nascent authoritarianism. According to the latter hypothesis, with the would-be challengers routed and acknowledged as anti-Party plotters, and with political power firmly centralized under Xi and his allies, China's leaders can now put politics aside and move on to the more difficult and important task of building a government ready to manage the profound social and political disruptions that will almost certainly accompany China's economic slowdown.

Xi's Strategy

In either case, the anti-corruption campaign and political centralization are not occurring in a vacuum. The campaign may be the highest profile of Xi's initiatives thus far, but it alone is clearly not sufficient to deal with China's myriad problems. The question, then, is what to expect next.

Two recent developments in particular frame our understanding of the trajectory of China under Xi and his strategy for ushering China and the Communist Party safely through the difficult years ahead. First is the Party's renewed emphasis following the Fourth Plenary Session in October on establishing effective rule of law. Second is the announcement in February that going forward, the anti-corruption campaign would center on 26 of the country's largest state-owned enterprises, with a focus on resource, construction, heavy industrial and telecommunications businesses. This announcement came one month prior to renewed government pledges to merge and consolidate the state sector. It also stands out as the first time the government has pre-emptively and publicly named potential future targets – thus, in theory, giving them fair warning. As one official put it, the government plans to "hang the sword of Damocles" over the state-owned sector's head.

The thread that binds these two seemingly disparate elements together is the problem of political development in the context of rapid social and economic change — that is, how to build flexible and adaptive governing institutions capable of adjusting to meet the emerging needs of an urbanizing and industrializing (in some regions, post-industrializing) society like China's.

Although Chinese society and its economy have undergone profound changes over the course of the past 30 years — China's economy has grown nine-fold since 2000 alone — the country's political structure has changed only incrementally. To be sure, China's government is in many ways stronger and more effective today than it was when Deng Xiaoping took power in 1978. But it retains the same basic form he put in place more than two decades ago. As long as China's economy was growing of its own accord, this model sufficed. Its task was simply to prevent politics — a second Mao — from derailing the economy. But as the anti-corruption campaign and Xi's power consolidation drive signify, the model of consensus-based political decision-making put in place by Deng is breaking down.

The leadership transition from former President and Party General Secretary Hu Jintao to Xi was the first since the late 1970s that was not pre-ordained by Deng. Following the ravages of the Great Proletarian Cultural Revolution and the brief reign of the so-called Gang of Four, Deng assumed the mantle of Chinese leadership, reversing many of Mao Zedong's economic policies, but also fundamentally altering the political organization of China. Rather than Mao's revolutionary model, which required perpetual upheaval, Deng proffered an evolutionary model — one that would use consensus politics to both break down the extreme factionalism of the Mao era and undermine the ability of any single individual to rebuild a clear faction in the face of multiple competing and cooperating interest groups.

To further reinforce stability, Deng selected both Hu and his predecessor, Jiang Zemin, ensuring more than two decades of clearly defined succession plans. During the economic growth of China's nearly three-decade “miracle,” the system of political consensus proved largely effective. The main purpose of government was to provide stability in the Party and the overall economic system, primarily serving a managerial role rather than a truly innovative leadership role. Certainly there were crises during these years, but these were frequently short-lived, and the government response was often one of delay followed by mitigation, rather than the implementation of any significant change in the underlying political, economic or social systems.

But as China neared its 2012-2013 leadership transition, it was clearly entering uncharted waters. Not only did this transition move beyond anything Deng had prepared for, it also occurred at a point where China's Deng-era economic model had clearly run its course. As with many of the Asian economic tigers before it, China's export-oriented and government investment-heavy model had reached a point where growth alone was no longer sufficient to sustain economic activity, and society had evolved faster than the political model. The global economic crisis, along with Europe's sustained sluggishness, only served to reinforce the end of China's easy times, and made it clear to China's leaders that they could no longer postpone what they had been delaying for more than a decade: a restructuring of the economy to one that would better harness internal consumption.

Xi Jinping's actions are symptoms, not causes, of the breakdown of the Deng political and economic model. As we wrote previously, the anti-corruption campaign is one element in a broader evolutionary process driven by the realization that the transition between China's former economic model (based on low-cost exports and investment-led construction) and new economic model (based on domestic consumption, services and high value-added manufacturing) will entail five to 10 years of immense social, economic and political strain. Simply put, the old model, whose legitimacy rested on the promise of ever-rising material prosperity and stability, is no longer viable.

Toward a New Political Order

What China is building in the old model's place appears to be a more centralized and more personalized political order: in essence, a dictatorship under Xi. At the same time, given the trajectory of Chinese social and economic development — the need to stimulate domestic consumption and innovative, high value-added industry — it is also clear that to succeed, this new order will have to differ fundamentally from the kind of dictatorship established under Mao.

The campaign against Zhou and Bo was more than a personality clash, and much more than an issue of basic corruption. It was a battle between competing models for the Party to maintain authority and control during the economic transition — and it was a battle over how the economy would make that transition. On the one hand, Bo — and by implication Zhou, as Bo's patron and ally — seemingly espoused what amounted to a return to the revolutionary politics of the Mao era, in which political legitimacy would rest not with the administrative apparatus, and certainly not within the rule of law, but in the hands of a charismatic leader, presumably Bo himself. On the other hand, if recent pledges to strengthen the rule of law and streamline and improve the functioning of powerful state-owned enterprises are to be taken seriously, then Xi and his allies would appear to be driving toward something else. The Xi camp's vision seems to be a political framework that could draw on elements of Mao's legacy — centralization of political power and nationalism, most saliently — while ultimately preserving the Deng model's promise of evolutionary, rather than revolutionary, change.

Let us assume that the politicization of the charges against Zhou is a sign of the Xi camp's victory over the Zhou and Bo camp regarding the political, social and economic model for Chinese reform. If that is the case, the Chinese leadership is, at least publicly, seeking a model that, though under tight central leadership, will try to rest on an autonomous, efficient and high-performing bureaucracy. This model also will almost certainly entail some level of legal protection for private and intellectual property rights — at least those of Chinese citizens — as a means to stimulate domestic consumption and innovation.

Recent Communist Party pronouncements on the importance of strengthening the rule of law, far from empty doublespeak, represent embryonic moves toward this end. The same goes for the anti-corruption campaign, especially in its application to the process of consolidating and streamlining the state sector. Authoritarianism and effective rule of law are not fundamentally incompatible. Neither are dictatorship and efficient administration. History offers several examples of countries that combined strong government and legal protection for things like private property and contracts without also adopting democracy: 19th century Prussia, for example, or 20th and 21st century Singapore. As China's leaders attempt to bolster their own rule of law and bureaucratic reforms, these examples are likely not far from their minds.

But the problem with this comparison is that Prussia, at its peak in 1871, had fewer than 25 million people. At the end of the Napoleonic Wars, its population measured only 10 million. Singapore is a city of 5.4 million. The leaders of each country worked for decades, over successive generations, to build high-performing bureaucracies that combined the kind of effective protection of property rights historically necessary to support the transition to advanced industrial economies. The differences between Prussia and Singapore and China are so many and so great as to make comparison virtually impossible. But two key differences — two fundamental constraints on China — stand out: size and time.

Evolutionary Versus Revolutionary Change

Throughout history, China has struggled with a common cyclical problem: To manage a nation as vast as China, the central government that first pulled together the far reaches of the empire needs to build and expand a bureaucracy to manage the complexities and scale of China. Over time, that very bureaucracy steadily usurps power from the center, and parochial interests reign supreme. At times of national crisis, the center tries to reclaim authority and control, only to realize that power has fragmented. The bureaucracy is resistant to change, and the system often breaks down after struggling to reform. Then, a new centralizing power rises from the ashes of the old, and the cycle begins again.

The Communist Party is no stranger to this cycle. Mao followed a revolutionary path, allowing frequent disruptions to keep the bureaucracy from ever fully usurping power from the center. Deng encouraged the bureaucracy, hoping that the economic prosperity it could bring would ultimately allow the center to balance the competing centrifugal forces with a fairly light touch. While Deng's model was a revolutionary shift from the Maoist model, it was predicated on a slow, steady evolutionary change in China and assumed it could somehow avoid the challenges of China's centuries of cycles. The transition from Hu Jintao to Xi Jinping, and the attendant challenge from Bo Xilai, questioned whether the Deng model was still applicable.

The difference between the Xi model of reform and the vision espoused by Bo was in part in how they would harness support from the population. Both Xi and Bo would need to reallocate capital from the more economically advanced coast and Yangtze River basin. Bo, who had built a cult of personality in Chongqing and blended Chinese nationalism with Party veneration, was apparently going to justify that through revolutionary propaganda, following the Maoist pattern of harnessing the vast masses of economically disenfranchised to force the redistribution of wealth.

Xi, on the other hand, though certainly consolidating power and taking on a more controlling tone, appears to be pursuing a more evolutionary path to reshape China's economic landscape. Rather than Maoist revolutionary ideology, Xi's propaganda machine nearly paints him as an equivalent of a U.S. or European president, a leader best qualified to be trusted to guide the Chinese forward through difficult times. While he is harnessing a type of Chinese nationalism or extreme patriotism, it is intended to keep all of the Chinese agreeing on policies, rather than turning against one another.

The fundamental question, however, is whether China has time for an evolutionary change. Other Asian nations that underwent significant economic and political transformation, from Meiji-era Japan to Park Chung-hee's South Korea, each made more radical and rapid changes — something that may be forced upon China's leaders. But each did so with the attending major social disruption and a heavy hand in domestic security. Major economic overhauls are messy affairs, and China has decades of dead wood to trim from its economy due to the lingering effects of Mao's intentional drive to ensure massive industrial redundancy, as well as to mismanagement and frequent unprofitability among state companies.

Although Singapore and even Prussia may be idealized models for China as countries that were able to transform and retain tight central authority, Lee Kuan Yew and the kaiser never had to manage a population of nearly 1.4 billion people, more than two-thirds of whom have effectively been left behind over three decades of promises that everyone would get rich in the end. As China tries to transition away from low-end manufacturing and economic stimulus driven by government-financed construction, it is the low end of the economic spectrum that will be disproportionally affected. A gradual shift in its economic model would allow China to slowly metabolize these displaced workers, but it is far from certain that China has the time to allow for this slow change, as the rest of the global economy is shifting with or without Chinese consensus.

"China's Fragile Evolution is republished with permission of Stratfor."

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