China approaches a defining moment

China is faced with the necessity of adjusting the way the political system operates, the economy is managed and society is governed. Where it could maintain the political status-quo and grow the economy through catching up with foreign technology, expertise and science, China is now quickly approaching the point where it will need to create new recipes.

Rogier Creemers
6 July 2012

Of the four Permanent Members of the UN Security Council where the top jobs are up for grabs this year, no transition is as shrouded in secrecy and suspicion as China’s upcoming leadership transition. Without even a semblance of popular legitimation, leadership transitions in China can be nasty affairs at the best of times. In the current political and economic climate, the leadership’s capacity to keep the Party and State together is becoming stretched. Recently, Bo Xilai, the Party Chief of China’s largest city, Chongqing, was publicly ousted in the most high-profile political incident since 1989.

Most importantly, this transition may become a defining moment, 34 years after Deng Xiaoping became paramount leader of the Chinese Party-State having skilfully manoeuvered his way past Hua Guofeng, Mao’s hand-picked successor. Although Hua was able to restore a modicum of stability and initiate economic modernization during his brief spell in power, he remained too closely linked to the memory of Maoism to be able to lead China into a phase of economic development. Also, he did not have the personal authority of revolutionary veteran Deng, who commanded tremendous respect from the army, the scientific community and the economic planners. In the next few years, Deng hammered out a model for economic development as well as political stability which largely remains unchanged, and which enabled China to embark on the growth path that has now led it to become the second economy in the world.

Economically, Deng’s strategy was based on pragmatism. For starters, Deng legitimized local experiments with market-like incentive mechanisms for agricultural production, phasing out collective agriculture. This led to a boom in food production which liberated millions of hands from the fields. Furthermore, realizing that China was far behind even the Soviet Union, and certainly behind western economies in nearly all aspects of economic activity, Deng supported scientific research at home, while opening China’s borders to the world. Investors wanting to profit from the enormous pool of cheap and docile Chinese labour were welcome, but so was their technology. Millions of Chinese students have gone abroad to study, predominantly in scientific and professional fields, and brought this knowledge back to the motherland. Thousands of books and other scientific materials were imported, translated and made available to Chinese scholars.

Politically, Deng’s position was complex. Having seen the horror and devastation of the Cultural Revolution up close (Deng’s son was paralyzed from the waist down after falling out of a window during his persecution), Deng was determined to ensure that no individual would be able to lead the country into catastrophe again. Ironically, he used his own personal authority to force the Party into accepting collective leadership. He did away with the strict dogmatism and political correctness that reigned during the Maoist era, and introduced intra-Party democracy to some extent. He encouraged discussion about issues to come up with resolutions and ideas. At the same time, however, Deng was clear about the leading position of the Communist Party. His political objective was to consolidate this position through sound governance, rather than lead the Party to pluralisation or democratization. Factionalism would not be tolerated, and neither would organized dissent from outside the Party. This was, of course, most clearly demonstrated in 1989, but echoes earlier moves by Deng to counter calls for political reform in the early Eighties. 

Internationally, Deng advocated a low profile. He wanted China to concentrate on economic growth and development, without becoming entangled in the Cold War rivalry between Russia and the United States. Throughout the last four decades, Chinese foreign policy has been aimed at participating in international regimes to obtain technological and legal knowledge, better opportunities for trade, and to make sure China’s national interests are safeguarded in international treaties. Wanting to counter increasing concern about China’s growing economic and military strength, the concept of peaceful development was launched, based on the idea that China would concentrate on its own international affairs, would not seek international expansion, but would work towards a multipolar world, and keep its borders open for international trade.

The problem facing the Party now is that different aspects of this model seem to be running out of steam. China’s economic growth, for example, has been fuelled by export and investment. Enormous quantities of money have been shifted from private wealth, particularly savings, to large, mostly State-owned enterprises, in an effort to cushion the impact of market liberalization. This has avoided the economic catastrophe that happened after the Russian “shock therapy”, but also created a new class of officials and SOE managers that grew tremendously wealthy off graft and corruption. As a result, Chinese household wealth remains relatively low, and the nearly non-existent social safety net further reduced incentives to spend. As the ongoing economic malaise in the United States and Europe dampens demand for Chinese products, it is clear that further growth needs to be fuelled by increase in domestic consumption.

Also, China is faced by economic challenges it created itself, in terms of inflationary pressure on commodities, but also matters such as environmental pollution. The voracious appetite of the Chinese economic machine has raised commodity prices across the board, causing inflation inside the country. The increasing use of cars causes traffic gridlock and severe environmental pollution in the larger cities, which themselves grow at breakneck pace. Growing meat consumption is straining Chinese agriculture. The speed at which new infrastructure is constructed, and the concomitant corruption, has led to quality and safety issues. There are significant amounts of bad investments, aimed at artificially boosting GDP numbers and local employment.

Most importantly, maintaining high levels of growth itself is becoming more difficult. While China’s double-digit performance is hailed as an economic miracle, it is easy to forget that China started from an extremely low base, which was to no small extent caused by the disastrous economic policies that were implemented between 1949 and 1979. Enormous gains could be made with simple measures, such as permitting farmers to sell some of their surplus produce on open markets, introducing financial incentive systems into enterprises and permitting foreign trade. The establishment of basic legal and regulatory structures went relatively rapidly in the beginning, but there’s a difference between recognizing the necessity of a patent system to incentivize innovative activities, and dealing with the enormous technological and legal complexities that operating a patent system in the twenty-first century entails. Also, the external conditions for Chinese growth were beneficial. Particularly after the end of the Cold War, the new impetus for international trade enabled China to grow swiftly through exports to the developed world, which at that time had the capacity to absorb this influx of cheaper goods. Now, China will need new consumers to support further growth of their manufacturing capacity, either at home or abroad. In other words, the low-hanging fruits for China’s economic development have been picked, and further economic development will become more arduous and less susceptible to centralized policy-making.

At the same time, the political model advocated by Deng is showing cracks as well. First and foremost, the next generation of leaders will be the first not to have been hand-picked by revolutionary Communists. Hu Jintao’s ascendancy was marked as Deng ensured a place for him on the Standing Committee of the Politburo in 1992, as the second youngest member ever. Hu had come to Deng’s eye because of his managerial skills, but also his determined actions in putting down an uprising in Tibet, where he was party secretary, a few months before the Tiananmen incident. This new generation lacks that blessing, and the resulting political strife. Second, Deng’s model of collective leadership is threatened by economic diversification. In the Nineties it was possible to have the rising tides lift all boats, as the economy was much more homogenous, meaning that simpler policies could have broader effects. Now, economic policymaking, by necessity, is becoming more of a balancing exercise between different interests. China’s goal to move up the value chain, for example, is now pushing lower value-added manufacturing into other Asian countries. However, these tend to be labour-intensive industries, and their departure may have a significant impact on employment. Inflation is an ever-present threat, with strong political repercussions in a country where most people rely on personal savings for pensions, in the absence of a stronger social safety net.

As a result, Chinese society is rapidly becoming more pluralized, as far as economic interests go, but this pluralisation is not reflected in politics. The enormous popularity of the recently ousted Bo Xilai, indicates that Chinese citizens might welcome a more open political debate. However, pluralized politics would strike against the very notion of collective leadership. Third, Deng advocated control over the public debate in order to maintain social stability. The Internet, however, has vastly increased the potential for citizens to communicate and organize outside of the official purview, raising the stakes in the control game. The Chinese government itself has spent enormous resources in policing the Internet, but has increasingly made websites and other service providers responsible for content inspection. This in turn greatly inhibits the development of commercial Internet activities, and may be a brake on further economic development. Development is a complex affair, and it may be true that the recipes that brought China to the position where it is now, may effectively be hindering its future path, something that is called the “middle income trap”.

This background explains to some extent China’s reluctance to take a leading role internationally. The single top priority for the leadership is to shape the international environment in such a way as to enable them to carry out domestic policies. China has no proselytizing international agenda, and does not aim to be a leader in international debates. Neither does it seem to want to be an active participant in global institution building or the establishment of global norms. This is one mistake many observers make: China is not making it a priority to become “more like us”. Rather, China has been closely observing developed economies and learning the technical side of how to manage an economy and generate growth, while at the same time maintaining the political core of Leninist Party rule as envisaged by Deng at the end of the Seventies. This doesn’t mean that there has been no political reform, but that reforms have been aimed at making the current system work better incrementally, rather than aimed at fundamental systemic change.

In short, China is faced with the necessity of adjusting the way the political system operates, the economy is managed and society is governed. Where it could maintain the political status-quo and grow the economy through catching up with foreign technology, expertise and science, China is now quickly approaching the point where it will need to create new recipes. In the realms of science, technology and economic management, China must generate new ideas and imagine new solutions for the problems that it faces as a country, and work together with the international community to resolve the global questions facing us today, including climate change, resource depletion, pollution, global crime, security, medicine and sustainable development. For a leadership that has been used to working off a well-established political precedent and foreign advanced practices, such boldness may not come naturally.  It is not at all clear how the next leadership will deal with these issues, and how the Party will weather the struggles over the leadership transition. Their outcome, however, will be crucial for the future of the entire world.

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