China Xi Factor

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HONG KONG – Before China’s leadership transition earlier this year, experts said
that the Chinese Communist Party was intent on preventing a larger-than-life
personality from assuming power. The CCP, it was argued, wanted someone more like
the bureaucratic outgoing leader, Hu Jintao, rather than a charismatic successor
like, say, the former Chongqing provincial governor Bo Xilai.
Yet the new president and CCP leader, Xi Jinping, is hardly dull. He began his term
by paying homage to Deng Xiaoping at his statue in Shenzhen, where, more than three
decades ago, the former Communist Party leader had launched the campaign to convert
a reluctant Party to free-market reforms. In a top-level November meeting, Xi set
out the details of a fundamental change in economic direction, overshadowing his

Xi now leads a new economic group that will coordinate and impose his reforms on
fractious colleagues. And, unlike Hu, he immediately became head of the military and
now runs a parallel national security council. At first glance, a new “paramount
leader” appears to be emerging.

Recent history explains this re-concentration of power. In 1993, central-government
leaders enjoyed relatively limited powers: they did not control the money supply and
had difficulty firing provincial governors or relocating top generals. Central
government revenue was low; indeed, proportionately smaller than that of central
governments in any other major economy.

This changed when then-Party leader Jiang Zemin and his prime minister, Zhu Rongji,
centralized authority in order to stave off economic crisis at a time of growing
risk to China’s banks. In the process, the labor force of China’s state enterprises
declined by 50 million, China lost 25 million manufacturing jobs, and
central-government employment was slashed. These measures saved China’s economy, but
at the price of widespread social stress, which made Zhu widely disliked when he
left office.

Popular reaction against the cosmopolitan, coastal, and market-oriented reforms of
Zhu and Jiang brought to power leaders whose formative experiences were in the
inland provinces of Gansu and Tibet. Riding a wave of resentment against inequality
and social tensions, Hu and his prime minister, Wen Jiabao, promised a “harmonious
society,” without the stresses of Zhu’s agenda. They slowed economic reform and
ceased political reforms. The bureaucracy expanded from 40 million to 70 million,
and power devolved to provinces, bureaucracies, and state-owned enterprises (SOEs).

The somnolent Hu/Wen era, fortunately, did not dampen the economic growth triggered
by the earlier reforms undertaken by Jiang and Zhu. But the economic-growth model
that those reforms created was running out of steam. Low-cost exports were
struggling as labor costs rose. Investment in infrastructure was shifting from
growth-enhancing projects, such as inter-city highways, to less productive shopping
malls in second- and third-tier cities. Productivity plummeted in SOEs, whose
privileged access to financing crowded out private-sector investment.
Local-government funding, through the seizure and resale of property, was reaching
its limits.

Thus, it became essential to launch a new wave of far-reaching reforms, including
liberalization of interest rates, securities markets, and foreign-exchange controls,
in order to fund the more productive private sector and reduce excess capacity in
SOEs. In particular, the reforms were needed to deflate an emerging property bubble
resulting from huge savings and foreign capital inflows that had no other profitable
investment outlet.

The government planned to liberalize interest rates and the capital account to
encourage investment in modern, high-value industries, rather than continue to
subsidize low-value exports. It started to shift the economy’s base from
export-oriented industries to domestic growth, and from manufacturing to services.
And it announced its intention to slow local governments’ seizures of farmland and
excessive borrowing through captive enterprises.

Unsurprisingly, opposition to reform was implacable. SOEs were determined to defend
their privileges. Highly leveraged local governments could not tolerate higher
interest rates or an appreciating currency, and they were adamant about continuing
land sales and opposing property taxes. They feared the financial burden of new
requirements to provide social services to urban migrants.

As a result, a new, lean leadership team had to be mobilized. The number of top
leaders was cut from nine to seven. The new lineup eliminated the most powerful
voice on the left (Bo) and relegated the “extreme reformers” on the right (Li
Yuanchao and Wang Yang) to the second tier. To reduce elders’ interference, Hu
stepped down as head of the military and Jiang Zemin promised to step back.

Moreover, a leading economic group was established to enforce bureaucratic
compliance, as was a national security council (similar to that in the United
States) to coordinate foreign policy. Previously, the military often kept the
foreign ministry in the dark; and the party’s foreign-affairs office, which handled
North Korea, often failed to coordinate its activities with the foreign ministry,
which handled South Korea. An anti-corruption campaign weakened opposition, and Zhu
re-emerged as a hero. This set the stage for Xi’s arrival.

In short, the new-style leadership, a form of managed charisma, was collectively
designed to serve national needs. And it implies that Xi is unlikely to emerge as
paramount leader. The Chinese presidency’s authority has certainly increased; but Xi
is powerful only when he has the votes. On contentious issues, he has but one of

William H. Overholt is a Senior Fellow at the Fung Global Institute and Harvard
University’s Asia Center.

: Project Syndicate, 2013

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