Centralizing Power in Beijing
I find myself disagreeing with much of this article by Bill Overholt (ex investment banking economist now at Harvard) entitled “The Politics of China’s Anti-corruption campaign”. It adheres to the conventional wisdom of centralization of power economically and politically that may be more honored in the breach than in the observance. As he notes:
“The Hu–Wen era saw the cession of power to enormously influential interest groups: SOEs, big banks, the Party and government bureaucracies, local governments and the military…This is one of the most audacious gambits in modern history: taking on all the most powerful groups at once, while betting on leadership unity”
Are Xi’s Plans Working?
1) Yes to SOEs for the most part, at the few lucky enough to be based in Beijing (117). Not so much to the 100,000 SOEs not owned by central SASAC, most of which are likely ailing and increasingly shut out of the mainstream economy.
2) Yes to the Big banks in that they have enjoyed fat margins from the interest rate differential between savers and borrowers. But no to the banks in that they have been in the middle of the lending boom (much of which they were forced to participate in) that has left myriad bad loans on their books that they will need to address. Even now, with the 2 trillion yuan bond swap, they are scrambling to contain the damage to their financial position. So internally and financially, their power has been weakened.
3) Yes to the Party given Xi’s push.
4) Possibly to “Government Bureaucracies” although that is rather a broad term. Do we mean NDRC or PBOC? The NDRC may have lost power against other actors in the system, particularly since the spending boom which is their forte is now over. The PBOC remains powerful but was missing in action during the stock crash, which was led by the CSRC (and others but we don’t know yet who). The State Council may have lost power against the Standing Committee.
Money Flows Outside of Beijing
But the key problem with this thesis is the decentralized nature of expenditure in China. While the state banks increased loans to SOEs, total credit flowed increasingly to private and semi-private institutions through the Shadow Banking system — which merely amplified China’s already hugely decentralized and Federalist fiscal system. There has been some debate about the Nick Lardy thesis (Peterson Institute) about credit to private institutions. Are they getting more or less capital? And what is a private firm in China? But there is some agreement about a general increase in capital flows to the private sector.
But there is no doubt that the 2009 4 trillion yuan fiscal stimulus (and another 8 trillion or so from other sources such as Trusts and Wealth Management Products) flowed to hybrid public-private companies and private companies locally. Are these part of the State? Yes – but very different from arguing they are part of the Central State in Beijing. A local property development with a host of investors (including a local township) is a far cry from an oil giant working hand-in-glove with the State Council to compete against national oil giants. So I would argue that the conventional wisdom that Bill is stating in his article is true for only the very blatant forms of State Control in Beijing. And that is by no means representative of all of China.
The politics of China’s anti-corruption campaign
15 September 2015
Author: William H. Overholt, Harvard
Chinese President Xi Jinping’s anti-corruption campaign has highlighted the seriousness of China’s official malfeasance. The outcome will shape a new era of China’s politics, economy and foreign policy.
‘Corruption’ covers quite disparate phenomena. It may mean graft, taking a tip for doing your job, or it may mean corruption in the stricter sense, taking money in return for undermining the national interest — which is much more costly.
Chinese ‘corruption’ is overwhelmingly graft, whereas in, for instance, the Philippines under former president Ferdinand Marcos, and in India, corruption in the narrow sense predominates. Many important Marcos-era projects were designed to fail, leaving the government in debt. In China, good roads and ports get built consistently. In India they don’t. Likewise with primary education and international sporting events.
More costly still, Japan has what’s termed ‘structural corruption’. A few major interest groups dominate the legislature to the extent that they can pervert national policy to their benefit. In an economy the size of California, Japan’s infrastructure spending long exceeded US infrastructure spending. So powerful was the grip of the construction lobby on the nuclear regulators that the operators of the Fukushima nuclear plant were allowed to build in an inappropriate location, to inappropriate standards, ignoring crucial safety rules.
In China, the scale of graft has become potentially fatal for the regime. Some claim that China’s authoritarian system inevitably causes extreme corruption and a democratic China would be much cleaner. But poor democracies typically have much more crippling corruption than China. In these countries, there are few or no political contributions other than bribes or candidate self-funding and the complexity of democratic judicial systems makes it difficult to convict criminals, which empowers wealthy criminality.
Most Chinese officials supplement their salaries with irregular income. Yet one characteristic of the Asian miracle economies is that the values of the top leaders have generally given priority to national service. In the Marcos Philippines, and much of Latin America and Africa, the motivation to become president is to become richer quicker. Nobody has accused Park Chung Hee, Chiang Ching Kuo, Lee Kwan Yew or Deng Xiaoping of being in it for the money. They were obsessed with saving their countries through economic growth.
Graft rather than corruption prevails in China because the growth-focused system demands performance at all levels. Every official and party secretary has high performance requirements. Securing promotions means fulfilling targets and outperforming ambitious colleagues. Most countries do not hold political leaders at any level to such performance standards.
Jiang Zemin and Zhu Rongji used structural reforms to keep graft, if still pervasive, under control. They cut down on government regulations, targeted state-owned enterprises (SOEs) and military businesses, and promoted competition and increased transparency. Corruption, while still pervasive, remained within limits.
Hu Jintao and Wen Jiabao reversed much of this. With the population weary of market-oriented reforms, having seen over 50 million SOE jobs evaporate, market reforms ceased or receded. To cope with the global financial crisis, they poured money into the only institutions that could create rapid increases of production: big SOEs. The government and party bureaucracies nearly doubled. SOEs revived their pre-eminence. The 1990s campaign to increase competition dissipated. Senior military officers reverted to managing lucrative side businesses. Some top leaders and their families began making huge fortunes. The scale of graft became astronomic.
Most importantly, whereas the central tendency of the Jiang–Zhu era was the successful centralisation of power, the Hu–Wen era saw the cession of power to enormously influential interest groups: SOEs, big banks, the Party and government bureaucracies, local governments and the military.
By the end of Hu–Wen’s first term, leading Chinese thinkers were expressing openly their concerns that the centre might lose its ability to govern effectively. Zhou Yongkang’s Petroleum Faction provided the archetype of the emergent interest group — an economic empire larger than many national economies. Leading corporate executives openly ridiculed the prime minister’s key policies and ministers sometimes defied him. Rising interest group power entailed emergent structural corruption.
Along with these economic ramifications came crucial political developments. Inequalities of income and wealth became more politically salient as social mobility declined. Resentment of a judicial system biased toward the elite intensified and a general sense of unfairness spread, potentially threatening the legitimacy of the regime.
All of this came to a head at a decisive moment: when China had to begin shifting its growth model in ways that would severely damage the interests of the preeminent interest groups. This was the worst possible time for the emergence of powerful interest groups determined to defend the status quo. If the trends of the Hu–Wen era were to continue, not only would it jeopardise the ability of the central government to reform environmental and financial practices, but incipient structural corruption would potentially cripple the system.
Realising the magnitude of opposition, China’s leaders achieved a working consensus to restructure China’s top political leadership to confront and defeat recalcitrant interest groups. They streamlined the Politburo Standing Committee from nine to seven and removed the extreme factions from the top leadership. Old guard interference was reduced. They chose a charismatic leader, Xi Jinping, and put him in charge of a set of ‘small leading groups’ that control the important aspects of Chinese governance.
This newly decisive leadership then announced economic plans that radically infringe the interests of all the newly powerful interest groups. Then came the anti-corruption campaign, which immediately struck the archetypes of reactionary interest group power: Zhou Yongkang, his Petroleum Faction and top military leaders.
This is one of the most audacious gambits in modern history: taking on all the most powerful groups at once, while betting on leadership unity, a technocratic economic strategy, an anti-corruption campaign as the core political weapon and a huge wave of popular political support.
So what are the prospects?
The history of anti-corruption campaigns suggests that structural reforms are crucial. Under Xi there are early but hardly decisive glimmerings of structural reform, particularly in the judicial system and through promoting markets, competition and governance.
Implementing economic reform has a paradoxical relationship to the anti-corruption campaign. While vital to nullify interest group opposition, the campaign frightens and immobilises the officials who should implement reforms. Any reform hurts someone and the offended person may respond with an accusation of corruption — almost everyone has some vulnerability. Until the intensity of the anti-corruption campaigndiminishes, economic reform will be limited. And that could take a while.
The outcome is uncertain. Xi’s experienced, able leadership team have the initiative, solid economic strategy and overwhelming public support. But bureaucratic resistance may gradually coalesce. Popular support depends on delivering economic reforms and limiting an economic downturn. To do this Xi must resolve the paradox that the anti-corruption campaign is prerequisite to economic reform but simultaneously inhibits immediate reform.
William H. Overholt is a senior fellow at Harvard University’s Asia Center.
An extended version of this article was first published in the most recent edition of the East Asia Forum Quarterly, ‘Leadership in the region’.