Special Issue analyzing the “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning comprehensively Deepening Reform of the Socialist Market Economic System,” issued at the Third Plenum of the Eighteenth Party Congress.

While not all Third Plenum decisions are revolutionary, they are all important. They set the national agenda until a new national congress is convened and holds its own Third Plenum, producing its own decision five years later. Hence, they serve as a general “five-year plan” for Party work and thereby for government work as well. A Decision’s compositional structure denotes this purpose. Each chapter can be viewed not only as focusing upon a particular area of governance, but also as addressing particular parts of the country’s vast political-administrative apparatus. Decisions do not present blueprints but rather guidelines; they indicate priorities as well as behaviors that will receive the state’s support or sanction. The timing and details of implementation are the work of other documents, crafted in other institutional arenas and at other administrative levels.

While the production of Third Plenum decisions have become standard operating procedures in the post-Mao era, the most recent Decision, issued in November 2013, differs from any previous one: it is the first that has been put forth under a Party chairman who is neither a Party elder nor an individual personally chosen by an elder. The heads of the third and fourth generation of Party leadership, Jiang Zemin and Hu Jintao respectively, had been approved for Party leadership while Deng Xiaoping was still a force in Chinese politics. The head of the fifth generation of Party Leadership, Xi Jinping, became heir apparently only quite recently. Thus, many watched to see whether this ‘new’ generation is in fact new in substance as well as name.

Reports indicate that the document has Xi’s imprimatur all over it. In April 2013, not long after Xi became Party chairman, a 60-member decision-drafting committee was constituted, headed by Xi. Breaking with precedence, Xi himself presented an “explanation” of the Decision to Central Committee members in November of that year. The buildup, staging, and subsequent government actions conducted under Xi’s auspices all indicate that he is no cipher.

The contributors to this issue, members of the Atlanta-based China Research Center, draw upon the Decision to assess Chinese governance in a range of policy arenas. Each essay draws its impetus from particular sections of the Decision. The essays do not speak with one voice. Assessments vary as to the effectiveness, feasibility, and intentions of the both the Party’s professed aims as well as its actual actions under Xi’s leadership. With that in mind:

Yawei Liu’s critical appraisal of state-society relations finds prospects for political reform bleak and language suggesting improvements in social justice and societal self-governance to be at odds with recent state actions.

Andrew Wedeman takes up issues of law and order by assessing the scope, length and targets of the recent anti-corruption campaign, in the Party and out, raising questions as to its impetus and ultimate aims.

Baogang Guo places proposed administrative reforms in broader historical context, finding signs of more effective governance in the furtherance of decentralization, red-tape reduction and law-based administration.

Eri Saikawa takes up environmental issues, a topic that for the first time has received its own chapter in the Decision. Her analysis of air pollution problems finds that while new governmental goals are a positive sign, the sincerity and effectiveness of implementation efforts remain to be seen.

John Garver’s examination of defense and foreign relations highlights a two-pronged party initiative that seeks to secure China’s external development interests, regionally and beyond, as well as preclude ideological subversion domestically.

Xuepeng Liu analyzes the Decision’s proposed economic reforms and priorities, helping to decode what it might mean to have the market play a dominant role and yet have the state sector play a decisive role in ongoing market liberalization and expansion.

Penelope Prime hones in on finances, examining the challenge of maintaining high growth rates while concurrently addressing debt, deficits, and currency reform.

Hongmei Li draws upon the Decision’s proposals for cultural work to outline countervailing trends in state-media relations that seek concurrently to consolidate state oversight while promoting media expansion, at home and abroad, in a competitive market environment.

Saikawa’s question – They talk the talk but do they walk the walk? – reverberates in a number of the other essays, as one might expect of such sweeping policy proposals in most any country. Still, Xi Jinping’s relatively recent assumption of Party leadership gives the question a particular edge. If the Party stays on schedule, fall 2018 should see the issuance of another Decision, and with it a chance to assess the Chinese government’s progress on these various specific issues as well as to assess Xi’s leadership at the start of his second term.

__________________________________________________________

We would like to thank Don Hoyt for the use of some of his photographs in this issue.

The post Special Issue: Introduction appeared first on China Research Center.

Shortly after he was anointed CCP’s general secretary in November 2012, Xi Jinping went to Shenzhen to pay tribute to Deng Xiaoping. Xi said that reform had entered into the zone of deep waters and that it was necessary to muster political courage and wisdom to seize the opportunity to deepen reform measures in important areas. Xi declared that in order to remain focused on the correct direction for reform, both ideological shackles and obstruction by special interest groups should be removed. Political commentators were euphoric, and all eyes were fixed on the upcoming Third Plenum. Some were optimistic that there would be significant measures in the political reform arena.

But many were disappointed by the series of remarks made by Xi since he replaced Hu Jintao as CCP’s leader. He talked about national rejuvenation and the rise of China and asked all Chinese people to dream the Chinese dream. He lamented that when the Soviet Union collapsed there was not a good man around to stop the fall. He called on the military to be ready to fight and to win wars. There was a glaring absence of the kind of thinking that Xi had presented in 2010. That year, during a speech at the Central Party School in Beijing, Xi said all CCP members should pay attention to the issue of power authorization and the fact that CCP’s power was bestowed by the people. The five-character term that “power comes from the people” (权为民所赋) sent a cheerful breeze to the political reform community in China because popular bestowing of power to the CCP would certainly involve a set of procedures that has always been missing from CCP’s action, despite the common chant that people are the “masters” of the state. Nonetheless, hope lingered that Xi was an open-minded Communist leader who believed political power derives from the people and a fixed process to bestow that power must be introduced. If such a proposal were to be discussed and written into the Plenum resolution, meaningful political reform would soon unfold in China.

Crushing Disappointment

Those who placed high hopes on Xi Jinping and expected the Third Plenum to engage in icebreaking measures in the arena of political reform were very much disappointed when they read the language on political reform in the Resolution that was adopted. Chapter Eight of the Resolution is entitled “Strengthen the Construction of Socialist Democratic Political System” and it contains three sections detailing how the CCP wants to expand and deepen democratization. The first section focuses on improving China’s People’s Congress system with high-sounding language, declaring that the congresses at all levels adopt laws and make the most important decisions. It emphasizes that “people’s government, people’s court and people’s procuratorate are elected by, responsible to and supervised by the people’s congresses.” China has people’s congresses at five levels: township/town, country/district, municipal, provincial and national. There are about three million directly (at township/town and county/district levels) and indirectly elected people’s congress deputies. This means Chinese people, at least on paper, have no less representation than their counterparts in democratic nations.

If the people’s congresses can do what they are charged to do by law and by the Resolution, there would be more accountability and transparency at all levels of the government and the so-called letter and visitation channel through which ordinary people try to file complaints against corrupt, abusive or negligent officials would become obsolete immediately. Sadly, the Resolution has not addressed the actual weakness of the people’s congress system. It made no mention of measures to correct the deficiency. The most serious problems of the people’s congress system in China are that 1) the Party still runs roughshod over it, and most party secretaries at the provincial level also are chairs of the standing committee of the provincial people’s congress; and 2) elections of the deputies, both direct and indirect, are not fair and competitive. When the foundation is soft and the top subject to Party control and manipulation, the people’s congress system cannot play a meaningful role. In this sense, the Resolution has simply repeated what had been for the past three decades and broke no new ground.

The second section elaborates on deliberative democracy, which is different from the kind of deliberative democracy that is known in the West. While Western deliberative democracy is usually applied at the grassroots level with societal activists pushing the government to be more transparent and accountable, the Chinese deliberative democracy discussed in the Resolution refers to the united front and its platform, the political consultative conference system. The actors on this stage are retired government officials, members of the eight democratic parties, celebrities, famous people without party affiliations and model workers. They are noisy, sensitive to social and political developments and keen on making policy recommendations but there is very little evidence this high-flying platform is having policy impacts at any level.

The last section talks about grassroots democracy, which includes village self-government, urban resident self-government, and worker self-government. Direct village committee elections and village self-government used to be the beacon of China’s expanding democratization. Urban residential committee elections have never been very competitive. Employee committees have always been attached to unions, which have never been rights bargaining mechanisms. The drafters of the Resolution seemed unable to clear a path for real grassroots democracy.

All in all, Chapter Eight of the Resolution calls for expansion of orderly political participation by Chinese citizens but offers little detail in delineating the specific channels through which participation will be allowed and become meaningful. The old wine was poured into a new bottle. The subsequent disillusion and disappointment in the political reform community is palpable. The sense is that Xi Jinping is no longer a credible champion of political reform. Disappointed as they are, Chinese scholars have tried to see the best in a worst-case scenario. Sun Xiaoli, a professor at the National Academy of Public Administration, makes two points when asked by the media why there is little mention of political reform in the Resolution: 1) deepening and expanding economic reform is in itself political; and 2) there is enough space created by the Resolution to plot further political reform.

A New Space in the Making

If Chapter Eight of the Resolution offered disappointment about political reform, Chapter Twelve provides a rhetorical opening for the pursuit of social justice. This section lists a plethora of measures that call for deepening of social reform. The most important seems to be an effort to ensure a more equitable distribution of wealth through a more seriously graduated income tax, and creation of a larger and wider social security net. The following paragraph in the Resolution sounds like a page from President Franklin D. Roosevelt’s New Deal:

We will regulate income distribution procedures and improve the regulatory systems and mechanisms and policy system for income distribution, establish an individual income and property information system, protect legitimate incomes, regulate excessively high incomes, redefine and clear away hidden incomes, outlaw illegal incomes, increase the incomes of low-income groups, and increase the proportion of the middle-income group in society as a whole. 

The lack of a more equitable distribution of wealth no doubt stirs anger deep within Chinese society, but according to Harvard sociologist Martin Whyte, this has not led to an eruption of unrest. His surveys indicate that Chinese people are more upset by social discrimination that favors the large urban centers. For example, a Beijing high school graduate can enter Peking or Tsinghua University with a 500-point score on the national college entrance exam, but a similar person from Changsha in Hunan Province needs a score of 600 or more to get into these universities. The Resolution makes it clear that authorities will tackle this kind of regional discrimination through reforming the matriculation system and giving universities more authority in admitting students.

It is indeed shameful for CCP to call China a socialist country when it has a healthcare system that builds in the kind of injustice that characterized segregation in the U.S. South before the Civil Rights Movement. Whether one in China can get good and comprehensive healthcare depends on your rank, your income and your residency. Hundreds of millions of Chinese farmers did not have any kind of health insurance until a few years ago when a new rural cooperative healthcare system was introduced. But in comparison to the benefits extended to the urban dwellers, government employees and military personnel, Chinese farmers still have to travel very far to receive proper care. They also must bear a larger financial burden to pay their healthcare costs. Therefore, the CCP vows to “deepen the comprehensive reform of grass-roots medical and healthcare institutions, and improve the network of urban and rural basic medical and healthcare services.”

Civil servants, military personnel and Party officials in China have the best pension system and retirement benefits. Ordinary residents of China have inadequate pensions, and many older people are dependent on their children for senior care. The only social security anchor for the farmers used to be the family plot of land. The pension system introduced by the government two decades ago is not entirely portable and management of social security funds is not transparent, making it highly susceptible to misuse and illegal transfer. The primitive nature of this system is highlighted by the proposed measures to reform it:

We will adhere to the basic old-age insurance system that combines social pools with individual accounts, improve the individual accounts system, complete the incentive mechanism in which those who contribute more will get more, guarantee the rights and interests of the insured, place basic old-age pension under unified national planning, and uphold the principle of balance based on actuarial mathematics.

These social reform measures, if fully implemented, would change the nature of the Chinese government overnight, making it more concerned with providing services to its citizens than with regime survival and enforced obedience to its reign. But these reform measures must have popular input, open access to government information, transparency, and accountability to be successfully implemented. In other words, without institutionalizing popular participation in deciding and supervising which social services are going to be provided and how they are going to be provided, these reform measures will either fail or will become window dressing to hoodwink people. If the CCP is serious about implementing what it has proposed in the Resolution, it will need to adopt relevant political reform measures, even if that occurs through an indirect process.

Civil Society

While many praise the proposed economic reform measures, Chapter Thirteen of the Resolution contains language that is innovative and even revolutionary in the context of CCP leaders who see any call related to expanding civil society as subversive and an evil plan cooked in the hallways of the U.S. State Department and bunkers of the Pentagon. This part of the Resolution does begin by saying social governance reforms will be conducted under the leadership of CCP committees and government agencies at all levels. But this is followed by a few paragraphs that rarely appear in CCP’s societal governing circulars.

If its language were realized, Section 48 could help liberate society from crushing state domination and infuse a checking and balancing force that modern, progressive states possess. The section calls on authorities to “intensify efforts to separate government administration and social organizations, encourage social organizations to clarify their rights and obligations, and enforce self-management and play their role in accordance with the law.” The iron hand of the state is told emphatically to relax or even to move away because now the CCP wants “social organizations to provide public services that they are apt to supply and tackle matters that they are able to tackle.” According to the section, “These organizations can directly apply for registration in accordance with the law when they are established. We will strengthen the management of social organizations and foreign NGOs in China, and guide them to carry out their activities in accordance with the law.”

Liberating as it sounds, there are challenges to putting these reform measures in place. First, the law that is supposed to govern the registration and management of the NGOs has yet to be submitted to the National People’s Congress for review and adoption. At this point, only a few cities in the south allow the registration of NGOs under provincial or municipal regulations. Second, the CCP has made it clear that it wants only certain kinds of NGO: trade associations, chambers of commerce, scientific and technological associations, charity and philanthropic organizations, and urban and rural community service organizations. NGOs with political missions or the intention to hold government accountable are not encouraged to form and can be declared hostile and illegal forces threatening social and political order. It is not a good sign that NGOs whose mission is to conserve nature and protect the environment are not mentioned as preferred social organizations.

What is even more alarming is that seven months after the adoption of the Resolution, there appears to be a concerted effort to investigate which institutes of the Chinese Academy of Social Sciences have been penetrated by foreign NGOs or foundations. This revelation came from a speech made by a member of the Central Commission on Discipline Inspection when he spoke at the Institute of Modern History. The CCP evidently does not want to govern foreign NGOs according to law, as was indicated in the Resolution. It simply desires to see them disappear in China. It is possible that many Chinese universities, colleges and existing NGOs will be subject to the same kind of investigation. Small wonder that many partners of Westerns NGOs have backed out of joint projects since late last year.

Chapter Thirteen ends with a proposal to establish a public security apparatus that includes creating a national security council that will coordinate with all national agencies involved in safeguarding national interests in information-gathering and decision-making. Unlike the U.S. National Security Council, whose sole mission is to stop threats that originate from abroad, the Chinese NSC would also respond to domestic threats to political and social stability. In traditional CCP discourse, all NGOs, domestic or foreign, are seeds of domestic instability, sources of so called “color revolutions” that are funded by Western powers eager to undermine the rise of China or to lead China into the wilderness of disintegration. Wang Zhenyao, former Ministry of Civil Affairs official and current dean of the China Institute of Philanthropic Studies at the Beijing Normal University, told the media that half of the one million NGOs in China are underground because of fear. These NGOs cannot register, dare not register, and will certainly not be able to register because the government sees them as enemies of the state. The stability maintenance apparatus nurtured by Zhou Yongkong—who is currently the subject of a criminal investigation in China—has been more richly funded than the country’s defense establishment. Many reform-minded Chinese hope the ouster of Zhou, who has been seen by many as the single most daunting obstacle to the growth of China’s civil society, may create an opening to expand civil society. When the Resolution was made public there was initial euphoria and media hoopla about the potential of this reform measure. It is too early to say that social reform is dead but not too late to say political reform will never be real and meaningful when there is no vibrant civil society and NGOs are always met with iron fist of the state.

The final balance sheet

In an interview with a newspaper in 2012, Zhou Ruijin, a retired media professional who is a strong advocate of political reform in China, said China’s reform, although interconnected and interwoven to a large extent, will have to be divided into three phases, namely economic, social, and political. The first phase of economic reform began in 1978 and was somewhat completed by 2004. The social reform phase began in 2010 and shall be completed by 2025. The final and the most important phase of the reform may kick in by 2030.

No Chinese leader, from Mao Zedong to Xi Jinping, has ever set a timetable for political reform. When asked in 1945 how the CCP would avoid the notorious dynastic cycles of the previous emperors, Mao said to Huang Yanpei proudly but vaguely that the CCP had found a miraculous mechanism to ward them off: democracy. During his negotiation with British politicians on the transfer of sovereignty of Hong Kong to China in 1986, Deng Xiaoping predicted that China might adopt national presidential elections by 2050 after overcoming the wealth, educational, economic, and geographic gaps between urban dwellers and rural residents. A year later, at CCP’s Thirteenth National Congress, Zhao Ziyang submitted a seven-point political reform package. This is the first time the CCP had introduced a political reform action plan. It did not have a five-year-plan kind of timetable and was quickly shelved after the political turmoil in 1989. It was not until 2008 when another top Chinese leader, Wen Jiabao, brought up a political reform plan that had implementable specifics. In a meeting with John Thornton, former chairman of Goldman Sachs, Wen outlined a three-prong action proposal: 1) direct elections moving up from villages to towns and to counties; 2) restraining government power via independent judiciary oversight; and 3) enhancing government accountability through a freer and more autonomous media. It appeared this proposal was more of Wen’s own personal aspiration than a CCP institutional push. He made his ambitious statement only to foreigners and never conveyed it to his own people.

Almost six years passed between Wen’s lofty plan and the adoption of the Resolution of the Third Plenum. In between, Xi came to power, Bo Xilai, a Politburo member of CCP’s Seventeenth Congress, was sentenced to life in prison, and two former high CCP officials—General Xu Caihou, a vice chairman of the Central Military Commission, and Zhou Yongkang—were placed under Party investigation and will eventually go to jail. The legitimacy of the CCP is under unprecedented self-inflicted assault. Will serious political reform be entertained? Prospects may seem unlikely, but if Xi Jinping is serious about keeping the CCP in power by making it less corrupt, more responsive to the people and more easily accountable to the people, political reform cannot wait until 2030 as was suggested by Zhou Ruijin. After all, there is a timetable that Xi and his Party are racing to keep. The goal is that China will become a democratic, prosperous, and wealthy nation in 2049 at the People’s Republic’s centennial. China watchers can measure whether the Xi Administration is moving closer to the timetable by examining how the Party is implementing proposed measures to 1) redistribute wealth via a new tax scheme and cast a wider social security net that includes all people regardless of differences in employment, residency, race, or age and 2) allow NGOs and other societal forces to participate in building China into a fairer and more just state. If the CCP can achieve this goal without instituting any political reform measures such as free speech, free elections, free press, and a judicial system free from CCP manipulation, the world will need to take a second look at China’s development and governance model. There may indeed be such as thing called Chinese exceptionalism. But that prospect seems dubious. Chinese leaders likely will find that democracy cannot be ushered in without thorough and deep political reform.

The post Where Is Political Reform in Xi Jinping’s Reform Scheme? appeared first on China Research Center.

These prior efforts notwithstanding, upon assuming the office of General Secretary of the party in November 2012, Xi Jinping announced yet another campaign, which was formally approved by the Third Plenum of the Eighteen Party Congress in early November 2013. At first, the campaign appeared to be a repeat of the same old song and dance. Many of the steely toned slogans about the necessity to fight a life-and-death struggle against corruption and the need to put an end to extravagant spending by officials and cadres had been raised many times before. Announcements of new regulations mandating fewer dishes at official banquets, banning the purchase of luxury sedans and their use for unofficial business, and the construction of lavish government buildings all reiterated orders issued in past years. Eighteen months on, however, it appears that far from a smoke and mirrors attempt to create the impression of action, Xi Jinping’s anti-corruption campaign may well be the most sustained and intensive drive against corruption since the start of the reform era.

By the Numbers

Measuring the intensity of an anti-corruption campaign is, admittedly, a tricky business given that we cannot even roughly estimate the true extent of corruption. Instead, we can at best guess at the extent by asking experts for their impressions of how bad things are or tracking changes in the number of officials who suddenly stop being corrupt because they get caught. Indices such as the popular Corruption Perceptions Index (CPI) published by Transparency International would have us believe that rather than getting worse, corruption in China has actually been on the decline for at least a decade, with its score falling from 7.6 (out of a maximum of 10, where 10 is the most corrupt and 1 the least corrupt) in 1995 to 6.0 in 2013, which would put China just below the 75^th percentile and hence not among the worst of the worse.¹

Data on prosecutions tell a different story. The number of criminal indictments was up 9.4 percent in 2013, with the total number of corruption and dereliction cases increasing from 34,326 in 2012 to 37,551 in 2013 (see Figure 1). The number of officials holding position at the county and departmental levels who were indicted rose from 2,390 to 2,618, a 9.5 percent increase. The number of officials the prefectural and bureau levels who were indicted shot up more dramatically, from 179 in 2012 to 253 in 2013, a 41.4 percent jump. Although nine percent increases in the total number of cases and in the number of county and department officials indicted may seem modest for a highly trumpeted campaign, these increases followed a decade in which the total number of indictments had been slowly decreasing. Increases in 2013, moreover, follow more modest increases in 2012. As a result, the total number of indictments in 2013 was 16.2 percent more than in 2011, and the number of country and department officials indicted was up 12.6 percent compared to 2011. More critically, the 41 percent increase in prefectural and bureau level officials indicted is the largest such increase since 2004, and represents a 27.8 percent rise over 2011. Finally, eight officials at the provincial and ministry levels were indicted, compared to five in 2012. The party’s Discipline Inspection Commission (DIC) also reported a 13.3 percent increase in the number of party members who faced disciplinary action.

Sources: Zhongguo Jiancha Nianjian [Procuratorial Yearbook of China], (Beijing: Zhongguo Jiancha Chubanshi, various years) and Zuigao Renmin Jiancha Yuan Gongzuo Baogao [Work report of the Supreme People’s Procuratorate], 3/18/2014, available at http://www.spp.gov.cn/tt/201403/t20140318_69216.shtml, accessed 6/12/2014.

Note: To provide a long-term perspective, I have transformed the raw data on cases filed into an index anchored on the years 1997-8. I do this because the 1997 revision of the criminal code decriminalized a large number of low-level offenses. The dramatic drop in cases filed thus creates the misleading impression that either corruption fell dramatically, which it did not, or that enforcement suddenly slacked off, which it did not either.

Targeting

It is also possible to look at the type of corruption a campaign is targeting and who is getting caught to get a more nuanced sense of whether Xi’s roar is that of a paper or a real tiger. China’s ongoing efforts to curb corruption are often described as a “war” and it is thus convenient to use war as a way to deconstruct the current campaign. The campaign can be decomposed into four distinct fronts. At the grassroots level the regime is fighting a guerrilla war in which whistleblowers and netizens have used social media to expose brazen examples of corruption and degenerate official behavior. Videos of officials laughing at the site of fatal highway accidents, photos of them sporting luxury watches, smoking outrageously priced cigarettes, documents identifying poorly paid low-level bureaucrats as the owners multiple of luxury condominiums and villas, videos of cadres playing sex games with their mistresses, drinking, and cavorting with Thai transvestites have gone viral within China despite the efforts of the army of “ten cent” Internet, forcing the party to move with unheard of speed to sack and indict officials. But the internet front of Xi’s war on corruption is a bush war in which most of the corrupt officials exposed are low-level officials who were so foolish, so arrogant, or so greedy that they failed to remember that corruption should kept discrete.

Parallel to the internet guerrilla war, the regime continues to wage a protracted war of attribution against low- and mid-level corruption. This part of the push against corruption resembles trench warfare: an ever-lengthening list of casualties but scant evidence of real advances. In recent years, prosecutors have indicted about 35,000 individual on economic crime charges each year, the bulk of whom are officials holding posts below the county and departmental leadership levels. The fighting on this front in 2013 seems a bit more intense than in past years. Based on a survey of cases reported in the press and on the Discipline Inspection Commission’s website, it appears that more “tiger cubs” – senior party cadres and officials holding posts just below the county and department levels – have been bagged. At present, however, there is no reason to believe the number of corrupt officials has been reduced by much.

The third front in Xi’s attack is a drive against “commercial bribery” in the domestic and foreign business sectors. Although official corruption receives the bulk of public attention, corruption often involves both a supply side (officials willing to use their authority for illicit private gain) and a demand side (private parties willing to pay officials to use their authority for illicit private gain). Corporate actors, moreover, can use the authority delegated to them to pursue illicit gains. Procurement managers, for example, can demand kickbacks from potential venders. Although the data are thin, it appears that inter-firm corruption is widespread in China and that a corporate “culture of corruption” exists in which bribery and corruption are viewed as a normal part of doing business. Chinese prosecutors began cracking down on corruption in the business sector in about 2006. In the spring of 2013, they intensified these attacks and expanded their targets to include foreign businesses. Chinese prosecutors are not alone. In recent years, prosecutors in both the United States and the United Kingdom also have gone after American and British companies for paying bribes to Chinese officials and companies. Chinese prosecutors have gone after evidence that foreign pharmaceutical and medical equipment vendors frequently turn a blind eye to the illicit means used by their sales forces to book orders and the complex dodges used by “consultants” and other middlemen to secure contracts and close deals. Charges were leveled against GlaxoSmithKline, Abbott Labs, Astra Zeneca, Sanoli, Norartus, Eli Lilly, and others. Prosecutors detained almost two dozen GlaxoSmithKline employees and consultants, including Peter Humphrey, a Shanghai-based British risk consultant, and his wife. JP Morgan, Goldman Sachs, Citibank, and Deutsche Bank have been accused of hiring the sons and daughters of senior Chinese officials with some expectation that such hires might benefit them financially.

The final aspect of Xi’s war on corruption is a highflying aerial combat in which corruption often becomes a weapon in factional infighting. Any scandal involving a senior official is inherently political. At a minimum, prosecutors have to receive high-level political approval to look into allegations of corruption among top officials. The inner leadership itself must presumably clear investigations of very senior officials. To go hunting a big tiger, therefore, investigators must first get a license. It is widely assumed, therefore, that factional politics play a major role in decided who gets investigated and who gets swept quietly under the rug.

Factional Politics

High-level scandals also create political opportunities. Xi’s current campaign is no different. Triggered by the exposure of Neil Heywood’s death and allegation that Bo Xilai’s wife either killed him or had him killed, the current drive has spawned a series of investigations into corruption in the oil sector and Sichuan that seem to implicate former Politburo Standing Committee Member and former Chairman of the Central Committee’s powerful Politics and Law Committee Zhou Yongkang. According to insiders, in the run up to the November 2012 Eighteenth Party Congress, Zhou had been pushing Chongqing Party Secretary, Politburo Member, and so-called “Red Princeling” Bo Xilai as a leftist counterweight to Hu Jintao’s heir apparent Xi Jinping.² Bo’s abrupt fall from power clearly removed a potential political rival, while investigations into corruption involving PetroChina Chairman Jiang Jiemin, Chengdu Party Secretary Li Chuncheng, Hainan Vice Governor Li Hualin, Vice Minister for Public Security Zheng Shaodong, former Sichuan Vice Governor Guo Yongxiang, and former Chairman of the Hubei Party Committee’s Politics and Law Committee Wu Yongwen – all of whom worked with Zhou at one point or another – enabled Xi or others to take out many of the now retired Zhou protégés.

In late July 2014, the official media announced that the Central Committee had approved a formal investigation of Zhou Yongkang. Zhou and his involvement in corruption had been the subject of rumors almost since the Bo Xilai case became public. For months, rumors circulated that Zhou and Bo had been plotting a coup, that Zhou had ordered three failed attempts on Xi Jinping’s life, that Zhou had his first wife killed after they divorced; Zhou’s son Zhou Bin had been detained; that his son had ties to Liu Han, a Sichuanese business tycoon who was sentenced to death in May after being convicted of leading an organized crime syndicate; that Zhou had had affairs with 400 women. For months there was also talk that Xi was afraid to put Zhou on trial because he feared that Zhou would speak out and expose the secrets he had learned during his days in charge of the internal security apparatus. Other rumors said that Xi had been unable to get permission to go after Zhou from former General Secretary and still party strongman Jiang Zemin. Despite talk that Xi might not be brave enough or strong enough, he ultimately did move against Zhou, but only after a series of Zhou’s former secretaries, protégées, and cronies had been detained and charged with corruption. Authorities also arrested Zhou Bin and a half dozen other members of Zhou’s extended family. Zhou has yet to be formally indicted and it is not entirely clear exactly what he will be charged with when the Procuratorate issues a formal indictment. The announcement that Zhou would face a formal investigation may signal the beginning of some sort of end game. Although the campaign has afforded Xi the opportunity to take down a series of rival political leaders, assert himself as party leader, and show the public that he is willing and able to do something about China’s corruption problem, the politics of the campaign also have a downside. Zhou is not the only rotten apple and he alone did not cause the rot to spread to other apples in the barrel. Moreover, Zhou has long been seen as a member of the “Shanghai Gang,” the cadre of officials linked to former General Secretary Jiang Zemin. Even before Zhou was formally taken down, the rumor mill was full of speculation about who the “real target” of Xi’s tiger hunt was and who would be the next retired leader to find himself detained by investigators from the Central Discipline Inspection Commission. There was also talk of a building backlash against Xi, who many senior leaders felt was going “too far” and was becoming dangerously like former Chairman Mao Zedong. Xi thus has incentives to use the indictment of Zhou as an opportunity to declare “victory” and begin scaling back the campaign or at least easing off on his attack on high-level corruption.

Scaling back also had a downside. One of the core objectives of an anti-corruption campaign is to demonstrate to the public that the leadership is determined to fight corruption. Bagging big tigers helps show such determination. But bagging too many big tigers can backfire if the public becomes convinced – if it is not already – that the party’s jungle is full of big tigers, senior leadership is full of corrupt tigers, and that the only big tigers being hunted are Xi’s political enemies and the politically unlucky and unloved whom Xi had sacrificed.

Finally, in recent months evidence of corruption among the senior military command has surfaced. General Gu Junshan, Deputy Commander of the PLA General Logistics Department, who was in charge of barracks construction, was indicted in March 2014 on bribery charges. According to various sources, Gu had received huge bribes and kickbacks from developers seeking rights to land controlled by the PLA and had used part of his illegal income to bribe senior officers, including possibly two Vice Chairmen of the Central Military Commission. One of them, General Xu Caihou was allegedly arrested in a hospital bed where he lay dying of bladder cancer. Corruption among the military has long been suspected, but before now, military corruption has remained largely hidden from view. Evidence of more extensive corruption among senior military officers could thus prove a major political liability for the party and could generate resentment among the officer corps.

Regardless of whether Xi opts for a slow winding down or an abrupt claim to have won, it seems unlikely that he will convince the Chinese public that the campaign had achieved its goals of significantly reducing corruption and ending official extravagance. Neither goal is, in fact, achievable in the short-term. Making real inroads into corruption will take time, sustained effort, and a combination of political and administrative reforms.

Conclusion

The scale and scope of the high-level, heavily political portion of Xi’s campaign differentiates the current campaign from its predecessors. The current campaign is clearly more sustained and intense. It is now 18 months old and by all indications more senior officials and cadres, perhaps as many as 31, have been investigated, expelled from the party, sacked, indicted by the Procuratorate, or tried than in any other post-1978 period. How many are ultimately brought down by Xi’s campaign remains to be seen and it may be months before the ultimate scale and intensity of the campaign become clear. It is also likely that many of those detained on corruption charges over the past year-and-a-half will not go to trial for some time. Regardless of what the coming weeks and months bring, however, it seems clear that Xi Jinping’s anti-corruption campaign is no tempest in a teapot.

Gauging the long-term and broader political impact of Xi Jinping’s anti-corruption campaign is difficult. Anti-corruption campaigns seek to achieve three goals. First, they seek to cull out corrupt officials. Second, they seek to deter those who are now tempted. As evidenced by the number of indictment and investigations, it is possible that Xi campaign has cut into the ranks of the corrupt, but how far is uncertain. Even more uncertain is whether the bagging of this crop of tigers will scare off other potential tigers and flies. Third, anti-corruption campaigns seek to convince the public that a regime is serious about fighting corruption, particularly in the highest places. Bringing down Zhou, or even his protégées, along with other senior officials, may convince ordinary Chinese that this time the regime is really determined to deal with corruption. Ultimately, however, the real proof will be in the follow-through. Should the fight against corruption fall off when all of the sound and fury of the current campaign comes to an end, then it is likely that the public will sink deeper into cynicism and dismiss the campaign as political knife fight in which a lot of flies and tiger cubs were killed to cloak the true factional reasons for the drive.

Suggested Reading

Roderic Broadhurst and Wang Peng, “After the Bo Xilai Trial: Does Corruption Threaten China Future?” Survival (June 2014): 53:3.

Jerome Doyan, “A new impetus for the fight against corruption,” China Perspectives (June 2013), 2; 74-5

Kilkon Ko and Cuifen Wen, “Structural Changes in Chinese Corruption,” China Quarterly (September 2012) No. 211: 718*740.

Peter Kwong, “Why China’s Corruption Won’t Stop,” The Nation (4/22/2013); 17-21.

Alice L. Miller, “The Road to the Third Plenum,” The China Leadership Monitor Fall 2013, (42): http://www.hoover.org/sites/default/files/research/docs/clm42am-2013.pdf

The post Xi Jinping’s Tiger Hunt and the Politics of Corruption appeared first on China Research Center.

The Third Plenum of the Eighteenth Party Congress held in November 2013 called for accelerating China’s administrative reform by building a law-based and service-oriented government. More specifically, it demanded deepening reforms of the administrative system, innovating administrative methods and enhancing the credibility and execution of the government. In the upcoming fourth plenary session to be held in October 2014, the rule of law—including building a government ruled by law—will refine the direction of the administrative reform even further. A number of new trends in China’s administrative reform are worth noting: streamlining governmental administrative approval processes, curtailing the excessive administrative powers, promoting plural governance, and strengthening the administrative litigation system.

Background of the Administrative Reforms

China’s latest administrative reform is motivated by a number of key concerns. The existing system of public administration is still based on the command-and-control approach inherited from the era of the planned economy. It has distorted the political and legal environment for doing business in China in the new age of the market economy and is largely responsible for the widespread rent-seeking and corrupt behaviors of government officials. Administrative redundancy and bureaucratic red tape also have hindered China’s competitiveness and economic vitality.

Over-centralization of power is long-held as a major problem in China’s administrative system. Therefore, China’s administrative reform has focused on three main areas: the decentralization of power and delegation of rights, simplification and rationalization of administrative power, and building a government ruled by law. The reform involves three overlapping stages. The first one is to reorganize government institutions and decentralize administrative powers. The second stage is to change governmental functions in order to assist the transformation from a planned economy to a market one. The third stage is to transform the government’s administrative methods.^[1]

Seven rounds of institutional reform have been carried out since 1982. Government ministries and agencies have gone through sizable reorganization. Many industry-related ministries have been phrased out or converted into industry associations. The number of ministries in the central government has been cut in half and several new “super ministries” have been created to simplify administrative management. The regulatory power of the central government over the economy has been gradually shifted from micro-management to macro-management. A new civil service system has been in place since 1993.^[2]

The decentralization drive has caused major change in state-local relations. Although the latest anti-corruption campaign has led to some recentralization of judicial and party disciplinary power, fiscal decentralization has characterized the new central-local governmental relationship and produced de facto fiscal federalism. Starting in 1994, a new “separated tax system” scheme (分税制) was implemented and local governments have acquired significant amounts of taxation, fee collection, investment, and legislative powers.

Today, the government is again in the process of streamlining the tax revenue-sharing system. The main problem with the existing system is that the reforms carried out in the last two decades, such as the elimination of agricultural tax and the restriction on collecting local fees, have a negative impact on local revenues. At the same time, more unfunded mandates, such as new programs on education, public welfare, and social and income security, are handed down from the top. Unable to pay for these new mandates, local governments are increasingly relying on borrowed money and land sales. Land sales in particular have directly and indirectly contributed to an overheated housing market and skyrocketing housing prices,^[3] and led to rapid increases in the number of anti-land-grab protests staged by farmers.^[4]

Another major delegation of rights has taken place in the areas of community governance. The 1982 Constitution codified the concept of local self-rule. There are 588,000 rural village committees and 95,000 urban neighborhood communities in China.^[5] In 1987, the National People’s Congress (NPC) adopted two organic laws for these two types of grassroots organizations.^[6] Self-rule and direct election are all integrated elements. In recent years the number of homeowners associations also has grown rapidly and played an important role in community governance.

However, contrary to the development of community self-governance, we have seen the latest development of a “city grid management” model being promoted in many cities. It is an attempt by the government to extend its reach to local communities and enhance its capability of community control. This move may compromise the achievement of recent community governance reform and seriously restrict the space for more community autonomy.^[7]

Curtailing Administrative Powers

One of the most important administrative reforms is to curtail excessive administrative powers. This reform actually started as early as in September 2001 when the Leading Group for the Reform of the Administrative Examination and Approvals was established. In October 2002, 789 administrative approval requirements were appealed. In August 2003, the NPC adopted the Law of Administrative Licensing to standardize the administrative power and procedures over issuing administrative licensing. The law requires that government at the local level create administrative service centers to allow license applicants to get their applications approved in one central office without having to visit many government offices and go through a lengthy and complicated review process.^[8]

Starting from 2013, the priority of the administrative reform has been placed on eliminating and delegating administrative review and approval powers. The new consensus seems to be that any administrative approval requirement that is not authorized by law should be repealed and that business and social activities not clearly forbidden by law should be permitted. It appears that the direction of the reform is to create a new system of retroactive supervision, which will eventually replace most of the prospective review and inspection requirements. The Plan for the Institutional Restructuring of the State Council and Transformation of Functions, which was adopted by the NPC in 2013, further specifies that many requirements concerning investment, production, operations, licensing, and accreditation shall be canceled or delegated to lower-level governments. The Plan also specifies that administrative charges and government-funded items that are illegal and improper shall be repealed or delegated.

So far, seven rounds of elimination and delegations have been conducted and 463 items have been repealed at the national level since 2013. That involves about one-third of all items that needed central governmental approval. This was done on top of five similar reductions and simplifications between 2002 and 2012. The remaining approval items are expected to be further reduced in the years ahead. Government departments at all level are now required to publish a list of existing items that need administrative approval. In addition, the screening of the existing 369 national non-administrative approval items has begun. It is hoped that these items also will be gradually eliminated.

Similar administrative reforms are being carried out at the provincial and local levels, but the extent to which administrative simplification is implemented varies greatly. Zhejiang Province, for example, has eliminated 181 administrative approval items and 464 non-administrative approval items since 2013. But the reduction in the number of the administrative approval items represents only 11 percent of the 1,617 existing administrative approval items.^[9] In Dongguan, the city government eliminated 81 administrative approval items, and delegated 58 in June 2014. This was done after a 55.1 percent of reduction in administrative approval items in 2013 and the elimination or delegation of another 135 items in March 2014.^[10]

Promoting Plural Governance

Another trend in China’s administrative reform is a move toward plural governance. Since the Sixteenth Party Congress, China has been moving away from the traditional emphasis on social control and unitary governance. Hu Jintao embraced the notion of social management in 2011, which was still a state-centered approach. The Xi-Li administration, however, embraces the notion of social governance, which calls for shared governance with an intention to minimize the unitary role of the central government.

The current system of registration and approval of civic organizations is very much outdated and restrictive.^[11] The regulations require a non-governmental organization (NGO) to be managed by two government departments (a sponsoring department and the civil affairs department). Only one professional organization is allowed in each professional field, and no inter-provincial or cross-regional associations are permitted. Officially, 440,000 social organizations are registered, but according to one estimate, 1.5 million others cannot obtain official approval and operate on an unregistered basis.^[12] Many unregistered organizations advocate labor rights, women’s rights, farmers’ rights, and environmental action, reflecting the rapid growth of these types of organizations and concerns.

The new regulations will remove some of the unwanted barriers. The government wants to invite NGOs to participate in or perform some of the social management functions for the government. Government agencies are encouraged to purchase social services from these organizations. But it is unlikely that the state will reduce its control of political-oriented civic organizations and grant full freedom of association. According to the MCA, the reform will be restricted mostly to the registration of four types of NGOs: professional and business, science and technology, charity, and community services.^[13]

The reform has encountered several problems. The effectiveness of the reform seems to diminish as the policies move down the layers of bureaucracy. Many government departments or agencies refuse to give up important regulatory power. Premier Li Keqing openly voiced his frustration over the resistance to the administrative reform and blasted local officials for inertia in carrying out central government directives in a cabinet meeting in May 2014.^[14]

Strengthening the Law-Based System of Public Administration

Building a law-based public administration is another important area in which we have seen some progress. For years, the practice of China’s public administration could be characterized as “administration according to policy” and “administration according to party directives or documents.” In an effort to legitimize administrative decision-making power and procedures, the NPC has adopted some much needed-laws in the area of public administration.

A large number of administrative laws also were formulated by the State Council to regulate market, enterprise activities, market exchange, economic contracts, intellectual property rights, taxation etc. In order to comply with WTO requirements, the state made a swift cleanup of all the so-called “red-heading documents,” or government internal directives. Some 188,000 provincial and city level “red-heading documents” were invalidated.^[15] In March 2004, the State Council published the Opinion on Pushing Forward Implementation of Administration According to Law. It stressed the need to safeguard people’s procedural rights, enhance administrative accountability and responsibility, and develop a “sunshine” government.

The enactment of the Administrative Litigation Law was a high point in China’s legal history. Encouraged by the law, hundreds of thousands of people began to file lawsuits to challenge local government acts or decisions.^[16] Since the law’s inception in the late 1990s, the court has heard more than two million administrative litigation cases.^[17] Urban construction disputes such as land management, city planning, sales of land, and housing demolition now make up almost 20 percent of all cases.^[18] Despite the sheer number of the cases, a plaintiff may still find it difficult to have a case accepted in the first place, to win these cases, and to enforce court decisions. In 2005, the court heard more than 127,000 cases. Among them, 25,317 resulted in rescinding or changing official decisions; in 15,796 cases, official decisions were upheld.^[19] Overall the percentage of cases resulting the plaintiffs’ winning is only about seven percent.^[20] Another issue is that as many as 40 percent of administrative cases do not conclude with judicial rulings; plaintiffs simply withdraw their cases for various reasons.^[21]

The lack of true separation of courts from local governments is one of the main reasons for these difficulties. Judges sometimes must seek local government approval if a lawsuit is unfavorable to the government before accepting these cases. Local party organizations may order courts to avoid accepting cases involving “hot issues” or sensitive matters. The low acceptance rate of administrative litigation cases may also be linked to the lack of qualified judges. Increasing numbers of judges have resigned because of long working hours, mounting case loads, and poor salaries. Another factor to consider is that administrative litigation remains a costly and unpredictable option for many people. Many people still prefer the administrative petition system (“letter-writing and office visits”) to get grievances resolved.

To solve these issues, the NPC is in the process of revising the Administrative Litigation Law to improve its effectiveness. The proposed revisions include reducing administrative interference, enlarging the scope of administrative decisions subject to administrative litigation, restricting discretionary power of courts to reject cases, trying cases in unrelated cities or counties, introducing simplified procedures for less controversial cases, and making administrators legally liable for enforcing court orders.^[22] Some core issues, such as how to make local agencies or chief administrators appear in the court, still lack enforceable measures. The proposed revision already has gone through the public comment phase. The revision process has been slowed after the first reading at the NPC in December 2013. The revision process may not conclude until sometime in 2015.

Concluding Thoughts on China’s Administrative Reforms

In general, China’s administrative reforms are in line with similar reforms carried out in many other countries. Its goals are to use scientific management to improve efficiency, to wage war on wasteful spending, to standardize administrative procedures aimed at making them fair and open, and to structure and limit administrative power to prevent corruption and reduce bureaucratic red tape.^[23] Returning the power to the people and strengthening the governance by law are at the heart of the reform.

One of the familiar criticisms of China centers on the lack of progress in political reform.^[24] Although there is certainly some truth to the claim,^[25] there is no doubt that China’s political landscape, at least the system of state governance, has undergone major changes because of continued administrative reforms. The creation of an effective, efficient, limited and service-oriented administrative system may involve only low-risk political changes, but we have reason to believe that good governance is one of the crucial prerequisites of higher-level political reform, such as electoral reform.^[26]

China’s administrative reform is clearly moving in the right direction. With a leaner and more efficient government, a reduction in governmental regulatory powers, a new plural governance structure, and law-based administrative system, China is in a better position to manage an increasingly more complex society. By pursuing a strategy of good governance, the Chinese Communist Party (CCP) has managed to consolidate its political legitimacy.

*The author wish to express his thanks for the generous support of the East Asia Institute, Singapore National University for conducting this research, and for the helpful comments made by Yongnian Zheng, Lance Gore and He Li.

^[1] Zhou Guanghui, “Toward Good Governance: Thirty Years of Administrative Reforms in China,” in Yu Keping ed., The Reform of Governance (Leiden, the Netherlands: Koninklijk Brill BV, 2010), p. 138.

^[2] Kjeld Erik Brodsgaard & Chen Gang,China’s Civil Service Reform: An Update, EAI Background Brief No. 493, 16 December, 2009.

^[3] Zhou Zhihua, The Land Supply System for Urban Development in China, EAI Background Brief No. 769, 18 October, 2012.

^[4] Cary Huang, “Land Grabs are Main Cause of Mainland Protests, Experts Say,” South China Morning Post, 20 December, 2012.

^[5] Ministry of Civil Affairs, PRC, “Quarterly Statistic Release of Social Services (March 2013),”

http://files2.mca.gov.cn/cws/201404/20140428173249870.htm, accessed 10 June, 2014.

^[6] The Organic Law of Village Committees of the PRC (1987) and The Organic Law of Urban Neighborhood Committees (1989).

^[7] Tian Yipeng and Xue Wenlong, “Chengshi guanli ‘wanggehua’ moshi yu shiqu zizhi chuyi [The ‘block management’model in urban management and its impact on community self-rule],” Xuehai, March 2012, http://www.sociology2010.cass.cn/upload/2012/12/d20121204154042925.pdf, accessed 10 June, 2014.

^[8] BBC Monitoring Asia Pacific, “Licensing law said ‘driving force’ behind China’s administrative reform,” 6 February, 2014.

^[9] Zhejiang News, http://zjnews.zjol.com.cn/system/2013/08/10/019525636.shtml, accessed 30, June 2014.

^[10] See Nanfang City Daily, http://epaper.oeeee.com/I/html/2014-03/24/content_2041348.htm, accessed 9 June , 2014.

^[11] The regulation in use was adopted in 1989 and amended in 1998. It requires a minimum 50 members, and minimum activities fund of 30,000 yuan. It must be sponsored by one of the government institutions. See Sonia Wong, Non-Governmental Organizations and Government in China: Enemies or Allies, EAI Background Brief No. 704, 8 March, 2012.

^[12] “Chinese Civil Society: Beneath the Glacier,” The Economist, April 12, 2014.

^[13] Li Liguo, Minister of Civil Affairs, “Chuangxin shehui zhili tizhi [Reinventing the System of Social Governance], Qiushi, no. 24, 2013, http://www.qstheory.cn/zxdk/2013/201324/201312/t20131212_301550.htm, accessed 15 June, 2014.

^[14] Wang Xiangwei, “After Power Start, Li Keqiang’s Frustration Grows with Resistance to Reforms,” South China Morning Post, 9 June, 2014.

^[15] Cai Dingjian, op cit, p. 253.

^[16] Kevin J. O’Brien and Lianjiang Li, “Suing the Local State: Administrative Litigation in Rural China,” The China Journal, no. 54, 2004, p. 76.

^[17] Ye Zhusheng, “’Min gao guan’ zai chufa [A New Beginning of the Administrative Litigation],” South Review, 10, January, 2014, http://www.nfcmag.com/article/4515-s.html, accessed 10 June, 2014.

^[18] He Haibo, “Kundun de xingzheng susong [Problems of Administrative Litigation],” Journal of East China University of Politics and Law, No. 2, 2012, pp. 86–95.

^[19] Cai Dingjian, op cit., p. 262.

^[20] Chinese courts also handled more than 300 million cases filed by government departments or agencies against individuals or enterprises under the administrative litigation category in the same period. The government won more than 90 percent of these cases. See Ye Zhusheng, op cit.

^[21] He Haibo, “Litigation without a Ruling: the Predicament of Administrative Law in China,” Tsinghua China Law Review, 3, no. 2 (Spring 2011), pp. 258–281.

^[22] Ye Zhusheng, op cit.

^[23] Chang Mengzhong, “Crossing the River by Touching Stones: a Comparative Study of Administrative Reforms in China and the United States,” Public Administration Review, special issue on comparative Chinese/American public administration, 69, sp1, (December 2009), pp. 82–87.

^[24] Richard L. Grant, “Political and Economic Reform in China,” The World Today, 51, no. 2, Februry, 1995, pp. 37–40; Hong Shi, “China’s Political Development after Tiananmen; Tranquility by Default,” Asian Survey, 30, no. 12, December 1990, pp. 1206–1217.

^[25] Lance L. P. Gore, Status Quo Interests Stall China’s Reform, EAI Background Brief No. 748, 23 August, 2012.

^[26] Zheng Yongnian, Zhongguo Gaige Sanbu Zou [China’s Reform: a Roadmap] (Beijing: People’s Oriental Publishing & Media Co., Ltd, 2012); Wang Yukai, “paichu gaige zuli xuyao gengda yongqi he zhihui [More Courage and Wisdoms Are Needed to Overcome Obstacles of Reform],” http://www.zgdzgblt.com/index.php/manage/showmagcontent/mid/124/newsid/37, accessed 15 June, 2014.

The post New Trends in China’s Administrative Reform appeared first on China Research Center.

In 2008 and 2009 if I asked a Beijing taxi driver or anyone on the street about air quality on a hazy day, I was normally told that it was fog. No matter how much I tried to convince them that it was air pollution, most would just laugh and tell me that I did not know anything. Now, there is not even a need to ask what it is. In fact, when President Xi Jinping walked in Nanluoguxiang district on February 25, 2014, Xinhua’s headline read: “Xi Jinping Visits Beijing’s Nanluoguxiang amid the Smog: Breathing Together, Sharing the Fate (Huang, 2014).” Some people even commented about it on social media, asking why he was not wearing a face mask, which has become popular recently. Extremely bad air pollution events, especially linked to fine particles known as PM_2.5, have contributed to changing Chinese perceptions of their air quality and to raising awareness.

Environmental problems and air pollution incidents in China are not at all new. Ever since China started with a rapid economic growth model, there was an underlying policy of industrializing first and cleaning up later. What is new is the magnitude of the problem, and the urgency within the government to solve it. Prime Minister Li Keqiang in March 2014 “declared war on pollution,” acknowledging that pollution is the major problem in the country (Li, 2014). Li wrote in a report he delivered at China’s annual parliamentary meetings that heavy pollution “is nature’s red-light warning against the model of inefficient and blind development,” and added: “We must strengthen protection of the ecological environment and resolve to take forceful measures (Li, 2014).”

This is also illustrated in the Decision of the Third Plenum of the Eighteenth Party Congress that the government will “improve local government’s performance in” and “allocate more law-enforcement resources to the primary level in such key areas as … environmental protection (Decision of Third Plenum, 2013).” Most importantly for air quality, the plenum also explicitly states that it will “establish and improve an environmental protection system that strictly supervises the emission of all pollutants, and independently conduct environmental supervision and administrative law enforcement.” As they promised to publicize environmental information, they also opened a new website where they post the real-time air quality index in various Chinese cities (http://113.108.142.147:20035/emcpublish/).

How bad has China’s air quality been, you might ask. The Ministry of Environmental Protection announced that only three of China’s seventy-four cities met the national standard for “fine air quality” in 2013 (Wong, 2014). The three cities were all in remote areas: Lhasa – the capital of Tibet; Haikou – the capital of Hainan; and Zhoushan in Zhejiang province. These were the only cities that had an average air quality index (AQI) value of less than 100. Although AQI is based on six different pollutants (sulfur dioxide SO₂, nitrogen oxides NO_x, coarse particulate matter PM₁₀, fine particulate matter PM_2.5, carbon monoxide CO, and tropospheric ozone O₃) and is determined by taking the worst value among them, it is safe to assume in China that PM_2.5 usually determines the general AQI. The Chinese AQI value of 100 translates into annual average PM_2.5 concentrations of less than 75 micrograms per cubic meter (μg/m³). Taking into consideration that the World Health Organization (WHO) guideline for the annual average is 10μg/m³, and the U.S. and EU standards are 12 and 10μg/m³, respectively, AQI of less than 100 is not necessarily considered “fine air quality” in other parts of the developed world. Even then, the northern region including Beijing, Tianjin, and Hebei had only 135 days in year 2013 that met this criterion (Wong et al., 2014). The figure below taken from Andrews (2014) compares China’s standards to those of the U.S. and Europe.

Figure 1. Comparisons of Air Quality Assessments in China, U.S., and Europe.

The WHO announced a report linking outdoor air pollution to 3.7 million annual premature deaths worldwide (WHO, 2014). Approximately 350,000-500,000 Chinese are estimated to die prematurely due to air pollution per year based on studies by the World Bank, WHO, and the Chinese Academy for Environmental Planning (Moore, 2014). This is no surprise, since PM_2.5 concentrations can be even higher than 500μg/m³, which is even not listed on the figure above. In addition, 450,000 deaths were already estimated in 2000 due to China’s PM_2.5 concentrations from its own emissions (Saikawa et al., 2009).

Air Pollution Policy

Although China has been putting development first for a long time, it started including emissions reduction in the 10^th five-year plan for 2000 through 2005. The first target included 10 percent emissions reduction for SO₂ from the 2000 level by 2005. This goal failed miserably. SO₂ emissions actually increased 28 percent from 2000 levels (Schreifels et al., 2012). In the 11^th five-year plan (2006-2010) SO₂ emissions reduction goal of 10 percent appeared again. This time the target was met successfully (Schreifels et al., 2012). In the 12^th five-year plan (2011-2015) China for the first time included politically binding targets not only for SO₂ (eight percent below 2010 levels), but also for NO_x (10 percent below 2010 levels) and CO₂ intensity (17 percent reduction in emissions per unit of GDP relative to 2010 levels).

As air pollution began to be more visible and cause problems for longer periods of time, the Chinese government started to change course on air pollution regulation. On February 29, 2012, China’s State Council approved its first national environmental standard for PM_2.5 at 35μg/m³ annual average (Zhang et al., 2012). Furthermore at the end of 2012, the government issued the 12^th five-year plan on Air Pollution Prevention and Control in Key Regions, which for the first time provided a comprehensive plan for three key regions (Beijing-Tianjin-Hebei, Yangtze River Delta, and Pearl River Delta) and 10 city clusters, involving 19 provincial level jurisdictions and 117 cities. There were three reasons why this was important. First, this issued ambient concentration targets for the first time for SO₂, PM₁₀, NO₂, and PM_2.5. The reductions required for these pollutants were 10 percent, 10 percent, seven percent, and five percent below 2010 levels, respectively by 2015. For the three key regions, PM concentrations were required to be reduced by six percent rather than five percent. Second, it set higher emissions reduction targets than the national target. For example, SO₂ reduction and NO₂ emissions reduction targets are four and three percent higher than the national target. It also required non-attainment cities to develop air quality attainment plans, which needed to be publicly available.

After severe haze events in January 2013, the Premier Li Keqiang pledged to use an “iron fist” on the country’s pollution at his first news conference after the annual legislative session in March (Wu, 2013). Ten Measures on Air Pollution Control was then issued in June 2013 to indicate his seriousness about that promise. The measures he outlined were quite vague. However, one specific goal was included: to improve public transport and clean energy production, reducing the ratio of atmospheric pollutant emissions to GDP by 30 percent or more by 2017.

This was not the end of regulation in 2013. On September 12, the government further implemented the Action Plan on Air Pollution Prevention and Control, which included much stricter standards, higher goals, and more concrete measures. Its target for PM₁₀ concentrations is now to reduce by at least 10 percent by 2017 compared to the 2012 level. A much larger emphasis was put on the three key regions (Beijing-Tianjin-Hebei, Yangtze River Delta, and the Pearl River Delta) and PM_2.5 concentrations are to be reduced by 25 percent, 20 percent, and 15 percent in each of the regions respectively, within the same period. For the first time, there was a specific target for annual PM_2.5 concentrations to be kept at 60μg/m³. Here again, there was a mention of reducing emissions in the transport sector such as eliminating old, high-emitting “yellow label” vehicles, promoting public transportation and alternative energy vehicles, and upgrading fuel quality.

Following the Third Plenum’s increased interest in pollution control, Beijing on January 16, 2014, passed the “Regulation on Prevention and Control of Air Pollution in Beijing” on January 21, 2014. This featured not only stringent emission controls but also higher penalties in order to mediate haze events. For the first time in history, the Beijing Municipal People’s Congress voted in favor of the regulation and replaced a guideline that was issued in 2000 (Zhu, 2014). Beijing is now required to limit and gradually reduce the major air pollutant emissions using annual quotas for district, county government, and for individuals. Quotas are also in place for coal burning, and a plan is in place for regulating vehicle emissions (Zhu, 2014). It is the first time Beijing has set a cap on total pollutant emissions rather than on growth rate, and these new regulations make clear the intention of the government to clean up its air.

Auto Industry and Air Pollution

From the recent regulations, it is clear that the target sector is coal-fired power plants and road transport. Why is the regulation of tailpipe emissions so important? One main and obvious reason is the sheer number of cars, which has increased exponentially in China starting in the 1990s (Saikawa et al., 2011). China has been promoting its automobile industry as a “pillar industry” since 1986 (Thun, 2006). As a way to introduce cleaner, more advanced technologies from developed countries, it has been strategic in adopting stringent emission standards (Saikawa and Urpelainen, 2014). Since it adopted its first emission standards in 2000, China has successfully been tightening the regulation at a very rapid pace (Saikawa, 2013). The problem here and in some other developing countries is the fuel quality. It has always been the case in China that emission standards are adopted first, followed by fuel quality standards with some delay, although it is inefficient to run vehicles with low-quality fuel (Saikawa, 2013). In the past, this even caused some of the vehicles to break down, without customers knowing it was because of high sulfur content in their gasoline.

Because China’s emission standards have advanced far, it is not possible any more to meet stringent emission standards with lagging fuel quality. Low sulfur fuel is required for vehicles with clean technologies, and without high quality fuel, vehicles are destined to fail. In fact, Euro IV emission standards, planned to be in effect in late 2011, had to be delayed because of the lack of high-quality fuel then (Zhang et al., 2012). Oil companies are more often than not reluctant to make investments in clean fuel and they play a powerful role in emissions regulations in the road transport sector (Saikawa, 2013). Whether the new Xi-Li administration can exert its will against the powerful oil companies is the big question.

Air Pollution and Climate Change

What is the main challenge for reducing emissions from power plants? Coal is cheap and China has been using coal to produce 69 percent of its energy (EIA, 2014). With a very rapidly increasing energy demand and being the largest global energy consumer since 2010, China has been investing in alternative energy including solar power and wind. China was the world leader in clean energy investment in 2013, with $54 billion invested in renewables and leading by a large amount from the second largest investor, the U.S., with an investment value of $36.7 billion (Magill, 2014). As China installs more electricity generation capacity from renewable energy, the hope is that coal dependence will be much lower.

China’s large investment in renewables is great news for the other countries as well. Although China’s main motive is its economic development, its shift to renewables could not only reduce air pollution and adverse health impacts within China, but also reduce the impact of global climate change. When China’s major energy source becomes renewables, then the current growth in plug-in hybrids in China will also produce much sought-after emissions reductions both from tailpipes and power plants.

New Politics

What does it mean to have new political leadership for environmental protection in China? So far, it appears that the new leaders are more serious and concerned about mitigating air pollution. For China and other countries that have prioritized rapid economic growth over everything else, now is the time to reverse such trends. Increasing the weight of environmental damage in development progress evaluation, as stated in the Third Plenum’s Decision, needs to become a norm for moving forward. With good air pollution goals in place, a workable implementation strategy is now needed. The new environmentally friendly China with new leaders began by showing the world that it is capable of creating stringent standards for its environment. Now is the time to also illustrate that China is serious by implementing effective policies as well.

References

Andrews, Steven Q. “China’s air pollution reporting is misleading.” China Dialogue. March 27, 2014. Retrieved online on May 13, 2014.

Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform, (January 16, 2014), http://www.china.org.cn/china/third_plenary_session/2014-01/16/content_31212602.htm

Retrieved online on July 31, 2014.

Huang, Rui. “Xi Jinping visits Beijing’s Nanluoguxiang amid the smog: breathing together, sharing the fate (in Chinese).” Xinhua News Agency, February 25, 2014. http://news.xinhuanet.com/politics/2014-02/25/c_119498782.htm Retrieved online on August 1, 2014.

Li, Keqiang. “Report on the work of the government.” March 5, 2014. http://online.wsj.com/public/resources/documents/2014GovtWorkReport_Eng.pdf Retrieved online on July 28, 2014.

Kaiman, Jonathan. “China’s toxic air pollution resembles nuclear winter, say scientists.” The Guardian. February 25, 2014. Retrieved online on April 21, 2014.

Magill, Bobby. “U.S. Lags Behind China in Renewable Investments.” Climate Central. April 3, 2014. Retrieved on May 14, 2014.

Moore, Malcolm. “China’s ‘airpocalypse’ kills 350,000 to 500,000 each year.” The Telegraph. January 7, 2014. Retrieved on May 14, 2014.

Saikawa, Eri, Vaishali Naik, Larry W. Horowitz, Junfeng Liu, and Denise L. Mauzerall. “Present and potential future contributions of sulfate, black and organic carbon aerosols from China to global air quality, premature mortality and radiative forcing.” Atmospheric Environment, 43 (17): 2814-2822, 2009.

Saikawa, Eri, Jun-ichi Kurokawa, Masayuki Takigawa, Jens Borken-Kleefeld, Denise L. Mauzerall, Larry W. Horowitz, Toshimasa Ohara, The impact of China’s vehicle emissions on regional air quality in 2000 and 2020: a scenario analysis, Atmospheric Chemistry and Physics, 11, 9465-9484, 2011

Saikawa, Eri. Domestic politics and environmental standards: China’s policy-making process for regulating vehicle emissions, J. Sato (ed.), “Governance of natural resources: Uncovering the social purpose of materials in nature“, Chapter 3, pp. 74-97, The United Nations University Press, 2013.

Saikawa, Eri and Johannes Urpelainen, Environmental Standards as a Strategy of International Technology Transfer, Environmental Science and Policy, 38, 192-206, 2014.

Schreifels, Jeremy J., Yale Fu, and Elizabeth J. Wilson. “Sulfur dioxide control in China: policy evolution during the 10^th and 11^th Five-year Plans and lessons for the future.” Energy Policy, 48: 779-789, 2012.

Thun, Eric. Changing lanes in China: foreign direct investment, local government, and auto sector development, New York: Cambridge University Press, 2006.

U.S. Energy Information Administration (EIA). “China.” http://www.eia.gov/countries/cab.cfm?fips=CH Retrieved on May 12, 2014.

Wong, Edward. “Most Chinese Cities Fail Minimum Air quality Standards, Study Says.” The New York Times. March 27, 2014. Retrieved on April 21, 2014.

World Health Organization (WHO). “Ambient (outdoor) air quality and health.” http://www.who.int/mediacentre/factsheets/fs313/en/ Retrieved on May 14, 2014.

Wu, Changhua. “China announces ten ‘tough measures’ to combat atmospheric pollution.” The Climate Group. June 25, 2013. Retrieved on April 27, 2014.

Zhang, Qiang, Kebin He, and Hong Huo. “Cleaning China’s air.” Nature, 484: 161-162, 2012.

Zhu, Ningzhu. “Beijing passes regulation on air pollution control.” Xinhua news. January 22, 2014. Retrieved online on April 22, 2014.

The post China’s War on Air Pollution appeared first on China Research Center.

The political direction outlined by the Third Plenum in November 2013 for China’s international relations embodied a contradiction. It coupled a call for deepening integration of China’s economy with the global economy with an intensified struggle against ideas carried into China by that very process of deepening globalization — ideas that are antithetical to the authority of the Chinese Communist Party and its monopoly on state power. To realize its and the Chinese people’s aspiration of making China rich and strong, the CCP must open China to the world. But that very opening brings in powerful ideas of human liberty that have already toppled scores of undemocratic regimes in recent years. Xi Jinping’s and the Third Plenum’s answer to this conundrum is rejection of political liberalization and intense ideological struggle among China’s people against liberal democratic ideas, coupled with the judicious use of assertive nationalism to rally popular support for the CCP regime.

The Communiqué issued by the Third Plenum affirmed the work of the Politburo since the previous Congress, work conducted, it said, “in the face of extremely complex international circumstances.”^[i] The nature of those “extremely complex international circumstances” was not specified, but the stress of the Communiqué was on maintaining internal stability. The Plenum resolved to “safeguard national security, guarantee that the people can live and work in peace and contentment, and that society is stable and orderly.” The Communiqué also warned against marching “the evil road of changing banners and allegiances” and falling from the path of “Socialism with Chinese characteristics.” This was an allusion to the Soviet experience and warning against political liberalization à la loosening of the Party’s control. To this end the Plenum decided to set up a National Security Commission and “prefect national security system and a national security strategy to guarantee national security.” It was imperative, the Plenum decided, to build strong armies for the Party, “people’s armies which listen to the Party’s instructions, [and] can be victorious in battle.” “New era” military strategies and “modern military force[s] with Chinese characteristics” were to be built.

Xi Jinping elaborated on the nature of security threats during an explanation after the Plenum of the decision to set up a National Security Commission. China faced two security challenges, Xi said, which would be addressed via strengthened unified leadership of state security work to be provided by the new Commission. The first challenge involved the need to safeguard China’s sovereignty, security, and “development interests.” The second involved the need to ensure domestic political security and social stability. ^[ii]

Challenges to Sovereignty and Development Interests

In the several years leading up to the Third Plenum, challenges to China’s “sovereignty” came mainly from Japan in the East China Sea and Vietnam and the Philippines in the South Sea. Starting in 2010 an escalating cycle of Chinese and Japanese military assertion of presence around and over the Sengaka/Diaoyu Islands and the disputed middle zone of the East Chinese Sea moved Chinese and Japanese military forces to an increasingly sharp confrontation that is, fortunately, still without firing. In 2010 the number of Chinese fishing boats entering the waters close to the disputed islands increased dramatically. Chinese boats also became less compliant with orders by Japanese coast guard ships to leave the area. In September one Chinese fishing boat, rather than leave the area as ordered by a Japanese coast guard ship, rammed the Japanese vessel. When Japan detained the offending captain, Beijing responded with a number of forceful moves, including severe restriction of export of Chinese rare earths to Japan. Large emotionally charged anti-Japanese demonstrations erupted in China, and Beijing catered to that opinion with strong moves.

When the Japanese government in September 2012 purchased several of the Sengakus still privately owned (reportedly as a way of preempting provocative actions there by freelancing Japanese nationalists) Beijing responded forcefully. China accelerated PLA-N operations in the seas around Japan, in effect warning Tokyo to desist from challenges to what Beijing deemed China’s territorial sovereignty in the East China Sea.^[iii] Japan responded to China’s moves with increased military moves of its own, and throughout 2013 Chinese and Japanese coast guard ships and aircraft confronted one another in the seas and airspace around and over the Sengakus. In the South Chinese Sea, Philippine and Vietnamese efforts to survey and exploit the energy resources under the sea floor were countered by PLA-Navy moves.

China’s “developmental interests” requiring “new era” military capabilities include evacuation of Chinese citizens (including Taiwanese, according to Beijing’s policy) working abroad but finding themselves in conflict situations. China’s first military operation to evacuate citizens endangered by internal disorder came in Libya during the uprising there in early 2011. More than 35,000 Chinese citizens were evacuated from Libya in a period of weeks, constituting the largest and most complicated evacuation of Chinese nationals up to that point. A PLA-N frigate on anti-piracy duty in the Gulf of Aden was dispatched to assist and safeguard the Chinese evacuation. The growing international presence of Chinese firms and personnel, combined with mounting instability in countries where Chinese firms operate, mean that Beijing called these rescue operations a major category of “military operations other than war.” By conducting these operations effectively and professionally, Beijing demonstrates to its citizens that it protects China’s interests and reputation as a strong country.

China’s most strategically vital “developmental interest” involves the sea lines of communications (SLOCs) over which moves China’s vast merchandise, energy, and raw materials trade. Broadly speaking, as China has globalized its economy, the SLOCs, which carry 90 percent of all world trade, have become more important to China.^[iv] The implications of this are profound, ranging from rising ship insurance costs for vessels transiting the pirate-ridden Gulf of Aden, to the hypothetical ability of the United States Navy to blockade China in the contingency of a U.S.-PRC war that became protracted.^[v]   There is a huge gap between PLA-N requirements and capability to protect China’s SLOCs.^[vi]

Beijing’s ability to defend these Chinese interests is linked to legitimization of the CCP regime and internal stability. Since the upheavals of 1989-1991, nationalism has become China’s dominant popular ideology and de facto legitimization of the CCP regime. This requires that the regime demonstrate its ability to defend China’s interests and honor. Having founded its claim to continued political tutelage on its ability to make China rich, strong, and esteemed among the nations of the world, the CCP cannot appear to be weak-kneed. Thus the Third Plenum Communiqué affirmed CCP rule since 1978 and proclaimed the objective for the future as “creat[ing] a wealthy, strong, democratic, civilized and harmonious Socialist country, and realize the Chinese Dream of the great rejuvenation of the Chinese nation.”

Enemies Within and Without

In the run-up to the Third Plenum, the CCP devoted considerable effort to ideological work aimed at unifying thinking. In May 2013 an internal document was issued by the Party’s General Office for study by Party organs. The contents of the document leaked to the foreign media.^[vii] The secret study guide identified seven dangerous Western values that had to be struggled against as a matter of life and death. It was especially important to prevent communication of these dangerous ideas via the Internet.   The seven dangerous and subversive Western ideas were:^[viii]

1. Constitutional democracy
2. Universal human rights
3. Media independence (from Party guidance)
4. Judicial independence (from Party guidance)
5. Civil society (made up of autonomous organizations)
6. Pro-market neo-liberalism
7. “Nihilist” criticism of past errors by the Party

Xi Jinping reiterated in an “important speech” to a National Propaganda and Ideology Work Conference convened in Beijing on August 19 (about a month before the Third Plenum), the importance of ideological class struggle against external and internal enemies. ^[ix] In effect, Xi was fleshing out the “extremely complex international circumstances” alluded to vaguely in the Third Plenum Communiqué. Powerful foreign forces were conducting a propaganda campaign, especially via the Internet, but including all forms of media and communication, to create the ideological base for overthrow of the CCP regime, Xi said:

Hostile forces are doing their utmost to propagate so-called ‘universal values’ … their objective is … to overthrow the leadership of the Chinese Communist Party and China’s Socialist system. If we allow [this] … those false efforts will … endanger the Party’s leadership and the security of the Socialist national regime… Western anti-China forces continue to vainly attempt to use the Internet to ‘topple China’ … On this battlefield of the Internet, whether we can stand up, and gain victory, directly relates to our country’s ideological security and regime security.

The ideological class struggle was crucial. Alluding to the upheavals of 1989-1991 Xi continued:

History and reality have repeatedly proven that whenever or not ideological work is done well relates to the Party’s future fate …we cannot even for a moment slacken and weaken ideological work. In this area we have gained deep lessons. The disintegration of a regime often starts from the ideological area, political unrest and regime change may perhaps occur in a night … If the ideological defenses are breached, other defenses become very difficult to hold. We must grasp the leadership power … in ideological work closely in our hands … otherwise, we will make irredeemable historical mistakes.

“Western countries see our country’s development and expansion as a challenge to their value views, systems, and models, and intensify ideological and cultural infiltration of our country,” Xi said further. There were a range of “mistaken viewpoints” within China upon which the Western ideological offensive could build: embrace of Western values, discussion of party or national history, denial of reform or the Four Cardinal Principles. There were also “social contradictions and problems” in Chinese society that were creating fertile soil for foreign hostile ideological subversion.

Xi Jinping’s August 2013 “important talk” on ideological class struggle was followed by the release of a six-part, 100-minute video program titled “Silent Contest.”^[x] Mandatory viewing for all CCP cadre above a certain level, the program apparently was produced by the General Staff Department of the PLA along with the PLA’s National Defense University and the Chinese Academy of Social Sciences. The program argued in detail that the U.S. defeated its greatest enemy, the Soviet Union, by non-military means, including especially ideological subversion, and was now trying to do the same thing with China. Gorbachev’s “New Thinking” that had erased Soviet Communist Party members’ awareness of domestic and foreign class enemies and attempted “westernization” that produced Soviet weakness, had all facilitated a sustained and long-term campaign of U.S. subversion. The result was the dissolution of the Soviet Union. This resulted in the U.S. shifting its spearhead toward China. The years 1978-1989 had been a “honeymoon” in U.S.-PRC relations because of common opposition to the Soviet Union. The United States was using a vast array of weapons to subvert China: radio and television broadcasts, cultural and academic exchanges, the Internet, support for Tibetan or Xinjiang rebels, and even the village election program of the Carter Center in Atlanta.

“Silent Contest” grew out of a decade-long debate in China over the cause of the Soviet disintegration. A leadership consensus was reached in 2004 that, in line with comments by Deng Xiaoping from 1989, a major reason for the Soviet collapse was the abandonment of core Marxist principles.^[xi]

Deep Internal Insecurity and Assertive Nationalism: Concluding Thoughts

The efforts of the CCP to anathematize expression of doubts about Marxism-Leninism and the Four Cardinal Principles are linked to debates within China, and probably within the Party itself, about whether to undertake basic reform in China’s political system. Discussion of that would, however, take this essay away from its proper focus on China’s international relations. In terms of China’s diplomacy, several conclusions follow from the previous discussion.

The deep insecurities of CCP leaders regarding domestic stability and legitimization will, first of all, lead Beijing to be careful to avoid genuine military conflict with its neighbors. In a conflict with Japan over a dispute in the East China Sea the PLA-N could well be defeated by the very high tech and very well-trained Japanese Maritime Self Defense Force. Chinese defeat in a naval clash with Japan would touch off anti-Japanese protests that could become very dangerous for the CCP. Hatred of Japan is easy to mobilize in China these days, but once anti-Japanese demonstrators are in the streets, it is extremely easy for popular anger to be directed against the government rather than against Japan. Under normal conditions Party authorities are able to turn down or off popular anti-Japanese fashions once they threaten state objectives.^[xii] But the spilling of Chinese blood by Japanese forces could well unleash a wave of emotion that overwhelmed controls that worked well enough during earlier upwellings of anti-Japanese emotion. In such circumstances, escalation into a larger scale clash with Japan might be deemed preferable to backing down. This could confront the CCP with a bigger war, with one of China’s main economic partners that might derail the economy and/or lead to a Chinese confrontation with the United States — with Japan at the U.S. side. On the other hand, assertive Chinese moves that generate tension but remain below the threshold of use of armed force, and which allow the CCP state to demonstrate its bold resolution in defense of China’s interests, could be very attractive to China’s rulers.

By defining liberal democratic ideas as “Western” the CCP is better able to anathematize them as part of a hostile Western ideological attack on China. In the first instance it must be observed that the linkage of democracy with the West is bogus.   While many of these ideas did originate in Europe, they are today embraced by many non-Western countries: South Korea, Mongolia, Japan, Taiwan, the Philippines, Indonesia, Thailand, Bangladesh, India, Turkey, and so on. Scores of non-Western countries are struggling toward adoption of some variant of these universal ideas: Iraq, Iran, Afghanistan, Nepal, Egypt, the Ukraine, Tunisia, etc. Ideas of human liberty and democracy have spread across the globe. To call these ideas today “Western” makes as much sense as to call science “Western.” Yet in China, convincing China’s people that these ideas are “Western” goes a long way toward persuading them that they come from power centers hostile to China and are outside China’s 4,000-year-old tradition.

The period between the spring 1989 internal challenge to the CCP regime and the collapse of the Soviet Communist state in December 1991 was pivotal. With old Marxist-Leninist ideas drained of popular appeal, the CCP state stood exposed as founded on naked brute power, unadorned by popularly appealing ideas. Confronted by this deep crisis of legitimacy, the CCP turned to aggrieved nationalism to rally popular support.   Ideological indoctrination and mobilization was one thing the CCP regime was still good at. Over the next two decades China’s populace was intensively indoctrinated with the ideology of “China’s century of national humiliation” focusing on all the putative injustices inflicted on China when China was weak — i.e., before the CCP came to power. Expression of contrary ideas within China was repressed. The CCP’s new ruling strategy was remarkably effective in re-legitimizing CCP rule, especially among China’s more educated urban classes, a group that historically was attracted to ideas of nationalism. The turn-around from a deep legitimacy crisis in 1989 to strong nationalist support for the CCP regime today (as indicated by many opinion polls) is truly remarkable. And perhaps troubling. Lacking the legitimization of free popular election —the immensely powerful legitimizing mechanism of modern liberal democracy — the CCP has appealed to nationalism.

The intense, popular nationalist belief fanned by decades of CCP indoctrination apparently has begun to exercise significant influence on China’s foreign policy moves.   Forceful moves against putative foreign miscreants injuring China’s interests or opposing China’s unquestionably just “rise” are popular, especially when directed against Japan, the number one villain of China’s national humiliation narrative. The idea that “little countries” like the Philippines or Vietnam should be allowed to trample on China’s unquestionable territorial sovereignty in the South China Sea — which is how the CCP’s ideological apparatus frames the issue — go down well with popular nationalist opinion.^[xiii] Moreover, attempts to settle territorial disputes with China’s neighbors via negotiation not backed by demonstrations of China’s now-great power and by concessions and compromise — as are perhaps inevitable in any negotiation — are decried as cowardly and naïve, or perhaps downright treasonous. China’s Ministry of Foreign Affairs, more attuned to foreign views than other organs of China’s government, has occasionally been criticized for lack of patriotic ardor.^[xiv] A Chinese leader who aspires to high position, such as Xi Jinping, cannot afford to seem weak in rebuffing foreign transgressions.

The PLA officer corps may be a second constituency particularly enamored of

China’s new aggrieved nationalism and favorable to forceful action to rebuff foreign offenses against China’s honor or interests. Since the upheaval of 1989-1991, the CCP has paid special attention to indoctrination of the PLA, and China’s soldiers are probably less exposed to challenges to the CCP’s orthodox national humiliation narrative than are China’s urban intellectuals. The PLA’s budget and status are also linked to an active role in defense of China’s interests. This is not to say that PLA leaders favor war, especially against countries allied with the United States. But the use of China’s carefully cultivated and ever-greater military power in support of China’s interests in ways short of war — i.e., in the sort of demonstrations in the vicinity of the Sengaku’s in 2009-2014 — may well accord with PLA recommendations.

These hawkish forces in China are balanced by extremely powerful groups with vested interests in minimizing conflict with China’s neighbors let alone with the United States. China’s state-owned enterprises, private sector entrepreneurs and development-oriented provinces, plus broad swaths of China’s slowly emerging civil society, are deeply interested in participation in the global economy and recognize that this would be hindered by international tension. CCP leaders also understand that it is they who will bear the possible risk of embarrassing defeat in foreign adventures, and/or the potentially internally destabilizing aspects of economic losses associated with foreign conflicts. The international trajectory of China’s rise is not ordained. Yet the question looms: how will an undemocratic and even anti-democratic but intensely nationalist China behave as its power waxes over coming years and decades?
NOTES

^[i]           Communiqué of the Third Plenum of the 18^th CCP Central Committee, (Full Text). http://www.c3sindia.org/china-internal/3787

^[ii]           Xi Jinping expounds security commission role, Xinhuanet. November 15, 2013 http://news.xinhuanet.com/english/china/2013-11/15/c_132892155.htm

^[iii]          A detailed review of PLA-N activities in the seas around Japan is in Defense of Japan 2013, White Paper, Ministry of Defense, Japan. www.mod.go.jp, Part 1: Security Environment Surrounding Japan, 41.

^[iv]          See, Rose George, Ninety Percent of Everything (New York: Metropolitan Books, 2013).

^[v]           A major factor prompting Beijing to decide in late 2008 to deploy PLA-N warships to join in international anti-piracy operations in the Gulf of Aden was the fact that Chinese companies were threatened with bankruptcy from escalating ship-insurance costs and disruption of delivery schedules because PRC ships needed to round the Cape of Good Hope rather than transit the Suez Canal.   See Andrew S. Erickson and Austin M. Strange, No Substitute for Experience; Chinese anti-piracy Operations in the Gulf of Aden (Newport: China Maritime Studies Institute, China Maritime Studies monograph Number10, November 2013).

^[vi]          For a review of PLA-N anti-piracy operations in the Gulf of Aden and growing PLA-N attention to “military operations other than war,” Erickson & Strange, Ibid.

^[vii]          Chris Buckley, “China Warns Officials against ‘Dangerous’ Western Values,” The New York Times, May 13, 2013; Chris Buckley, “China’s New Leadership Takes hard Line in Secret Memo,” The New York Times, August 19, 2013.

^[viii]         Raymond Li, “Seven Subjects Off Limits for Teaching, Chinese Universities Told,” South China Morning Post, September 19, 2013.

^[ix]          “Xi Jinping’s 19 August speech revealed?” (Translation), China Copyright and Media. http://chinacopyrightandmedia.wordpress.com/2013/11/12xi-jinpings   For a discussion of the authenticity of the leaked CCP document see Cary Huang and Keith Zhai, “Xi Jinping rallies party for propaganda war on internet,” South China Morning Post, September 4, 2013. http://www.scmp.com.

^[x]           Jeremy Page, “China Spins New Lesson From Soviet Fall,” The Wall Street Journal, December 11, 2013, 1.18; Jane Perlez, “Strident Video by Chinese Military Casts U.S. as Menace,” The New York Times, October 31, 2013. The program was available on November 2013 at https://www.youtube.com/watch?v=m_81sjicoswb but was later removed.

^[xi]          Page, “China Spins New Lesson From Soviet Fall.”

^[xii]          For an insightful discussion of the relation between CCP authority and semi-autonomous nationalist activism see, James Reilly, Strong Society, Smart State; the Rise of Public Opinion in China’s Japan Policy (New York: Columbia University Press, 2012).

^[xiii]         One study found that a Google search of the Chinese media yielded 210,000 uses over a several year period of key three-phrase descriptions of putative Vietnamese and Philippine violations of China’s sovereignty and resources in the South China Sea. Zheng Wang, “Bad Memories, Good Dream: the Legacy of Historical Memory and China’s Foreign Policy,” The Asan Forum (July 25, 2014): 10, http://www.theasanforum.org

^[xiv]         Jeff Bader, a key Obama China aide during his first term, recounts in his memoir the intimidation of less militant-minded voices in China’s elite during the 2009-2010 debate.   Jeffrey A. Bader, Obama and China’s Rise; An Insider’s Account of America’s Asia Strategy (Washington: Brookings Institution, 2012, 109. 122. 104-05).

The post Foreign and Security Affairs in the Third Plenum appeared first on China Research Center.

The articles on protecting property rights and developing a healthy non-public sector are in line with China’s commitment to continued free market reform. Despite the determination of the Chinese government in implementing and deepening the market reforms, government will still play a leading role in the economy. The Decision says in Chapter II:

The basic economic system with public ownership playing a dominant role and different economic sectors developing side by side is an important pillar of the socialist system with Chinese characteristics and is the foundation of the socialist market economy. We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector, and continuously increase its vitality, controlling force and influence. (Emphasis added by author)

Even after several decades of market reform, the government today still has control of the commanding heights of Chinese economy, usually the upstream sectors such as resource and energy sectors.^[1] By analyzing the domestic value-added content of Chinese exports, Tang, Wang and Wang (2014) shows that state-owned enterprises (SOEs) are consistently more upstream than small and medium-sized enterprises. This finding suggests that SOEs indeed still play an important role in shaping China’s exports.^[2]

The dominant role played by state ownership stated above seems to contradict somewhat with the decisive role of the market. Such an inconsistency just reflects the mixed feelings about the role of government in China’s economy. Over the last several decades, along with the economic boom, China has developed a mixed economy with cross holding by and mutual fusion between state-owned capital, collective capital, and non-public capital. The problems of socialist policies had been well understood, and the government has gradually loosened its grip on the economy. At the same time, we also observed many issues with privatization in Russia and Eastern European countries, such as insider trading and voucher privatization,^[3] and their much less impressive economic progress. All of these, together with the 2008 world financial crisis, have spawned new critiques of privatization and free market economy, giving us an impression of the crucial role of government in the economy. They also gave rise to the so-called “China Model” or “Beijing Consensus,” with both market and government playing key roles in an intertwined way, as opposed to the neoliberal “Washington Consensus.”

On one hand, China has demonstrated the effectiveness of a gradual and determined reform that releases the vitality of the market in a controlled way to maintain fast economic growth and a stable society. China’s pragmatic use of innovation and experimentation has achieved an “equitable, peaceful high-quality growth” and “defense of national borders and interests” (Ramo, 2004).^[4] This is exemplary for many developing and transitional economies. On the other hand, however, some may be suspicious of such a type of “China Model.” To a large extent, the dominance of state capital is simply a leftover of the socialist era. The true impetus to China’s economic growth over the past decades is not government control but the introduction of market mechanisms. In other words, China’s economic success should be attributed to less, not more, government controls. But the coexistence of the still relatively high share of state assets and China’s economic success tends to give people a false sense of the importance of public ownership and an underestimation of the inefficiencies of government controls.

Since the reform of the agricultural sector in 1978, Chinese government has been retreating from the commanding heights of the economy, and private sectors have been playing a larger and larger role. Because China adopted a gradual approach to reform, unlike the shock therapy in the USSR and Eastern Europe, the change in public ownership has been gradual. Promoting this kind of mixed economy may have been a good move for China; it is debatable whether it has been the optimal choice. This point is especially important when other countries consider copying China’s approach to transform their own economies.

Although the Chinese government considers the dominant role of public ownership a feature of its socialist market economy “with Chinese characteristics,” it can be better understood from classic economy theories of market failures. As we know, government controls may be able to improve market outcomes in the cases of market failures. But public ownership is rarely the best option. The appropriate role of government in economics is not as a player, but as a referee that guarantees a level playing field. There is much evidence in the literature of the inefficiency of SOEs. For example, Dollar and Wei (2007) find that even after a quarter century of reforms, state-owned firms still have significantly lower returns to capital than private firms. By their calculation, if China succeeds in allocating its capital more efficiently, it could reduce its capital stock by eight percent without sacrificing economic growth.^[5]

Another serious problem associated with the state ownership in some key industries in China is “red” capitalism, a symbiosis between large businesses and high-level government officials, their delegates, or family members. This nurtures an environment for corruption and rent-seeking, discourages innovation and fair business practice, and hence is against the objective of enhancing the role of free market in the economy. Of course, this is also a political problem. Although the step-down of government from the commanding heights may not eliminate this problem, it can at least help to alleviate it. It can also help to transform the functions of the government.

I am not saying that China should privatize its state-owned sectors completely and immediately. The lesson from the shock therapy in Russia and Eastern Europe should be remembered. The importance of stability should never be underestimated, and the gradual approach adopted by China can be indeed conducive to long-term economic prosperity. My point is on the direction of change regarding the roles of market versus government in the economy. The Decision, emphasizing the decisive role of market on one hand but the dominant role of state-ownership on the other, is rather confusing. The Chinese government is obviously correct in promoting modern corporate governance for SOEs. At the same time, it is also important to point out that a stronger SOE sector does not necessarily imply a bigger SOE sector.

History can be a good guide for the future, so it is useful to review the rise and fall of the roles played by government versus market over the last 100 years. At the turn of the 20^th century, the market dominated western economies. With the Great Depression and two world wars, however, the advent of state-dominated economies was seen. The state gradually extended its sphere of influence into areas originally controlled by the market. At the extreme, the Communist states planned their economies so that government would be an omniscient entity. Many industrial countries in the West and in developing countries around the world were building “mixed economies” in which the government dominated but still allowed a functioning market system. The goal of such reforms was to provide justice, opportunity, and a good life for all. Until 1970s, this “mixed economy” remained practically uncontested and government was unceasingly enlarging. However, starting from the 1970s, government started to lose ground. Led by Margaret Thatcher in the U.K. and Ronald Reagan in the U.S., western governments were casting off power and tasks as the spotlight was shifting to “government failure” rather than “market failure.” Privatization or deregulation became the goals of governments as they rushed to sell state-owned assets to the public and took hands off the operation of businesses. After the failure of Communism in 1990s, the system disappeared in Eastern Europe and what had been the Soviet Union and had been replaced by a more market-oriented economy in China. Today all over the world, government planning has decreased, regulation has decreased, and markets have grown. Markets began the 21^st century again in a dominating position.^[6] During the 2008 world financial crisis, however, the role of governments expanded again in many countries through ambitious rescue plans, and fiscal and monetary policies.

In sum, economic development and reform remain the major focus of this report. To achieve continued economic growth and prosperity, radical reforms are still needed. The Decision recognizes the importance of finding a good balance between government and market in the economy. A revolutionary breakthrough on this issue in the Decision is the recognition of the key role played by the market in resource allocation, but the dominant role of state-owned sectors as stated in the report may cause some confusion. The planned deeper market reform is encouraging, while its true effect remains to be seen and will rely on its successful implementation. Several current economic difficulties can well prevent the government from following the rules of market. For instance, under the backdrop of a potential significant slowdown of Chinese economy after the 2008 world financial crisis, the government had already carried out stimulus plans and may step in again to avoid the collapse of its housing market. In addition, many new concerns such as environment protection and building the social security system also require the government to play a key role. Therefore, we may continue to see ups and downs of government in China in the years to come.

Liberalizing International and Domestic Trade

The Decision shows the continued commitment of China to open economic policies by further relaxing control over investment access; by providing equal treatment to both domestic and foreign investment; by providing stable, transparent, and predictable policies; by promoting the orderly opening up of finance, education, culture, healthcare, and other service sectors; and by further liberalizing general manufacturing. Although many people claim China has given up the “crossing the river by stepping on the stones” strategy and started to embrace whole heartedly the free market and open economic policy, I would still expect to see gradual changes. The reforms in the above areas may be carried out in a faster pace than before, but will not happen immediately.

A good example is the establishment of the China (Shanghai) Pilot Free Trade Zone. It is a major step that China has taken to deepen reform and open up in the face of new circumstances. Different from the special economic zones and export processing zones established in earlier years aimed mainly at promoting manufacturing, this new type of free trade zone focuses instead on financial and business services, which China has been very reluctant to open. A competitive services sector, as a typical feature of a modern economy, is crucial to sustained growth of China. If the experiment carried out in this free trade zone is successful, we would expect to see its expansion soon to the whole country.

Trade liberalization is usually achieved through various trade agreements. Besides the multilateral liberalization approach under the GATT/WTO, free trade agreements (FTA) have been on the rise, especially after the 1990s, partially because of slow progress made under the WTO in the last two decades. China also intends to speed up the construction of FTAs with neighboring countries, covering many traditional and non-traditional trade and investment related issues. FTAs may serve as an experiment for China to carry out some deeper liberalization initiatives in the areas such as investment, property rights, and services trade. In these areas, China and many other developing countries have been reluctant to open their domestic markets for fear of the fierce competition from advanced economies. Different from the multilateral approach adopted by the WTO, however, FTAs are by their very nature discriminatory because the preferential treatments apply only to member countries within the bloc, not to countries outside the bloc. This is a major exemption to the most favored nation clause of the GATT.

One pitfall of FTAs is the potential trade diversion effect when a country switches from a highly efficient non-FTA member country to a less productive FTA partner that enjoys preferential tariffs. In addition, the complex rules of origin and overlapping FTA networks, called “spaghetti bowls” by Jagdish Bhagwati, is another undesirable feature of regionalism. As a result, China should be cautious when moving away from the multilateral approach under the WTO to the bilateral approach. China has to balance well the potential benefits and costs of forming FTAs with neighboring countries.

Opening the Hinterland

The Decision also discusses how to further open up inland and border areas. China intends to promote the development of inland industry clusters by using preferential policies and promoting cooperation among regions. China will also accelerate the construction of infrastructure connections to neighboring countries and regions to build a Silk Road Economic Belt and a Maritime Silk Road, so as to form a new pattern of all-round opening. All of these policies are conducive to the economic development of the inland region.

When it comes to trade barriers, people tend to focus on international barriers and ignore domestic ones, even though domestic trade barriers can be significant. It is encouraging to see that the Decision also emphasizes developing transportation and logistics infrastructure to form a “corridor” of foreign trade that links different regions within China. Together with the market reform policy to “combat regional protection” in Article 9 of the Decision, this policy initiative intends to address the high cost of doing businesses among different regions within China. Although this issue is touched in the Decision, the economic cost of barriers within China and the potential impact of lowering such barriers may not be fully understood. Despite China’s impressive export performance in recent years, internal trade barriers remain surprisingly high but are less well understood. For example, it was reported that,

… a kilogram of cargo shipped from Shanghai to New York costs 1.50 yuan while the same weight shipped from Shanghai to Guizhou (the capital city of an inner province that is 2,000 km away) costs between 6-8 yuan. This makes the total cost of shipping from Shanghai to Guizhou four to five times as expensive as shipping to New York, which is 11,862 km away.  Transportation costs added to storage, and distribution management costs, lead to logistics costs 18 percent of GDP, that’s more than twice as much as the U.S. … Any western fashion brand from Gap to Versace, even clothing made in China, are priced 30 percent to several times more than the same product in the U.S. ^[7]

Much work has been done to examine national borders as impediments to international trade, but less attention has been paid to inter-state/provincial border effects. The internal trade barriers in China are significant and the domestic market segmentation is substantial, but these have been largely concealed by the country’s impressive export performance. These barriers not only explain why many Chinese-made products are sold in China at higher prices than in the U.S., but also help to demonstrate why China’s growth relies heavily on exports rather than domestic demand (arguably a contributing factor to global trade imbalance). A reduction in intra-China trade barriers and a less segmented national market is critical to a successful transition of an export- and investment-driven economy to a domestic consumption-driven economy.

Conclusion

To conclude, the Decision reconfirms China’s dedication to further liberalization of international and domestic trade in not only manufacturing sectors but also services sectors. Because policy making in a globalized economy becomes more complicated, the coordination of various policies remains to be a challenging task for China. It is inevitable to see some policy inconsistencies, loopholes and even setbacks during this process. For both policy makers and researchers, it is important to evaluate these policies appropriately and provide policy remedies in a timely manner.

Further Readings:

Ramo, Joshua Cooper, 2004. “The Beijing Consensus,” The Foreign Policy Centre. http://fpc.org.uk/fsblob/244.pdf

Williamson, John: What Washington Means by Policy Reform, in: Williamson, John (ed.): Latin American Readjustment: How Much has Happened, Washington: Institute for International Economics 1989.

Yergin, Daniel and Joseph Stanislaw, The Commanding Heights: The Battle for the World Economy, Published by Simon & Schuster, New York, 2002.

^[1] Upstream industries refer to sectors that process raw material into an intermediary product for the final production of finished product by the downstream industries. For instance, petroleum refineries refine crude oil into intermediary chemicals which can be used to produce plastics by other firms.

^[2] Tang, Heiwai, Fei Wang and Zhi Wang, “The Domestic Segment of Global Supply Chains in China under State Capitalism”, CESifo Working Paper No. 4797, May 2014.

^[3] Voucher privatization is a privatization method in which citizens are given or can inexpensively buy a book of vouchers that represent potential shares in any state-owned company. See

http://en.wikipedia.org/wiki/Voucher_privatization

^[4] Ramo, Joshua Cooper, 2004. “The Beijing Consensus,” The Foreign Policy Centre. http://fpc.org.uk/fsblob/244.pdf

^[5] Dollar, David, and Shang-Jin Wei, 2007. “Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China,” NBER Working Paper No. 13103. http://www.nber.org/papers/w13103

^[6] For more detailed discussion, please refer to The Commanding Heights: The Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw, Published by Simon & Schuster, New York, 2002.

^[7] Li, Waiching, 2011. “Why ‘Made in China’ Costs More in China.” http://econintersect.com/wordpress/?p=11897

The post Market vs. Government in Managing the Chinese Economy appeared first on China Research Center.

The Eighteenth Party Congress’ Third Plenary Session’s Decision of November 2013 lists a new round of financial reforms aimed at introducing more market forces into the economic system. Two of the most important facets of this stage of reform are market-determined interest rates and permitting the value of the RMB to float. Both are a necessity for the leadership to attain the goal of making the yuan a world reserve currency to rival the U.S. dollar. But looks can be deceiving. Forces are arrayed on both sides of the question of reform, with uncertainties about China’s future economic growth rate.   As a result, implementation of these financial reforms is likely to come in fits and starts, but the changes could end up being significant.

China faces the same conflicting pressures that other countries do. Polices are needed to stimulate growth but debt and deficit financing must be kept in check. China’s financial system must support growth by providing credit to companies and funding investment by local governments, but it also must manage resulting deficits and debt. For years, capital costs have been subsidized for state companies and governments by fixing interest rates. Now the People’s Bank of China, China’s central bank, has been advocating market-determined interest rates to improve the allocation of investment capital by conveying the true cost of borrowing. Rates would likely rise, however, which would dampen new investment, affect growth, and raise the costs of refinancing outstanding loans. The construction industry has been a main driver of domestic growth, but it is sensitive to the cost and access of loans. Hence, numerous interests within China are wary of moving in this market-oriented direction.

To make matters more complicated, China is in a period of slowing economic growth, which enhances the risk to some projects. Slow sales of housing, commercial property, and manufactured goods have increased the chances of default on related loans. Property prices in many parts of China have softened. For some, this sounds all too similar to the beginning of the U.S. financial crisis when housing prices began to fall in mid-2006.

Market-determined Interest rates

One difference between China and the U.S., however, is that China’s key financial prices are not yet fully market determined. For example, interest rates for loans in China are capped in the formal banking sector, as are deposit rates. Because there is more demand for loans than banks are willing, or can, offer, there is a thriving “shadow” banking sector where the costs of borrowing are much higher. This sector has grown substantially over time, and even state banks and large companies have diverted funds to these channels to earn higher returns.

Reforms envisioned in the Decision would lessen the need for shadow lending. While the shadow sector has served a useful purpose—supplying capital to many companies that would not have access otherwise—there is a strong argument for letting the formal credit market determine rates. As the cost of borrowing in the formal sector would most likely rise, this would focus borrowers on good quality, reasonable risk projects, since they would have to pay more for access to credit. This should help investment efficiency by improving the quality of projects in China’s domestic economy.

To achieve the reforms laid out in the Decision, the development of new financial products carrying different rates of return will be essential. For example, banks are experimenting with offering certificates of deposit to individuals and corporations at higher interest rates than savings accounts. Another major step is allowing corporations to offer corporate bonds to individuals and companies, rather than just to financial institutions. Pursuing these reforms would help create the conditions for interest rates to vary according to demand. Chinese banks currently hold large household savings deposits that could potentially be used for investment, and holders of the deposits could earn higher returns, if they were willing to take on more risk. Certificates of deposit would open new sources of investment funds for banks, and expanding the scope of corporate bond issuance would take pressure off banks to make loans at a time when concerns about are intensifying about bad loans on bank balance sheets.^[i]

Evidence of demand for new investment products by households can be seen in services being created by Alibaba and the telecom companies to offer a return on funds held by these companies for deposits. Alibaba began its online investment service in 2013. China Unicom is planning to offer a similar service, starting with its Shenzhen contract phone customers.^[ii] The rates of return are higher than those offered by banks on savings accounts. For example, Alibaba advertises a five percent annual return and China Unicom has said its service will earn six percent, while a one-year term deposit at the commercial banks is capped at 3.3 percent.^[iii]

Currency Rates and International Capital Flows

A related piece of China’s financial market liberalization is the value of the yuan, or RMB. As long as the RMB value is fixed by the People’s Bank, and not by the market, the Central Bank cannot use the money supply as a policy tool. For example, in the current fixed exchange rate system, if the Central Bank decreases the money supply by raising banks’ reserve requirements—which would raise interest rates—there would be upward value on the RMB, and the Central Bank would simply have to increase the amount of RMB in circulation again to keep the RMB value stable. Hence, an important aspect of the Decision is a set of changes leading eventually to a market-determined exchange rate and more policy leverage for the Central Bank.

With a market-determined exchange rate, the value fluctuates with the relative demand and supply of that currency. This will mean volatility in the currency’s value. Chinese policy makers have thus far not been willing to accept such volatility, in part because China’s finance system does not have adequate tools to help companies hedge this type of risk. The Decision emphasizes making changes in an “orderly way” along with establishing risk management systems. The specifics of these challenges are not addressed explicitly.

Another risk factor in play here is the flow of money into and out of China. So far, access to foreign exchange or RMB for trade in goods and services is open and does not need special permission; however, access to currency for investments in China or in other countries is highly restricted. Again policy makers are concerned about volatility of capital flows, especially the possibility of “hot money” flowing quickly in and out of China to take advantage of short-term portfolio investment opportunities. These types of short-term portfolio flows add to currency and equity value volatility and have caused serious problems for many countries such as in Mexico in 1994 and Thailand in 1997.

Volatility concerns need to be considered. However, access to RMB and to foreign currency is increasingly important to the development of Chinese companies as global players. In addition, the RMB can potentially become one of the important international currencies, but this cannot happen without cross-border access to the currency.

Dealing with financial and public debt

Related to the growth equation is the issue of debt. According to one estimate, China’s bank credit to GDP ratio rose by 69 percent of GDP between 2009 and 2012.^[iv] And although non-performing loans currently are not seen as a crisis issue, they have been rising for several years.^[v]   In tandem with this concern are worries about the financial health of local governments.   Local officials have been major players in supporting growth since the early days of China’s reforms. Vigorously responding to incentives to develop their cities, towns, counties, and provinces, they had to manage with major constraints in access to capital. Public finance reforms implemented in the mid-1990s left them with larger expenditure responsibilities than local revenue could support. According to the Asian Development Bank, local governments’ share of revenue is 50 percent or less of total revenue collected but they are responsible for 85 percent of the expected government expenditure.^[vi]

How has this been possible? Local governments have worked with development corporations that can borrow funds for local projects on the governments’ behalf. The Asian Development Bank estimates that local government debt is about 30 percent of GDP and is rising.^[vii]   According to Public Finance International, local direct and indirect debt is about 50 percent of GDP as reported by Moody’s.^[viii]

To partially address this issue, the Decision includes reforms to allow local governments to issue municipal bonds to raise needed funds instead of relying on the indirect loans from non-bank entities. This would be another financial instrument that would affect interest rates and investment options across the economy. There is also a call to clarify center-local expenditure responsibilities. In addition, instituting real estate taxes has been discussed for some time now, both to increase local governments’ revenue streams but also to help manage the demand for housing, and this is included in the Decision.

Opening financing to the private sector

The slowing of China’s economy adds to the risk of default on outstanding loans held by both the public and private sectors. This brings us back to the delicate balance between trying to stimulate growth but not by increasing new loans too much or too fast. One of the goals of the Decision is to give more help to the private sector to increase its role as a driver of growth. During the summer of 2014, the Central Bank made a concrete move in this direction. The Bank exempted smaller banks from an attempt to slow loans by raising banks’ reserve requirements. In fact, a “targeted cut” was proposed for banks that lend to rural and small companies. In other words, those banks could lower their reserve requirements and thus increase their loans.^[ix]   Talk of helping the private sector is not new in China, but there have not been many concrete measures. This policy may not make a large difference to small, private firms, but it is at least in their favor and may be a sufficient incentive for banks to loan to them.

Conclusion
Financial reforms, growth and deficit/debt reduction represent a triplet of policy challenges that will not easily move forward together. Ultimately which one dominates in the short-run will be influenced by the need for political leaders to ensure growth above all. Annual growth estimates vary but tend to be between seven and 7.5 percent. If the actual growth falls much short of this, reforms will likely be put on a back burner, given the political sensitivity to a slowing economy. As of this writing, official growth rates are holding. Second quarter growth in 2014 was 7.5 percent—up from 7.4 percent in the first quarter.^[x] The good news underlying these figures is that growth has not collapsed as some had predicted, and no doubt many others feared in silence.

Still, these growth targets do not allow for much experimentation. Most likely the interest rate pilot reforms will be the most robust, followed by exchange rate values determined increasingly by demand and supply of the currency.   A completely open capital account will likely be the last step in China’s financial system development, but is certainly being discussed as a long-term goal along with the market determination of the currency. (See “China’s Currency Reforms from a Banker’s Perspective,” China Currents Vol. 13, No. 1, 2014.)

^[i] Jiang Xueqing, “CD Liberalization ‘A Step Forward,’” China Daily, May 27, 2014, Business & companies p. 15, and Jiang Xueqing, “Analysts urge broader range of channels for sales of domestic corporate debt,” China Daily, May 24-25, 2014, business weekend, p. 10.

^[ii] Meng Jing, “Telecoms dialing up financial products,” China Daily, May 27, 2014, Business & Companies, p. 16.

^[iii] Jiang Xueqing, “CD Liberalization ‘A Step Forward,’” China Daily, May 27, 2014, Business & companies p. 15.

^[iv] Niall Ferguson and Moritz Schularick, “The U.S. and China both need economic rehab,” The Wall Street Journal, November 5, 2013, http://online.wsj.com. Accessed November 8, 2013.

^[v] Zheng Yangpeng, “Watchdog sure of nation’s bad-loan figures,” China Daily, May 31- June 1, 2014, p.2.

^[vi] Takehiko Nakao, “The road to public finance reform,” China Daily, March 25, 2014.

^[vii] Ibid.

^[viii] Vivienne Russell, “Chinese local government debt risks stability of public finance,” publicfinanceinternational.org, January 6, 2013. Accessed June 10, 2014.

^[ix] William Kazer, “China’s Central Bank Unveils Cuts in Reserve Ratios for Some Banks,” The Wall Street Journal, June 9, 2014, online.wsj.com. Accessed June 11, 2014.

^[x] Michael J. Casey, “In China, Warnings Flash Despite Better Data,” FX Horizons, The Wall Street Journal, July 27, 2014. Online. Wsj.com. Accessed July 28, 2014.

The post New Approaches in Banking, Currency and Public Finance appeared first on China Research Center.

This essay does not aim to provide a comprehensive commentary on China’s recent cultural policies as they relate to the Decision. Instead, it focuses on the intersection between cultural and media policies and the push and pull between the party-state and aggressive market-oriented media producers. Specifically, the essay will highlight some potential changes in the following six areas: (1) control mechanisms, (2) the prescribed nature of a media organization, (3) media censorship, (4) media consolidation and economies of scale, (5) the entry of private capital into the Chinese media industries, and (6) China’s soft power and public diplomacy.

First, the Decision stresses the government’s role as administrator rather than player in managing cultural agencies. This is framed as a measure to further cultural reforms that aim to separate operations of the government from those of the enterprise. Specifically, the Decision proposes to establish unified management organizations linking party and state to administer cultural staff, affairs, capital, and orientation. This opens the possibility of changing what has been a dual-track media control system in China.

Generally speaking, Chinese media have been regulated and controlled both by a Party and an administrative system. The Party system is represented by the Central Propaganda Ministry and its branches at the provincial, district and county levels. The administrative system is represented by various ministries under the State Council and the nationwide branches of each ministry. For example, TV and radio have been regulated by the State Administration of Radio, Film and Television (SARFT); print media, audio, and video by the General Administration of Press and Publication (GAPP); and the Internet by the Ministry of Industry and Technology Information. In 2013, SARFT merged with GAPP to form a new body called the State Administration of Press, Publications, Radio, Film, and Television. The new body, whose name has been widely criticized by netizens for its lack of creativity, aims to streamline China’s regulation over both print and broadcast media.

China’s Central Propaganda Department and its branches monitor media content and can stop problematic programs at any time by issuing formal or informal notices or oral directives. Since the founding of the People’s Republic of China in 1949, shaping culture has always been a key official mission of the government and the Party. Except for a few years during the Cultural Revolution (1966-1976), the Chinese Communist Party has maintained tight, centralized control over Chinese media (Zhao, 2008). Various ministries also participate in controlling media content. For example, China’s State Language Affairs Commission, which seeks to standardize Chinese language and enforce proper pronunciation in China, can file official complaints about problematic content. Given the tradition of the Communist Party’s pervasive ideological control involving many different government agencies, a transition away from the current structure is likely to encounter resistance at various levels.

Second, the Decision emphasizes the dual role of a Chinese cultural organization as both an instrument of social control and a business, with social benefits prioritized over economic benefits. While this kind of positioning is not new, the statement could be viewed as a corrective measure, aiming to rectify media practices in China that overemphasize economic benefits, as discussed below.

In the era of reform, media organizations have been told to simultaneously serve as an official organ of the state and at the same time rise or fall based on market forces (Zhao, 1998, 2008). In the last few decades, the Chinese government has gradually reduced subsidies and the vast majority of Chinese media now rely predominantly or solely on advertising as a source of income. The market now plays a key role in dictating media content, as evidenced by the importance of the ratings system and the booming entertainment culture.

The media ratings system was introduced in China in the late 1990s. Now, CCTV-controlled Yangshi Suofurui, with its shortened English name CSM, is the most important media research firm in China. Firms that monitor print media, radio, outdoor media, and the Internet have also been established since the early1990s. Among them, Hui Cong, established in 1992, is one of the most important, currently monitoring more than 1,400 print outlets and more than 7,000 Internet sites. Ratings have become a common currency of exchange and the most important criterion in dictating a TV station’s programming and daily practices. CCTV even implemented a system called “the last rated program out” in 2002, which means the lowest rated program gets canceled first. Although the CCTV system was replaced by a more comprehensive evaluation mechanism in 2011 that stresses four dimensions, including a program’s leadership power, influence, communicative power, and professionalism, ratings still take up more than 50 percent of the weight in the equation (Chinanews.com, 2011, Aug. 12).

An entertainment culture has boomed since the late 1990s with the rise of media metrics. Entertainment programming often is less controlled and more profitable that other types of content. Many provincial satellite TV channels have launched entertainment programs to increase their competitiveness in an economy that depends on eyeballs. Hunan Satellite TV (HSTV) in particular has become a successful model. Starting with its flagship program Happy Camp, a variety show that debuted in July 1997, and its subsequent dating program The Promise of Rose (running from July 16, 1998 to August 25, 2005), HSTV has distinguished itself by celebrating happiness and youth culture. Other stations followed suit and attempted to differentiate themselves either through TV dramas, martial arts, localized storytelling or other types of programming.

Chinese authorities often show ambivalent attitudes toward media entertainment, fostering the boom on the one hand but attempting to control it on the other. A number of policies and regulations have been issued by China’s SARFT to control the “over-entertaining” trend in Chinese media. Entertainment is often criticized by the authorities as promoting vulgarization, infotainment, and celebrity gossip. For example, SARFT issued an order requiring that no satellite TV channel, starting in July 2011, should air entertainment programs more than three times a week in prime time from 17:00 to 22:00. This example demonstrates an inherent contradiction in the dual functions of Chinese media.

Third, the Decision speaks to censorship. It aims to improve ideological control mechanisms, enhance the management of media infrastructure and content, establish “a unified mechanism to prevent and strike online crimes,” and “improve the mechanism to handle unexpected events over the Internet” so as to “form a working framework that combines direct guidance and administration under the law.” It further calls for “the institutionalization of news releases, tightening of the journalist qualifications, management of new media^[1], and the regulation of the communicative order.” In a way, the Decision proposes to tighten ideological controls and online censorship, probably as a response to the fragmentation of the Chinese media market and the threat posed by new media, such as social media and mobile phones.

Indeed, many observers and analysts have pointed out that since Xi Jinping took power, control over the Internet has been increased. Most recently, China issued a document called “Temporary Rules for Managing Instantaneous Communication Tools and Public Information Service Development,” which aims to manage and censor information distribution. However, authorities have always been struggling with the issues of control over media. There has never been a clear line about what is allowed and what is not. There is no single media law in China, and scholars have been discussing whether the state should adopt one. Chinese media are now regulated by scattered regulations, orders, and circulars, and the control regime is ambiguous, combining formal and informal controls. Arguably, the lack of formal boundaries makes censorship effective. Media workers often censor themselves to a degree that goes further than the often unclear official guidelines.

Other controls are being put in place. Chinese people have long had to obtain state-issued work certificates (shanggang zheng) to work in media organizations, and regulations are being tightened. Recently, regulations were implemented to prevent people on social media from distributing news unless they are licensed to do so. As the least controlled sector, advertising traditionally has been under less scrutiny. However, a 2007 decree issued jointly by the Ministry of the Personnel (currently the Ministry of Human Resources and Social Security) and the State Administration of Industry and Commerce initiated the practice of certifying ad workers. This decree specifies criteria used to evaluate and grant the certificates of “assistant advertising expert,” “advertising expert,” and “senior advertising expert” through annual exams overseen by the Chinese Advertising Association. In 2011, the first qualifying exam was held and the subjects tested include advertising laws and regulations, practices, copywriting, design, and planning. The practice makes China the only country that grants official certifications to advertising workers.

Fourth, the Decision continues to stress media consolidation and economies of scale. It states that “a special shareholding policy will be applied to state-owned media that are reformed according to state policies.” It also stipulates that China will “push consolidation and acquisitions of cultural enterprises across geography, industry, and different kinds of ownership and improve the scale, concentration, and professionalism of the cultural industries.” This is a response to the exponential media growth in China in the last few decades and to the competition posed by large foreign media. A staple slogan in Chinese media industries since the late 1990s calls for enterprises to “become larger and stronger.” In the last two decades, Chinese media have been characterized by a rapid expansion as well as a simultaneous consolidation under the direction of the government as a way to enhance their competitiveness prior to China’s entry into the WTO.

Media consolidation started in 1996 with the formation of the Guangzhou Daily Newspaper group. By 2003, China had established 69 media groups, including 38 newspaper groups, 13 broadcasting groups, one magazine group, nine book publishing groups, five distribution groups, and three film groups (“Zhongguo chuanmeijituan fazhan baogao,” 2004). In May 2011, China News and Publishing Group was founded. Not officially allowed to form cross-media groups, most conglomerates are based on single medium and related entities, or geography. The Decision means that in the future cross-media groups can be formed. Media organizations from different industries and different places can be consolidated. Consolidation is a means to achieve economies of scale as well as a way to support government control over previously fragmented media (Zhao, 1998, 2008).

Fifth, the Decision aims to further promote the development of private capital in China’s media market. It encourages private cultural enterprises, lowers the threshold of entry, and allows private capitalists to be involved in overseas publishing and online publishing businesses and in holding shares of state-owned film production, cultural, and arts organizations. It also states that China will increase government subsidies, cultural purchases, and copyright protections. This is evidence of China’s effort to develop its culture industries domestically and internationally.

While allowing private capital into media industries is not entirely new, it can potentially lead to new practices. In the past, private capital was mainly allowed in the areas of production and distribution. Since the late 1980s, TV stations have started to purchase programs on the market, inaugurating a system that separates the producer from the broadcaster. Since the 1990s, state authorities have begun to more aggressively promote the system and allow private capital to enter the TV market. TV drama is the first area that has witnessed the penetration of private capital. It is a common practice now for TV stations to buy programs produced by others. Now, the stages seems to be set for a broadening of the embrace of private capital in media.

While Chinese TV producers initially only cloned successful foreign programs, starting with HSTV’s highly influential show Super Girl, they have in recent years begun to purchase global programming, such as Ugly Betty (debuting in 2008 and licensed from Televisa), If You Are the One (debuting in 2010 based on the UK program Take Me Out), China’s Got Talent (deputing in 2010 and licensed from UK-based FremantleMedia), Daddy, Where Are We Going? (debuting in October 2013 and licensed from a South Korean producer), Voice of China (debuting in July 2012 and licensed from the Dutch program The Voice of Holland), Chinese Dream Show (debuting in April 2011 and licensed from BBC) and so forth.

Fashion magazines have long entered the Chinese market through licensing or partnership with a local publisher (Fritha & Yang, 2009). For example, the Hearst Corporation from the U.S. started to publish a Chinese version of Cosmopolitan in 1993. Harper’s launched the Chinese version of Harper’s Bazaar in 2001, and the Chinese version of Vogue was introduced in 2005. Japanese magazines such as Vivi, With, Style, Oggi and CanCam have also launched Chinese versions in the 2000s. Given that most of these magazines are advertising vehicles, content is less controlled than news programs. In the book publication area, U.S. publisher Simon & Schuster started to collaborate with Chinese publishers in the late 1990s in licensing or co-publishing deals.

Lastly, the Decision stresses China’s public diplomacy. Since the turn of the 21^st century, China has attempted to increase its comprehensive power, which includes a higher international profile and soft power. In addition to increasing China’s international aid and participation in global affairs, an important step has been the spread of Chinese culture through Confucius Institutes. China has founded more than 300 Confucius Institutes worldwide. Interestingly, promotion of Chinese culture overseas emphasizes ideology as well as economic benefits. Recently, Confucius Institutes in the U.S. has been under increasing scrutiny.

While there is no doubt that China’s international influence has increased recently, there is a general consensus that China’s soft power mainly emanates from its conformity to international norms rather than its power to shape global policies (Li, 2009). Li (2009) argues that China’s soft power concerns “the soft use of power.” China has not yet taken a leading role in international affairs except in the case of climate change. Also, there is a deep suspicion toward China in the West. While China has allocated huge amounts of money for state-owned media such as Xinghua News Agency, China Central TV, and Shanghai Media Group to increase their international influence, gaining credibility is a major challenge for these media outlets. Competition for viewers in other countries is always contentious (Price, 2002), but China faces a unique challenge because of its Communist ideology, state control, and the West’s anxiety about China’s rise.

In this essay, I discussed potential changes in China’s media control mechanisms, the dual role of China media, censorship, media consolidation, the entry of private capital into the Chinese media industries, and China’s soft power and public diplomacy. In summary, it seems that the Decision largely aims to further promote the economic function of culture and media industries and control their ideological function. It would not be surprising if we see China implementing tighter controls over the Internet and social media and simultaneously encouraging entrepreneurship and creativity. To a large extent, culture and media industries are dancing with chains. They are allowed to become economic entities that only disseminate non-threatening cultural contents. Chinese media aiming to expand internationally will encounter even more challenges. After all, they may continue to be viewed as the Chinese Communist Party’s mouthpieces. Their dual roles will be constantly tested and contested in the domestic and international markets. One more note: the Decision only prescribes the rules for the media and cultural industries, but the practices may be different.

References

Chinanews.com (2011, Aug. 12). Shoushi lu bu zai shi wei yi, yangshi gaige feichu lanmu mowei taotai zhi. http://www.chinanews.com/yl/2011/08-12/3253041.shtml. Accessed Feb. 1, 2013.

Fritha, K., & Yang, F. (2009). Transnational cultural flows: An analysis of women’s magazines in China. Chinese Journal Of Communication, 2(2), 158-173. doi:10.1080/17544750902826681

Li, H. (2010). Chinese Diaspora, the Internet, and the image of China: A case study of the Beijing Olympic torch relay. In J. Wang (ed.), Soft power in China: Public diplomacy through Communication (pp. 135-156). New York, NY: Palgrave Macmillan.

Li, H. (2013). China’s media transformation and audience studies. In A. N. Valdivia (Gen. Ed.) & R. Parameswaran (Ed.), The international encyclopedia of media studies. Vol. 3: Audience and interpretation in media studies (pp.341-364). Oxford, UK: Wiley-Blackwell.

Li, M. (2009) (ed.). Soft Power: China’s Emerging Strategy in International Politics. Lanham, MA: Lexington Book.

Price, M. (2002). Media and sovereignty: The global information revolution and its challenge to state power. The MIT Press.

Wang, J. (2011). Soft Power in China: Public Diplomacy through Communication. New York: Plagrave Macmillan.

Zhao, Y. (1998). Media, Market and Democracy in China. University of Illinois Press.

Zhao, Y. (2008). Communication in China. Rowman & Littlefield

“Zhongguo chuanmeijituan fazhan baogo” (2004, May). Zhongguo chuanmeijituan fazhan baogao. Changsha, China: Hunan Jiaoyu Chubanshe.

^[1] Many observers believe the party-state’s aim is to converge new and old media so as to maintain the dominance of traditional outlets and thereby maintain ideological control.

The post Chinese Media and Culture: Dancing with Chains appeared first on China Research Center.