Can Xi Jinping’s Governing Strategy Succeed?

When Xi Jinping assumed his position as the new face of the Chinese leadership in November 2012, the optimism was palpable. Emerging from what some considered to be a “lost decade” under the leadership of Hu Jintao, China was ready for a new approach to steering the Middle Kingdom’s continued global rise. In his first days, Xi earned deserved praise at home and abroad as he embarked on an anti-corruption campaign, called on officials to use plain language and avoid ostentation, proclaimed the ultimate importance of the rule of law, and followed in Deng Xiaoping’s economic reformist footsteps by traveling south to Shenzhen, the site of China’s first special economic zone.

As Xi’s honeymoon has progressed, however, the initial deluge of optimism has slowed to a trickle. Many watchers of the Chinese leadership have become dispirited by a lack of substantive progress toward much-needed political reform, while Chinese public intellectuals have been dismayed by orders instructing them not to speak about seven sensitive issues: universal values, freedom of the press, civil society, civil rights, past mistakes by the Chinese Communist Party (CCP), crony capitalism, and judicial independence. Media censorship has tightened, and participants in human rights activities have encountered increasing political harassment and even arrest.

In an attempt to consolidate his footing among party conservatives, Xi in July traveled to Xibaipo village, the People’s Liberation Army headquarters at the end of the civil war, where he quoted Mao Zedong to bolster Communist spirit. Following his trip, the leadership launched an effort to bar construction of new government buildings for the next five years. As Xi works to revitalize his image, he continues to favor superficial party controls and propaganda over substantive political and judicial reform.

Cognizant that his ideas did not fully catch on initially—with officials turning to online shopping and secret dining clubs to avoid being seen consuming in public, and with citizens expressing cynicism about the government’s anti-corruption rhetoric—Xi appears to realize that his political capital is waning and his honeymoon is reaching its end. Equally important, China’s economic slowdown has prompted growing concerns about the ability of the new leadership to deliver on its promises. This climate has roused Xi’s sense of urgency to adopt more liberal economic policies, stimulate China’s weakening growth, and regain the confidence of his wary fellow leaders and the middle class at large.

Xi is not the only Chinese leader in recent decades to have entered office facing high expectations in the realms of political and economic reform. His predecessors discovered that economic reforms were easier to pursue than political reforms. Xi now confronts this same reality, yet he also faces deeper and rougher political waters than any Chinese leader since Mao, with the very survival of the party-state resting in his hands.

Despite these dire circumstances, the economic reforms wrought by his predecessors have nurtured in Xi and other leaders of his generation great confidence in their economic management skills, as they have helped shape China into the world’s second-biggest economy. Those same reforms have also bred a rapidly growing middle class that now holds greater consumer power and higher levels of education, and makes more political demands, than ever before.

As these trends converge at a political crossroads, will Xi be able to utilize his team’s economic skills to implement reforms that both please the middle class and break the political bottleneck? Can further economic reforms succeed without any accompanying political reforms? It is vitally important for the Chinese to explore these questions surrounding Xi’s politically conservative, economically liberal approach to governing while there is still time to change course.

ELITISTS AND POPULISTS

The leadership transition of 2012–13 brought the promotion and retention of experienced economic reformers, in addition to the exclusion of a couple of political reform–minded heavyweights from top leadership positions. Although this once-a-decade power transfer usually takes place behind closed doors, stained by backroom deal making, the most recent transition was muddied more than usual by major political scandals. Yet, even as uncertainty surrounded the leadership selection and the country’s political trajectory, one policy goal remained clear: Economic reform would endure as a priority.

As in any society, the identities of the political players help shape the policies they will implement. China is a one-party state, but this does not necessarily mean that the leadership is monolithic. On the contrary, China’s leadership can be divided into two informal but well-known coalitions: the “elitist coalition,” which emerged during the era of former President Jiang Zemin, and the “populist coalition,” once headed by former President Hu. The top two current leaders, President Xi and Prime Minister Li Keqiang, now head these two coalitions, respectively. This informal division of power is sometimes referred to as the “one party, two coalitions” political mechanism.

The two coalitions represent different socioeconomic and geographical constituencies and differ in expertise, credentials, and experience. Most of the top leaders in the elitist coalition, for instance, are “princelings” from families of veteran revolutionaries and high-ranking officials. Princelings often began their careers in rich and economically well-developed coastal cities. The elitist coalition usually represents the interests of China’s business elites, especially the state-owned enterprises (SOEs), and the vast majority of the emerging middle class.

Most of the populist coalition’s leading figures, by contrast, come from less-privileged families and tend to have accumulated much of their leadership experience in less-developed inland provinces. Many of these leaders began their climbs up the political ladder through leadership in the Chinese Communist Youth League and are known as tuanpai (League faction). The populists often voice the concerns of vulnerable social groups such as farmers, migrant workers, and the urban poor.

More than any other leadership organization, the makeup of the Politburo Standing Committee (PSC), China’s top ruling body, will determine the direction and pace of the next phase of economic reform, as well as the arc of sociopolitical change in the country. In this latest leadership changeover, only one of the seven top leaders in the PSC—Prime Minister Li—represents the populist coalition, while the other six are all protégés of Jiang. However, the balance between the two camps on the Politburo and the Central Military Commission has largely stayed intact, and many of Hu’s people made it onto the 376-member Central Committee. In any case, the dominance of elitists on the PSC reduces the chance for policy deadlock as a result of factional infighting, giving Xi tremendous power to carry out his policy objectives.

MARKET FRIENDLY

Although the strong presence of princelings in the top leadership likely will reinforce public perceptions of the convergence of power and wealth in the country, the four princeling leaders on the PSC—Xi, Zhang Dejiang, Yu Zhengsheng, and Wang Qishan—all have decades of experience leading China’s major cities and provinces, and are highly competent in economic and financial affairs. Some Chinese analysts argue that, due to their princeling background, these leaders have more political capital and resources than did their predecessors Hu and Prime Minister Wen Jiabao (who came from humble family backgrounds) in terms of running the Chinese economy and coordinating various governmental agencies.

Xi has long been known for his market-friendly approach to economic development for domestic and foreign businesses alike. Xi’s experience leading Fujian, Zhejiang, and Shanghai, three economically advanced regions, has prepared him well to promote the development of the private sector, foreign investment and trade, and the liberalization of China’s financial system—all of which experienced serious setbacks under the previous administration.

Another example of effective leadership is Wang Qishan, now serving as the anticorruption czar. Over the past few years Wang served as a principal convener in the Sino-US Strategic and Economic Dialogue. Wang, whose nickname is “chief of the fire brigade,” is arguably the most competent policy maker in economic and financial affairs in the Chinese leadership. The public regards him as capable and trustworthy during times of emergency or crisis, whether it be the country’s response to the 1997–98 Asian financial crisis, the 2003 Severe Acute Respiratory Syndrome (SARS) epidemic, or ongoing rampant official corruption. Wang likely will promote the continued development of foreign investment and trade, the liberalization of the financial system, tight control of government spending, and tax revenue reforms, all of which are crucial for maintaining smooth central-local economic relations.

The members of this PSC are clearly interested in economic reform, but their views regarding political reform are notably conservative. For proponents of political reform, the exclusion from the PSC of two key liberals, Vice President Li Yuanchao and Vice Prime Minister Wang Yang, was a setback. Wang Yang lost out because many conservative leaders saw him as a threat.

His main political rival was Bo Xilai, before Bo’s dramatic fall in 2012. As Bo succumbed to political scandal, the conservatives clearly wanted to exclude Wang. That Li Yuanchao also did not get promoted, however, was surprising to many. An instrumental voice for liberal intellectuals who demand the rule of law, governmental accountability, and intra-party democracy, Li has many supporters. Both of these tuanpai leaders will still meet age eligibility requirements for the next PSC in 2017.

TECHNOCRATS IN CHARGE

Beyond the PSC, Xi has recruited or retained a capable and well-regarded team to shepherd monetary and fiscal policy reforms at the ministry level. The team includes an impressive mix of experienced economic technocrats, including Zhou Xiaochuan, Lou Jiwei, and Liu He. Zhou has become the longest serving governor of the People’s Bank of China, which he has led since 2002 and to which he was reappointed this year. Zhou has participated in economic reforms since the 1990s and has been an assertive advocate of further liberalizing the financial sector. He has helped transform the struggling state-owned banks into commercial lenders, accelerate the opening of the capital account, and loosen restrictions on the Chinese currency.

Lou, appointed finance minister this year, has also been active in economic reform since the 1990s, when he was a critical player in the transformation of China’s tax system and planning for a domestic bond market. A protégé of former Prime Minister Zhu Rongji, Lou served as vice minister of finance from 1998 to 2007, and gained international attention in 2007 when he was appointed chairman and CEO of the start-up China Investment Corporation, becoming one of the most powerful fund managers in the world. In charge of that $200 billion sovereign wealth fund, he was tasked with generating higher returns for the country in the midst of the world economy’s downturn.

Finally, Liu, the new deputy director of the National Development and Reform Commission (NDRC), will also take on the powerful role of director of the Office of the Central Leading Group on Financial and Economic Affairs. A graduate of Harvard’s Kennedy School of Government, Liu began his work on China’s economic policy in the 1990s, when he helped shape China’s five-year plans at the State Development Planning Commission (today’s NDRC). As one of the most influential economists of his generation and a proponent of financial liberalization, Liu served as a major collaborator in a World Bank report published in 2012 that advocated market-driven change to constrain SOE monopolies. Now, as a key player in financial policy over the coming years, he will help lead the attempted structural transformation from an export-driven economy to a domestic consumption–driven economy.

Together, these leaders could combine experience with innovation to help accelerate this transformation, and their patrons on the PSC will support this trajectory. It is particularly encouraging that this team of economic technocrats is planning a comprehensive economic reform agenda that includes financial liberalization, central-local tax reform, pricing reform, greater incentives for private sector development, deregulation, SOE reform, land use rights, and more accommodating policies for rural-urban migration, among other measures. Some of these liberal economic policies have already been adopted, and more likely will be approved at the CCP’s Third Plenary meeting in October.

REFORM TENSIONS

Such an economic reform–minded and experienced group of policy makers could not have been elevated to positions of power at a more opportune time. It will take such an accomplished team to steer China through the deep, rough waters ahead. From a chaotic urbanization push, a housing bubble, and an impending banking crisis to a falling GDP growth rate and persistent college graduate unemployment, the need for innovative policy making is clear. Over his first year in office, Xi has set the stage for economic reform through his actions and statements, and a growing sense of crisis will compel the leadership to embark on these reforms with a sense of urgency.

Nonetheless, the tensions within Xi’s politically conservative, economically liberal approach to governing mirror those confronted by his predecessors, who always seemed to take one step forward economically while taking a step backward politically. During his famous “southern tour” in 1992, Deng called for greater market reform and economic privatization, while continuing to crack down on political dissent. Jiang broadened the CCP’s power base by recruiting entrepreneurs and other new socioeconomic players (a formulation known as the “three represents”), while launching a harsh political campaign against the Falun Gong, an emerging group of religious believers. Hu’s populist appeal for a “harmonious society” sought to reduce economic disparities and social tensions while he tightened censorship over the media and police control of society, especially in ethnic minority regions. In all of these major socioeconomic and political developments, the CCP leadership made a calculated but far reaching ideological and policy move in one area, but resisted political pressure in another.

Xi’s recent pronouncement of the “Chinese dream” presented the slogan that will likely encapsulate his time in the leadership and serve as the objective by which he hopes to be judged in history books. In his vague explanation of the Chinese dream, Xi paired nationalistic sentiment (or national rejuvenation) with an economically liberal desire to accommodate the wants and needs of a middle class lifestyle, also implying an equal opportunity for all Chinese to rise to middle class status. When Xi held his first summit with President Barack Obama in June 2013, he expanded on the definition of the Chinese dream, highlighting its similarity to the American dream and calling for “economic prosperity, national rejuvenation, and people’s well-being.” While the official meaning of the Chinese dream has become better defined over time, CCP conservative leaders have strongly rejected the notion it might include dreams of constitutionalism and political democracy.

The Chinese people, hearing these ambiguous messages emanating from the leadership and state run media, do not know whom to trust. Forced to turn to social media for unfiltered (albeit often censored) news, they continue to express feelings of deep political uncertainty and fear for their country’s socioeconomic stability. Many wonder how they can realize a Chinese dream when their country is facing declining economic prospects, especially when they have economic statistics to validate their concerns. China’s economic growth rate slowed from 9.3 percent in 2011 to 7.8 percent last year, the lowest growth rate since 1999. In 2013, debates have raged over whether the country will even be able to reach its initial 7.5 percent growth target.

At the same time, China’s Gini coefficient, which measures economic inequality (with zero representing perfect equality and 1 representing perfect inequality), continues to far exceed the 0.44 threshold generally thought to indicate potential for social destabilization. Independent estimates have shown the figure rising to 0.47 in 2009 and 0.61 in 2010, significantly surpassing official government estimates. In an attempt to measure official corruption, the Washington-based group Global Financial Integrity has shown that cumulative illicit financial flows from China totaled $3.8 trillion from 2000 to 2011. Facing these dire economic trends, the leadership cannot afford to vacillate: The time has come for bolder, more comprehensive action.

CONFLICTING INTERESTS

As he seeks to impose his Chinese dream on concerned Chinese citizens (while confronting liberal intellectuals who have become increasingly skeptical of the concept), Xi will also have to navigate a murky political climate. When Xi first took office, Hu’s unpopularity among opinion leaders and the middle class initially enhanced Xi’s public support—giving the sense that he had a new mandate. Furthermore, in the wake of the Bo Xilai scandal, all party elites regardless of factional affiliation united under Xi’s leadership in order to defend CCP rule. But will the leadership remain united and retain the fortitude necessary to enact meaningful economic reforms while balancing the demands of interest groups?

Xi’s leadership team has strong incentives to embrace economic reforms. On the one hand, successful reform will greatly enhance the public’s confidence in the CCP, providing the leadership with the political capital to confront many other problems in Chinese society. On the other hand, failure to act will increase the likelihood of domestic instability (and potentially a bottom-up revolution).

Despite these incentives, there are many external factors that could come into play and erode the support for Xi’s factional majority on the PSC or the leadership’s inherent interest in economic reform. It remains possible that new political scandals, economic crises, environmental disasters, or public health hazards might emerge and affect China’s political climate. As we learned from the spate of events that preceded the 18th Party Congress last year, including the purge of Bo, the demotion of Hu’s chief of staff, and a New York Times report accusing Wen’s family of corruption, timing is everything.

However, beyond unpredictable events and continuing intra-party machinations, the greatest obstacles to economic reform are the companies that are part of the State-owned Assets Supervision and Administration Commission (SASAC), which accounted for 43 percent of China’s GDP in 2012. The formidable power of this group explains why it took 13 years for China to pass an anti-monopoly law, why the macroeconomic control policy of the past decade was largely ineffective, and why the widely acknowledged property bubble has continued to grow. In each of these cases, corporate and industrial interest groups have encroached on the governmental decision-making process, either by inducing policy deadlock or manipulating policies in their favor.

Under the SASAC, various players associated with property development have emerged as one of the most powerful special interest groups in present-day China. According to official state accounts, more than 70 percent of the total of 120 SASAC companies engaged in the real estate business and property development in 2010. In response, the State Council ordered 78 SASAC companies to withdraw their real estate investments. But resistance from these companies made the government order largely ineffective. In the first half of 2013, SASAC companies saw their profits increase by 18.2 percent over 2012. This profitable trend will only increase tensions surrounding new market-oriented policies.

Pressure from these powerful and well-connected SASAC companies, however, will not be enough to derail economic reform. Other interest groups—primarily made up of members of the rising middle class who hold a negative impression of SOEs—will also weigh heavily on the minds of the leadership. For example, college graduates, who often come from middle class families, continue to face a high unemployment rate, with nearly two million failing to find work each year. A shrinking private sector has alerted the middle class to the increasingly obvious oligarchic power of SOEs and their inability to innovate.

Indeed, a study conducted by Chinese scholars shows that the profits made by China’s 500 largest private companies in 2009 amounted to less than the total revenues of just two SOE firms, China Mobile and Sinopec. With no incentive to innovate, these and other SOE monopolies will continue to hamper China’s economic growth, severely undermining the leadership’s effort to generate an innovation-led and consumption-driven economy. As potent and profitable SOEs push back against reform, and the middle class pushes back against them, the ultimate shape of the economic reforms will reveal which group holds the real economic and sociopolitical upper hand in society: state-owned corporations or the middle class.

POLITICAL PERILS

Even with varied interest groups holding sway over the eventual outcome, China’s leadership is poised to adopt some economic reforms to promote the private sector. But SOEs are not the only obstacles the country faces. The road ahead is also far from certain because of the leadership’s ambivalence toward—or outright avoidance of—discussions of the political reform that must accompany any successful economic reform effort. Just as past economic reforms bred the need for current economic reforms, economic transformation today will breed the need for political reform tomorrow.

Both China’s emerging middle class and its lower class have taken note of the economic problems that arise from a closed political environment. A truly innovation-driven economy requires political openness, just as a service sector–led economy requires a developed legal system, the rule of law, and the ability to contain widespread official corruption. As China’s economy undergoes the transformation from an export-driven to a consumption-driven model, the middle class likely will sit in the driver’s seat of economic development. Adopting political as well as economic policies that please those economic drivers is the key to ensuring a smoother economic transformation.

No group in Chinese society better exemplifies the conundrum of the government’s development policies than the middle class. Born from the economic reforms of the past, the middle class believes its interests have been ignored by the government for too long. Even if members of the middle class obtain the resources to consume everything they desire, they will ultimately want a say in what the future holds for them. Recent studies conducted in China have found that the middle class, more than other social groups, tends to be cynical about the policy promises made by authorities, more demanding of policy implementation, and more sensitive when it comes to official corruption. As middle class Chinese realize that their voices are being suppressed, that their access to information is being blocked, and that their space for social action is being unduly confined, increased political dissent may take shape.

Even beyond the middle class, vulnerable social groups have begun to express dissatisfaction with their inability to achieve the middle class lifestyle. The manual labor shortage that has hit some coastal cities in recent years reflects a growing awareness of individual rights among these vulnerable groups. Migrant workers have shown a willingness to move from job to job seeking better pay, yet China’s urbanization policy is markedly unaccommodating to migrants. As they see middle class families with multiple homes and corrupt officials or rich entrepreneurs buying costly villas for their mistresses, their discontent will only continue to mount.

In recent years, these disgruntled groups have given the leadership a taste of what the future will hold if it continues to avoid political reform, often turning to organizing “mass incidents” (protests involving more than 100 participants)—more than 100,000 of which occur each year, according to official estimates. These protests arise from a number of factors, including social dislocation, political injustice, lack of work safety or job security, inadequacy of consumer rights, environmental degradation, and problems associated with internal migration.

The cost of “maintaining social stability” (weiwen), primarily through the police force, has become astonishingly high. The Chinese government’s official budget for national defense in 2012 was 670.3 billion renminbi (about $109 billion), while the budget for police and public security was 701.8 billion renminbi (more than $114 billion) Clearly, the regime could save a great deal of money if it were to provide the people forums in which to express their concerns instead of leaving them little choice except public protest.

To regain the public’s confidence and avoid a bottom-up revolution, the CCP must embrace genuine and systematic democratic change. The following profound political reforms need to be made. First, legal reforms—including the realization of judiciary reform, the rule of law, and constitutionalism—are essential. The scandals of the past few years have shown leaders that legal reform is the best way to protect all citizens, including themselves, in a country that still lacks the rule of law. It will take decades for China to construct a constitutional system, but before long the party should make the ideological, political, and legal statement that it serves under, rather than above, the constitution.

Second, media regulation is in urgent need of reform. Social media have become so powerful that the Chinese authorities often shut down domestic microblogging services. This is not an effective way to run the country (especially when innovation is supposed to be driving the economy). The reason people rely on social media for news is that the mainstream media are not particularly informative or trustworthy. Thus, the way to avoid the sensationalism produced by social media is to open up the mainstream media. Leaders should realize that the more sensational stories are suppressed, the more powerful such stories become.

Third, the CCP should pursue bolder intra-party elections, which could involve voting as a means of assigning leadership positions. The nature of collective leadership will likely encourage factional politics. Yet China’s emerging balance of power between the elitist and the populist coalitions should prevent the zero-sum games of the past, in which the winner takes all in elite competition. Incorporating intra-party elections into elite selection will help increase party legitimacy.

WINDOW CLOSING?

The costs and risks of not delivering such reasonable reforms will only grow in the years ahead. As China’s leaders engage in discussions about the country’s falling economic growth rate, the housing bubble, and the banking crisis, they may believe—rightly—that they hold the keys (and they have the experience) to bring about essential transformations. They also have the support of a rising middle class eager for SOE reform, tax cuts, and assurances that their housing investments are safe. But at the same time, the leaders must realize that without gradual but bold reform of the legal system, media openness, and a more accountable and representative political structure, the next phase of economic reform will not go far.

As the window closes on their politically conservative, economically liberal approach to governing, Xi and his team should embrace this moment to stand on the right side of history. October’s Third Plenary meeting of the 18th Central Committee, traditionally an occasion when leaders have taken the opportunity to break with the past, provides the perfect opportunity. After failing to boost public confidence and deliver sound economic policies at their first two major meetings, the leadership needs to use the Third Plenary meeting to begin crossing the deep waters of reform and avoid drowning. Until China’s leaders take this essential step toward embracing gradual political reform as part of a larger reform plan, Xi’s hope for national rejuvenation will remain nothing more than a pipe dream.

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