By Shaun Breslin.

Xi Jinping’s tenure as China’s top leader began with might call a stage of symbols and signposts – an attempt to give indications of the main thrusts of policy under his leadership. Making his first trip as leader to the south in an echo of Deng’s南巡 in 1992 (which has become the symbol of the return to reform and liberalisation  and the high profile given to combating corruption are both cases in point. The announcement of a “plan” to tackle income distribution began to make the transition from signposts to actual policy; though it still leans more towards being an annunciation of aspiration and grand strategy rather than a detailed outline of specific changes to come.

These signposts (and more) suggest that the leadership has been gauging the popular mood and seeking to address what are considered to be the major areas of dissatisfaction with the political system. And in this respect, we seem to be seeing history repeating itself. Go back to 2002 and Jiang Zemin warned the party congress that not dealing with corruption could finish the party. Actually, you can go further back to when he took power in 1989 to find numerous speeches about the importance of dealing with corruption if party rule was to survive.

This theme was continued throughout the Hu-Wen era. In 2004 the central committee produced a rather damning report on the state of the party’s ruling capacity (zhizheng nengli 执政能力). Referring to official studies of the collapse of communist party regimes further west, it argued that ‘We must prepare for danger in a time of peace (居安思危 juansiwei), ‘from start to finish, carry out good government for the people’ and argued that ‘constructing a clean and honest administration and fighting corruption are a matter of life and death for the party’.

Similarly, the move towards a “scientific concept of development” under Hu and Wen was intended to deal with the growth of inequality that the previous leadership of Jiang Zemin and Zhu Rongji had failed to address (and even made worse). Yet Jiang himself had also been keen to signal a new polity when he announced the policy to open to the West in 1999 and moved to reduce fiscal burdens on peasants.

So China’s leaders have been well aware of the potential problems for a number of years. But turning intention into actual change has been another issue altogether. Powerful vested interests (either in the state system or connected to it) that have benefited from the status quo are often cited as a reason for this failure. So too is the relative lack of real power of Hu and Wen within the top leadership echelons. And we should not forget that when the global crisis hit China through a collapse in exports, the short term goal of ensuring that 8 per cent growth was attained (and exceeded) was simply deemed much more important than pursuing longer term objectives for structural economic exchange.

Whilst this response to the crisis proved a great success in its own terms, the way that China responded to the impact of the global crisis might provide major challenges to the new post- “lianghui” leadership. There are three issues here. First, many local governments are going to face big problems in coming years paying off the debts that their local investment companies incurred in 2009 as the banks spread liquidity. A CBRC study in 2010 suggested that 70 per cent of the projects funded in 2009 weren’t raising enough money to even pay the interest due. And the burden isn’t evenly spread – around two thirds of the debt is held by local governments at the city and county level, with those in central and western China expected to face most problems in paying off their dues. Second, there are what look like bubbles in some places in property/real estate sectors, with some already deflating (if not bursting on a national scale). Third, we also see a large number of mass demonstrations in 2012 blamed on land seizures and demolitions by local governments. And these three problems are all linked together.

Local governments have increasingly used selling land use rights as a means of gaining revenue. Not selling the land but selling the right to use the land. It’s grown enormously in the last three or four years to become the single biggest source of locally collected and controlled government income. In the process, there have been accusations that officials have used this power to make personal fortunes rather than simply boosting local government coffers.

This was the initial cause of the protests in December 2011 that ultimately saw the overthrow of the local government of Wukan, and of a major disturbance in Zuotan in June 2012. Rising land prices also make it easier to pay off some of the loans taken out in 2009 and 2010. And with depositors getting low returns on savings in banks, they are looking for other ways of raising money with investing via trusts and so on in real estate seen as one way of doing this. At the same time, we have a banking system where many small and private enterprises find it difficult to get loans through the formal structure, so often have to go into the “shadow” sector instead, where interest rates are typically much higher. And for both investors and borrowers who operate in the shadow financial markets (with varying degrees of shadownyness) it can be a very risky option. Witness, for example, the collapse of the informal financial system in Wenzhou in 2011.

Fears of a banking crisis are probably ill founded. The state can and has stepped in to bail out the banks in the past and continues to support them today (for example, by guaranteeing interest payments due from the Asset Management Companies that took over much of the banks’ bad debts when the state previously bailed them out). Failing trust investments also appear to have been propped up by the state – or should we say by the state utilizing Chinese citizens’ money. And the state has the ability to support both local governments and also individual savers if their investments don’t turn out to be profitable. Local hazard is alive and well in the Chinese financial system/

But such interventions don’t solve the problems. And if land and property prices continue to grow, then it’s going to be even harder for people to buy property in many places than it already is. If they drop, though, then local governments will lose revenue and many ordinary people might lose their investments. The banks could change their lending policies and interest rate policies could shift – but that would harm those who currently benefit from being able to get loans. And according to the Chinese think tank Unirule (天则经济研究所), this includes many SOEs that get loans well below the official market rate. So any changes are obviously going to create losers as well as winners.

So the leadership will first have to work out the technicalities of what needs to be done – the economic task if you like. This might prove easier than accomplishing the political task – negotiating with (or through) the different interests and powers that exist in China today. And they will have to do this while continuing to fight corruption and keeping the support of the people. The direction of change has been signposted, and it’s time to see if it can be achieved. What Xi and Li probably can’t afford is for their successors to come to power with the same agenda as they have – an agenda which implicitly says that their predecessors didn’t do what they promised.

Shaun Breslin is Professor in the Department of Politics and International Studies, Warwick University. He is Associate Fellow in the Chatham House Asia Programme and Co-edits The Pacific Review.

Comments

  1. He will face challenges if he wants to reform. If he just want to stay harmonized, there isn’t too much challenge. And I think he wanting to change is just so much wishful thinking.

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