China's princelings can't rule alone

The average western executive may prefer for Beijing's elitist faction to control China, but with social stresses rearing their head, it can't govern on its own.

FT.com

If you seek a lively leadership campaign, the place for you is not Iowa or New Hampshire but China. Instead of caucusing among voters in schools and halls, these all-action candidates are punishing Walmart in Chongqing and pacifying 13,000 irate villagers in Guangdong.

Not only is China's leadership contest more dramatic but it matters more than the eccentric Republican primary to global businesses and investors. Over the next decade, its new leaders will determine whether China grows into the world’s most important consumer market as well as the country where most things are manufactured – or degenerates into chaos and instability.

The average chief executive, if they had a vote, would probably cast it for the elitist faction – some of them 'princelings' whose fathers worked with Mao Zedong and Deng Xiaoping – who promise more of the business-friendly, centrally controlled recipe of recent decades. The sort of communists, in other words, with whom business can be done. It is just as well they don’t vote, and that China is edging towards its own variety of coalition government. The princelings led by Xi Jinping, who is likely to become party secretary and president, will be balanced by advocates of political and social reform such as Li Keqiang, likely to be the premier, and Wang Yang, party secretary in Guangdong.

In the short-term it would be simpler for multinational businesses to deal with princelings such as Bo Xilai, the party boss in Chongqing, who has balanced populist crime-busting and Maoist rhetoric with can-do policies to attract US and European companies to his city. Chongqing has fixed an 11,000km transcontinental rail link to Germany for exports.

Executives often cite such dirigiste gestures when discussing with admiration how China’s technocrats get things done that would be all but impossible in the sclerotic, indebted west. Railways are built! Roads are laid! Migrant workers travel from farms to coastal factories to make iPads and washing machines!

But such state-engineered transformation has a cost, made evident last month in Wukan, the Guangdong village where rebels barricaded themselves against police in protest at land seizures by officials – one of whom acquired a $31,000 car in the process.

Abuses of power and petty – often non-petty – corruption threaten the party’s legitimacy among ordinary Chinese. Meanwhile, princelings and their families, who study at elite western universities, run companies and investment funds and get rich, look like a gilded class.

Elitism and making money does not seem like a problem to western chief executives – it is the mirror image of themselves. But China’s domestic discontents will turn into a problem for those doing business there if it hinders the transition into an advanced economy.

"Business tends to be associated with the elitist faction,” Cheng Li, a senior fellow of the Brookings Institution, says. "But if their approach is not balanced, politics might unfold in a way that shocks the nation and the world. If China were to become chaotic, it would be a disaster.”

The sort of reform that western businesses seek – more freedom to compete on equal terms with state-owned enterprises, liberalisation of banks and financial markets, and intellectual property protection – stand the best chance of being enacted by princelings. Wang Qishan, a vice-premier who could beat Li to the premiership, is known as a financial reformer.

The acceptance of competition on fair terms would be valuable. While princelings are more kindred spirits to chief executives than others in the senior ranks of China’s government, they are hardly a soft touch. Reform efforts have now been placed on hold while the political rivals jostle for places in the 2012 transition.

Walmart felt the effects in Chongqing when 13 of its stores were temporarily closed for selling pork mislabelled as organic. Meanwhile, Bo has organised mass singing of Maoist 'red songs' and pledged to reduce income inequality.

This looks like a calculated display rather than a deep-rooted reform effort of the kind espoused by Wang Yang in Guangdong. Wang ended the Wukan standoff by sending in investigators who conceded the complaints and returned land.

He is part of the populist faction with roots in the poor inland provinces and the Communist Youth League, headed by Hu Jintao, the president. Wang will probably gain a seat on the nine-member politburo standing committee – China’s cabinet – along with Bo later this year.

On the face of it, the populists’ priorities – curbing inequality and corruption, and improving workers’ rights – are at best irrelevant, and at worst inimical to business interests. Some Hong Kong entrepreneurs have grumbled at efforts to raise wages and make unions more independent.

But Hu has a valid point about "harmonious development”, as espoused in the latest five-year plan. Without popular consent and a fair distribution of economic opportunity, the entire Chinese experiment will come tumbling down. It may be easier for businesses to barter solely with a business-inclined coastal elite and not to face the populists, but that option isn’t open.

As Jonathan Fenby of the consultancy Trusted Sources notes, the plan’s shift from export-oriented growth to a consumer-led economy is threatened by the eurozone crisis and a weak US economy. The first priority of China’s new leaders will be to maintain growth. After that, they will have to balance social reform with economic liberalisation. The princelings should not rule the economy alone.

Copyright The Financial Times Limited 2011.