Groupthink and gridlock in China's fifth generation

China’s new leaders have been vested with great hopes for reform but deep factional divisions in the Politburo mean real change will be elusive.

Ten years ago, Western China-watchers welcomed the ascension of President Hu Jintao and Premier Wen Jiabao. Allegedly from the ‘liberal’ side of Chinese politics, many expected the Hu-Wen team to further liberalise the economy and modernise the country’s political institutions. Premier Wen even spoke convincingly about gradually introducing democracy to China. It was not to be. The contemporary record shows that the country has moved backwards on many economic and political measures in important respects.

There are fresh hopes that putative President Xi Jinping and Premier Li Keqiang will lead China in a different direction. After all, Xi is well travelled, is reputed to be charismatic and engaging rather than technocratic and dour, and appears far more comfortable amongst Western crowds than his stodgy predecessor. Li has made some positive noises about domestic economic reform, particularly developing rural China and offering domestic private firms greater opportunity to thrive.

Are these reasons for optimism? As the Hu-Wen record shows, what individuals say before coming to power need not bear a close relationship to what they do over the next 10 years. The reality is that we know next to nothing about what makes these two men tick. Even so, we do know something about factional and vested interest in the Chinese political economy – and it was these structural and vested interests that shaped the policies of the Hu-Wen team rather than individual personality and will. The need for changes in policy is growing more acute. But the forces opposed to reform are more formidable now than a decade ago.

The key body is the Standing Committee of the Politburo, currently a nine member group that could be trimmed down to seven members for the next 10 years. The Standing Committee has ultimate authority in forming all Chinese domestic and foreign policy.

Formally, the Standing Committee is selected by the politburo, which in turn is selected by the several hundred members of the Central Committee. In practice, the process is a top-down rather than a bottom-up one, meaning that a handful of Chinese Communist Party elites including President Hu and former President Jiang Zemin exercise decisive influence in choosing the next generation of leaders. It is extremely rare for future leaders to rise up in the absence of a powerful patron with whom they have a close personal and ideological association. In this context, the current vanguard of the Party tends to appoint their protgs whom they have been grooming for several years. The Central Committee will then rubber stamp these choices. This top-down process is generally replicated all the way down the political hierarchy in central and provincial administrations.

This top-down process is noteworthy since those who have been publicly or privately critical of current or former leaders and their policies are extremely unlikely to be nominated by these same elites. The next generation of leaders are not chosen to govern with bold, radical strokes.

Although we will not know very much about the individual personalities of the Fifth Generation leaders when they are eventually announced, we do know that the CCP is generally split between two broad factions.

The first is commonly known as the ‘princelings’, so called because they are from the families of veteran revolutionaries and high-ranking officials. Notable princelings include putative president Xi Jinping, who is known to be a protg of former president Jiang Zemin.

The privileged background of many princelings is significant. Most began their careers in the rich and economically developed coastal regions of China’s east and southeast. Princelings tend to favour pro-growth policies and are personally and institutionally aligned with powerful big business interests. They also tend to emphasise the importance of China’s ‘going out’ strategy of Chinese firms competing in international markets in order to further the country’s standing and influence in the world. For example, Xi Jinping has frequently spoken about positioning Shanghai as the financial and shipping capital of Asia and eventually the world.

In contrast, the second faction, the so-called ‘populists’, tend to take a broader view of Beijing’s policy priorities beyond the narrow focus on economic growth. Notable members in this faction include current leaders President Hu Jintao and Premier Wen Jiabao. The putative premier, Li Keqiang, is also in this faction and is the standout protg of Hu Jintao.

Many of the leading populists came from the Chinese Communist Youth League, an organisation of approximately 70 million people which is popular with ambitious CCP members lacking the personal connections normally required to rise to the top in Chinese politics. Indeed, Hu, Wen and Li were all prominent members of the CCYL.

Many of the prominent populists come from China’s inland regions. Subsequently, many tend to focus on social justice and redistribution policies. These include greater emphasis on social safety nets such as healthcare and affordable housing, greater rights for migrant workers in the coastal cities, lowering or eliminating taxes on poorer citizens, and prioritising inland economic development over further advancement of richer coastal provinces. Periodic comments by leaders that corruption could bring down the CCP are almost invariably issued by those in the populist faction. For example, President Hu’s opening speech last week at the current 18th Congress was an explicit attack against the dominant role of princelings in corporate China and the economy more generally.

Importantly, the two factions are almost perfectly balanced in terms of numbers and influence in all major decision-making bodies. This means that the future Standing Committee of the Politburo, the Politburo and Central Committee is likely to remain deadlocked in terms of factional balance.

Since actual decision-making generally proceeds on a consensus model, in which the vast majority of members of that committee must consent to every major decision, radical reform is extremely difficult to achieve.

Because the CCP remains obsessed about the appearance of unity, difficult and controversial reform decisions that could publically expose disunity are generally put to one side. The lack of reform during the Hu-Wen years is a direct result of the inherently conservative structure of political ascension and decision-making within the Chinese system.

What is the upshot of this? One of the major areas of agreement between both factions is that state-owned enterprises should remain the dominant entities in the economy. Plum positions within SOEs, and shares in them, remain a path to political power and a reward for political service. In reference to national capacity, princelings such as Xi Jinping frequently speak about the importance of commercial skills, entrepreneurialism, innovation and experimentation. Others such as Wang Qishan (current Vice Premier and a favourite to be appointed to the Standing Committee) have spoken about financial reform of the banks and improving loan quality through merit-base rather than policy-lending. But careful reading of these sentiments reveal that the policies they subsequently supported generally aid SOEs in taking the lead in improving these capabilities and not the private sector.

Even statements by populists in support of greater inland development tend to imply a greater support for inland provincial SOEs to take the lead in rural development. Many redistribution policies favoured by populists consist of a redistribution of wealth towards inland governments and SOEs.

Tellingly, the12thFive Year Plan (2011-2015), which was released in March 2012 and undoubtedly received input from putative Fifth Generation Leaders, confirmed that "national champions" are to take the lead in all "emerging industries" such as renewable energy, healthcare, biotechnology, high-end equipment manufacturing, energy-efficient vehicles and new sectors in information technology. In the plan, the government is to "channel state capital into industries pertinent to national security and the economy through discretionary and rational capital injection or withdrawal". This includes both resources from the formal fiscal budget, but also, loans from the country’s state-owned banks.

Putative premier Li Keqiang has recently mentioned the importance of supporting the private domestic sector as one of his reform priorities. This would be a healthy and significant direction for the country. But it would also be a radical reform and not one currently supported by either faction.

China is hardly closer to meaningful political or economic reform now than it was a decade ago. There is no reason to doubt Li’s sincerity on this or other issues. It is obvious that the domestic private sector needs to thrive in order for China to escape the ‘middle-income’ trap and truly prosper. But over the next decade, Li and other Fifth Generation protgs will need to demonstrate more courage and imagination than the patrons who put them there in the first place.

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