Xi Jinping's reform strategy is becoming clearer

Lowy Interpreter

In Systems of Survival, Jane Jacobs describes the two moral codes that co-exist in modern life: the merchants and the guardians. Merchants trade, competing within the laws, and are open, industrious and pragmatic. Guardians are loyal traditionalists, hierarchical, expert; they command political, military, professional and civic power. Merchants seek profit while guardians value honour. The two castes co-exist warily, they need each other but effective law must separate and regulate them. It is easy to see that problems occur (especially corruption) when they mesh dysfunctionally.

In China, socialism was intended to be a guardian system, but collective ownership drew the guardians into business. Running state-owned enterprises (SOEs) was vastly lucrative. Jiang Zemin welcomed private entrepreneurs into the Party. The merchants and the guardians merged.

This is the ideological dilemma President Xi Jinping is facing. His SOE reform program has until now been confusing, even contradictory. But clarity has emerged in recent days.

At first, reforms emphasised 'mixed ownership', bringing more private sector involvement into SOEs. This was always questionable. While indebted local governments are gung-ho about privatisation, the private sector suspects 'a ploy for SOEs to draw in money.' Others worry the entire system is rigged against private investors. SOEs often struggle to serve both the state and the market: monopolistic central SOEs have become complacent and remain largely closed (Sinopec's restructuring is a notable exception), while smaller SOEs burdened by welfare obligations are hammered by competition. Without a clear profit mandate, SOEs have pursued scale, leading to over-capacity. There are suspicions that managerial carpet-baggers have looted state assets over the years. And previous reforms failed because insular SOEs struggled to hire professional managers from outside.

Some thought the solution was to pay SOE managers more. A State-owned Assets Supervision and Administration Commission (SASAC) official beamed as he described his new opportunities: 'SOE managers, now permitted to fire workers, could be measured on profits, in which they could share.' A major bank said that it was 'urgent' to introduce stock options, a move which would surely be followed enthusiastically by rivals.

Yet in recent days a very different message has descended from the leadership: pay and perks for SOE executives are to be cut by as much as 50%. While not paid extravagantly by international standards, these bosses enjoy royal benefits. Their comedown will be publicly popular, and Xi Jinping may likewise be harnessing his widely supported anti-corruption campaign to force through reforms in the SOE sector. The campaign invokes 'shock and awe' so managerial resistance may be muted.

What aim does the President have in mind? 

I believe Xi is trying to mark a clear distinction between the administrative role of the state and the executive management of the companies it owns. His model is Singapore. At an operational level, independent professionals will be well paid in line with the market, while the government will appoint directors in a supervisory role. Like elsewhere, there will be a gap between executive and non-executive compensation. The Party-member directors will be paid less, perhaps much less, than the SOE executives they oversee. They will be paid as guardians, not as merchants. They will bear the honour of serving the people; those seeking riches should look elsewhere.

So much for the principle. The question is whether it can work in reality.

So far this administration has surprised many with its ferocity. The tough tactics have been mirrored in Xi's martial language ('reform wielding a knife,' for example). Indeed the very force of change, ruthlessly executed by his 'fireman' Wang Qishan, has caused unease that due legal process is not being observed and that law enforcement is politically motivated. Even reform cheerleaders are wondering where this is all heading, with Caixin's Hu Shuli plaintively reminding us that 'effective rule of law must be the endgame of anti-corruption.' There are some steps towards judicial reform but it's not clear if Xi can truly 'verticalise' legal power and simultaneously empower local judges with more independence, which seems to be his plan.

What is clear is that economic reform is being handled with a political iron fist. The leadership appears to have reached an anti-liberal reform consensus. Or perhaps Xi is merely guarding his ideological flanks. Or maybe there is no consensus and this is a naked power grab.

In any case, the guardians of China's party-state are being asked to rally for a higher purpose. For Xi Jinping the reform program, and the anti-corruption campaign subsumed within it, has an overarching goal of making China more stable, equitable, just and governable. Xi's language evokes a struggle of life or death. Just as Jane Jacobs predicted, properly separating guardians from merchants has become Xi's system of survival.

Originally published by The Lowy Institute publication The Interpreter. Republished with permission.