China’s Inevitable Changes

The Central Committee of the Communist Party of China will convene its Third Plenum meeting Nov. 9. During the three-day session, President Xi Jinping’s administration will outline core reforms to guide its policymaking for the next decade. The Chinese government would have the world believe that Xi’s will be the most momentous Third Plenary Session since December 1978, when former supreme leader Deng Xiaoping first put China on the path of economic reform and opening.

Whether or not Xi’s policies will be as decisive as Deng’s — or as disappointing as those of former President Hu Jintao — the president has little choice but to implement them. China’s current economic model, and by extension its political and social model, is reaching its limits just as it had prior to Deng’s administration. The importance of the upcoming meeting is that it comes at an inflection point for China, one that its leaders can hardly afford to ignore.

A Fundamental Challenge

It is worth recalling just how extraordinary Deng’s 1978 meeting was. Mao Zedong had died only two years earlier, taking with him what little remained of the old pillars of Communist Party legitimacy. China was a mess, ravaged by years of economic mismanagement and uncontrolled population growth and only beginning to recover from the trauma of the Cultural Revolution. Had the People’s Republic fallen in 1978 or shortly thereafter, few would have been truly surprised. Of course, in those tense early post-Mao years hardly anyone could foresee just how rapid China’s transformation would be. Nonetheless, battling enormous institutional constraints, Deng and his colleagues quickly set up new pillars of social, political and economic stability that guided China through the fall of the Soviet Union and into the 21st century.

Although Xi presides over China during a time of economic prosperity, not disrepair, perhaps not since Deng has a Chinese leader faced such formidable challenges at the outset of his tenure. Former Party general secretaries Jiang Zemin, and to a greater extent Hu, could largely follow the lead of their predecessors. Jiang, emerging as a post-Tiananmen Square leader, was faced with a situation where the Party was rapidly losing its legitimacy and where state-owned enterprises were encumbering China’s economic opening and reform. But internationally, China’s position was relatively secure at the beginning of Jiang’s term in office, and by the time he took on the additional role of president in 1993, the decline of the Japanese economy and the boom in the United States and the rest of Asia left an opening for China’s economy to resurge.

These conditions enabled Jiang’s administration to enact sweeping bureaucratic and state sector reforms in the late 1990s, laying much of the groundwork of China’s post-2000 economic boom. When Hu succeeded Jiang in 2002-2003, China’s economic growth was seemingly unstoppable, perhaps even gaining steam from the Asian economic crisis. The United States, which had seemed ready to counter China’s rise, was instead fully focused on Iraq and Afghanistan, and though the Communist Party of China was not exactly seen as the guiding moral compass of the state, the role of print and social media in raising criticism of Party officials had not yet exploded.

As Xi prepares his 10-year plan, China has reached the end of the economic supercycle set in motion by Deng. Public criticism of officials and thus of the Party is rampant, and China’s military appears much more capable than it actually is, putting China is a potentially dangerous situation. Once again the United States is looking at China as a power perhaps to contain or at least constrain. China’s neighbors seem eager for Washington’s assistance to counterbalance Beijing’s influence, and long-dormant Japan is awakening once again. Xi may not have to rebuild a fractured Party or state as Deng did, but in some ways he faces the same fundamental challenge: redirecting and redefining China.

China can no longer follow the path it has in previous decades. Deng emerged as China’s paramount leader out of the struggles and chaos of the Gang of Four era and the Cultural Revolution. He redefined what China was and where China was going, not out of a desire to try something different or an infatuation with “Western” economic models but out of a fundamental need to change course. Whether Xi wants it to be or not, China is at another crossroads. He has little choice but to make consequential decisions, lest he leave China scrambling from one quick fix to another at the expense of long-term opportunities.

The Perils of Rapid Reform

Reform, with “Chinese characteristics,” is not about Westernizing the Chinese model. Rather, it is about reshaping the relationship between the Party, the economy and the people in a way that will maintain the centrality of the Party. This may require improving the efficiency of the Party and governing structures, changing the organization and rules of business, and deferring to the rights and responsibilities of the citizenry. But while this will likely entail selectively scaling back the Party’s power in certain areas, it does not mean the overall reduction of Party power.

Since the founding of the People’s Republic in 1949, the Party has been constitutionally at the center of Chinese leadership. Mao’s authority stemmed from his role as chairman of the Central Committee of the Communist Party of China, a position he held from 1945 until his death in 1976. Concerned by Mao’s concentration of power, Deng never adopted the same titles, though he still managed China through the Party, drawing strength and authority through his careful balancing of retired and serving Party officials. In 1993, the Party general secretary took on the parallel role of the president. Jiang served in both roles, as did Hu and Xi.

The consolidation of Party and political leadership was made clear in the formula. It is matched by the general secretary and president also holding the dual roles of chairman on the two parallel Central Military Commissions, one under the Party and the other under the state. Under Mao, the Party and the state were united in the figure of Mao himself. In the 20-year transition from Mao to Jiang, the Party remained synonymous with the state, but the consolidation of power in a single individual was replaced as Deng sought to initiate a system of group leadership to avoid the rise of another strongman. Jiang’s accession to the presidency formalized Party-government leadership, but consensus leadership constrained his power. Jiang may have technically held all the key posts of power, but other power brokers in the Politburo could counterbalance him. The system ensured that the paramount leader remained constrained.

This group dynamic allowed the Party to avoid the rapid and far-reaching policy swings of Mao, but it created stagnation in the bureaucracy and state sector. Ensuring the right web of connections often became more important than fulfilling the responsibilities of the Party or the state. Deng’s machinations helped eliminate strongman politics and degraded political factions like the Gang of Four, but these were replaced by more complex and widespread bureaucratic and industrial patronage networks. The result was more a web than a set of individual strings. No longer could any one interest press entirely against another without risking the entire structure. The intertwining threads were just too complex. Rapid policy swings were impossible and factional battles that threatened the fabric of the state were effectively eliminated, but the cost was a decision-making process that was increasingly cumbersome and timid. Radical reform would never make it through the process of consensus building, and any policy deemed harmful was met with resistance.

This worked well during China’s boom. Though China was corrupt, beset with a cumbersome regulatory environment and prone to violations of intellectual property rights, it was fairly predictable overall, unlike so many other developing economies. The consensus model was also more attuned to social stability, constantly making tiny adjustments to appease or contain the demands of public sentiment. In times of slowed economic growth, China’s leaders would stimulate the economy. In times of apparent overheating, they could cut back on credit. If people were frustrated with local officials, the central government would alternately remove the accused leaders or crack down on the protesters. But when the foundation of China’s economy began to shake after 2008, when China’s very success drove up wages and prices as its biggest consumers faced serious economic problems of their own, China’s consensus leadership proved unequal to the task.

During China’s rise, Beijing needed only minor adjustments to maintain stability and growth. But now that the country is in a far different set of circumstances, Beijing needs a major course correction. The problem is that consensus rarely allows for the often radical but necessary response. And for good reason: The success of radical change is not guaranteed. In fact, history suggests otherwise, as it did notably with the case of Mikhail Gorbachev and the Soviet Union.

Adaptation

To overcome the limitations of consensus leadership, Xi apparently is trying to strengthen the role of president. He wants to redefine the presidency so that it is not merely the concomitant title for the Party leader but also a post with a real leadership role, similar to the presidencies of other major countries.

This is a way to compromise somewhere between consensus and strongman. The presidency should not exceed the Party, but as the head of state, Xi is hoping to use his position to have a greater say in how the Party is restructured. The first target is the bloated bureaucracy. Already there are signs that several of the reforms are about removing layers from China’s bureaucratic structures. This should add efficiency to the system (its stated goal), but it may also confer greater central oversight and control by cutting through the webs of vested interests that have taken hold in many of China’s most powerful institutions.

The reforms slated for the economic sector are similar. They will introduce more market and competitive mechanisms while giving Beijing greater control over the overall structure. Consolidation, efficiency, transparency, reform and restructuring are all words that possess dual meanings — one regarding more efficient and more flexible systems, the other regarding systems that the center is better able to direct. At a time when China needs radical change, it first needs to change the mechanism through which policies are decided and enacted. The government hopes that by disengaging from constant, restrictive intervention into certain sectors, it will have greater capacity to intervene selectively, focusing on enforcement and compliance rather than dictating every move of state-owned enterprises. There is no guarantee that these reforms will work or that they can be implemented effectively or smoothly. China has seen three decades of economic growth, and in turn three decades of more tightly woven relationships and knitted interests. Unraveling any thread can rapidly degrade the entire structure, unless stronger central replacements are already in place.

China’s leaders are facing the difficult task of adjusting once again to changing circumstances. Political legitimacy and control remain closely linked. It is Xi’s position as head of the Party that ostensibly gives him legitimacy as head of the state. But to create a more nimble and adaptive government, Xi is seeking to harness the people in a slight reversal, using his role as president to rebuild the legitimacy of the Party, and in doing so take stronger control of the Party mechanisms. This is a difficult balance. But China is at a turning point, and without nimble leadership, a system as large and complex as China can move very rapidly down an unpredictable and uncontrollable path. The leadership can attempt to take control and hope for success, but the consensus system and entrenched and bloated bureaucracy are reaching the end of their effectiveness as China enters uncharted economic and social waters.

“China’s Inevitable Changes is republished with permission of Stratfor.”

• Become A Funded Futures Trader