block Xi Jinping s Vested interests reforms Insight Perspectives China strategic investments and by the underwriting of more

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1 16 Insight Perspectives China Vested interests block Xi Jinping s reforms By Invitation Insightperspectives regularly invites experts to write about special issues of importance to the financial market. In this context, Joergen Delman, professor, PhD, China Studies, Department of Cross-Cultural and Regional Studies, University of Copenhagen, has been invited to write about what is slowing China s reform process. Joergen Delman works on China s political economy, politics, civil society, climate policies and environmental issues. He is a frequent public speaker and media commentator on these topics and lived in China for ten years, working as a consultant for international development organisations, as well as Danish and international businesses. He has worked extensively with and within Chinese government organisations at central and local level. Joergen Delman is Co-coordinator of ThinkChina.dk. In recent months, Xi Jinping has been frustrated with the speed of reforms. The standard initiatives of the government under Prime Minister Li Keqiang to prop up growth rates by a new round of unprofitable, so-called strategic investments and by the underwriting of more debt through state banks and SOEs will not do the trick in Xi s view. In fact, China s debts already amount to 249% of its GDP.

2 Insight Perspectives The Guardian s Tom Phillips argues that there are open rifts about the reform path within the top leadership as Xi Jinping pushes for new substantial reforms. Says Xi: If we hesitate in making decisions and do things halfway, we will lose this rare opportunity. However, Phillips also notes that some experts caution against exaggeration of the internal rifts among top leaders, since they still agree on the basics of the economic policies. Therefore, it is time to shift the focus in order to understand Xi s frustrations and the frank and critical, yet anonymized debates about economic policy that have made it to the front pages of the top party newspapers this spring. Reforms are a revolution A statement at the end of June from the top level Leading Group for Overall Reform noted that: Reform is a revolution that aims to rectify the system and challenge vested interests. Xi Jinping chairs the Group which charges reforms across the economy and the political-administrative and legal systems. The statement is noteworthy because it contests basic Communist Party ideology by calling reforms a revolution against vested interests. Traditionally, the Communist Party has seen revolutions as historical events brought about by inherently contradictory economic, social, and political factors, especially contradictions between the basic socio-economic interests of privileged vs unprivileged groups, while reforms are seen as the normal state of affairs through which the Communist regime promotes economic and social progress. So why does Xi challenge this orthodoxy? He apparently realized that radical systemic reforms are necessary to overcome the opposition of vested interests against reforms. The reform process has stalled, not least in key economic sectors with heavyweight state-owned enterprises (SOEs) exerting monopolistic dominance. Xi Jinping and Premier Li have both spoken gravely on the matter. Said Li: Sometimes it is often more difficult to move interests a bit than to touch one s own soul. Reforms are on deep and difficult waters because interests are embedded in rigid structures. Xi Jinping points to the link between vested interests and the Party-state system: There is a fence around ossified interests ; Inside the Party, there must be no relations based on personal attachment ; The cadres are the Party s cadres, not somebody s furniture. Even more, he has linked vested interests to political infighting within the Communist Party: [we will] not allow gangs, factions, [we will] not allow [people] to set up interest groups or that they exchange interests. 17

3 18 Insight Perspectives How to recognize vested interests Why this focus on vested interests? In the West, vested interests are largely seen as legitimate if they move within the boundaries of the law. Trade unions and business associations are part of the political establishment and can interact directly with politicians as long as they are clear and transparent about their purpose. Vested interests can promote or block reforms because this is their raison d etre. They contribute to the stability of the political system by fulfilling this role. Not so in China, where vested interests are seen as illegitimate forces that silently, but at times even openly, fight against, undermine or divert reforms. Much of the public and academic debate argues that vested interests have benefited hugely from the first wave of reforms in the 1990es. They are satisfied with the status quo and do not want a new round of reforms. They are afraid that new reforms could harm the power and benefits they have gained. Therefore, they tend to behave like a clandestine political opposition, as Xi notes. The blog-writer and non-party member Deng Yuwen identifies seven types of vested interests: (1) Strong national government organizations and the officials working within them; (2) local governments and their officials; (3) state owned monopoly enterprises (SOE), especially the core or strategic national SOEs, as well as SOEs and their chief executives at the local level; (4) multinational capital and its comprador agents in China; (5) real estate developers; (6) large private enterprises and private capital, such as private real estate developers, private coal mine owners and owners of financial service and investment institutions; (7) scholars and specialists who depend on the above types of vested interests. Vested interests are broadly criticized for forming interest groups and alliances to promote their political or private interests. They thrive on the institutional architecture of the party-state and its control over the strategic and powerful SOEs, including the financial sector, through formal and informal ties. At the same time, the central and local authorities are frequently in conflict about the control over local resources and the distribution of economic benefits. Naturally, local authorities primarily have their own vested interests in mind. What is the problem? Sun Liping, a famous Tsinghua sociologist, argues that vested interest groups combine political power and

4 Insight Perspectives market opportunities. He calls them big-wig groups ( 权贵集团 ) within a big-wig system ( 种权贵体制 ). The consequence is that the public sector advances while the private sector must retreat. The big-wig groups use violent measures so preserve system stability since they thrive on the status quo. They use force to extract levies and they undo the party-state system by conniving in corruption. The big-wig system impairs the vitality of the political-economic system, society becomes bifurcated, and the rule of law suffers setbacks. Social ethics are on the decline and the environment is in a mess. Even more, Sun links the big-wigs to the political interests of what he calls the Maoists and the liberalists. They are ideological groups or factions on the fringes of mainstream Party politics that he accuses of putting up roadblocks everywhere for new reform initiatives. Indeed, the Party has become a powerful economic elite by itself. A survey from 2006 found that amongst the richest people in China, 27,310 had assets worth more than RMB 50 million, and 3,220 more than 100 million. Out of the latter group, 91 % (2,932) were children of high-level party-state officials. As noted by one author, it is no secret that the large majority of the super-rich have used their family s political power as a resource to become rich and form a club of super-rich. How does Xi fight vested interests? The anti-corruption cases, especially against the tigers, i.e. top leaders such as Bo Xilai, Zhou Yongkang and Ling Jihua, have offered privileged insights into the formation and operations of vested interest networks. For example, the published material pertaining to Ling Jihua claimed that his family and network had monopolized the coal sector in Shanxi. His wife, Gu Liping, was accused of being the mediator of Ling s network, not least in relation to Zhou Yongkang and Liu Zhijun (former railway minister). Ling, Zhou and Liu are now all in prison for life, primarily convicted for being extremely corrupt. Anti-corruption is one of the powerful tools in the hands of Xi Jinping to deal with vested interests and political opponents. The other tool is the Party s system of promotion through which he can control the appointment of future top leaders. He uses both of these tools vigorously to promote his political agenda and to 19

5 20 Insight Perspectives ensure loyalty from the new leadership ( ) that will be elected next year. But these tools will hardly help him settle the bill with vested interests. The interventions that he employs are selective and vulnerable. While anti-corruption policies may seem radical, or even revolutionary, as now stated, the fundamental question is whether it is not the Communist Party itself that has created the conditions for the vested interests groups to thrive and for the new privileged strata to use the Party-state-SOE big-wig system to protect their own interests? Fundamental economic reforms must therefore be matched by reforms of the political and legal systems. Some of these reforms are on the drawing board, but they are exceedingly difficult to implement as noted by Xi Jinping and Li Keqiang. Most Chinese analysts argue, somewhat surprisingly, that China must adopt the checks and balances known from more democratic systems to deal with vested interests. By doing so, they challenge Xi s conviction that the Communist Party must retain its monopoly on power, that China cannot learn from democratic systems, and that China and the Party must simply revert to its Marxist traditions to manage its internal affairs better. Vested interests and international companies At times, there is an anti-foreign and also anti-western tone in the Chinese debate about vested interests. However, it is unlikely that the reforms planned to deal with vested interests should constrain foreign companies more than they already are. On the contrary, promises to open up the state controlled sectors and expand the hybrid economy may eventually provide more opportunities for international companies. As noted by London School of Economics Professor, Ke Yujin: If [reforms are] implemented fully, they would have a far-reaching impact on China s political economy, because they shift the balance of power from officials to markets. More fundamentally, the Chinese leadership needs to recognize that there are legitimate and illegitimate interests and that openness, transparency and accountability of the interactions between government, business and interest organizations are prerequisites for successful reforms. As long as vested interests are demonized and linked with corruption and political infighting, legitimate interest groups are unable to play a constructive role and help stabilize the political regime. Legal regulation of such interests could be a constructive way forward and it would be a real

6 Insight Perspectives revolution if such reforms could be presided by an independent judiciary. However, this is a long shot since Xi Jinping is unwilling to render any of the Party s authority to an independent judiciary. Front page Table of Contents 21