By Kumar David –

Prof Kumar David

Upshot of the Third Plenum: Decoding the inscrutable Chinese CP

The Third Plenary session of Central Committee elected at the 11-th Congress of the Chinese Communist Party’s met in December 1978, chose Deng Xiaoping as paramount leader, adopted an agenda of economic reforms and the rest is history you might think. No, it was two years before the world awoke to its colossal impact. The plenum communiqué, crafted in Mao-speak, was as opaque as a slab of lead. The Third Plenum of the 18-th CC met in November 2013. Xi Jinping has been waffling about monumental change for months, but the post-plenum communiqué matched its predecessor in foggy opacity. However, a more lucid plenum resolution containing 60 initiatives was released last week. I have not been able to lay hands on a full English version.

However, a few things have happened already; small but crucial experiments in Anhui to allow peasants to sell land, and second, asking Sri Lanka, after CHOGM, to pay attention to human rights. The latter may not be a one-off thing but signal a turn bringing Beijing back from where it is now, way out on a limb, closer to the prevailing international consensus on human rights. Don’t expect a reversed vote at the next UN-HRC or anything dramatic. China moves by deliberate infinitesimal steps, but like a glacier once it begins to shift, change is inexorable. This however is not my topic today, Rajapakse buffoonery bores me. Instead, I turn to the infinitely and globally more important issue of the reforms that have kick-started the Xi Jinping decade.

There is one trait to grasp if you wish to figure out the post-Mao chess board; slow, gradual moves in small steps, watch then move again. Never precipitate big-bangs. Chinese political thinkers are unanimous: The Soviet Union collapsed because of big-shot, big-noise folly; perestroika, glasnost and such like desperate throws of the dice. Confucius like fixation with social stability, consolidation at every stage, safeguarding Party authority, that’s the pace. ‘On the darkest of nights a monkey does not loose its grip’. The Politburo has learnt a Tamil proverb!

The leaders turned a blind eye in 1979 when peasants in one area dismantled Communes, let it spread, and then enacted a universal household responsibility system (in effect, private farming). First a few experimental  joint ventures with state enterprises in the early 1980s, then a welcome mat for overseas Chinese capitalists, now some of the largest foreign investments in history – Foxconn is not a factory, it’s a whole blithering district! Reform came from the countryside and mutated into glittering seaboard cities, then gradually took over the global consumer goods market. All gingerly done with bandaged feet; China’s women may be liberated, but the Party prefers measured steps.

The debate in China

Again now it is practical steps, not resolutions that will count. There will be some opposition within the establishment (state and party, central and provincial); so it is still open season between decision and action. The crucial issues raised within and outside the Party are well known, but there are two life and death matters I will not touch today. I bypass the self-avowed determination to stamp out corruption, and side-step the regrettably futile grass-roots clamour for democratic loosening and tranparency. Reams of paper have been devoted to both, readers are well clued up, and there’s little new that I can add right now.

After this long but necessary prologue, let’s get down to restructuring issues. Enumerating and sorting in priority order helps to marshal thoughts. This list (corruption and democracy aside) is what keeps leaders awake at night and strategic planners pulling out their hair.

(a) Greater use of market forces while ensuring that the hegemonic and directive role of Party and state in macro-economic course-setting is not compromised.

(b) Accommodating pressure from the countryside to sell land; class-power, social stability and rural prosperity are concerns if a land market is opened. Unauthorised drift to towns and the restrictive hokou or residence permit system are also concerns.

(c) Rethinking the essential paradigms of state owned enterprises (SOE); property rights, managerial reform and reorganisation for efficiency and accountability.

(d) The yawning wealth and income gap, versus much touted socialist equity; wages, wage-default, pensions, unemployment protection.

(e) Social issues; relaxation of the one-child policy, health, education, welfare.

(f) Reorganising the financial sector, particularly banks.

(g) Cooling and controlling the boom-bust urban property market.

Financial sector reform (f) and opening to foreign banks will be limited to small units. There will be larger openings in electricity, petrochemicals and mining. The big problem with banks is balance-sheets, even behemoths like ICBC, CCB and BoC (some Chinese banks, by asset valuation, are the largest in the world). Large loans to Provincial Governments and SOEs, enforced by Beijing for policy reasons, will end in default and tears. The Central Government is sitting on trillions in dollar reserves and gold, but should it use public funds to bail out, albeit public banks?

I also doubt whether the urban property bubble (g) got much attention at the Plenum though it is driving Hong Kong folk round the bend. Not only residential property in China’s elite cities, but Hong Kong property prices are going through the roof as rich Mainlanders rush to invest in the ‘near-abroad’. Still, this is a middleclass gripe, not a CC Plenum sized matter. In any case, space, with great difficulty, permits me only to deal with the first and third items (a) and (c) on the list.

Socialist Market economy, oxymoron or valid concept?

A man is entitled to blow his trumpet once; this section heading is the title of a paper I wrote for the Hector Abhayavardhana Felicitation Symposium of January 1999. My thesis of 15 years ago about China’s economic and state-form trajectory has held up incredibly well; nowhere in the world did anyone else get it even half as right! Enough trumpeting, now to business.

The Chinese are not afraid the market will summon capitalism back from the grave. They call it a tool, an operational thing to be used in any type of economy. Economists Gao Shangquan and Chi Fulin are typical in ‘Theory and Reality of Transition to a Market Economy (Foreign Languages Press, Beijing):

“The market, or the market-oriented economy regulated by market mechanisms, belongs neither to capitalism nor socialism. Under capitalism it plays its due role in economic regulation, but also exists and plays the same role in a socialist system. The socialist market economy is a market economy operating under socialism”.

Confident of their system, Chinese scholars say the danger of reverting to capitalism is a red herring. They make claims (“The market economy under socialism must and does perform better than in capitalist conditions”) which will rudely awaken a famous Mr Smith resting in peace in Canongate Kirkyard, Edinburgh.

Gao and Chi also reject the central-planning model of the Soviet command economy as ossified, inflexible and bureaucratised. This is what they and others say:

“The main operational modes of the Chinese economic system, from income distribution to investment decisions, determination of prices, selection of new economic policies, and employment of work force, have to a great extent been divorced from the former Soviet-style planned economic model. The economy has been subject to the increasing domination of market forces”.

A striking feature to the casual visitor is that price determination is divorced from price control in the colossal consumer goods sector that has sprung up everywhere, even in small towns and villages. Regulated prices persist only in energy, heavy industry and economically strategic products. Simply put, over 90% of prices are market driven. This is true of agricultural output, village and town products, private enterprises of course, and the output of most SOEs.

Chinese Communist Party power structure

If the Chinese model is divorced from Soviet-style central planning and differs profoundly from American private enterprise capitalism, what is it, how does it differ from both? Let me be as simple as possible. Very roughly (the numbers are evolving) about a third of GDP output  – including energy, telecoms, heavy industry and finance – is in large SOEs giving the state considerable direct leverage; another third is in agriculture and in provincial and small enterprises in townships, retail etc. The final third is in capitalist enterprise proper. The crucial point is this: Party and state direct the macro-economy in ways that Washington cannot – South Korea and Taiwan, in their take-off period, were half way like this. Banking and finance is state-driven, unlike capitalism. Loans to provincial governments and SOEs are directed to achieve policy objectives. A final crucial difference whose importance cannot be overemphasised is devolution; a great deal of economic power is decentralised from centre to province. This never was the case in the Soviet Union and Eastern Europe.

Call this a socialist market economy, state capitalism or what you will, but this is the animal. And this is the animal who’s grooming and tuning is on the agenda. The task is to increase the role of the market to enhance operational efficiency and resource allocation, while holding the macro-economic reigns firmly in the hands of Party and state.

What about SOEs?

How big is the SOE sector? With 100,000 medium and large enterprises, 30 to 40% of the national asset base (over 50% of industrial assets), and 80% of the value of all listed companies, it really is something. There were over a million, 35 years ago, including minuscule retail outlets and restaurants (the comedy survives in Cuba in fealty to caricatured notions of socialism) but thankfully 95% have been closed down or sold to small operators. As with state-owned industrial enterprises in other parts of the world, the trouble is political interference and rotten management – two sides of the same coin. Low operational efficiency, absence of accountability and dearth of initiative except in venality, are endemic. Tens of thousands of SOEs are good, but in China that’s a small proportion. There is agreement all round that efficiency, competence and corruption worries must be addressed.

Chinese CP Politburo Standing Committee in November 2013. Left to right,
Zhang Gaoli, Liu Yunshan, Zhang Dejiang, Xi Yinping (Party Secretary and President),
Li Keqiang (Prime Minister), Yu Zhengsheng and Wang Qishan

There are two contending Party factions; gradualists and radicals. Gradualists want internal reform, better processes and an end to state financial codling. This approach has been tried numerous times in China and elsewhere; after a good start it flops back to bad old ways again. Radicals are digging in for transformation of the state ownership paradigm. They want the government out of enterprise control, management and the direct-ownership scenario. Since privatisation – return to capitalism – is unthinkable, radicals have formulated striking new structural proposals.

The key is innovative hybrid-ownership to drag all but the 100-200 largest SOEs out of ministry and government control – but government will appropriate 30% of profits! One out of many options discussed is to vest ownership in state-shareholder-‘other’ partnerships. The shareholder part is perhaps conventional public listing. The innovative element is the ‘other’ which opens the door to new forms of social ownership; savings institutions, pension funds, provinces, banks. Savings and pension funds with cash oozing out of their ears exist in Japan (the post office) and the US (the social security trust fund). Hence, forming, nurturing and maturing such institutions, has to come first; there is no shortage of money in savings and reserves. Ten years is plenty of time to get it done; state-property can then, perhaps, become people’s property.