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Remember that in China conservatism persistently triumphs over reform

Das Capital: Reforms that reduce the power and control of the Communist Party are likely to meet opposition

Satyajit Das
Thursday 07 January 2016 01:50 GMT

Reform in China depends ultimately on the willingness of the Chinese Communist Party (CCP) to embrace change.

The role of the party is pervasive. It wields significant influence through party cells within businesses, agencies, courts, the police and the armed forces, as well as the strategic placement of party members in key senior roles throughout the economy. Since the 1989 Tiananmen Square protests, the party has increased its control of the economy. Membership of the CCP has increased from 20 million to 45 million.

Continuation of the Communist Party’s influence and monopoly power requires strong economic growth. China’s state corporatist model, based on credit driven investment, is designed to deliver growth. The strategy requires the government to exert significant power over the economy, with the ability to intervene in economic activity and allocate resources.

In practice, this is done through the state-owned enterprises and, especially, control of the banking sector. Reforms which reduce this power and control of the party are likely to meet opposition.

CCP members and their associates also benefit directly from the system. Party connections are essential to building and maintaining wealth. Reforms that adversely affect existing wealth or the ability of the CCP-connected Chinese to accumulate wealth are also likely to be opposed.

Resistance to reform is also founded on the belief that in the longer term it will create pressure for a plural political system, reducing the party’s control.

In recent years, the books of 19th-century French historian Alexis de Tocqueville, particularly his analysis of the French Revolution, L’Ancien Régime et la Révolution, have been popular among China’s leaders. The focus has been on De Tocqueville’s argument that the French Revolution did not occur when conditions were harshest but when improving conditions created further expectation of progress and change.

Western observers want to believe that this time the Chinese leaders’ frequent reference to reform is not mere party speak and will lead to decisive action.

On balance, economic, political and social difficulties will prevent meaningful change in the near term. There will be minor adjustments, but China will continue its present economic model until it fails or the existing structure reaches breaking point.

The need for economic growth will drive investment by state-owned entities with money borrowed from state-controlled banks. Overheating asset prices, overcapacity or defaults may lead to some reduction in the flow of credit. But as growth slows, liquidity will be pumped into the economy to boost growth. Bad debts will be shuffled on to the state’s balance sheet or dealt with by continuing to keep the deposit rate below inflation.

The need to maintain the profitability of businesses and avoid insolvency in the banking system will impede the transfer of a greater share of GDP to households. Steps to improve social services and welfare will be constrained by growing claims on the government’s resources.

Social change, improvement in property and legal rights and reducing environmental degradation will be slow, reflecting the cost and complex factional politics within the party and between Beijing and local governments.

Meaningful rebalancing between investment and consumption, reform of state-owned businesses and liberalisation of the financial system will be less radical and much slower than forecast.

Instead, short-term measures such as tolerating the shadow banking system, engineering a devaluation of the yuan currency, steps to boost exports and attacking foreign investors will be used to boost short-term economic performance.

In November 2012, the then Chinese president, Hu Jintao, spoke about the need for economic and political reform. But the president simultaneously cryptically cautioned against taking the “evil road of changing flags and banners”.

This reluctance to make the necessary changes, circulated widely on Weibo, China’s Twitter-like micro-blog, drew the following derisory comment from one user: “So we will walk in place until we die.”

The resistance to reform is evident in China’s increasing repression and intolerance of analysis that contradicts the official view.

The World Bank ranked China 91st out of 185 countries in a recent “Doing Business” report, using established and well regarded methodologies. Beijing responded furiously, accusing the World Bank of using the “wrong methodologies”, failing “to reflect facts” and misleading readers. China is also lobbying to eliminate the rankings altogether.

In addition to restricting access to certain websites and external media, China has begun to target foreign researchers and analysts, especially high-profile ones, who challenge China’s economic progress, particularly the rate of economic growth.

China’s history is one where conservatism persistently triumphs over reform. It is also one where leaders inflict great hardships and costs on the people, such as during Mao Zedong’s ill-fated Great Leap Forward and Cultural Revolution. It will be interesting to see if this time it is different.

Satyajit Das is a former banker and author whose latest book ‘A Banquet of Consequences’ is published in February

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