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Xi Jinping’s Challenge

Kenneth Lieberthal
November 9, 2012
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Now that the U.S. election finally is over, it's time to focus on the other most important leadership transition in the world: China's.

Like the United States, China is also at a turning point, and though the specifics differ, the crux of the problem is the same: major structural change is critical to sustained future growth and stability, but the country's current leaders have been unable, or unwilling, to implement the necessary reforms to shift its economy onto a path of sustainable development.

If anything, China's heirs apparent have the harder task.

Unlike Barack Obama, for instance, the incoming leader Xi Jinping won't be able to choose most of his own team. Beginning Nov. 8, when the Communist Party convenes its 18th Party Congress, and continuing in March 2013, Beijing will in two steps replace about 70 percent of the incumbents in its top communist party, government, and military bodies. China watchers expect Xi Jinping and Li Keqiang to ascend to the most powerful two spots on the Politburo Standing Committee, the country's highest decision-making body, but nobody outside a small circle of insiders knows who will fill the other 5-7 spots -- let alone what those individuals think about how to run the world's second-biggest economy and one of its major military powers.

Nor is the president of China as powerful as is commonly assumed. Since Hu Jintao, the outgoing leader, ascended to the top job in 2002, collective leadership built around consensus decision making has become the norm. Each Standing Committee member manages a distinct part of the overall Chinese system. The outgoing premier Wen Jiabao runs the cabinet, Zhou Yongkang runs domestic security, and so forth.

This system has its advantages, such as the ability to mobilize enormous resources and act quickly when all Standing Committee members agree on a priority course of action. But it has also produced a willingness to spend more money on top priorities ("you vote for my priority and I'll vote for yours"), coupled with an inability to adopt decisions that seriously disadvantage any member's sector, such as reducing subsidies to major state-owned enterprises or cutting back the scope of the civilian security apparatus. There have thus been no major structural reforms in China for the past five years, and few in the half-decade before then.

The recognition of the need for sectoral reform of the Chinese economy -- and related political reforms to make that happen -- is so widespread that Xi undoubtedly has this on his agenda. But it is unclear how high a priority he attaches to this or whether he can fairly easily be dissuaded by other considerations.

And even if Xi proves to be an ardent reformist (which is by no means clear), he may prove unable to move the system sufficiently in the directions he knows it must go. Wen has called for such changes for at least the past half decade, even as the system has in fact moved in the opposite direction. Success or even rapid progress here is far from assured.

The hurdles are high for Xi. Because he does not even get to pick most of the members of his own team, virtually no other Standing Committee member will owe his job solely to him -- current and former members select the lineup of the new Standing Committee in order to achieve a balance among their interests. It may take an impending or actual major crisis, therefore, for Xi to garner the authority to drive through necessary but painful decisions.

And painful decisions are essential to avoid snowballing structural drags on growth and heightened social tension and instability. With the government already spending more on domestic security than on the military in the face of a reported 180,000 "mass incidents" in 2010, serious reform is necessary.

The outgoing leadership of President Hu and Premier Wen has in recent years chosen to muddle through, handing off the problems to their successors. But China's huge economic gains over the past decade primarily reflect the payoffs from reforms made in the decade before that, including the privatization of housing, drastic downsizing of state-owned enterprises, restructuring of the banking system, joining the WTO, and expanding the political base of the party to include businesspeople.

Despite early signs that Hu and Wen would continue to promote reforms meant to improve social equality and rural living standards, these initial initiatives took place years ago, and problems have since multiplied.

Beijing's economic strategy must be drastically overhauled. The Hu/Wen leadership, recognizing the danger, in March 2011 formally adopted a new development strategy that stresses increasing household consumption, reducing reliance on exports, expanding services, and moving to more innovative, less resource-intensive manufacturing. A study released this February by the World Bank in conjunction with the State Council Development Research Center, one of China's top government think tanks, confirmed the importance of this new strategy. But little serious reform has happened to date.

A key obstacle is that the old way of doing business is now built into the DNA of the leaders of the roughly 40,000 political jurisdictions outside of Beijing, from the province to the city to the county to the township level. These officials, rewarded primarily on the basis of producing rapid GDP growth while keeping a lid on social unrest, have used their political power to nurture infrastructure building and other capital-intensive projects. This in turn has generated short-term GDP growth and employment, along with massive flows of bank loans and other funds from which they can skim.

The results have been clear: breakneck growth, huge infrastructure and manufacturing development, enormous corruption, massive environmental devastation, growing inequality of wealth, and rising social tensions. If they wish to change the behavior of these local leaders, Xi and his colleagues must expend enormous political capital to do so.

And local officials are hardly the only impediments to reform. Beijing has fostered "national champions" -- state-owned corporate behemoths, many of which are seen as key to the party’s grip on power and are closely tied to elite political families. This marriage of wealth and political power presents major obstacles to effective changes in economic strategy.

Corruption at all levels, moreover, makes reforms even more difficult to implement through China's massive bureaucracy. And the fear that reform itself can generate expectations that may get out of hand adds to the hurdles to making necessary changes.

Thus, there are no simple solutions to China's challenges, almost all of which are more difficult than those confronting the United States. In the United States, the core issue is one of gaining a political consensus on federal revenues and expenditures. For China, the challenges require major structural overhaul of the economy and wide-ranging changes in the political system. The complexity of both the problem and the necessary corrective measures are massively more daunting in Beijing than in Washington.

The reforms China knows it should undertake are very much in America's interests -- reducing Beijing's need to resort to unfair trade practices, while at the same time further opening its economy, increasing the role of the market, and allowing greater opportunities for U.S. investments in sectors (such as financial services) in which the United States is highly competitive. In addition, putting China on a path of more sustainable, less environmentally damaging growth increases the chances that its government will be more confident, outward-looking, and constructive internationally. China, in turn, has a major interest in U.S. success in getting its deficit under control, given how heavily Beijing has invested in the health of the U.S. dollar and the American economy.

U.S.-China relations, in short, will almost certainly experience less strain if both Beijing and Washington deal more effectively with their need to undertake significant reforms. If each falls short, the opposite is true. Leaders on both sides should keep this fundamental reality in mind over the coming years.

 

Kenneth Lieberthal is senior fellow in the John L. Thornton China Center at the Brookings Institution. He served as the National Security Council’s senior director for Asia during U.S. President Bill Clinton's administration. 

 

© 2012. Foreign Policy.

 

 

 

 

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