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China Center

For Economics and Business China CEO Council Pre-Reading Pack


Chinas 5th Generation Leadership Return to Reform, or Return of the Empire?

June 1, 2012 Beijing It is a truism that behind the curtain of Chinas stunningly fast change are the continuities what we call Chinese characteristics many of which are stubbornly resistant to change and pose risks to Chinas modernization process. The intention and effectiveness of Chinas 5th generation of leaders to navigate through and remedy these risks, many of which have arguably now become acute, may be the most important factor shaping Chinas sustained development and the medium- and long-term outlook for MNCs in China. This China CEO Council session will attempt to portray the new leaderships agenda embraced or imposed and dimension the political-economy dynamics surrounding them to seek insights on what reforms may be in offing, and what the upcoming leadership transition may mean for business. In particular, the session will explore the ascent, extent and nature of structural corruption in the business environment i.e. the systemic use of relations to access economic opportunity and extract disproportionate economic benefit and how this phenomenon has arguably become the defining challenge for both the Party and for MNCs in China. Can structural corruption be resolved and remedied in an orderly way and if not, then what?

Attached, please find a selection of recommended (optional) pre-reading materials for the meeting. The China Center Team

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China Investment Boom Starts to Unravel

By Jamil Anderlini, The Financial Times May 14, 2012 In an unguarded moment in 2007, the man anointed to take over next year as the helmsman of the worlds second-largest economy revealed his doubts about Chinas economic growth statistics. The countrys official gross domestic product figures are man-made and therefore unreliable, Li Keqiang told the US ambassador at the time, adding with a smile that he regarded them as being for reference only. When evaluating the speed of economic growth Mr Li, who is expected formally to replace Wen Jiabao as Chinas Premier next March, said he focused instead on three sets of data electricity consumption, rail cargo volumes and disbursement of bank loans. If Mr Lis assessment is correct the Chinese economy is in a lot more trouble than headline GDP figures have indicated until now. Less closely watched economic data released in recent days, including figures for electricity, rail cargo and bank loans, have all shown a steep drop in activity that appears to have caught policymakers by surprise. Chinas GDP statistics are only released every three months and in the first quarter of this year they appeared to show a continuation of the gradual decline that has been under way for the past year. An 8.1 per cent expansion in the first three months from the same period a year earlier was a clear deceleration from 8.9 per cent growth in the fourth quarter of last year but it could hardly be considered a hard landing for the high-flying Chinese economy. Following this relatively strong reading, most analysts and government officials declared that growth had bottomed out in the first quarter and the rebound would begin in April. Sell-side analysts and Chinese officials wanted to believe the story that this was just a little dip and the economy would come roaring back, says Patrick Chovanec, a professor of business at Beijings elite Tsinghua university. But those forecasts were mostly a triumph of hope over reason. China's electricity production Chinas electricity consumption in April hasnt been published yet but electricity output increased just 0.7 per cent last month from a year earlier, compared with a 7.2 per cent increase in March and an 11.7 per cent annual increase in April 2011. Rail cargo volumes in the first few months of the year increased by low single digits or about half the pace they were growing this time last year and banks extended far fewer new loans than expected. Chinas been riding an investment boom over the last three years that everyone recognised was unsustainable and now were seeing what unsustainable looks like, Mr Chovanec says. The unravelling of this investment boom is happening with nothing to replace it and that means China is in store for much lower GDP growth than weve become accustomed to. Much of the current slowdown has come from the slumping real-estate market, where government efforts to rein in a credit-fuelled bubble are starting to look a little too effective.

Investment in real estate, which directly accounts for about 13 per cent of GDP, has dropped precipitously in just the past few months, with construction of new residential floor space falling 4.2 per cent in the year to April from the same period last year. That compared with growth of 5.1 per cent in the first two months and 16.2 per cent growth in new starts this time last year. A 51 per cent drop in sales of Chinese bulldozers in March from the same month a year earlier reinforces the picture of plummeting construction. But the slowdown is coming from more than just a downturn in real estate. Chinese exports and imports in April were much weaker than predicted, with imports expanding just 0.3 per cent from a year earlier, compared with the average analyst forecast of about 11 per cent growth. Leading commodity imports slowed sharply while industrial machinery imports fell significantly, indicating a worrying downturn in industrial investment, according to Stephen Green, an economist at Standard Chartered. In the absence of further policy easing, we expect growth to continue to slow for the remainder of the second quarter, he says. Many analysts believe the Chinese government has already waited too long to stimulate the slowing economy. The purge of Chinese leader Bo Xilai last month and the resulting political turmoil is one reason why Beijing has not acted sooner but some economists say its options for boosting growth are more limited than in the past. In response to recent dismal data, the central bank on Saturday cut the portion of deposits that banks must hold in reserve to encourage more credit to flow into the economy. But the huge flood of easy credit and government-backed investment unleashed after the global financial crisis has left Beijing with limited firepower this time round amid concerns about resurgent inflation and bad loans at the state-owned banks. As he prepares to take office next year, Mr Li must be hoping his assumptions were wrong and that Chinas GDP figure is the more accurate reading. Otherwise he may be faced with a deteriorating situation that he has relatively little power to address.

China Pays High Price to Spare State Firm from Bankruptcy

By Gabriel Wildau and Carrie Ho, Thomson Reuters May 21, 2012 WEIFANG, China The Chinese official was adamant the city of Weifang would keep its rayon factory open, noting that local authorities had just stepped in to help the plant's owner repay $60 million in commercial paper. The bailout averted what would have been China's first ever bond default and was good news for domestic bond investors, who were reassured that in China even mid-sized state-owned firms can count on "too-big-to-fail" treatment. But for the long term, the opaque, politically driven rescue of Shandong Helon Co bodes ill for a country that must rely heavily on small, private-sector firms for future growth, as investments in infrastructure and basic industry yield diminishing returns. Private firms, already crowded out of funding markets, will struggle even more to get credit after the bailout sent a clear message to investors that state companies are the safest bet. "We strongly support the company," said the Weifang official, who gave only his surname Wei, as he discussed the Helon case over a lunch of chicken's feet soup, sweet green radishes and copious amounts of Chinese white liquor. "The government definitely won't let them go bankrupt." Officials at the Weifang propaganda office, which handles publicity for the city, confirmed that the local government had ensured Helon could pay off 400 million yuan ($63.3 million) in commercial paper on schedule last month, although they declined to give details. The rescue notwithstanding, the synthetic fibre maker's ordeal resembled a bankruptcy in everything but name. The hallmarks were all there: a sea of unpaid debts, a contest between creditors over who gets paid, and a potential takeover by stronger rivals.

But there were no bankruptcy court judges or rules on credit seniority at work - just politicians making backroom deals with banks and others to ensure the company remained in operation and their own reputations remained intact. "I especially object to the way the Helong case was handled," Wu Xiaoling, a former central bank vice-president, told a forum in Shanghai earlier this month. "In my opinion, they should have let the bondholders shoulder the risk." ERSATZ BANKRUPTCY The Helon case flouted the principle of credit seniority, turning the usual order for creditors' claims on its head. After a nail-biting process fraught with rumours and media speculation of an imminent default, creditors holding Helon's unsecured commercial paper - which carried a coupon of 5.8 percent but was yielding close to 400 percent in early April - were paid off in full when it matured on April 15. But company filings show 919 million yuan in overdue bank loans to the company were still outstanding as of April 11.

"It seems odd if the company is only repaying the CP but not the other debt," said Shi Lei, vicedirector of fixed-income at Ping An Securities. Such bailouts reinforce the preferential access to credit enjoyed by state firms, which analysts say makes it harder for China to channel credit to the more efficient private-sector companies that could secure future economic growth. "It has a bit of crowding out effect," said Zhang Zhiming, head of China research for HSBC in Hong Kong. "Anything related to government - particularly local government - they were under stress prior to this. Now, people are betting they're not going to go under, at least this year. At the same time, anything pure private, without government affiliation, people will be more sceptical," Zhang said. Bond investors have begun noticeably to look beyond credit ratings, favouring debt from state companies compared to similarly rated paper from private firms, he said. This staunches the flow of capital to the private sector, which analysts say can put the funds to better use. "You've got basically 10 times the amount of credit going to the state sector as to the private sector to produce the same amount of output," said Fraser Howie, chief executive of brokerage CLSA in Singapore. Known in China for its annual kite festival and green radishes that can reach the size of a human forearm, Weifang - like many newly prosperous Chinese cities - boasts wide tree-lined highways and a new stadium and convention centre. For the local government in this city of 4.3 million, also home to diesel engine maker Weichai Power and Weifang Yaxing Chemical, the spectacle of a very public bond default by Helon would have opened a Pandora's box. They ended up diverting considerable resources to a company that, having overextended itself by moving into property and cargo port development during high-growth periods, fell into distress when high resource prices pressured its core business making rayon and other fibres for clothing and industrial uses. In May, the chairman of the board, the board secretary, and several company directors resigned as reports emerged of huge losses at the company. The Shenzhen Stock Exchange warned on April 23 it may de-list Helon, since the company had reported net losses for two consecutive years. WAKE-UP CALL The Weifang government, which owns 16 percent of Helon via its investment arm and is its biggest shareholder, has committed 1.7 billion yuan in loan guarantees, payments to contracted management companies and other forms of aid, the official China Securities Journal said in late March, citing an unnamed source. The bailout also further put off a badly needed, if painful, wake-up call for China's bond investors to start taking credit risk seriously - which would help to develop the sort of credit risk culture needed for a bond market that could efficiently provide financing to small and mid-sized private sector firms. And while a formal bankruptcy could have shut down the factory and threatened the livelihood of Helon's 8,700 employees, analysts say the company still produces high-quality, globally competitive products and a bankruptcy may have left it stronger in the end, by easing its debt burden.

But officials had little incentive to take the long view. With a once-in-a-decade political transition scheduled for this October, stability is the dominant theme of official pronouncements on almost every topic. Lenders and suppliers, shunted to the back of the queue for repayment, could not have been pleased with the special treatment given to unsecured bondholders, however, and 14 have sued Helon since January seeking repayment of loans or unpaid receivables. Although several creditors won court judgments ordering the company to pay its debts, lawyers said they have little recourse to actually collect without forcing the company into bankruptcy. And even if they were willing to go that route, they would be unlikely to succeed without the support of the local government. "Even if a Chinese bank wanted to try to petition for bankruptcy on a creditor claim, my strong suspicion - especially if it's a high-profile situation - is that the court is unlikely to accept the petition unless the relevant local government is prepared to let this happen," said Neil McDonald, a Hong Kong-based partner at law firm Hogan Lovells, who is currently working on the bankruptcy of SinoForest Corp. In such cases, McDonald says, the government prefers to negotiate outside of court, creating an opaque and potentially arbitrary process. The treatment of individual banks' claims in the Helon case has often been less than clear. China Merchants Bank and China Everbright Bank Co Ltd late last month abruptly withdrew lawsuits filed against Helon earlier this year seeking repayment of more than 300 million yuan in overdue loans, a company filing showed. The announcement gave no details about whether the banks had been repaid. BANKS IN COURT Shenzhen Development Bank Co Ltd is still pressing its claim in court. In early March, the bank won a court judgment freezing 70 million shares of Helon stock that was mortgaged to the bank to secure a loan of around 100 million yuan. "We don't think they will have money to pay for the loans, but just hope the company that eventually takes control of Helon will buy the shares once we have them in hand," said a source at Shenzhen Development Bank. Helon refused repeated requests for an interview to discuss its circumstances. China Merchants and China Everbright declined to comment on the law suits. It would have been difficult for Helon or the Weifang authorities to negotiate any arrangements with Helon's bondholders, who unlike the locally based bank creditors were a diffuse group of investors from around China whom city officials would find difficult to persuade to accept a delay in payment on the commercial paper. A better solution, from the government's perspective, was to take care of the bondholders immediately, while pressuring local banks to be patient, analysts say. But a long-term solution to Helon's troubles - a takeover by a stronger state-owned firm - has eluded Weifang officials.

They have been using short-term management agreements with would-be rescuers and ad hoc cash injections in the meantime to maintain production and keep workers employed. The unlisted parent company of Shenzhen- and Hong Kong-listed Chenming Paper signed a one-year management agreement with the city in May of last year, but then backed out three months later. The same day that Chenming withdrew, Helon announced that it had launched negotiations with China Hi-Tech Group, a central government-owned textiles conglomerate, over a possible restructuring. But in November, Helon said those negotiations had made no substantial progress and announced plans for a contract management agreement with a special-purpose vehicle to be established by the Weifang government. The World Bank says more than one in four of China's state firms lose money. It also cites studies showing that average return on equity - even for state firms that do turn a profit - is lower than for the non-state sector. As China's economy slows and the cost of capital rises, the inefficiency of many state firms may again become a burden on the state, pulling investment away from areas of the economy where it could be more productive. But life at the Helon factory goes on as before. The plant operates around the clock. Workers trickle out of the factory gate looking worn out from a day's work but showing little sign of worry over the company's future. "They've been talking about bankruptcy for years," says a worker clad in a standard-issue blue uniform as she heads towards a company dormitory. "But the factory is still here. And I've been paid on time every month." (Additional reporting by Pete Sweeney; Editing by Jason Subler and Edmund Klamann)

A Chinese Composer Sounds Off About Music and Politics

By Didi Kirsten Tatlow The New York Times May 16, 2012 BEIJING Ye Xiaogang, artistic director of the Beijing Modern Music Festival and one of Chinas leading contemporary composers, is a quicksilver personality who laughs wryly, exudes determination and likes to dress in black. Just back in Beijing from receiving a prestigious Guggenheim Foundation award for music in the United States, Mr. Ye helped make musical history for arranging a performance in Beijing last Saturday of the Happiness Suite by Ma Sicong, marking the centennial of Mr. Mas birth. A widely admired violinist and composer, Mr. Ma composed in 1937 one of Chinas most popular tunes, Nostalgia. But the founding president of the Central Conservatory of Music after the Communists seized power in 1949 was so harshly persecuted during the Cultural Revolution he fled to Hong Kong in 1967, then to the United States, where he died in 1987. His suite had never before been publicly performed in China, Mr. Ye said. Mr. Ye, 56, who is vice president of the conservatory, said the concert and a seminar dedicated to Mr. Ma were a powerful memorial to a man whose life was marked by great talent and equally great tragedy. Im really proud of what I did yesterday in putting on his music, the pieces that got criticized and the ones he wrote after committing treason and fleeing to America, said Mr. Ye, using the word treason with irony. We did them all. Everyone was really moved. Yet the event left Mr. Ye with a pressing question, he said. The late prime minister Zhou Enlai once expressed regret that Ma fled. But my question is, since Ma fled, has society really improved? I cant say there has been no improvement, he said in an interview. But I have to place a question mark there. How much has improved? We have to ask. Question mark. Today there are still people being crushed, who cant publish their works, and not just one or two. One result of what Mr. Ye says is a chronic left atmosphere is that the country is backward in a range of educational and cultural areas, including music, even though talented Chinese musicians and composers do extremely well when they go abroad. At home, he said, Chinese contemporary music isnt doing very well. Even Chinese works arent being performed, let alone overseas works. So the music festival, which runs until May 25, is an opportunity to showcase to Chinese audiences the work of foreign composers like Robert Beaser, Enjott Schneider and Stephen Hartke. In fact, of five composers whose works will be performed this Saturday at the opening concert at the National Center of Performing Arts in Beijing, just one, Zou Hang, is Chinese. Chen Yi is a China-born U.S. citizen. There will also be pieces by Narong Prangcharoen of Thailand, Mr. Schneider of Germany and Mr. Beaser of the United States. The half-British, half-Thai pianist Christopher Janwong McKiggan will perform. China simply has to learn more about whats going on elsewhere, Mr. Ye said.

The music world here doesnt know about these things, and thats why we must do them, he said. Only in this way can we synchronize Chinese music circles with overseas music circles. Mr. Yes own work will be profiled on Tuesday with Seven Episodes for West Lake, a piece he described as a crowd-pleaser, and The Road to the Republic, a satire on politics today though ostensibly about the toppling of the Qing dynasty in 1911. At its premiere last September, said Mr. Ye, who is a member of the Standing Committee of the Chinese Peoples Political Consultative Conference, a government advisory body, Jia Qinglin, the bodys chairman as well as a member of the Communist Partys Politburo Standing Committee, praised the work. He said, You havent said enough, keep going, said Mr. Ye, smiling slightly. Today, everybody wants change, everybody knows, he said. Even the top leaders know. China is a leaky boat, but instead of fixing the holes, since they have money, they just keep pouring more oil into it. Chinas new wealth is also benefiting the music festival. Founded in 2002 on a shoestring, today it is financially stable, thanks to government funding. The Education Ministry provided about a $1 million for the event, he said. Like Mr. Ma, whose flight prompted savage reprisals a brother committed suicide, a doctor who gave Mr. Ma a sick note was jailed for eight years, and a family chef was jailed for four years, as Sheila Melvin and Jindong Cai recounted in Rhapsody in Red: How Western Classical Music Became Chinese Mr. Ye had his own experiences of horror. His father, the film score composer Ye Chunzhi (or Ip Shun-Chi, as hes better known in his adopted home of Hong Kong), was similarly persecuted and tried to commit suicide during the Cultural Revolution, after returning to China from Hong Kong in 1955 in a burst of patriotism. He swallowed 273 sleeping pills, said Mr. Ye. He was saved. My older sister found him at nine oclock in the morning after he took them in the night. Mr. Ye himself labored on a farm for a year, then six years in a factory. Mr. Ye said he aimed to compose music about his society in the way the great 19th-century European writers, like Balzac and Tolstoy, wrote novels about theirs. He plans an opera based on the original libretto of Peony Pavilion, the 16th-century opera by Tang Hsien-tsu, to be performed next year in Beijing. I dont need to change the text or anything; its all in there, he said. The Ming dynasty was feudal and dictatorial. The same! Its never changed! Its very scary, but artistically its energizing and interesting.

Princelings in China Use Family Ties to Gain Riches

By David Barboza and Sharon LaFranier, The New York Times May 17, 2012 SHANGHAI The Hollywood studio DreamWorks Animation recently announced a bold move to crack Chinas tightly protected film industry: a $330 million deal to create a Shanghai animation studio that might one day rival the California shops that turn out hits like Kung Fu Panda and The Incredibles. What DreamWorks did not showcase, however, was one of its newest and most important Chinese partners: Jiang Mianheng, the 61-year-old son of Jiang Zemin, the former Communist Party leader and the most powerful political kingmaker of Chinas last two decades. The younger Mr. Jiangs coups have included ventures with Microsoft and Nokia and oversight of a clutch of state-backed investment vehicles that have major interests in telecommunications, semiconductors and construction projects. That a dealmaker like Mr. Jiang would be included in an undertaking like that of DreamWorks is almost a given in todays China. Analysts say this is how the Communist Party shares the spoils, allowing the relatives of senior leaders to cash in on one of the biggest economic booms in history. As the scandal over Bo Xilai continues to reverberate, the authorities here are eager to paint Mr. Bo, a fallen leader who was one of 25 members of Chinas ruling Politburo, as a rogue operator who abused his power, even as his family members accumulated a substantial fortune. But evidence is mounting that the relatives of other current and former senior officials have also amassed vast wealth, often playing central roles in businesses closely entwined with the state, including those involved in finance, energy, domestic security, telecommunications and entertainment. Many of these so-called princelings also serve as middlemen to a host of global companies and wealthy tycoons eager to do business in China. Whenever there is something profitable that emerges in the economy, theyll be at the front of the queue, said Minxin Pei, an expert on Chinas leadership and professor of government at Claremont McKenna College in California. Theyve gotten into private equity, state-owned enterprises, natural resources you name it. For example, Wen Yunsong, the son of Prime Minister Wen Jiabao, heads a state-owned company that boasts that it will soon be Asias largest satellite communications operator. President Hu Jintaos son, Hu Haifeng, once managed a state-controlled firm that held a monopoly on security scanners used in Chinas airports, shipping ports and subway stations. And in 2006, Feng Shaodong, the son-in-law of Wu Bangguo, the partys second-ranking official, helped Merrill Lynch win a deal to arrange the $22 billion public listing of the giant state-run bank I.C.B.C., in what became the worlds largest initial public stock offering. Much of the income earned by families of senior leaders may be entirely legal. But it is all but impossible to distinguish between legitimate and ill-gotten gains because there is no public disclosure of the wealth of officials and their relatives. Conflict-of-interest laws are weak or nonexistent. And the business dealings of the political elite are heavily censored in the statecontrolled news media. The spoils system, for all the efforts to keep a lid on it, poses a fundamental challenge to the legitimacy of the Communist Party. As the states business has become increasingly intertwined with a class of families sometimes called the Red Nobility, analysts say the potential exists for a backlash against an increasingly entrenched elite. They also point to the risk that national policies may be

subverted by leaders and former leaders, many of whom exert influence long after their retirement, acting to protect their own interests. Chinese officials and their relatives rarely discuss such a delicate issue publicly. The New York Times made repeated attempts to reach public officials and their relatives for this article, often through their companies. None of those reached agreed to comment on the record. DreamWorks and Microsoft declined to comment about their relationship with Mr. Jiang. A secret United States State Department cable from 2009, released two years ago by the WikiLeaks project, cited reports that Chinas ruling elite had carved up the countrys economic pie. At the same time, many companies openly boast that their ties to the political elite give them a competitive advantage in Chinas highly regulated marketplace. A Chinese sportswear company called Xidelong, for example, proudly informed some potential investors that one of its shareholders was the son of Wen Jiabao, according to one of the investors. (A private equity firm, New Horizon, that the son, Wen Yunsong helped found invested in the company in 2009, according to Xidelongs Web site.) There are so many ways to partner with the families of those in power, said one finance executive who has worked with the relatives of senior leaders. Just make them part of your deal; its perfectly legal. Worried about the appearance of impropriety and growing public disgust with official corruption, the Communist Party has repeatedly revised its ethics codes and tightened financial disclosure rules. In its latest iteration, the party in 2010 required all officials to report the jobs, whereabouts and investments of their spouses and children, as well as their own incomes. But the disclosure reports remain secret; proposals to make them public have been shelved repeatedly by the party-controlled legislature. The party is unlikely to move more aggressively because families of high-ranking past and current officials are now deeply embedded in the economic fabric of the nation. Over the past two decades, business and politics have become so tightly intertwined, they say, that the Communist Party has effectively institutionalized an entire ecosystem of crony capitalism. They dont want to bring this into the open, said Roderick MacFarquhar, a China specialist at Harvard University. It would be a tsunami. Critics charge that powerful vested interests are now strong enough to block reforms that could benefit the larger populace. Changes in banking and financial services, for instance, could affect the interests of the family of Zhu Rongji, Chinas prime minister from 1998 to 2003 and one of the architects of Chinas economic system. His son, Levin Zhu, joined China International Capital Corporation, one of the countrys biggest investment banks, in 1998 and has served as its chief executive for the past decade. Efforts to open the power sector to competition, for example, could affect the interests of relatives of Li Peng, a former prime minister. Li Xiaolin, his daughter, is the chairwoman and chief executive of China Power International, the flagship of one of the big five power generating companies in China. Her brother, Li Xiaopeng, was formerly the head of another big power company and is now a public official. This is one of the most difficult challenges China faces, said Mr. Pei, an authority on Chinas leadership. Whenever they want to implement reform, their children might say, Dad, what about my business? There are also growing concerns that a culture of nepotism and privilege nurtured at the top of the system has flowed downward, permeating bureaucracies at every level of government in China. After a while you realize, wow, there are actually a lot of princelings out there, said Victor Shih, a

China scholar at Northwestern University near Chicago, using the label commonly slapped on descendants of party leaders. Youve got the children of current officials, the children of previous officials, the children of local officials, central officials, military officers, police officials.Were talking about hundreds of thousands of people out there all trying to use their connections to make money. To shore up confidence in the governments ability to tackle the problem, high-ranking leaders regularly inveigh against greedy officials caught with their hand in the till. In 2008, for instance, a former Shanghai Party secretary, Chen Liangyu, was sentenced to 18 years in prison for bribery and abuse of power. One of his crimes was pressing businessmen to funnel benefits to his close relatives, including a land deal that netted his brother, Chen Liangjun, a $20 million profit. But exposs in the foreign press like the report in 2010 that Zeng Wei, the son of Chinas former vice president Zeng Qinghong, bought a $32 million mansion in Sydney, Australia are ignored by the Chinese-language news media and blocked by Internet censors. Allegations of bribery and corruption against the nations top leaders typically follow rather than precede a fall from political grace. Mr. Bos downfall this spring, for instance, came after his former police chief in Chongqing told American diplomats that Mr. Bos wife, Gu Kailai, had ordered the murder of Neil Heywood, a British businessman, in a dispute over the familys business interests. Evidence has surfaced of at least $160 million in assets held by close relatives of Bo Xilai, and the authorities are investigating whether other assets held by the family may have been secretly and illegally moved offshore. Wen Jiabao, the prime minister, responded by demanding a more forceful crackdown on corruption. Without naming Mr. Bo by name, Peoples Daily, the official Communist Party newspaper, denounced fortune seekers who stain the partys purity by smuggling ill-gotten gains out of the country. Some scholars argue that the party is now hostage to its own unholy alliances. Cheng Li, an expert on Chinese politics with the Brookings Institution in Washington, said it would be difficult for the Chinese government to push through major political reforms aimed at extricating powerful political families from business without giving immunity to those now in power. And with no independent judiciary in China, he said, party leaders would essentially be charged with investigating themselves. The party has said anticorruption efforts are a life-and-death issue, Mr. Li said. But if they want to clean house, it may be fatal. Chinese tycoons have also been quietly welcomed into the families of senior leaders, often through secret partnerships in which the sons, daughters, spouses and close relatives act as middlemen or co-investors in real estate projects or other deals that need government approval or backing, according to investors who have been involved in such transactions. Moreover, Chinas leading political families, often through intermediaries, hold secret shares in dozens of companies, including many that are publicly listed in Hong Kong, Shanghai and elsewhere, according to interviews with bankers and investment advisers. Lately, the progeny of the political elite have retooled the spoils system for a new era, moving into high-finance ventures like private equity funds, where the potential returns dwarf the benefits from serving as a middleman to government contracts or holding an executive post at a state monopoly. Jeffrey Zeng, the son of the former Politburo member Zeng Peiyan, is a managing partner at Kaixin Investments, a venture-capital firm set up with two state-owned entities, China Development Bank and Citic Capital. Liu Lefei, the son of another Politburo member, Liu Yunshan, helps operate the $4.8 billion Citic Private Equity Fund, one of the biggest state-managed funds. Last year, Alvin Jiang,

the grandson of former president Jiang Zemin, the former Communist Party leader and president, helped establish Boyu Capital, a private equity firm that is on its way to raising at least $1 billion. Most recently, with the Communist Party promising to overhaul the nations media and cultural industries, the relatives of Chinas political elite are at the head of the crowd scrambling for footholds in a new frontier. The February announcement of the deal between DreamWorks and three Chinese partners, including Shanghai Alliance Investment, was timed to coincide with the high-profile visit to the United States of Xi Jinping, Chinas vice president and presumptive next president. The news release did not mention that Shanghai Alliance is partly controlled by Jiang Zemins son Jiang Mianheng. A person who answered the telephone at the Shanghai Alliance office here declined to comment. Zeng Qinghuai, the brother of Zeng Qinghong, Chinas former vice president, is also in the film business. He served as a consultant for the patriotic epic Beginning of the Great Revival. The film exemplified the hand-in-glove relationship between business and politics. It was shown on nearly 90,000 movie screens across the country. Government offices and schools were ordered to buy tickets in bulk. The media was banned from criticizing it. It became one of last years top-grossing films. Scholars describe the film industry as the new playground for princelings. Zhang Xiaojin, director of the Center of Political Development at Tsinghua University, said, There are cases where propaganda department officials specifically ask their children to make films which they then approve. Zhao Xiao, an economist at the University of Science and Technology in Beijing, said, They are everywhere, as long as the industry is profitable.


Chinas Next Generation Should Look to Zhu

By Arvind Subramanian, The Peterson Institute April 9, 2012 Remember that issue with the Chinese currency? As markets await this weeks economic data releases from Beijing, it is easy to be complacent over its mercantilist exchange rate policies, now concern is shifting to whether China has a hard landing ahead. Foreign exchange reserves have stabilised at about $3.2tn. The renminbi has appreciated by about 30 percent against the US dollar since 2005. Despite all this, however, the renminbi problem is still not a thing of the past. The good news is that there is an opening for the reformist wing of the current Chinese leadership to follow the model of Deng Xiaopings protg and former prime minister Zhu Rongji to look abroad to address the problem. It should do so, for the benefit of China and the world. Leave aside the question of whether the worlds fastest-growing and still-poor economy should be running such large (if shrinking) current account surpluses. The self-insurance motive for building reserves was met at least a trillion dollars ago. Even the desire for export-driven growth has become less attractive because of the over-investment, inefficiency and corruption associated with the range of policies supporting mercantilism. But policies remain mercantilist. By how much? One way of assessing the competitiveness of the Chinese economy is to compare Chinese prices with those of other countries, taking into account that richer countries tend to have higher prices. If a countrys prices are lower than what might be expected given its standard of living, its currency is undervalued (and vice versa). This is the purchasing power parity method for assessing currency valuation. My calculations suggest that the renminbi remains substantially undervalued, by about 30 per cent against the dollar. The mercantilist juggernaut is alive and well. Unsurprisingly, Chinas partners have been exercised by the policies underlying such undervaluation. Discussions are afoot in several international forums the International Monetary Fund, the G20 and most recently in the World Trade Organisation to define standards for mercantilist exchange rate policies and to find effective ways of enforcing them. Not all these attempts reflect rich country grievances. In fact, China poses competitive problems for other developing countries, because it is these countries that are Chinas main competitors. In recent research with Aaditya Mattoo of the World Bank and Prachi Mishra of the IMF, we show that Chinas exchange rate has a substantial effect on the exports of other developing countries that compete with China in third-country markets. For example, a 10 per cent appreciation of the renminbi could increase exports of competitors by between 2 and 6 per cent. How can China definitively address the renminbi problem? The reformers within China are aware that the answer lies in opening up the capital account and freeing up interest and exchange rates. The opposition to reform remains substantial, however, and the leadership transition later this year appears to have sharpened the divide over economic reforms. But, emboldened (or liberated) by the prospect of relinquishing power later this year, the reformers are increasingly asserting the case for change. The reform-imbued World Bank China 2030 report bearing the governments imprimatur; the recent moves to open the capital account; and, most striking of all, premier Wen Jiabaos call to break the monopoly of the state banks, all reflect the new-found zeal for reform.

Chinas reformers need all the help they can get to overcome the domestic opposition. It might seem counter-intuitive to suggest that a strong powerful and fiercely nationalistic country such as China can get help from the outside. But there is a recent historical precedent. About a decade ago, Mr Zhu shrewdly used accession to the WTO as a way of furthering domestic and external liberalisation, often against public and political opinion. Todays reformers can similarly harness the lever of international co-operation to help liberalise Chinas exchange rate and financial sector policies. The right forum for and design of co-operative efforts will need to be worked out. But how fitting and effective it would be for Mr Zhus protg, Mr Wen, to turn to the same source of help, at the same, twilight, stage of his professional career and for the same laudable reason of pushing through reform. The writer is a senior fellow at the Peterson Institute for International Economics and author of Eclipse: Living in the Shadow of Chinas Economic Dominance


Exploring Constitutional Reform in the Wake of the Bo Xilai Affair

By Keith Hand, China Brief Volume: 12 Issue: 10 May 11, 2012 In recent years, Chinas commitment to rule in accordance with law has been called into question as Chinese Communist Party (CCP) leaders have intensified the politicization of legal institutions, deemphasized judicial professionalism and formal adjudication, and suppressed rights defenders (CCP Tightens Control over Courts, China Brief, June 17, 2011). The fall of Politburo member Bo Xilai and reappraisal of his anti-crime campaign have fueled debate over these trends. While official media have tried to spin Bos fall as a demonstration that no official is above the law, the incident has intensified public discussion of the excesses of political elites, disregard for the law, and instability and lack of transparency in Chinas political system. Some analysts argue that the Bo Xilai affair has put CCP conservatives such as Zhou Yongkang on the defensive and reinvigorated a reform faction led by Premier Wen Jiabao (Washington Post, April 26). While such political dynamics are difficult to interpret, recent events raise the possibility that Chinas leaders could explore political-legal reforms to bolster CCP legitimacy and public confidence in their rule of law narrative. Veteran China watcher Cheng Li suggests the Bo affair could create an opening for constitutional reform (Financial Times, April 26). A recent series of state media commentaries calling for political-legal reform also indicate that reform dynamics could be in play (Peoples Daily, April 23; Xinhua, April 23; China Youth Daily, April 23). The CCP has pursued legal reform in the postMao era in part to shore up its governing legitimacy and ease pressures for broader political reform [1]. In this context, it should be noted that both the commentaries and previous leadership statements emphasize reform as a tool to strengthen CCP leadership (The Limits of Reform: Assaulting the Castle of the Status Quo, China Brief, April 26). This article explores three reforms with constitutional dimensions that would be consistent with Chinas party-state structure and that the Zhongnanhai might represent as steps toward enhancing supervision of state action. Constitutional Supervision Committee Under Chinas Constitution, the National Peoples Congress (NPC) is the supreme organ of state power. There is no separation of powers under this constitutional structure, which was modeled on that of the Soviet Union. The NPC and its Standing Committee (NPCSC), rather than the courts, are charged with supervising enforcement of the Constitution and annulling regulations that conflict with the Constitution. Even official Chinese sources acknowledge the NPCSC has failed to perform these functions in practice. To address this dysfunction, legal scholars have pushed for the establishment of a specialized constitutional supervision committee under the NPC. While proposals vary, at minimum such a committee would be empowered to review the constitutionality and legality of some legislative acts [2]. Legal scholar Ji Weidong has proposed a constitutional committee of political and legal figures that would issue rulings on such issues subject to the condition that the NPC could reject them. [3]. Scholars involved in the drafting of the 2000 Legislation Law and the 2006 Peoples Congress Standing Committee Supervision Law included provisions for a constitutional supervision committee in early drafts of these statutes, but in both cases the provisions were later removed. There is precedent for such a committee in constitutional system similar to Chinas. As a component of Mikhail Gorbachevs reforms, the Soviet Union established a Constitutional Supervision Committee under its supreme legislature, the Congress of Peoples Deputies (CPD), in 1990 [4]. The CPD elected a Committee of more than twenty members from the fields of both politics and law. The Committee was empowered to review the constitutionality and legality of a range of state acts of the USSR and its republics and in most cases could suspend their effect. If the Committee found that a CPD law or a union republic constitution violated the USSR Constitution, however, its

ruling was advisory in nature and could be rejected with a two-thirds vote in the CPD. The Committee structure thus respected, at least nominally, the CPDs constitutional supremacy [5]. The life of the Committee was cut short by political events that led to the dissolution of the USSR in 1991. During its brief existence, however, the Committee exhibited several flashes of independence. In one 1990 case, for example, the Committee reviewed the constitutionality of provisions related to the Soviet internal passport and registration system, which resembled Chinas hukou system. The Committee suspended some of these provisions after finding that they violated fundamental human rights. In another case, the Committee reviewed the constitutionality of a Gorbachev presidential edict that empowered the Soviet Council of Ministers, rather than the Russian Federation, to exercise jurisdiction over the growing number of mass demonstrations in Moscow. To Gorbachevs displeasure, the Committee found the edict to be an unconstitutional exercise of executive authority. Although the Soviet experiment provides a precedent for a constitutional supervision committee in a communist state with a supreme legislature, a risk-averse Chinese regime may have concerns about following this model. The CCP has expended enormous effort to study the collapse of the Soviet Union. Though the Soviet Committee did not play a significant role in these events, Chinese leaders may be reluctant to consider an institutional model that was associated Gorbachevs failed reforms or that demonstrated even limited willingness to constrain central political leaders. One alternative would be to take modest steps to improve the transparency and effectiveness of existing NPCSC review procedures. Under current law, Chinese citizens have the right to propose that the NPCSC review the constitutionality and legality of some regulations. Although the NPCSC has received over 900 citizen review proposals, it has never issued a formal decision in response. To address criticism related to this institutional silence, the NPCSC procedure could be reformed to require the issuance of formal, public responses on the handling of such proposals and expand the proposal right to include a broader range of state acts. Some provincial procedures for local peoples congress supervision over normative documents (official documents with repeat and binding legal effect) already contain such features [6]. Chinese citizens would likely view either the establishment of a constitutional supervision committee or modest improvements to NPCSC procedures as a symbolic step forward in Chinas constitutional evolution. Consultative Mechanisms A second possibility involves the establishment of consultative mechanisms for the resolution of constitutional disputes. Such a mechanism would involve CCP-supervised processes of deliberation, consensus building, and mediation that balance both legal and non-legal considerations. Some Chinese scholars argue that an informal mediation mechanism for resolving constitutional disputes already exists (Zhongguo Xianfa Jiaoxue Wang, Apr. 24, 2004). The process through which the State Council decided to repeal regulations on custody and repatriation in 2003 and to adopt new regulations on urban property expropriations in 2011 provide examples of these consultative dynamics. As an alternative to a formal constitutional supervision committee, the CCP could consider steps to institutionalize consultative practices that are currently employed on an ad hoc or informal basis. A consultative mechanism could take a number of forms. Proposals for a constitutional supervision committee could be adapted to provide for the establishment of a body with only deliberative and advisory powers, perhaps under the framework of the Chinese Peoples Political Consultative Conference. Such a body could receive and deliberate on constitutional complaints, mediate intrastate conflicts and make recommendations for corresponding legal and policy reforms to party-state leaders. Chinas existing grand mediation system is another consultative mechanism that might be adapted to address sensitive constitutional disputes. Under the grand mediation framework, first introduced in 2002, CCP and state leaders jointly identify collective or sensitive disputes and deploy integrated

CCP, state and social resources to resolve them at the local level. Within this framework, judges serve as legal advisors in a multi-party political conference that balances legal, political, and other factors and resolves disputes through mediation and persuasion. An adaptation of grand mediation framework at the national level could provide a mechanism for resolving sensitive and politicized rights claims through a consultative framework. A consultative mechanism would have several features that might be desirable to the CCP. First, it would build on practices at the core of existing legislative, policymaking and dispute resolution processes and would reinforce efforts to build controlled channels for citizen participation and supervision. Second, a consultative mechanism might ease concerns about potential threats to CCP power and in turn represent an acceptable compromise for conservatives in a divided leadership. Finally, senior leaders could claim reform progress by arguing that they have taken steps to ensure consideration of constitutional complaints but do so through an indigenous, CCP-supervised mechanism grounded in Chinas political traditions. While consultative mechanisms could facilitate citizen-state discourse on sensitive constitutional issues, however, the same features that could make them desirable to the CCP also highlight their limitations as mechanisms for constraining party-state power in practice. Administrative Law Reforms A third option would be to press forward with administrative law reforms at the national level. Scholars have argued that in the absence of enforceable constitutional law, administrative law has emerged as a partial substitute [7]. Chinese scholars have pushed for the adoption of a comprehensive Administrative Procedure Act (APA) that would establish detailed standards and procedures for the exercise of administrative power. These central efforts have been stalled for over a decade. A decision to press forward with administrative procedure reforms at the national level would address key governance issues and constitute a broad legal reform with constitutional significance. Central leaders have local models to draw on should they decide to take this path. Facing obstacles at the national level, Chinese scholars turned to provincial-level administrative procedure reforms. Initial efforts focused on Hunan, where governor Zhou Qiang a played a key role in pushing through the first provincial-level administrative procedure provisions and several related reforms beginning in 2008. Zhou viewed these reforms as vehicles for imposing greater transparency and checks on administrative decisions that often involve corruption or generate social conflict (Southern Weekend, September 25, 2008). The Hunan provisions subsequently inspired local efforts in Shandong province, Wuhan, Shantou, and other locales. Zhou, a Hu Jintao ally and a lawyer by training, is rumored to be in play for a Politburo seat at the 18th Party Congress (Hu Jintaos Sixth Generation Protgs Play Safe to Ensure Promotion, China Brief, April 26). The Hunan administrative procedure provisions and related measures establish important rules designed to constrain state action [8]. The provisions more clearly define administrative powers and require the adoption and publication of standards for the exercise of discretionary authority. They enhance citizen supervision and participation by requiring consultation with experts, notice and comment procedures, and public hearings for major administrative decisions and other administrative acts. They also improve transparency and establish procedural protections for citizens subject to or impacted by administrative decisions, adjudication, or enforcement. Finally, the provisions take steps to control normative documents by restricting their scope and providing that they expire automatically after five years. A push to accelerate administrative procedure reforms at the national level may be the most likely of the three possibilities examined here. Central leaders have drafts of a national APA and local experiences to draw on. Notably, one of the April 23 commentaries on deepening reform included contributions from research centers in Hunan and Shandong, the two provinces that have enacted administrative procedure provisions (Peoples Daily, April 23). National administrative procedure

reforms would address key governance issues such as improving transparency; enhancing public participation and democratic supervision; and standardizing administrative practice. Wen Jiabao also emphasized these themes in a recent article that focused on controlling corruption (Qiushi, April 26). While arguably enhancing legal constraints on state action, however, such reforms would not directly implicate the sensitive issue of interpreting or enforcing citizen rights enshrined in the Constitution itself. Conclusion Although some may question whether significant reforms are feasible when competing CCP factions are engaged in a political transition, Chinas last transition highlights just such a possibility. In 200203, Hu Jintao and Wen Jiabao took the reins of the party-state apparatus in the midst of a political debacle that damaged CCP legitimacy (the SARS crisis) and a human rights case that drew attention to local abuses (the death of Sun Zhigang in official custody). The Hu-Wen team responded to these challenges by emphasizing transparency, encouraging reform discourse, and opening the door to modest constitutional-legal reforms. They also leveraged these responses to strengthen their position in an uncertain transition. (China Leadership Monitor, Summer and Fall 2003). Similarly, a rising leadership team under Xi Jinping might consider one or more of the reforms discussed here as a tool to restore confidence in Chinas legal construction project and bolster the legitimacy of both the Party and their own leadership. Of course, such reforms would likely impose only limited constraints on the party-state in practice. China has experienced many obstacles in implementing even modest administrative law reforms, and the CCP would undoubtedly maintain tight control over any constitutional supervision or consultation mechanism. The Hu-Wen teams eventual shift away from the reformist rhetoric of 2002-03 and toward efforts to strengthen CCP control over legal institutions and contain the rights defense movement is also a reminder that reform dynamics in China can change rapidly. That said, even superficial or incomplete legal reforms have the potential to raise citizen expectations, create political space for reformers, and provide new platforms that can be used to exert pressure on the party-state. In this respect, they may be useful to reform-minded citizens working to shape Chinas political environment in ways that would make legal institutions more meaningful over the long term. Notes: 1. Randall Peerenboom, Chinas Long March Toward Rule of Law, Cambridge: Cambridge University Press, 2002, pp. 9-26. 2. Zhu Guobin, Constitutional Review in China: An Unaccomplished Project or a Mirage? Suffolk University Law Review, Vol. 43, No. 1, 2009, pp. 65053. 3. Ji Weidong, Hexianxing Shencha Zhidu de Liangbu Zou Silu, [The Two-Step Road for a Constitutional Review System], 2003 Renda Yanjiu, No. 7, pp. 1011. 4. For one account of the Committee, see Joseph Middleton, The Soviet Experiment with Constitutional Control: The Predictable Failure of the USSR Constitutional Supervision Committee, in Constitutional Reform and International Law in Central and Eastern Europe, Kluwer, 1998, pp. 13348. 5. Prior to 1990 constitutional amendments, the USSR Supreme Soviet was the highest organ of state power. 6. See, e.g., Zhejiang Sheng Geji Renda Changweihui Guifanxing Wenjian Beian Shencha Guiding [Zhejiang Province Provisions on Filing and Review of Normative Documents with Local Peoples Congress Standing Committees at Each Level], Issued Dec. 18, 2007. 7. He Xin, Administrative Law as a Mechanism for Political Control in Contemporary China, in Building Constitutionalism in China, Palgrave, 2009, pp. 16061; Stanley Lubman, Citizen Rights, the Constitution, and the Courts, China Real Time Report, September 26, 2011. 8. Hunan Sheng Xingzheng Chengxu Guiding [Hunan Province Administrative Procedure Provisions], Issued Apr. 17, 2008; Hunan Sheng Guifan Xingzheng Cailiang Banfa [Hunan Province Measures on Standardizing Administrative Discretion], Issued April 17, 2010.


No Roads Are Straight Here

By Murong Xuecun May 8, 2012 BEIJING In the spring of 1997 in a small hotel in a small town in the middle of Sichuan Province I met Mr. Zhao. He had a battered suitcase, tattered clothes and a desperate expression. Early on in our conversation he asked me if I knew any officials who could help him land some road-building contracts. Mr. Zhao must have been very desperate because I had just graduated from university and was working as junior legal consultant for a state-owned company, and knew nothing about roadbuilding contracts. In todays China, business deals are hardly ever carried out fairly. Mostly its a matter of who you know, or who you pay off, and then the proceeds are divvied up and down the chain of corruption. Mr. Zhao was the lowliest link in the chain the person who actually did some work. He claimed to be able to take on any kind of construction job. The price he was willing to pay for kickbacks was irrelevant because in his quest to make money, the more he had to kick back, the less hed pay for materials. It was simple math. To try to get me interested, Mr. Zhao offered me 100,000 yuan (almost $16,000) per kilometer of road built if I could help him land a contract. I initially thought he was a con man but soon realized that this offer was entirely normal and in accordance with the Rules of China game. Mr. Zhao was not a con man, he was simply an ambitious small-time operator lacking the right connections. Like most Chinese people, he was harmed by corruption yet he dearly wanted in. I will never forget something Mr. Zhao said to me: Theres not a single straight road in China; they were all built with kickbacks. No one stays clean when traveling along these sparkling, yet tainted roads. Corruption is the norm, it has become the unwritten law, an article of faith. It is everywhere. You dont have to engage corruption, corruption engages you. It follows you, no matter where you go. No one can stay clean. Journalists take travel expenses for writing articles. Professors ask for a consulting fee to go to doctoral seminars. Doctors expect red packets of cash for performing operations. Even donations to charities and temples are subject to corruption. Good luck to the person who tries to stay clean. In the autumn of 1997, a co-worker absconded with company funds. My supervisor and I were asked to accompany two police officers to another province to investigate. As is common practice, my company was expected to cover all the police officers expenses. One evening after dinner, an officer suggested we go to a nightclub to have some fun a polite euphemism for hiring prostitutes. My supervisor was a bit too slow to acquiesce and the policeman was furious. He spent the next hour cursing my boss. You ungrateful idiot! he shouted. Am I asking too much? Did I ask for money? My boss and I were speechless. But deep down, I felt for the police officers grievance and I think most Chinese people would feel the same way.

In China, there is a commonly accepted protocol when dealing with the police: If the police agree to help you, it is your job to meet all their demands. It is not considered corruption for an officer to charge extra money to do his job it is normal practice. And that night, our officer was being more than fair he did not even ask for money. He merely wanted to have some fun. He had every right to be upset, I remember thinking. If corruption is inevitable, then people inevitably force themselves to get used to it, and even defend its legitimacy. Most of us Chinese go from being shocked to being numb. In 2001, I was working for a different company in Guangzhou, Guangdong Province. The day before the Chinese New Year, two officers from the local Bureau of Industrial and Commercial Administration turned up. Their visit was to offer thanks for our support of their work. They wanted to listen to our suggestions. My boss knew the rules of the game well. She told me to prepare two envelopes. One contained 2,000 yuan, roughly $300, for the section chief, the other 1,000 yuan, for his assistant. We had tea together and talked about work. Everyone was happy. My boss later told me that she had done this many times. She did not see the 3,000 yuan as a bribe. It was merely a friendly gesture. These are trivial examples from the recent past that do not represent a full picture of corruption in China. Soon I came to hear about and witness far more serious and disturbing things: a village chief embezzling several hundred million yuan; a provincial governor embezzling several billion yuan; a woman able to become a high official by selling her body; an attorney presenting a virgin to a judge ... At a time when I was nave, I thought that the officials at the highest levels of government genuinely opposed corruption and that it was those on the lower levels who were not necessarily clean. Later, when I saw for myself the ever-increasing assets of corrupt officials, when I saw that every level of government resists the reporting of assets of civil servants, and when I saw that the mass media has become more and more constrained in their reporting on corruption cases, I came to realize that no one in Chinas bureaucracy genuinely opposes corruption. In the summer of 2009, in the middle of a well-publicized anti-mafia campaign spearheaded by Bo Xilai, the now-disgraced former head of Chongqing caught up in a murder and corruption scandal, the Chongqing Public Security Bureau invited me to Chongqing to write another book on corruption in the legal profession, like my novel Dancing Through Red Dust, which they considered incisive. The idea, I assumed, was that a new book by me would stress the significance of the anti-mafia campaign in Chongqing, and the governments determination to combat corruption. I turned them down. By then I had learned that you cant fix corruption without fixing our noxious system, which lacks a robust legal and judicial regime. Until China has a new system based on the rule of law, any anti-corruption campaign would be simply for show. And, of course, anti-corruption campaigns are often themselves corrupt. The leadership in Beijing needs corruption and actually encourages it. Corruption is the systems natural lubricant, without which everything would grind to a halt. Theres no shortage of upright people in China, but in this system even the upright must study the crooked arts simply to survive. Not a single person in China can completely break free from corruption, and not a single road is straight.


Murong Xuecun, the pen name of Hao Qun, is one of Chinas early Internet writers, best known for the novel Leave me Alone, A Novel of Chengdu and Dancing Through Red Dust. This article was translated from the Chinese by Jane Weizhen Pan and Martin Merz.


The Rumour Machine

Wang Hui on the dismissal of Bo Xilai, The London Review of Books April 27, 2012 Wang Hui is a professor in the Department of Chinese Language and Literature, Tsinghua University, Beijing. His research focuses on contemporary Chinese literature and intellectual history. March 14 used to be shorthand in China for the 2008 unrest in Tibet; now it stands for the 2012 Chongqing incident. It is unusual for municipal policy to have national impact, and rarer still for the removal of a city leader to become international news. Some observers have argued that the dismissal of Bo Xilai, the party secretary of Chongqing, is the most important political event in China since 1989. Stories began to circulate on 6 February, when Wang Lijun, Chongqings police chief, fled to the US consulate in the nearby city of Chengdu. Neither the Chinese nor the American authorities have revealed anything about what followed, the US saying only that Wang had an appointment at the consulate and left the next day of his own accord. Since then he has been in the custody of the Chinese government. Reports in the foreign media fuelled online speculation, with the result that all sorts of rumours began to spread some of them later shown to be true. There were stories about a power struggle between Bo and Wang; about the corruption of Bos family (how could they afford to send their son to Harrow, Oxford and Harvard?); about coup attempts by Bo and Zhou Yongkang, the head of Chinas security forces; about business deals and spying; about a connection between Bo and the mysterious death of the British businessman Neil Heywood in November. Even supporters of what has been called the Chongqing experiment the reforms implemented under Bo, who became party secretary there in 2007 were unwilling to say that no corruption or malfeasance took place. In todays China, these offer a convenient pretext for an attack on a political enemy. As the stories multiplied, two main interpretations emerged. The first supported by a good deal of leaked information saw the Chongqing case as merely a matter of a local leader who had broken the law. The second linked the incident to political differences. With a population of 32 million, Chongqing is one of the PRCs four centrally governed municipalities (the others are Beijing, Shanghai and Tianjin). In the 1930s and 1940s, the city was an important arms-manufacturing centre for the Kuomintang, and today serves as a hub for much of south-west China. The Chongqing model operated within Chinas existing political institutions and development structures, which emphasise attracting business and investment, but involved quite distinctive social reforms. Large-scale industrial and infrastructural development went hand in hand with an ideology of greater equality officials were instructed to eat the same, live the same, work the same as the people and an aggressive campaign against organised crime. Open debate and public participation were encouraged, and policies adjusted accordingly. No other large-scale political and economic programme has been carried out so openly since the reform era began in 1978, soon after Maos death. Both interpretations, one denying, the other privileging the political character of the Chongqing events, are partial. The important question is whether the scandal will encourage the development of a politics of democratic participation or merely end up reinforcing Chinas practice of backroom politics. A critical moment came when Premier Wen Jiabao gave a press conference on 14 March at the end of the Two Meetings the National Peoples Congress and the Political Consultative Conference in Beijing. If there were different views about how to handle the Wang Lijun incident, or problems concerning Bo Xilais behaviour or that of his family, the Two Meetings would have been the appropriate place to discuss them. This wasnt what happened.

According to media reports, on the morning of 3 March He Guoqiang, one of the nine members of the Politburo Standing Committee and the secretary of the Central Commission for Discipline Inspection, visited the Chongqing delegation to the Two Meetings and was warmly welcomed by Bo Xilai and Huang Qifan, Chongqings mayor. On 8 March, Zhou Yongkang, another member of the Standing Committee and secretary of the Central Political and Legislative Committee, spoke at the Chongqing delegations policy deliberation meeting at the National Peoples Congress. On 9 March, the Chongqing delegation held a press conference at which Bo Xilai and Huang Qifan took questions for nearly two hours. Yet at the closing press conference on 14 March, the final question (from a Reuters reporter) elicited a prepared response on the situation in Chongqing from Wen. He began by acknowledging the achievements of successive Chongqing governments, but then changed his tone: The current Chongqing and government leadership must reflect on the Wang Lijun incident and learn lessons from it. He referred to the 1978 Central Committee plenum that announced the start of the reform policy, and even more pointedly to the CCPs 1981 Resolution on Certain Questions in the History of Our Party, which officially declared the Cultural Revolution to have been a disaster for the country and the people. We have resolved that we should free our minds and seek truth from facts, and we have formulated the basic guidelines for our party, he continued. In particular, we have taken the major decision of reform and opening up in China, a decision that is crucial for Chinas future and its destiny. What has happened shows that any practice that we take must be based on the experience and lessons we have learned from history and must serve the peoples interests. The actions that we take must be able to stand the test of history and the reality. I believe that everyone in China understands this, and I have confidence in our future. It is nearly forty years since the end of the Cultural Revolution and the situation in China today is not remotely comparable to that of the 1970s. So why did Wen want to link Chongqing and the Cultural Revolution? The Chongqing model certainly has its faults, and they have occasioned substantial debate, but the criticisms should have led to improvements. There have been comparable problems in other regions Guangdong and Wenzhou, for example but Wens rhetorical invocation of the Cultural Revolution served to single out the Chongqing experiment and seal it up, like the Cultural Revolution itself, as a forbidden subject, not available for public debate or historical analysis and fit only for political condemnation. Those associated with it can now be vilified as power-seekers, conspirators, propagandists or reactionaries who want to turn back the wheel of history. Around 9 oclock the next morning, the Peoples Daily website hinted on Weibo, the Chinese version of Twitter, that there was about to be an important news announcement (the Wang Lijun incident had been made public the same way). At 10.03 a.m., the Xinhua news agency reported on Weibo that Bo had been removed as Chongqing party secretary. Soon afterwards a number of leftist websites began to experience server problems, which lasted for the next five days, and activists were forbidden from mentioning the matter on Weibo. What happened during the two days after 13.45 on 14 March 2012 can be described as a palace coup, a reporter for the Financial Timess Chinese website declared. Around midnight on 15 March, Li Yuanchao, head of the Central Committees Organisational Department, and Vice Premier Zhang Dejiang arrived in Chongqing and announced Bos dismissal. People who were old enough at the time remembered what the atmosphere was like after the mysterious death of Maos nominated successor Lin Biao in 1971. Information is selected or fabricated according to political need, and then released through channels determined by the same considerations. Rumours have flourished inside and outside China, and there are signs of conspiracy everywhere. Rumours are a product of backroom politics, and at the same time provide the means

for backroom politics to come out into the open. On 10 April, another rumour went round: the government was going to make an important announcement. The statement came not in the main news bulletin at 7 p.m., but in the 11 oclock news, when it was announced that Bos wife, Gu Kailai, had been arrested on suspicion of murdering Heywood. Bos suspension from the Politburo and Central Committee was also announced allegedly to allow serious violations of party discipline to be investigated. As for Heywood, there are plenty of contradictory accounts there too: the official statement calls him a businessman, but some British reporters have suggested he might have been a spy. Websites critical of the government, such as Utopia (wuyou zhixiang), were shut down in the days before Gu was arrested to forestall any uncensored comments about her, though the reason given was to remove improper discussions of decisions made by the National Peoples Congress. While leftist websites were being closed down, foreign sites, including hostile websites like the Falun Gongs that are usually blocked, were suddenly selectively unblocked, providing a conduit for more rumours to flow into China. The means of transmission itself tells us a lot, involving as it does collaboration between the Chinese and US authorities, as well as interaction between domestic and foreign media. It became difficult to distinguish between the coverage in the New York Times, the Financial Times, the Wall Street Journaland the Falun Gongs outlet, the Epoch Times, or to differentiate them from Chinese newspapers and websites. The question here is whether there is a single intelligence at work, or a network of forces collaborating to bring about a particular result. The government doesnt always seem sure which line to take on the affair. On the one hand, with Wens press conference, Bos sacking and Gus arrest what was first said to be an isolated incident has been turned into a situation of the utmost political gravity. Wens talk of the Chongqing reforms presaging a repeat of the Cultural Revolution seems intended to indicate that open politics social experiment and competition between different political positions will no longer be allowed in China. (The chief similarity with the Cultural Revolution, as many online commentators have pointed out, is the speed with which Bo was removed.) Having ratcheted up the importance of the incident, the government then tried to downgrade it, releasing information through various channels about Bo and his family breaking the law, in an attempt to cast the matter as a merely criminal case. The Financial Times has claimed the affair shows that the curtain that covers the highest-level secrets of Chinas rulers is no longer so tight. But the curtain has always opened to let through snippets of information at opportune moments. The aim of the current manoeuvres is to clamp down on political freedoms in order to make it easier to drive through deeply unpopular neoliberal measures. In the late 1980s, after some failed attempts to push through price reforms on many basic commodities, the death of the former party leader Hu Yaobang deposed several years before partly because of his leniency over student demonstrations inspired the discontent that manifested itself in Tiananmen Square and elsewhere. After the students had been repressed the price reforms were pushed through without further protest. It is a pity that during the current celebrations of the 20th anniversary of Deng Xiaopings southern tour and his call for the speeding up of reforms, nobody is mentioning that the precondition for the accelerating marketisation of 1992 was the crackdown of 1989. The southern tour opened the way for the privatisation of state-owned enterprises, leading to largescale lay-offs and systemic corruption. Agricultural reforms caused crisis in rural areas, while the marketisation of social security systems, including medical insurance, led to increasing disparities of provision between rich and poor, country and city. This has led to unrest: in 2008, the state council announced that there were 128,000 collective protest incidents in that year. The number has increased since then to 180,000 a year. There has been widespread discussion of the problems of state-owned enterprises, the agrarian crisis and the rising cost of education, housing and medical care, the so-called new three great mountains. In response to all this a directive to pay more

attention to social equality replaced the Central Committees 1990s policy of giving priority to efficiency, with due consideration of equality. Yet now that Hu Jintao and Wen representing a new generation of national leaders have consolidated their power, political reform has been put on hold and the bureaucratisation of state structures has continued apace. The emergence of different local models was in clear opposition to this trend. In the past few years, observers from all over the world have come to study the experiments in Chongqing, Guangdong, Chengdu, Sunan and elsewhere, with Chongqing attracting more interest than most. The models in these cities were all constantly adjusted, partly as a result of keen competition between them but also because of the involvement in policy debate of local people, dissatisfied with the position of labour and the gap between rich and poor, rural and urban dwellers. In Chongqing there was more emphasis than in some other places on redistribution, justice and equality, and because the province was already highly industrialised, state-owned enterprises were important to its model. Chongqings experiment with inexpensive rented housing, its experiment with land trading certificates, its strategy of encouraging enterprises to go global: all these, under the rubric the state sector progresses, the private sector progresses, contributed to societys debate. Chongqing may not have offered a perfect blueprint, and its hard to know whether Bo himself was corrupt, but its architects stressed the importance of equality and common prosperity, and tried to work towards them. The Chongqing experiment, launched in 2007, coincided with the global financial crisis, which made a new generation feel less confident of the benefits of free-market ideology. The policies followed in Chongqing demonstrated a move away from neoliberalism at a time when the national leadership was finding it harder to continue with its neoliberal reforms. What the Chongqing incident now offers the authorities is an opportunity to resume its neoliberal programme. Just after Bo was sacked the State Councils Development and Research Centre held a forum in Beijing at which the most prominent neoliberals in China, including the economists Wu Jinglian and Zhang Weiying, announced their programme: privatisation of state enterprises, privatisation of land and liberalisation of the financial sector. At almost the same time, on 18 March, the National Development and Reform Commission issued a report on Important Points and Perspectives on the Deepening of Economic Structural Reform Priorities. It contained plans for the privatisation of large sections of the railways, education, healthcare, communications, energy resources and so on. The tide of neoliberalism is rising again. But it wont go unchallenged, even when left-wing websites have been closed down. In the past ten days both the Peoples Daily and the Guangming Daily have devoted several pages to the achievements of state-owned enterprises and the argument against privatisation.


The Rot Inside

By John Garnaut, The Age April 14, 2012 As a scandal engulfs China's political class, a battle is being waged against graft in the other institution of power the People's Liberation Army. THE People's Liberation Army is barely accountable to any civilian body, its affairs are out of bounds for China's media and netizens, and scandals are routinely airbrushed from public to preserve its image. Outsiders get glimpses of the enormous flow of military bribes and favours when they see the inner streets of Beijing crowded with luxury cars with military number plates. Business people gravitate towards PLA officers because of the access and protection they bring. PLA veterans contrast inadequate pensions with the luxury lifestyles they observe among serving officers. Retired officers say promotions have become so valuable that it has become routine to pay six and seven-figure bribes to even be considered for senior positions. Until General Liu Yuan took his stand, however, the culture of secrecy ensured that only fragmentary anecdotes of corruption could be observed. Liu, the highest-born of all of China's princelings, is political commissar in the General Logistics Department. Some believe he is on the way to becoming China's most powerful general thanks, in part, to his lifelong friendship with the anointed incoming princeling president, Xi Jinping. He is known outside China as one of the rising hawks whose spasmodically firebrand comments have contributed to almost every nation in the region scrambling to upgrade its military capabilities and the United States "pivoting" its focus back towards China. "Man cannot survive without killing," Liu wrote last year, in the preface to a friend's book. While Liu and other leaders hold up the US as China's potential wartime enemy, he is more worried about what the PLA is doing to itself in times of peace. "At home and abroad, no country can defeat China and no force can destroy our party," Liu told his officers on December 28, according to sources who have seen and verified his speech. "But only corruption, our own corruption, can smash us and cause our armed forces to be defeated without firing a shot." Liu said the practice of buying promotions is now so widespread that even President Hu Jintao, chairman of the Central Military Commission, had sounded the alarm: "When Chairman Hu severely criticised the 'buying and selling official posts', can we sit idle?" If even half of what Liu says about the professional decay of his colleagues is true, then the Obama administration may be pivoting back towards Asia including Australia for the wrong reasons. Analysts may be over-estimating China's military operational capacity as much as they once underestimated its technological development. The greatest dangers presented by the PLA may derive from its lines of command being corroded by corruption, compromised by ties of patronage and asphyxiated by the ever-greater effort required to impose political control. This is a recipe for accidents, and dangerous bureaucratic paralysis in crisis situations, rather than regional military domination. When China's princelings talk about saving the Communist Party from the rot within they like to adapt Chairman Mao's metaphor of "curing the disease to save the patient". Perhaps because Liu Yuan was talking about the PLA where putrefaction appears more advanced than elsewhere he took the image beyond its usual graphic limits. In a closed-door speech this year to a party-study class he recalled a childhood tale about a surgeon in Siberia who saved himself from acute

appendicitis by using a mirror to guide a knife into his lower abdomen and remove the fetid organ. "How many people on this earth are really able to operate on themselves?" asked Liu Yuan. "No matter if it is an individual or an organisation, to fix a problem when it arises requires this type of guts and nerve." One reason Liu Yuan has the guts to cut through the shiny carapace of the People's Liberation Army is because he is "the sole surviving male descendant of president Liu Shaoqi", as President Hu once put it to Liu's late mother, say sources close to Liu. One of his brothers was killed in the Cultural Revolution while the other emerged insane, to die soon after. His mother, Wang Guangmei, was jailed for a decade. His father, who had been Mao's anointed successor for 20 years, died in a cold concrete prison cell: naked, emaciated and caked in vomit and diarrhoea. Liu Yuan's legendary pedigree gives him licence to do and say what others cannot. When he talks of a "life and death" struggle to save the PLA and the Communist Party system his father helped create nobody doubts that he means it. What is less clear, however, is whether the PLA can simply remove its own rotten parts, and if the divided and compromised civilian and military leadership will allow Liu Yuan to do the surgical work. In January Liu Yuan ripped out one allegedly cancerous node, the deputy director of his Logistics Department, General Gu Junshan, after a protracted internal struggle. Those close to the investigation describe details of Gu extorting county officials with threats of violence and buying his way up the PLA hierarchy. Together with friends, relatives and patrons in and beyond the military, they say, he profited immensely from property developments, distributed hundreds of PLA villas to his closest friends, and generally ran his construction and infrastructure division like a mafia fiefdom. They detail a bewildering list of personal assets beginning with his own luxury villa, which stands outside the usual military compounds, behind a high wall next to Beijing's East Fourth Ring Road, called General's Mansion. "Gu's issue is extraordinary big," says an official who is close to the investigation. "You might wonder how someone at major-general level can enjoy chartered flights when travelling domestically and overseas. How could he build a martyr's cemetery for his father, who used to be a Kuomintang soldier?" In February, Gu's removal was officially confirmed but only in passive terms: "Gu Junshan no longer holds the position of deputy director of the General Logistics Department." The leadership, it seemed, was still battling over his fate. The Gu Junshan investigation could turn out to be the first big corruption expose since the Yuanhua Group was found in 1999 to have used military connections to evade 30 billion yuan in taxes by smuggling everything from cigarettes and luxury cars to fully-laden oil tankers. The case brought down the head of a PLA intelligence division and enabled former president Jiang Zemin to consolidate his grip on the military. The only significant case since then was that of deputy commander of the navy, Admiral Wang Shouye, who was arrested in December 2005. Hong Kong media reports claimed he was brought down by a mistress he had five, according to one report and he had stolen 160 million yuan. PLA leaders promised an anti-corruption campaign but all that seemed to change was that the sums grew much bigger. Soon after Gu's removal, around Spring Festival, Liu Yuan gave a more detailed account of corruption and insubordination, which confirmed the problems were not confined to one rogue general. In his speech to the party study class, according to sources who have seen it, he described a disease of "malignant individualism" that makes officers follow only orders that suit them, rely on their guanxi connections everywhere and openly sell their services at "clearly marked prices".

The web of military cliques, factions and internal knots of organised crime sounds more like the workings of warlord armies before the communist revolution than the rapidly modernising force now rattling China's neighbours. Liu Yuan described the situation: "Certain individuals exchange public money, public goods, public office and public affairs for personal gain, flouting the law and party codes of conduct. They even resort to verbal abuse and threats, clandestine plots and set-ups. They physically attack loyal and upstanding officials, kidnap and blackmail party leaders, and drag in their superiors to act as human shields. They deploy all of the tricks of the mafia trade within the army itself." The rot was so ubiquitous that officers had little incentive to act honestly: "Why would you follow the other path when you can rely on being given a promotion and, while still not even firmly in the position, waste no time to scoop out wads of cash and extort money a few more times before being sent on again to the next position to extort again," Liu said. And even he, the highest-born of all the princelings who are coming to dominate the upper ranks of the party and the military, admitted to feeling the pressures of playing the honest cop in a crooked system. "It is as if fighting corruption, catching and correcting people, investigating breaches, fighting mafia and eliminating evil has become some sort of secret activity," he said. Chen Xiaolu, a princeling and former PLA colonel who gets together with Liu Yuan after each Spring Festival, declines to repeat the "terrible stories" he hears from recently retired generals except to confirm the broad thrust of those about Gu Junshan. "Liu Yuan is an honest person and he does not collect money for himself," he says. "If Liu Yuan said those things then he must have his own proof, because he is in power and we are not." Chen Xiaolu does, however, have a distinct vantage point from which to assess why military discipline appears to have slipped so far. He is the son of one of China's 10 great marshals, Chen Yi, who founded the Third Army. He married the daughter of his father's right-hand man, General Su Yu, widely considered one of the PLA's greatest wartime commanders. Chen Xiaolu was a top student at an elite Beijing school who went on to serve in the PLA's 39th Army and as defence attache in London. He opted out of the system after 22 years on the PLA payroll, when on June 4, 1989, troops were sent into the heart of Beijing and massacred students and other protesters for the first time in the PLA's recorded history. Chen, who was seconded to a political reform institute at the time, refused various offers of senior positions. "I can remain silent, but I cannot tell lies," is how he explained his decision to superiors at the time. Some of Chen's military and princeling friends say he would by now be one of the highest-ranked generals if he had stayed in the system, but he has no regrets. In an interview in Chen's father-inlaw's old courtyard home, next to Beijing's Houhai Lake, he said the June 4 massacres left a vacuum of ideology, purpose and integrity which money has rushed to fill. "The problem has really got out of hand in the past 20 years," he says. "After the June 4 movement, when 'opposing corruption' was the protesters' slogan, some of the officers no longer cared about anything. They just made money and broke all the rules." Chen says the PLA has made huge efforts to politically indoctrinate its officers to secure their loyalty, at the expense of parallel efforts to "professionalise". He does not believe the political campaigns are working. "Maybe one day they will not be willing to obey their higher authorities because they are corrupt," he says. "Maybe the young generation of officers don't want to serve anybody and just want to take their own advice." Another princeling, who holds a senior post on the civilian side of the party apparatus, says lack of discipline and unity in the PLA has grown much worse in the past decade.

Unlike in the days of Mao and Deng Xiaoping and the latter years under Jiang Zemin, China no longer has a paramount leader who can stamp authority at crucial junctures. He says an unprecedented leadership vacuum has opened up at the top of the military because President Hu has never consolidated his grip, even after 10 years at the helm of the Communist Party. "Corruption is the glue that keeps the whole system together, after the age of idealism," says the senior official, who is close to the family of former president Jiang Zemin. He said it is worse in the military, where "gangs" and clusters of patronage are tied together by favours and corruption. A third princeling, whose father once oversaw China's security apparatus, goes so far as to blame Jiang for sabotaging the last leadership transition, back in 2002, by refusing to relinquish control of the military. "Jiang Zemin promoted dozens of generals while he was in power, and those people are either morons or his personal henchmen," he says. "Chinese politics has not become institutionalised." The result, he says, is that nobody is really in control. On the civilian side of the Communist Party, the spectacular demise of Liu's friend, the former Chongqing Party boss Bo Xiali, has further punctured the facade of "institutionalised" power transitions. The episode showed there are no enforceable rules, nor independent arbiters, to decide who governs the world's most populous nation and how they do it. Now that Bo has been suspended from the party's elite Politburo and is being investigated for "serious discipline violations", and his wife, Gu Kailai, is the prime suspect in the murder of British national Neil Heywood, Liu Yuan's "life and death" battle against corruption in the PLA may have become the new field of elite political struggle. An official with direct knowledge of Gu Junshan's case says President Hu Jintao had three times ordered that Gu's case be dealt with after receiving a request from Liu Yuan, but it was twice obstructed by one of Gu's patrons high in the military command. "It was as if President Hu was making a show of his impotence," he says. Some close Beijing political observers say Hu eventually succeeded only by bypassing military channels. "With Hu's direct instructions they bypassed the PLA discipline inspection commission and asked the central discipline inspection commission," says the political analyst Chen Ziming. "This means the case faced major resistance inside the PLA. It shows that those in actual power, both in the PLA and the party, have paved their paths with money and they control key people." Liu Yuan, with President Hu's backing, eventually succeeded in removing Gu but his networks and patrons in the Central Military Commission and beyond remain in place. In speeches this year Liu Yuan spoke darkly of those who acted as "shields" and "umbrellas" for corrupt officers. He also spoke mysteriously of "hostile forces" who tried to use last year's uprisings in the Middle East "as a spear to attack our army" and sow "discord between the party", suggesting another dimension of struggle. Other signs of PLA power struggles are bubbling to the surface. Three weeks ago a Chinese official informed a foreign military academy that one of the PLA's rising stars, General Zhang Qinsheng, would not attend a conference because he had been "replaced" as first deputy chief of the General Staff Department, according to a source at the academy. The information appeared to confirm swirling rumours at the time. Chinese defence officials then rushed to inform diplomats that there had been "a misunderstanding" and General Zhang's position was, in fact, secure. The false information was then followed by false rumours of a military coup that swept the country. The PLA's top brass has responded with repeated pledges of loyalty to Chairman Hu Jintao and by further isolating their officers from the outside world. "Whenever reform and development reach a crucial juncture, struggle in the ideological arena becomes even more intense and complex," said an

editorial in last Friday's People's Liberation Daily. "We must pay close attention to the impact of the internet, mobile phones and other new media on the thinking of officers and troops." The status of Liu Yuan's parents, the magnitude of his family tragedy and his prodigious self-belief stands him apart from most of his peers. Working against him is the fact he has spent less than a decade in the PLA, after transferring from the People's Armed Police, and some officers resent being ordered around by a man who lacks a professional military background. Others are suspicious of his ambition and believe his political comments have far overstepped the boundaries of military discipline. Many see Liu Yuan's challenge to their financial and other interests as an existential threat. Already, false rumours have been spread that Liu Yuan is battling cancer. "At the slightest movement one is labelled as fomenting conflict, not being a team player and purposefully spoiling other people's fun; to the point where those who work against corruption are out-competed by those who are corrupt," said Liu Yuan, in his party study speech this year. "Justice is under pressure and people fear retaliation while the scum congratulate each other on their great career prospects, get promoted and become rich." As Liu Yuan drives his corruption campaign deeper into entrenched networks of factions and patronage, and reveals his political ambitions more openly, he is becoming as polarising in elite political circles as his deposed friend, Bo Xilai. "Liu Yuan has gone mad," says the senior official who is close to the family of former president Jiang. Chen Xiaolu is standing firmly on Liu Yuan's side. "He says the Communist Party is in crisis and has to change," says Chen. "Some people question his intentions. I say I don't care about intentions; I say if he's against corruption then I support him." There are signs Liu Yuan may be making progress. In recent weeks a formal investigation into Gu Junshan was finally given official approval. A week ago the director of Liu Yuan's department, General Liao Xilong, was empowered to form a new PLA-wide corruption-fighting audit committee. Liao had supported Liu Yuan's efforts to unseat Liao's deputy, Gu Junshan. "Thoughts and actions must be united to the decisions and instructions made by Chairman Hu and the Central Military Commission," said Liao. Depending on how far it goes, Liu Yuan's surgical work could alter the delicate balance of factional power involving President Hu, his predecessor Jiang Zemin and his anointed successor, his staunch princeling friend Xi Jinping. If Liu Yuan succeeds he could vault into the vice-chairman position of the PLA's top governing body, the Central Military Commission. Some close observers believe he is enabling civilian party leaders to finally assert authority, as Jiang had done with a huge anti-smuggling campaign late in his own term. "The formation of the audit committee in the military finally signifies a decisive move by the current civilian leadership to assert more control over the military," said Victor Shih, a political scientist at Northwest University. "For a variety of reasons, it has taken Hu Jintao almost his entire administration to prepare for such a move." If the PLA is the malignant morass of theft, bribery, extortion and mistrust that Liu Yuan and other princelings say it is, then China's military offensive capabilities must be lower than many overseas strategists fear. Behind the PLA's shiny exterior is a world in which information is not trusted, important decisions require cumbersome bureaucratic consensus and leaders fear their subordinates will evade responsibility or ignore directions.


This entails a different array of risks. Even Liu Yuan appears unsure whether the PLA is capable of self-surgery in the age beyond ideals and strong leaders. "We are falling like a landslide," said Liu Yuan. "If there really was a war, who would listen to your commands or risk their life for you?"


Dr. Doom (Nouriel Roubini) and the Chinese Economy

By Peter Lee, Counterpunch 2011 May 19 [TCB COMMENTARY This comprehensive article explores the likelihoods and issues around Nouriel Roubinis recent claim that China will have a significant hard landing in 2013.] Chinas Ministry of Railways recently announced its high-speed trains will run slower in order to cope with problems of high operating costs and low passenger figures. This was promptly seized upon as a matter of important symbolism for the United States. Charles Lane, an irregular contributor to the Washington Posts famously right-wing op-ed page, echoed the view of many conservative pundits when he wrote that the Chinese move vindicated Republican opposition to President Barack Obamas plans for high-speed rail in the United States. Lane wrote: Meanwhile, in the United States, Obamas high-speed rail plan, originally set at $53 billion over six years, has gotten a thorough democratic vetting. Three freshly elected Republican governors spurned federal dollars for high-speed rail, fearing a long-term burden on their budgets; homeowners in liberal Northern California are fighting construction through their neighborhoods; and the president agreed with Congress to trim current-year spending as part of a budget deal. On the whole, Id say China should envy us. [1] In Lanes view, partisan gridlock will allow the United States to avoid the perils of socialist biggovernment planning and enjoy the enviable economic trifecta of decaying infrastructure, sluggish growth, and high employment. By way of instructive contrast, the financial year 2011 cost of US military operations in Iraq and Afghanistan is expected to exceed US$171 billion (for a cumulative total of over $1.2 trillion to date). Fortunately this exercise in financially irresponsible big-government paternalism is discretely piling up corpses and blasting holes overseas, instead of affronting the eyes of value-conscious American taxpayers with the infuriating spectacle of shiny new high speed trains in their backyards. [2] Nouriel Roubini observed the same Chinese trains and was able to extract some useful lessons for the Chinese economy. China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for importcompeting and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP [gross domestic product] to 5%, Chinas leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%. Thus, China did not suffer a severe recession as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%. The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for

the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors. Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment including East Asia in the 1990s have ended with a financial crisis and/or a long period of slow growth. [3] The views of Dr Roubini, a professor at New York University and lord of an extensive econometrics and punditry empire, carry significant weight in China because of his reputation as "Dr Doom" the economist who, as early as 2005-6 and virtually alone among his peers, predicted the catastrophic popping of the US real estate bubble and the subsequent unraveling of the world financial system. Dr Dooms diagnosis of the problem is widely accepted. China engaged in an orgy of infrastructure building to stimulate industrial as opposed to consumer demand in order to dodge the 2008 recessionary bullet. Chinas extravagances, most notably in the area of high-speed rail, do need some paring back. As for the prognosis that China will finally, in 2013, experience the hard landing that economists have continually predicted since the economy of the Peoples Republic kicked into high gear views are considerably more mixed. Morgan Stanleys analysts weighed in with an optimistic prediction that the Chinese consumer will, at long last, step up and drive the restructuring of the Chinese economy away from export-oriented industries and immense infrastructure projects that generate much more prestige than cash flow: Most controversially perhaps, the analysts predict what they call "a golden age of consumption". Chinas consumption as percentage of GDP is currently among the lowest in the world, which many analysts attribute to cautious Chinese families saving money for their retirements or to pay for healthcare bills. But Mr Wang says Chinese consumers arent waiting for the government to build a new social safety net before they spend more. Theyre waiting to make more money, which theyll do as labor demand boosts wages over the coming decade. Consumer spending zoomed in [South] Korea and Japan after those countries reached the $7,000 mark. [4] Shaun Rein of the China Marketing Group put some factual or at least statistical meat on the rhetorical bones in an an op-ed for CNBC: My firm interviewed 5,000 Chinese in 15 cities last year. It is true consumers over the age of 60 reported savings rates near 60% because they feared soaring medical and housing costs. After living through decades of upheaval and missing out on the recent economic boom, they remain thrifty. Little can be done to change decades of ingrained habits. Our research suggests the key metric Roubini misses is shifts in how younger Chinese spend. Respondents under 32 years old had effective savings rates of zero. They remain confident about their money-making potential. Secretaries earning $600 a month commonly save two months salary to buy the latest Apple iPhone or Estee Lauder cosmetics. Consumer finance reforms are also spurring more consumption for younger Chinese. Total credit cards in circulation rose from 13.5 million in 2005 to 240 million in 2010 and will rise 22% annually for five years. More than 80% of the 18 million auto sales there last year were paid 100% up front. Brands like Toyota and General Motors are starting to push financing options, which will further unlock consumption. The data dispels the myth that Chinese are culturally high savers. [5]

Xinhua took note of Roubinis arguments and the rebuttals in a Chinese-language article. The basic theme was polite skepticism, pointing out that Chinas growing economy had in the past defied predictions of overbuilding by catching up to the infrastructure and productive capacity poured into the economy. But as for the future However, Roubini is perhaps quite correct in one respect. He believes that Chinas infatuation with excessive investment will lead to enormous waste and a significant decrease in the growth rate in the future. This view of his is very persuasive. [6] A Caixin article picked up on the "future" theme, pointing out that the 2008 infrastructure investment bulge was a temporary measure to counteract the global economic slump. An academic at Beijing Normal University, Li Shi, was interviewed by Caixin. He also pinned his hopes on the Chinese consumer. According to Li: In the past, increases in individual incomes have lagged behind GDP growth. However, the 12th Five Year Plan intends to change this. It should be said it can be changed, because in the coming years there will be a major change in Chinas entire economic structure. If the economic structure can change, urbanization will accelerate, excess labor capacity in the villages will be mopped. It is possible that within three to five years, if the labor market experiences conditions of demand exceeding supply, workers wage growth will accelerate. This would change the problem of excessively low personal incomes. Also, China has been continually upgrading the social safety net which will, to a certain extent, contribute to an increase in individual consumption.. Maintaining 7% growth and maintaining relatively full employment while at the same time the government structurally adjusts its outlays and use a greater proportion to meet the demands for improved peoples well-being, all can increase personal consumption. Lot of conditionals, ifs, cans, coulds, and shoulds in Mr Lis observations. [7] Roubini identifies some deeply embedded structural issues for the Chinese economy that he defines as critical and fears will take "two decades" to reform, rendering moot hopes of a soft landing in the next couple years: To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth. More importantly, China needs either to privatize its SOEs [state-owned enterprises], so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households. Instead, on top of household savings, the savings or retained earnings of the corporate sector, mostly SOEs, tie up another 25% of GDP. But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful. As a result, China will invest even more under the current Five-Year Plan. Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political

leadership in 2012-2013, Chinas policymakers may be able to maintain high growth rates, but at a very high foreseeable cost. Dr Roubini has a point. The 12th Five-Year Plan is not a glorious political and economic document. Its apparent priority is to kick the can down the road rather than risk the big reforms that might upset the applecart prior to the leadership handover. Instead of moving openly and aggressively on the issue of the real estate bubble thereby gutting the finances of the SOEs and local governments that rely on the real estate boom for significant revenues the Five-Year Plan puts a political band-aid on the problem by mandating the construction of low-income housing for citizens priced out of the private sector residential market. The perpetual lure of the bubble, combined with access to virtually cost-free money courtesy of Chinas inflation-beleaguered individual depositors, continues to drive runaway bank lending, despite government efforts to cool things down by raising interest rates, boosting reserve requirements, limiting the leverage available to buyers of first and second homes and trying to reduce local government dependence on revenues from real estate boondoggles by introducing a property tax. As Reuters reported: "Net interest margins for the quarter were higher, and thats the most important factor for Chinese banks," said James Antos, a banking analyst with Mizuho Securities. [8] Higher "net interest margins" translated into expected average profit margin gains of 29% for the banking sector in just one quarter over last year. The undervalued yuan is still one of the best bargains on the planet, especially since the burgeoning Chinese economy offers plenty of places to invest it. Chinas exchange rate policy continues to suck in dollars hot money and investment dollars as well as export earnings that contribute to the real estate and stock market bubbles. Chinas forex reserves are ballooning to ridiculous levels ridiculous as in $3 trillion. The immense reserves and the exchange rate policy that enabled them are no longer a source of reflexive national pride. They are a source of anxiety, as Zhou Xiaochuan, the head of the Peoples Bank of China, conceded: "Foreign-exchange reserves have exceeded the reasonable levels that we actually need," Zhou said. "The rapid increase in reserves may have led to excessive liquidity and has exerted significant sterilization pressure. If the government doesnt strike the right balance with its policies, the buildup could cause big risks," he said, without elaborating. [9] In the current environment, an ever-growing mountain of foreign exchange represents a double headache. Forex inflows have to be purchased using yuan, and then yuan bonds issued to sop up the excessive liquidity the sterilization pressure Zhou is talking about, and a most unwelcome contributor to Chinas worrisome inflation rate. Meanwhile, the forex has to generate some kind of return, but theres no good place to put $3 trillion thanks in part to the inrush of Chinese dollars, the rate on short term US Treasury paper is near zero. Raising interest rates in a global environment of rock-bottom interest rates is not a recipe for success, as Brazil is learning. Rapid appreciation of the yuan is emerging as a possible measure to curb inflation and cool the economy.


Even so, allowing rapid yuan appreciation in order to put Chinas financial and forex policy on an even keel is an unnerving leap into an unknown of diminishing exports and growing unemployment that the Chinese government is still hesitant to make. In sum, Chinas response to its overheating and structurally unbalanced economy is not a profile in courage. Maybe its a disaster waiting to happen. Over at the quant-hive Seeking Alpha, Craig Pirrong pontificated: whether Chinese economic management can avoid the kind of catastrophe that Roubini and I consider to be likely depends on your view of the efficacy of centralized economic management of the type that China practices. The Thomas Friedmans of the world, and arguably Obama, believe that such dirigisme is superior to the messy, decentralized, unplanned and non-centrally coordinated actions of greedy individuals in markets. People like me, conversely, believe that the visible hands of greedy, largely ignorant, and short-sighted politicians and bureaucrats is likely to lead to inferior outcomes. Pirrongs smug celebration of free-market omniscience is a little harder to digest when one remembers that, in 2006-2008, the invisible hand was not efficiently allocating capital. Instead it was engaged in busy, sticky self-gratification as hedge funds and investment banks pumped subprime debt into the financial markets to give them an excuse to sell more derivatives and borrow more money until leverage was over 35:1 so they could buy and sell more derivatives. The credit default swap (CDS) market grew to $60 trillion or $38 trillion, depending on how you keep score (for comparison purposes, total US GDP is $14 trillion). A delicious vagueness was part of the whole CDS magic. The swaps were almost entirely synthetic, written and purchased by financial institutions that had no exposure to the underlying security or commodity. The market was unregulated, open only to the so-called "experienced", ie deeppocketed investors, and characterized by fearsome information asymmetries. Despite declarations of its defenders that the existence of this global casino promoted efficiency and liquidity, the global markets fundamental lack of transparency came back to bite it. As the real estate market finally soured, a spasm of panic and mistrust in 2008 caused the entire financial system to seize up; the market lost the ability to price the complex and opaque swaps, capital flowed out of the financial companies, and credit was unobtainable. Titanic leveraging converted into titanic deleveraging and the financial markets were overwhelmed. The financial companies thereupon slunk back to the public trough like whipped hounds to convert to bank holding companies to avail themselves of government-insured deposits, or to obtain government assumption of toxic waste debt in order to enable mergers between stronger firms and their crippled rivals. The public the "little guys" who were disqualified from participating in the derivatives financial orgy in the first place were not allowed to simply play the role of fascinated and eventually horrified bystanders. When the mess unraveled, they paid the toll in lost retirement savings, lost homes, lost jobs, and the cutbacks in public services that came with collapse of tax revenues in the recession. The only force to survive intact was the industrys invincible self-regard, made possible only by its convenient and conveniently short memory, the tender mercy of bespoke politicians and regulators worldwide, and the co-dependent driveling of the fanboy financial press. In contrast to the United States, Chinas financial system is biased toward regulation, government management, keeping a lid on international capital flows, and ignoring calls for financial innovation that serve primarily to enlarge and fatten the profits of the financial sector.

Chinas wishlist for reform of the international financial system is incorporated in the April 14 declaration at Sanya, Hainan, after a summit of the leaders of Brazil, Russia, China, India and South Africa the BRICS group of nations. The declaration makes it clear that the PRC believes that the current default attitude ignoring the role of the sizable Chinese government stimulus in averting a global recession and finger-wagging China for its exchange-rate peccadilloes while disregarding the Western worlds colossal financial fail should be abandoned. Instead, the PRC is yearning for an endorsement of Chinas government-knows-best financial policy on a global scale: a coordinated international effort to make the international flow of capital and trade in derivatives more transparent and susceptible to multilateral intervention. The conclusion that the United States, by reason of its serial regulatory and fiscal transgressions, is no longer fit to lead the international financial system (or impose fealty to its free-market nostrums) is also made clear by the call for a new reserve currency protected from the machinations of the US Federal Reserve. Recognizing that the international financial crisis has exposed the inadequacies and deficiencies of the existing international monetary and financial system, we support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty. We welcome the current discussion about the role of the SDR [the special drawing rights of the International Monetary Fund] in the existing international monetary system including the composition of SDRs basket of currencies. We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economies. We call for further international financial regulatory oversight and reform, strengthening policy coordination and financial regulation and supervision cooperation, and promoting the sound development of global financial markets and banking systems. Excessive volatility in commodity prices, particularly those for food and energy, poses new risks for the ongoing recovery of the world economy. We support the international community in strengthening cooperation to ensure stability and strong development of physical market by reducing distortion and further regulate financial market. The international community should work together to increase production capacity, strengthen producer-consumer dialogue to balance supply and demand, and increase support to the developing countries in terms of funding and technologies. The regulation of the derivatives market for commodities should be accordingly strengthened to prevent activities capable of destabilizing markets. We also should address the problem of shortage of reliable and timely information on demand and supply at international, regional and national levels. The BRICS will carry out closer cooperation on food security. [10] Good luck with that. The counterintuitive lesson that the US and Europe seem to have derived from the financial meltdown is that debt, stimulus, reform, and regulation are only going to make matters worse. With an unwillingness to regulate capital and derivative markets domestically, the will to regulate them internationally is non-existent. The most interesting social experiment in the world today is communist Chinas attempt to manage economic stresses through classic national Keynsianism, while the United States gyrates in an apparent death spiral of deregulation, austerity, and defunding of its national and local government services. To be sure, China has to date displayed a distinct aversion to the hard choices that would reform its economy and put it on a firm footing for sustainable growth such as pricking the real estate bubble and undertaking a major and risky appreciation of the yuan.

The difference is that Chinese Keynesianism retains the fiscal, regulatory, and political means for intervention, adjustment, redirection, and if desirable, deregulation and privatization. In the United States, once the revenue and regulatory apparatus is gutted as a result of political calculation and national disillusionment, will there be any turning back? Perhaps thats the real approaching train wreck. Notes: 1. Chinas train wreck, Washington Post, Apr 21, 2011. 2. Estimated War-Related Costs, Iraq and Afghanistan, Infoplease, by end of the fiscal year of 2011. 3. Chinas bad growth bet, Aljazeera, Apr 18, 2011. 4. Great China Debate Continues: How Fast, How Long?, Wall Street Journal, Apr 25, 2011. 5. Why Nouriel Roubini Is Wrong on Chinas Economy, Apr 19, 2011. 6. Click Here for the Chinese text of Xinhua. 7. Click Here for the Chinese text on 8. Hefty Chinese bank profits expected despite govt tightening, Reuters, Apr 25, 2011. 9. Zhou Says $3 Trillion China Reserves Have Risen Beyond Reasonable Level, Bloomberg, Apr 19, 2011. 10. Sanya Declaration of the BRICS Leaders Meeting, Chinese Embassy in Norway, Apr 14, 2011. Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.


The Revenge of Wen Jiabao

The ouster of Chongqing boss Bo Xilai was 30 years in the making -- a long, sordid tale of elite families and factions vying for the soul of the Chinese Communist Party. By John Garnaut, Foreign Policy March 29, 2012 If Premier Wen Jiabao is "China's best actor," as his critics allege, he saved his finest performance for last. After three hours of eloquent and emotional answers in his final news conference at the National People's Congress annual meeting this month, Wen uttered his public political masterstroke, reopening debate on one of the most tumultuous events in the Chinese Communist Party's history and hammering the final nail in the coffin of his great rival, the now-deposed Chongqing Communist Party boss Bo Xilai. And in striking down Bo, Wen got his revenge on a family that had opposed him and his mentor countless times in the past. Responding to a gently phrased question about Chongqing, Wen foreshadowed Bo's political execution, a seismic leadership rupture announced the following day that continues to convulse China's political landscape to an extent not seen since 1989. But the addendum that followed might be even more significant. Indirectly, but unmistakably, Wen defined Bo as man who wanted to repudiate China's decades-long effort to reform its economy, open to the world, and allow its citizens to experience modernity. He framed the struggle over Bo's legacy as a choice between urgent political reforms and "such historical tragedies as the Cultural Revolution," culminating a 30year battle for two radically different versions of China, of which Bo Xilai and Wen Jiabao are the ideological heirs. In Wen's world, bringing down Bo is the first step in a battle between China's Maoist past and a more democratic future as personified by his beloved mentor, 1980s Communist Party chief Hu Yaobang. His words blew open the facade of party unity that had held since the massacres of Tiananmen Square. This October, the Communist Party will likely execute a once-in-a-decade leadership transition in which President Hu Jintao and Premier Wen hand over to a new team led by current Vice President Xi Jinping. The majority of leaders will retire from the elite Politburo Standing Committee, and the turnover will extend down through lower tiers of the Communist Party, the government, and the military. Wen hopes his words influence who gets key posts, what ideological course they will set, and how history records his own career. Wen Jiabao and Bo Xilai have long stood out from their colleagues for their striking capacities to communicate and project their individual personalities and ideologies beyond the otherwise monochromatic party machine. The two most popular members of the Politburo, they are also the most polarizing within China's political elite. They have much in common, including a belief that the Communist Party consensus that has prevailed for three decades -- "opening and reform" coupled with uncompromising political control -- is crumbling under the weight of inequality, corruption, and mistrust. But the backgrounds, personalities, and political prescriptions of these two crusaders could not be more different. Bo has deployed his prodigious charisma and political skills to attack the status quo in favor of a more powerful role for the state. He displayed an extraordinary capacity to mobilize political and financial resources during his four and a half year tenure as the head of the Yangtze River megalopolis of Chongqing. He transfixed the nation by smashing the city's mafia -- together with uncooperative officials, lawyers, and entrepreneurs -- and rebuilding a state-centered city economy while shamelessly draping himself in the symbolism of Mao Zedong. He sent out a wave of

revolutionary nostalgia that led to Mao quotes sent as text messages, government workers corralled to sing "red songs," and old patriotic programming overwhelming Chongqing TV. From his leftist or "statist" perch, Bo has been challenging the "opening and reform" side of the political consensus that Deng Xiaoping secured three decades ago. Wen Jiabao, meanwhile, who plays the role of a learned, emphatic, and upright Confucian prime minister, has been challenging the other half of Deng consensus -- absolute political control -- from the liberal right. He has continuously articulated the need to limit government power through rule of law, justice, and democratization. To do this, he has drawn on the symbolic legacies of the purged reformist leaders he served in the 1980s, particularly Hu Yaobang, whose name he recently helped to "rehabilitate" in official discourse. As every Communist Party leader knows, those who want a stake in the country's future must first fight for control of its past. Until last month Bo appeared to hold the cards, with his networks of princelings -- the children of high cadres -- and the gravitational force of his "Chongqing Model" pulling the nation toward him, while Wen's efforts had produced few practical results. Bo earned his reputation as a rising star until Feb. 6when his police chief and right-hand man, Wang Lijun, drove to an appointment at the local British consulate to shake his official minders and then veered off and fled for his life down the highway into the U.S. Consulate in Chengdu. He carried with him allegations of sordid tales of Bo family criminal behavior including in relation to the death of British businessman Neil Heywood, according to Western government officials. In Beijing's eyes, this was the highest-level known attempted defection in 40 years, and it occurred on Bo's watch. Wang "betrayed the country and went over to the enemy," said President Hu Jintao, according to a Chinese intelligence official. Wen, the son of a lowly teacher, saw his family constantly criticized and attacked during the Cultural Revolution, and rose to power by impressing a series of revolutionary veterans. Bo, in contrast, was born to rule. The son of revolutionary leader Bo Yibo, he studied at the nation's most prestigious middle school, Beijing No. 4. Bo had not yet turned 17 when a rift between the princeling children and those with "bad class backgrounds" erupted into class warfare. In June 1966, in the early months of the Cultural Revolution, one of Bo's school mates invented the rhyming ditty that became the anthem for the princelings that led the early Red Guard movement: "The father's a hero, the son's a brave lad; the father's a reactionary, the son's a bastard." The student red guards at Beijing No. 4 turned an old eating hall into a gruesome incarceration chamber for the teachers and other reactionaries they captured. They painted the popular slogan "Long live the red terror" on the wall, in human blood. Within months, however, Mao directed his Cultural Revolution toward his comrades-in-arms and unleashed a coterie of lesser-born red guards against the old "royalist" ones. Bo Xilai spent six years in a prison cell. His father, Bo Yibo, was tortured. Red Guards abducted Bo's mother in Guangzhou and murdered her, or she committed suicide; if any records exist, they remain sealed. Since former leader Deng Xiaoping's 1981 "Resolution on History," the Cultural Resolution has officially been a "catastrophe," but the Communist Party never explained what happened. It was left as little more than a name, signifying bad but unknown things. By raising the specter of the Cultural Revolution, Wen Jiabao has opened a crack in the vault of Communist Party history: that great black box that conceals the struggles, brutality, partial truths and outright fabrications upon which China has built its economic and social transformation. Beneath his carefully layered comments is a profound challenge to the uncompromising manner in which the Chinese Communist Party has always gone about its business. And to grasp what the Cultural Revolution means to Wen Jiabao requires taking a journey through the life of his mentor, the 1980s reformist leader Hu Yaobang who ran the Communist Party in its most vibrant era. Hu Yaobang was struck down from his job at the helm of the Communist Youth League on Aug. 13, 1966, five days before Chairman Mao presided over the first mass rally of the Cultural Revolution.

Detained for six weeks, Red Guards beat and abused him and forced him to stand for hours with a huge wooden placard hanging from his neck and his arms wrenched behind his back. Six weeks later, as they retired for their national holidays, they called Hu's eighteen year-old son Hu Dehua to pick him up. "I cried when I saw his appearance," Hu Dehua told me. "He told me 'don't be such a goodfor-nothing, let's go home, it doesn't matter.'" Hu Yaobang was already back at work when Mao died, in 1976, and the Communist Party united behind the idea of moving on from the Cultural Revolution but lacked any further road map. Appointed head of the powerful Organization Department, Hu led a crusade to "seek truths from facts" -- for ideology to yield to reality -- and to rehabilitate fallen comrades. Deng, who by 1980 had secured his position as paramount leader, elevated Hu to general secretary of the Communist Party. By the early 1980s the Communist Party was rapidly retreating from everyday social life. As the economy grew, Chinese people began to enjoy a degree of personal freedoms, but the essential norms of internal party politics remained unchanged. At crucial junctures there were no enforceable rules, no independent arbiters, only power. In 1985, while most elders had been appointing each other or each other's children to important positions, Hu Yaobang recruited Wen Jiabao, the teacher's son, to run his Central Office -- a position akin to cabinet secretary. The following year Hu Yaobang's elder son, Hu Deping, spoke in terms uncannily similar to Wen Jiabao's of two weeks ago. "The Cultural Revolution was a tragedy," he said to the then propaganda minister, at a time when his father was at the height of his power. "It will not appear again in the same form, but a cultural revolution once or even twice removed cannot be ruled out from once again recurring." Perhaps he had an inkling of what was coming. By 1986 the tensions between an increasingly market-oriented economy and more liberal social environment began to clash with Communist Party elders' demand for absolute political control. Hu Yaobang tried to limit corruption among the elders' children, studiously ignored conservative ideological campaigns, and tolerated student protests. By the end of that year the elders had had enough. Then, as during the Cultural Revolution, and as remains the case today, no rules governed Hu Yaobang's downfall; just a group of backstage power brokers who judged that he had gone too far. In January 1987, 21 years after his purging in the Cultural Revolution, party elders subjected Hu to a torrid five-day criticism and humiliation session called a "Democratic Party Life meeting." The harshest of Hu's critics was Bo Xilai's father. Hu Dehua, the youngest son, lives at home with his wife in the same large but rundown courtyard home, just west of Beijing's closed-off leadership district Zhongnanhai, where he has lived nearly all of his life. His recollections about what the Cultural Revolution meant to his family and his father, Hu Yaobang, informs the story that Wen Jiabao is telling today. Hu Dehua tells how his father was pained, but not surprised, when Communist Party elders used his own political demise to drive an "anti-bourgeois liberalization" campaign across China. Party apparatchiks instructed Hu Dehua to show his ideological opposition to his own father's political platform, but he refused. "It was the same as 1966. If someone was said to be 'liberalized', then everyone would line up to criticize them," Hu Dehua said. "The country was turning back at a time when it should be have been democratizing and transitioning to rule of law." Hu Dehua told his father how pessimistic he felt about his country's future. Hu Yaobang agreed that the methods and ideologies of the 1987 anti-liberalization movement came straight from the Cultural Revolution. But he told his son to gain some historical perspective, and reminded him that Chinese people were not joining in the elite power games as they had 20 years before. He called the

anti-liberalization campaign a "medium-sized cultural revolution" and warned that a small cultural revolution would no doubt follow, Hu Dehua told me. As society developed, Hu Yaobang told his son, the middle and little cultural revolutions would gradually fade from history's stage. It is fortunate, perhaps, that Hu Yaobang could not see how his death in April 1989 triggered an outpouring of public grief at Tiananmen Square, as Chinese students held him up his honesty and humanity in contrast to their perception of other leaders of the time. The protests morphed into a mass demonstration for liberalization and democratization and against growing corruption among children of the political elite. Wen Jiabao remained in charge of the Communist Party Central Office, now working for Hu Yaobang's increasingly reformist successor, Zhao Ziyang. A famous photo shows Wen standing behind Zhao's shoulder as his boss declared the haunting words "I've come too late" to students who refused to leave the square. Shortly afterward, Deng and the party elders ordered in the tanks, triggering another Cultural Revolution-style convulsion and adding a new bloody file to the Communist Party's vault of history. Bo Yibo moved to have Wen purged, according to a source whose father was a minister at the time, but other elders were impressed with how Wen shifted his loyalty from Zhao (who spent the rest of his life under house arrest) and supported martial law. Wen played by the rules of a ruthless system, his family -- especially his wife and son -- leveraged his official status for their own business interests, while his career progression resumed. Hu Yaobang was largely airbrushed from official history after his purge in 1987. But because he did not publicly challenge the Communist Party, he maintained his legacy and his supporters, including all of the current and likely future party chiefs and premiers: Hu Jintao, Wen Jiabao, Xi Jinping, and Li Keqiang. All four regularly visit the Hu family home during Spring Festival. But only Wen Jiabao has publicly honored his mentor's legacy. Two years ago, on the 21st anniversary of Hu Yaobang's death, Wen penned an essay in the People's Daily that was remarkable in a nation whose leaders rarely give any public hint of their personal lives. "What he taught me in those years is engraved on my heart," wrote Wen. Of the four top leaders who regularly pay homage to Hu Yaobang's old home, Wen Jiabao has the warmest connection with Hu Yaobang's widow and four children. Hu taught his children to resist the idea, wired into the Communist Party psyche, that they had any particular hereditary right to high office. Nevertheless the eldest son, Hu Deping, rose to vice minister rank in the United Front Department. And last year he used his princeling heritage and networks to organize and say things that would have banished lesser-born men to jail. He published a book about his father, with a forward written by Wen. He organized a series of closed-door seminars for leading intellectuals and other princeling children of reformist leaders to try and build a consensus for reform. The first and most low-key seminar, in July, ignited what became a raging public debate about Bo Xilai's "Chongqing Model" versus its possible antidote, the more liberal "Guangdong Model." The second, in August, celebrated the 35th anniversary of the arrest of Mao's radical "Gang of Four," which slammed the door shut on the Cultural Revolution just weeks after Mao's death in August 1976. The third, in September, explored the 30th anniversary of the 1981 Resolution on History, which had confirmed the Cultural Revolution as a catastrophe that must never occur again. It was at the September gathering that Hu Deping set down the themes that Wen later referred to in his press conference, and published his comments on a website dedicated to chronicling the life and times of his father: "The bottom line is making sure to adopt the attitude of criticizing and fundamentally denouncing the Cultural Revolution ... In recent years, for whatever reason, there seems to be a 'revival' of something like advocating the Cultural Revolution. Some people cherish it; some do not believe in the Cultural Revolution but nevertheless exploit it and play it up. I think we must guard this bottom line!"

The subtext, only barely concealed, was that Bo Xilai must be stopped from dragging Communist Party back toward its most radical, lawless past. How, one could be forgiven for asking, could Bo grasp for power by praising a movement that killed his own mother? Hu Deping honed in on the need to forge mechanisms to institutionalize the power games between party leaders. He told his princeling and intellectual friends in the seminar audience that the remnants of feudal aristocracy -- old fashioned despotic power -- might again emerge as the party had said it had during the Cultural Revolution. He foreshadowed the ructions that are now taking place: "If we really want to carry out democratization of inner-party political life, the cost is going to be enormous. Do we have the courage to accept that cost? If we do it now, there is a cost certainly. Do we dare to bear the cost? Is now the right time? I cannot say for sure. However, I think it might create some 'chaos' in some localities, some temporary 'chaos', and some localized 'chaos'. We should be prepared." Hu Deping has been stepping forward, with some reluctance, to draw on his father's legacy to help shape China's future. He is a member of the standing committee of one of China's two representative-style bodies and mixes with senior leaders. He discussed the Cultural Revolution with both President Hu Jintao and his expected successor, Xi Jinping, not long before Wen Jiabao's news conference and Bo Xilai's demise, according to a source familiar with those conversations. China's politically engaged population is watching the battle now under way within the Politburo to frame the downfall of Bo Xilai and set the lessons that will shape China's future. "So far we cannot identify whether Wen Jiabao is representing himself or representing a group," says a recently retired minister-level official, who had confidently predicted Bo's sacking to me 10 days before it happened. "Maybe it's 80 percent himself and 20 percent the group. We still have to watch." It remains far from clear whether the Communist Party's webs of patronage and knots of financial and bureaucratic interests can be reformed. But with China's leftist movement decapitated by the purge of Bo Xilai, and Bo's critics now talking about his reign of "red terror" after daily revelations of political and physical brutality under his command, Wen has begun to win over some of his many detractors. "In the past I did not have a fully positive view of Wen Jiabao, because he said a lot of things but didn't deliver," says a leading media figure with lifelong connections to China's leadership circle. "Now I realize just to be able to say it, that's important. To speak up, let the whole world know that he could not achieve anything because he was strangled by the system." Hu Yaobang's most faithful protg, who carried his funeral casket to its final resting place, is building on the groundwork laid by Hu and his children ostensibly to prevent a return of the Cultural Revolution. Wen Jiabao is defending the party line set by Deng Xiaoping's 1981 historical resolution against attack from the left. Between the lines, however, he is challenging the Communist Party's 30year consensus from the liberal right. Hu Dehua, the youngest son, spelled out the gulf between these positions in a rare Chinese media interview one month ago: "The difference between my father and Deng is this: Deng wanted to save the party; my father wanted to save the people, the ordinary people." Wen Jiabao sees Bo's downfall as a pivotal opportunity to pin his reformist colors high while the Communist Party is too divided to rein him in. He is reaching out to the Chinese public because the party is losing its monopoly on truth and internal roads to reform have long been blocked. Ironically,

he is doing so by leading the public purging of a victim who has no hope of transparent justice, because the party to which he has devoted his life has never known any other way.


Chinas Second-Richest Man Says Monopoly State Needs More Entrepreneurs

By Bloomberg News March 5, 2012 Zong Qinghou, Chinas second-richest man, called on the government to increase the role of private business in the economy and said the nations prospective next president agrees. The 66-year-old self-made billionaire who is chairman of Hangzhou Wahaha Group Co (HWGZ). and a member of Chinas legislature, said the nation should cut taxes and allow private investment in more industries. When Vice President Xi Jinping comes to power, he will encourage the development of private enterprise, Zong said in a March 3 interview. The government has become a monopoly company that invests in everything, Zong said before annual meetings of the National Peoples Congress that start today. The biggest hurdle facing Chinas economy now is that the governments income is too high and the peoples income is too low. Premier Wen Jiabao set a growth target of 7.5 percent today for 2012 which was down from an 8 percent goal in place since 2005. He has also pledged to adjust taxes today as the national seeks to end the economys reliance on investment and exports that in the past three decades produced average annual growth of 10 percent and fueled social unrest sparked by pollution, corruption and a widening wealth gap. Personal Income The World Bank last week said China, where state-owned companies control banking, energy and media, needs to depend more on markets and private business to avoid derailing growth. It isnt realistic to drive the economy by exports or investment now, said Zong, who is a delegate to the legislature from eastern Chinas Zhejiang province, where Xi served as Communist Party Secretary from 2002 to 2007. China should boost growth by cutting taxes to increasing individual incomes, he said. Ordinary people still lack money, he said. Wahahas Growth Zongs rise to wealth began with a 140,000 yuan ($22,230) loan in 1987 when he and two retired teachers in the city of Hangzhou started their business by selling popsicle, soda and stationery. He built Wahaha, which means laughing children in mandarin Chinese, into a beverage maker that had 7 billion yuan of profit last year. The privately-held company may boost that to 10 billion yuan this year on sales of 85 billion yuan, Zong said. Wahahas growth is rare in China, where the 12 biggest publicly traded companies by market capitalization are all state-owned. The government is the majority shareholder in the nations four largest banks, its three biggest oil companies and the largest producers of cars, computers, steel, washing machines and milk. Private investment continues to be limited in industries such as tobacco and banking. Bank Investments Zong said he plans to propose that the government allow more private companies to open banks and that they be exempted from taxes if they extend financing to small- and medium-sized enterprises. If possible, Zong said he would open a bank because I have money and my reputation is good.

His personal wealth was estimated at $10.7 billion by Hurun Report last year, trailing only the $11 billion of Sany Heavy Industry Co. (600031) Chairman Liang Wengen. Foreign businesses have also expressed concern about the role of state-owned companies in Chinas economy. The movement toward a market economy seems to be pretty much stalled, Chris Murck, president of the Beijing-based American Chamber of Commerce in China, which counts General Electric Co. and Intel Corp. as members, said in a January interview. World Bank President Robert Zoellick said last week in Beijing that Chinas economic-growth model isnt sustainable and that the nation needs to rely more on markets and the private businesses. Vice President Xi Zong said Vice President Xi, in line to succeed Hu Jintao as head of the Communist Party and President in a process that starts later this year, also believes in the importance of private enterprise as a result of his time in Zhejiang. Private companies including Wahaha, Alibaba Group Holdings Ltd. (1688) and Zhejiang Geely Holdings Group Co. (175) have fueled growth in the province. Zhejiang, which ranks fifth among Chinas provinces and municipalities in per capita gross domestic product, has the smallest gap between rural and urban consumption of any region in China. Because he spent some time in Zhejiang, he believes private enterprise is the main direction of economic development, Zong said of Xi. I figure when Xi Jinping comes to power, hell encourage the development of private enterprise. China may pass the U.S. to become the worlds largest economy during Xis tenure as president, according to estimates by the International Monetary Fund.


A Century after the Qing Yesterday's Empire and Today's Republics

By Charles Horner and Eric Brown, China Heritage Quarterly September 2011

Sometime in the late-nineteenth century political and intellectual leaders in China began to flirt with a genuinely radical idea that stood against two millennia of Chinese historythat the country could get along without an emperor and, even more, that the country would probably not survive if it kept its venerable imperial system. In this, China would precede Europe's great empires into a new era of republicanism. Over the decades, other great multi-ethnic empiresthe Hapsburg, the Ottoman, Britain's South Asia Raj and, most recently, the Soviet Uniondevolved into independent nations. But, after a century, the geopolitical territory of the Manchu empirethat is, the Qing dynasty, China's last, which began in 1644 and ended in 1912is still largely intact. It may yet dissolve into independent nations but, so far, Outer Mongolia is the only major part of the Qing patrimony that has formally done so. Taiwan, a one-time Qing colony, has emerged as an independent, democratic, self-governing polity, although its independence and sovereignty are not widely recognized. The rest of the Qing realm has, since the early 1950s, been ruled from Beijing, the capital of the People's Republic of China (PRC). Indeed, the PRC is the last consequential regime in the world which has not given up the vision of a polity that is a vast multi-ethnic empire in content, albeit one that is a constitutional republic in form. This relationship between content and form isto employ some Maoist-era terminologythe primary contradiction of the PRC. Indeed, given what has happened, and what continues to happen, in other parts of the world, even the mere claim that any one non-democratic state should govern the once-vast domains of the former Qing Empire is striking in and of itself. But the People's Republic does more than assert that claim; since l949, it has gone to extraordinary lengths to make the claim stick.
The Manchu Court and the Communist Party

In February 1912, Prince Chun, the regent acting on behalf of his five year-old son, Puyi the famous Last Emperor, Xuantong, executed an instrument of abdication whereby the Qing dynasty came to an end. In power in the imperial city of Beijing since 1644 (the Qing had ruled 'outside the pass' or beyond the Great Wall for some years before that), the dynasty was the creation of the Manchus, a hitherto obscure inner Asian people who, at the end, constituted perhaps two percent of China's 400-plus million population. The Manchu empire, not only in sheer power but also in cultural achievement, was one of the greatest in Chinese and, indeed, world history. At its height at the end of the eighteenth century, it accounted for about thirty percent of the world's gross domestic product. But, most significant for us today, is that the 'China' that the Qing dynasty bequeathed to the new Republic in 1912 was about twice the size of the 'China' it had taken over in the late 1600s. To China Proper, through alliances, warfare and guile they added Mongolia, East Turkistan, Tibetand Taiwan. For all this, beginning in the latter part of the nineteenth century and continuing for many decades thereafter, the informed Beijing Consensus of the age was that the Qing had outlived whatever usefulness it had once had, and that it was especially ill-suited for life in the new, globalized, world of the early twentieth century. The relatively peaceful transfer of power achieved in the formal abdication of 1912 was unprecedented in China's history and the civility of it stands in contrast to the many decades of disorder and bloodshed, which included anti-Manchu pogroms, that preceded it. For the Manchu-led Qing did not go

without a fight, indeed, many fights, and big ones that claimed millions of lives. And it did not go without a brilliant effort at national renovation, which confronted many old ways of thinking and doing. These were profound changes and, over the past three decades, historians and other observers have noticed that China's post-1979 renovation resembles in many striking ways this 'self-strengthening movement' of the last Manchu decades. But, today, as it must be, the Qing is well-regarded by the People's Republic of China, because it was the Qing who created the One China, which would be half its current size were it not for the Manchu expansion. Outside the government, there are other commentators who do not work for the People's Republic but who also applaud the last period of Qing rule for its major political and economic reforms, and for its constructive critique of the country's inherited cultural and intellectual traditions. Some of these, heretically, have gone so far as to challenge the very foundational principles of the People's Republic by maintaining that the country was fundamentally on the right track when the republican revolution intervened and ignited the decades of abject misery that are only now coming to a close. Still other observers see parallels between the problems of excessive corruption, growing regionalism, and widespread disorder that overwhelmed the Qing in its last days and the growing internal difficulties that face the People's Republic today. The great, and still underappreciated, reforms of the late-Qing era certainly did the country a lot of good, but they did not save the dynasty. Though they were strengthening in their way, they were also subversive of the polity and of its ruling caste. They started to change the ways that many things were done and they introduced non-traditional ideas about almost everything. People began to think and live in different ways. New definitions of the good and proper life no longer comported with older ones. Thus, even as the Qing polity succumbed to its many failures, its reformist successes became ironic reminders of its irrelevance. It helped sweep itself into history's dustbin. The Manchus at the center of this tale of rise and fall were only a tiny part of the Empire's population and the Aisin Gioro, the core imperial clan, was but a small fraction of that. In retrospect, the Aisin Gioro's vision, ruthlessness, tenacity, and adaptability in building and preserving the Qing Empire are extraordinary: relentlessly violent and obsessed with building and maintaining their continental empire; brutal and conciliatory; stubborn, yet flexible in employing new tactics; celebrators of the Sinic tradition, but wholesale adopters of new foreign ways. The story of the Aisin Gioro is a useful primer for any successor regime which would like to replicate their achievements but escape their fate. It is a story that reveals one grand strategy for empireand its limitations. We do not know in what detail that history has been studied by the Communist Party officials who now hold power in Beijing, but we do know that their challenge today is in its essence not so very different from the Aisin Gioro in whose palaces they now live.
One Empire, Two Republics

Since 1912, two Republicsthe Nationalist Republic of China in power from 1912 to l949 and the Communist Party's People's Republic of China in power sincestruggled to hold the Manchu empire together. The first republic needed to fill itself with substance and meaning. No such thing ever had existed in China before. Its founders had argued that there was a fundamental conflict of interest between the Manchus and the Han Chinese they ruled. But what to make of the Manchus' empire that they now claimed? Would the new Chinese rulers have comparable conflicts of interest? How would such a diversity of people, once ruled by Manchus but now by Han Chinese, react to the change? How could the change be

justified and managed? Interestingly enough, we know relatively little about how the new Republic, almost immediately, decided to lay claim to all Manchu imperial domains as part of the new republican dispensation. But, ever since, it has required considerable conceptual legerdemainand the repeated use of forceto recast the One Manchu Empire into the One Republic of China. The struggle about what 'Republicanism with Chinese Characteristics' should mean and how it should work in practice turned out to be long, complicated, and very violent, an indication of the depths of feeling on all sides. The first two decades after the Qing abdication were known as the 'Warlord Era', a symptom of the incoherent republic's growing pains. A new National Government emerged after sustained military campaigns, but its writ was narrow. There was then open war between China and JapanJuly l937 until August l945an underappreciated theater of World War II, but a ferocious one, comparable only to the German-Soviet front in Europe. Tens of millions of Chinese lives were lost. When that war ended, the on-again, off-again civil war between the Nationalists and the Communists resumed. Millions fought on both sides and millions died. In l950, the new People's Republic of China laid claim to the Qing/Republican inheritance and sent its forces into Tibet. In the lands of East Turkistan, which came to be known to Chinese through the Manchu conquests as 'Xinjiang', or the 'New Territory', Turkic peoples also offered sporadic resistance against Chinese rule and they, like rebellious Tibetans in the late 1950s, were bloodily repressed. The new government then turned against the Chinese people themselves. First there were the mass purges and executions of the early 1950s, followed by a series of campaigns and the murderous Great Leap Forward of the late l950s, which produced horrific destruction comparable to Stalin's in the Soviet Union; tens of millions of lives were lost in what has become known as the Great Leap Famine. In the mid 1960s Mao Zedong and his supporters then launched the Great Proletarian Cultural Revolution, claiming yet more lives and causing still more devastation. Obviously, Mao and the Communist Party believed that only violence, or rather 'class struggle,' on a grand scale could secure the Qing's domains and then rule the hundreds of millions who lived within its borders. Today, China is in the midst of another unanticipated upheaval, one that has been far less violent and which may have far more staying power. Over thirty years ago, the Chinese Communist Party which had once been determined to be the most radical socialist ruling parties in the world, put the country on a new course, one inspired both by history as well as by the economic prowess of kindred societies like the ones in Japan and South Korea. Even more, it was inspiredgrudgingly, but also proudlyinfluenced by the successes of the Chinese societies in Taiwan, Singapore and Hong Kong. At one level, these last three survivors in the century-long battle to define Chinese Republicanism seem woefully mismatched vis--vis Beijing, but the existence of conspicuous alternatives to the PRC's way of doing things was and remains consequential. On the island of Taiwan especially, there is another republicthe Republic of China (RoC)that is more advanced than the People's Republic of China on the Asian mainland. The RoC is better at manufacturing, more sophisticated in banking and finance, more productive in research and development, and better integrated into the world economy. The PRC now relies heavily on the RoC for capital investments, managerial expertise, and technical know-how, even as it fears the constitutional and democratic governance at which the RoC also outperforms its mainland sibling and which also accounts for its other successes.


Command Capitalism

The quiet departure of the Qing and the decades of political anomie and violence that followed in its wake provide a rich background for understanding the next round of change that will come to China and how that change will be realized. After Mao Zedong died in l976, the implementation of new economic and social policies caught most observers by surprise. The opening up of the People's Republic to the global economy and to contemporary ideas and practices has since created new geo-economic and socio-cultural centrifugal forces within China that have already dramatically altered the character of the Chinese polity. The last thirty years have witnessed the greatest continuous economic boom in the history of the world, and the strains show. China's urbanization rate is the fastest in the history of the world and yet there are perhaps 800,000,000 more Chinese in rural areas still to migrate. The effects on every facet of China's social, intellectual, and cultural life have been profound. Not least, in response to the changes in China's 'substructure', the doctrine of the ruling Communist Party has become so contorted as to have become what would seem to be a parody of itself. There have been officially sanctioned reports that acknowledge tens of thousands of rural disturbances of various sizes. Thus, one may justifiably ask: Is yet another abrupt shift in China's political economy in the offing? These socio-political indicators and the social pathologies associated with them are not in and of themselves the best way to highlight the many challenges that face the Communist Party of China, the organization which set up the PRC in l949 and which has run it ever since. Rather, the challenges are better understood as systemic, as inherent in the modus vivendi the ruling party has struck between itself, the country, and the world. It is an arrangement, so the Party has concluded, which is the best way of doing what its Leninist charter requires it to dogain power, and then hold it. Early on, the Soviet Model seemed the only way to accomplish this but that model, in the end, proved unavailing. Indeed, well before the end of its fraternal party's rule in the USSR, the Communist Party of China set out to reinvent the system it had created and to connect itself to the world market economy. But to accept the 'market' is to cede much power to a potent, impersonal, and unpredictable force. No political figure enjoys the fact that his power can be undone at the whim of the bond market, or of the foreign exchange market, or of short-selling in some faraway commodities market. For a Leninist party that is also the inheritor of an emperor-centered, mandarin-run, system the tensions and ambiguities inherent in today's arrangements will always be unsettling, and often nerve-wracking. Everything the leaders of Communist Party of China had once been taught to think about their country's nature and traditions tells them that the system they have put in place should not be able to workbut it is working nonetheless. It continues to make the country richer and more powerful by the day, and yet the decisive controlling forces, forces to which it must respond because it cannot control, now reside outside the country, in no one place in particular, and not subject to the say of any one person or group. The system is fundamentally mysterious, but it favors democratic regimes: economies expand and then they collapse; prices fall and then they rise; peoples pour into the streets, and it is tyrannies that fall. The worries of today's Party leadership were unknown to their fathers. The Party survived the Asian financial crisis of l997, and may also survive the world financial crisis of 2008 and its aftermath, which is ultimately drawing in the financial system of the entire world. But what is next? When faced with repeated domestic failures, the People's Republic's founders stressed an agrarian ethos of 'hard struggle and plain living', and also made systematic use

of foreign quarrels to whip-up the populace and shore-up their rule. Their sons, dubbed by many as 'the Princelings' and who are increasingly coming in to power, are aware that such machinations can be enormously costly: They know that a huge share of China's economy, and their own personal wealth, rest on foreign trade, most of it seaborne and thus reducible to a trickle in the event of war in the South China Sea or the Taiwan Strait. But there is no need to speculate archly about the catastrophic or even the dramatic; the pedestrian and the mundane serve us well enough. The relentless changes underway within Chinese society as it becomes more modern are producing a People's Republic that will inevitably be much different from the regime that rules today. Such ongoing change need not lead to a Soviet-style, sudden collapse for it to produce deep-seated internal and international effects. Rather, structural, societal, and attitudinal changesinherent in the processes of modernization and globalizationare remaking PRC, no matter the intentions of those who initiated them thirty years ago and of those who are carrying them forward today. The transformational changes inside the country cannot but bedevil the PRC domestically and affect its ambitions and performance as an international actor. The geographic, economic, and cultural territory that is commonly understood as 'China' is not the same thing as 'PRC', which is a regime, a system, a way of managing the affairs of a huge number people spread across a vast territory. As we have noted, PRC, the regime, was the self-conscious creation of the Communist Party of China, itself a highly self-conscious group of men who think constantly about what they doing. And, as we have also noted, the Communist Party of China, though it certainly has 'Chinese characteristics', it also has Leninist ones; it says so in its constitution. In creating a political and economic system as well as in propounding social and cultural norms it does what Lenin directs it to doseize power and then keep it. The Party's sense of how to do this has changed considerably over time. Today's PRC is much different from what it was at the time of its founding in l949, but both the old PRC and the new PRC are creations of the ruling Communist Party. PRC was what it was then and it is what it is now because, in the Communist Party's considered judgment, each embodies what the Party needs to do to maintain itself in power. This is called 'tactical flexibility'; it is not the historical determinism that fueled the Communist zeal of the last century, but quite its opposite.
The Burdens of Empire Before the Qing Dynasty could reach its apex it had first to go about the business of empire-building. The Aisin Gioro were violent and self-centered, and deeply engaged with the outside world as they believed themselves to be the leaders of a universal empire. In the nineteenth century, threats to the empire from the outside world, and expanding internal ones, led to reforms that further opened up the realm to a host of new intellectual and political forces. The Qing concluded that it had run out of options, for without serious renovation'self-strengthening'the dynasty was certainly doomed, whereas reform just might save it. The great post-Mao reforms'reform and opening up'were born of comparable desperation. Reconstituting the empire while, at the same time, attempting to implement Mao's monomaniacal and demonic social vision had brought the PRC to a tipping point, a tipping point not so very different from the one USSR would reach at the time of Gorbachev's ascendancy. Deng Xiaoping himself understood that his program was a roll of the dice like jumping into the sea, like crossing the river by carefully feeling for the stones beneath.

But beyond the question of PRC's external boundaries there's another kind of geo-political indeterminism affecting the inside of the country. The leadership's program of major social and economic renovation has had large structural effects on the internal balance of power. The economy now rests on a half-dozen or so macro-economic regions, each one centered

on what the Chinese call a Special Municipality, that is, an urban center afforded the status of a province in its own right: Beijing, Shanghai, Guangzhou, Wuhan and Chongqing. The regions centered on Guangzhou and Shanghai are the richer ones, and the disparities in wealth between these and the other regions are widening (as at least one theory of developmental economics would have predicted). The government worries about the regional disparities and has directed major investments in a politically-directed, rather than market-directed waythat is, to parts of the country which, in the natural course of development, would not attract large amounts of capital. The national government also collects taxes from the richer regions and sends the money to the poorer ones. These two undertakings constitute a fundamental conflict of interest between a central, self-conscious, political regime and regional, impersonal, economic forces. The result has been to replicate in lagging areas the political economy as it exists in the more advanced ones. Infusion of new money into Xinjiang or Tibet has served only to exacerbate local grievances because the new local economies under construction merely mimic the larger economy elsewhere in the PRC. The new wealth is severely mal-distributed; the corruption its creation entails is more widespreadand hence, more visible. Beyond that, at the same time, far older kinds of Chinese 'regionalism' and 'localism' have acquired a new strategic meaning and they have entered into the international relations of the PRC in new ways. The reappearance of geographically centered loyalties, even beyond the macro-economic regionalism, now is manifesting itself in unexpected ways and is complicating both the internal workings and the foreign ties of the PRC. For one example, there is now within China a huge deracinated population of workers in cities, who appear to be clustering by 'native place' affiliations. They are creating urban ghettos, defining themselves by common occupations, organizing 'native place associations', and other shared interests and concerns. This is a 'localism' of a neo-traditional kind, that is, a potentially explosive source of resistance to central authority. A new form of localism is the effort by regions and major cities to connect themselves directly to the world without going through the national capital. Such places are becoming increasingly internationally-minded. Indeed, there is substantial precedent for the phenomenon going back to that other period of 'opening up and reform' in the late nineteenth century as new trans-border ties are being created in every direction. Economic geographers call this 'the internationalization of Chinese localism' and call the result of it 'Chinese-driven transnational regionalism'. One famous manifestation is 'Greater China', that is, the expanding ties among Chinese peoples living in the PRC, Taiwan, Hong Kong, Singapore, and beyond. Some of these connections may augment the PRC's power, but others circumvent Beijing's control altogether. There is additionally a Northeast Asia Regional Economy under construction which encompasses Northeast China, Korea, the Russian Far East and Japan. There is also a developing Greater Mekong Economy, which conjoins Southwest China to the eastern portion of the Indochina peninsula, as well as a Southwest Silk Road Economy that connects southwest China to Burma and reaches into parts of India. We can also add East Turkistan to this list and imagine the emergence, albeit further in the future, of a Greater Turkic Central Asia Economy. In one way, of course, this is the outline of a grand imperial project that does the Qing dynasty one better. Yet even as PRC-driven trans-national regionalism is an assertion of Chinese national power, it also serves to dilute the PRC's central authority at one and the same time. Trans-national regional relationsbetween the regions of the PRC and the areas beyond the control of the PRC regime to which they are attachedare headed toward becoming at least as important as relations among the PRC's own exclusively Han regions.

And, as such, this trend is necessarily and inevitably a contributor to the decomposition of the PRC as it is operating today because these vast undertakings are every day at odds with a 'Beijing-centric' system.
The Dao of Modernity

There is more to the transformational change in today's China than the impersonal and mechanistic processes of modern political economy and geo-strategy. The PRC's opening up of the country to the modern world has also set in motion a variety of sociological and cultural forces that both derive from, but also accelerate, economic and geo-strategic change. To be sure, both dimensions of deconstructive changethe economic and the socio-culturalare intimately intertwined. Economic modernization, as today's PRC shows us, generates greater degrees of social variegation that, in turn, produce new centers of political power and forms of cultural expression. These then create new and expanding levels of centrifugal pull on the PRC's central authority. But if the PRC is searching for centripetal countertrends that can pull together the many centrifugal trendseconomic regionalism, localism, ethnic separatisminto a revived 'national will', it has its work cut out for it. For many socio-cultural developments in the New PRC are making 'politics-incommand' projects of the sort that defined the Old PRC seem like a thing of the past. There is first of all the family, the essential institution upon which all regimes are based. For generations, the traditional Chinese familylarge, and organized around complex codes of filial conduct and obligation between sometimes quite distant relatives, all of whom were subservient to a dominant family patriarchshaped the norms that sustained the predominantly agricultural economy and internal political balance of imperial China. But late-Qing reformist efforts to dismantle the Confucian system and its ideals placed the family as an institution under attacka process further deepened during the Maoist era, when traditional values were subject to a frontal assault and when sexual egalitarianism and anti-family collectivism were formalised. But it was not until the late 1970s, with the implementation of PRC population control policies, that all of these deconstructive trends were institutionalized. Today, demographers track the consequences of these policiesa society that will grow old before it gets rich; a male-female sex imbalance; the connected rise of a class of millions of unmarried male migrant laborers which will raise the likelihood of crime and social, and political, unrest; epidemics of the diseases of modernity hypertension, diabetes, depression, HIV-AIDS. Outside the family this turn also expresses itself in contemporary Chinese art, literature, film, social activism and sexuality. This does not necessarily prefigure the emergence of a nation of middle-class liberals ; a good deal of it, in fact, demonstrates the same cynicism, irony, disenfranchisement, pathology, and self-absorption that we see in the contemporary West. But it does suggest that the PRC's future is, and will likely remain, defined increasingly by the desires, anxieties, ambitions, and fickleness of individuals, rather than by the social engineering of PRC technocrats. What this cultural celebration of identity and autonomy might mean for the PRC's political lifeor, for that matter, how the basic geographical structure of the country inherited from the Qing dynasty will fare in this new atmosphere remain open questions.
History vs. the Han

Traditionally, each new dynasty compiled a massive history of its predecessor, and PRC began a massive projecttens of millions of dollars committed, scholars from around the

world engagedto write the history of the Qing dynasty. The work is scheduled to appear in 2012 to mark the centennial of the Manchu abdication. Among other things, it is supposed to address why the Qing failed and why Modern Chinain its best and last form, the PRC came to be. Implicitly, then, the Qing Dynastic History is supposed to explain why the PRC is better than the political order it replaced, and why, in turn, it should continue, presumably forever. But, as with other grand historical reflections on why societies rise and fall, this one has proved politically contentious, and it is widely bruited that internal disputes and unresolved arguments may delay the appearance of the great work. Meanwhile, even as the PRC spends millions to produce proper national history, unofficial, guerrilla, histories multiply. They began to emerge in the 1980s, at first with the tacit approval of the authorities, since they helped legitimize the post-Mao reforms. But guerrilla history has since moved well beyond that. In 2008, for example, a former Xinhua reporter, Yang Jisheng, published Tombstone [Mubei ], a devastating Solzhenitsyn-esque account of the mass starvation of the l950sthe Great Leap Famine. This book will, in time, become known around the world but, for now, it is but one example of a new reckoning with the PRC's past, a reminder that revolution and re-education, no matter how violent, cannot overcome history's legacies. The decentralization and diffusion of writings about history have other important implications. New ethnic and cultural historiesincluding some written in the West and and absorbed into the intra-Chinese discussionhave begun to undermine the very idea of a single, identifiable identity, 'Han China.' There is also renewed interest in pre-modern identities in their own right, not as mere embellishments to a mainstream 'Han historiography'. Such ideas, should they acquire greater currency and force, will corrode overarching Han nationalist and imperialist claims, and will abet the centrifugal forces as the interior of the country is more exposed to the ideas of the wider world. Indeed, in this new era, not only are Tibetan, Uighur, and Mongolian nationalisms placing their own claims and designs on the country's future, but there has also been a re-emergence and flourishing of other 'Han' local nationalismsCantonese, Fujianese, Sichuanese, othersthat are making it more and more difficult for the PRC to speak on behalf of Han interests as such.
The Withering Away of the PRC

While all these critical and expressly modern factors will shape the PRC's future, much will depend on thoughts that are not modern at all. Modern China has not been a happy experience, and Old Thinking is asserting itself in many ways, not least in the revival of traditional religion. There are hundreds of millions of Chinese believers. Some are Christians, who sometimes understand their faith in terms consistent with the imperatives of Chinese modernization, but who never understand it in ways accepting of PRC's arbitrary rule. Some are Muslims, and some of them hold to religious principles which reject not merely PRC rule but also modern life as such. Many millions more are Buddhists of one sort or another. Some of them live in Tibet and, there, Buddhism has not yet been tamed by repeated PRC invocations of patriotism. Tibet is also part of a politically active Buddhist International that includes communities in counties as different as Mongolia, Burma, and Thailand. Buddhism, usually described as the archetypical religion of peace, in fact encompasses a great warrior and warring tradition; across the centuries, it has been receptive to violent millenarian ideologies and visions. Indeed, this strain of Buddhist thought has repeatedly fueled peasant uprisings in China, some of which became major challenges to the central government.

The revival of religion in China expresses a larger disenchantment with politics and with modern life; it works at cross-purposes with the PRC's ambitions for the country's emergence in the twenty-first century. In the 1990s, many intellectuals routinely blamed the horrors of the Maoist era on one of two fundamental lapseseither that Maoism broke too radically with China's Confucian past, or that it broke too radically with Western thought, especially with modern Euro-American thought. This helped the country recover its equilibrium after decades of Maoist madness and also helped to legitimize ideas that facilitated the PRC's rejoining the world. The revival of interest in the past also helped restore sobriety to Chinese life while, at the same time it has given rise to a renewed interest in classical Chinese social thought. But today, it is not yet clear whether this movement will prove itself friend or foe of Western thought, whether it will accept modernity and seek to accommodate itself to it, or whether it will seek to confront the modern world outright. These are open questions and they can provoke great debate over whether the relentless transformation of China will make the country more modern or less, stronger or weaker. However, no matter which, the transformation unleashed by China's rise is transforming the very nature of the PRC regime itself. Indeed, the changes already have produced major structural consequences and, because they are real and visible, they are also expanding the imagination of thoughtful people throughout the Chinese-speaking world. After all, it took a while for the notion to gain hold that China's honored, respected, and revered dynastic system, had become an obstacle to the country's advancement in the modern world. Why then should we not believe that the same conclusion about the PRC will spread and gather forceespecially since the PRC does not enjoy, and never will enjoy, the honor, respect, and reverence once given to the great dynasties of China's past. It is thus wrong to assume that merely building a state powerful enough to 'save China' as the republican revolutionaries of 1912 desperately wanted will, in and of itself, produce the solidarity and cohesion that will make the state even more powerful and effective. Today, no one disputes that the PRC is the most powerful and efficacious Chinese state of the past two centuries. However, it is also indisputable that the process of creating the efflorescence of its power is corroding the very 'unity and order' which were its original inspiration. The regime in Beijing may continue to insist that there is an unbreakable union among Nation, State, People, Party and Culture, but the more it persists in its own program, the more it generates creative destruction that is dissolving its governing myth of unbreakable union that the One Party needs to ensure its rule. Indeed, the PRC developed the idea of 'one country, two systems' to accommodate the reincorporation of Hong Kong in 1997. Now many Chinese have gone on to imagine 'one country, many systems', for the PRC is but one possible regime within 'Greater China', and it is certainly not the best. We know that the China mega-economy is creating intra-national regions that seek their own independent relations with the outer world. Scholars of urban change predict that the great cities on the China coast are forming, de facto, a league of their own with other great cities on the world's seacoasts. The unceasing energy and dazzling creativity in contemporary cultural creation among Chinese around the world can certainly come together in support of something like the 2008 Beijing games. But, for all that, day in and day out, in their disparate geographical bases and in their complexity of their inspiration, they work against the PRC's ongoing national project. In these and other ways, the very idea of 'Chinese-ness', and of the 'Chinese nationalism' it is supposed to produce, are becoming elusive, not merely to outside observers but to Chinese themselves.

Going Quietly Into the Night?

In the late-nineteenth century, the Qing Empire began to accelerate its own subversion, mostly out of an instinct for its own survival, and also for the survival and comfort of the people who ran it. Yet, perhaps, it was not exclusively for these reasons. Certainly, the Aisin Gioro might have hung on; the imperial clan might have rallied millions of adherents put off by the heresy of Republicanism; it might have gained and held large swaths of territory and taunted its enemies to come after it. That, after all, is what all its doomed predecessors over the centuries had done in the venerable Chinese way. But the new Republic of China, for all its many problems, did not have to overcome a rearguard resistance in the name of the Last Emperor. The rulers of China today could, if they wanted to, describe the manner of the Qing departure as 'objectively patriotic'that is, as an act that put the greater interests of the country first, and before those of the ruling clan. But patriotism of this kind is now a threat to the current order centered in Beijing. Patriotic Chinese are increasingly coming to realize that the Communist Party of China, also a self-conscious clan, needs to take leave of the scene. And yet, unlike the Aisin Gioro, the party need not disappear. It could, for one example, learn from the experience of its erstwhile rival, the Kuomintang, Taiwan's ruling party, which once held a monopoly on power on the island but surrendered it in l989, trusting to a democratic political system for its future. The KMT has survived well enough and, sometimes, it also wins elections. Former ruling Communist parties have also survived in some places and have also won elections. China's transformation is pushing the PRC toward such a decision and a party that prides itself on its study of History is going to have an opportunity to place itself in front of it. That is a new idea, one that comports with the way the world is today. But there are also old ideas about the world as it once was, or as it was once imagined to have been, before China began its modern re-emergence and transformation. Even within that self-purportedly most advanced of political organizations, the Communist Party of China, some theoreticians say that China's future political arrangements should be built on avowedly more imperial and more 'authentically Chinese' foundations. They also seek to resurrect pre-Republican ideas about tianxia'All-Under-Heaven'as a model for a larger world order. Indeed, the Communist Party of China could soon be in full retreat from Republicanism altogether, abandoning even the pretensions behind which it now operates. Against this stand the examples of the Qing abdication and Taiwan's program of democratic liberalization, each of which in its own way derived from a realization that the string had run out. Of course, there are other examples before China's Communist Partythose ruling houses which resisted to the end and, increasingly fearful of the future, plunged themselves into futile rearguard actions. Yes, the Party's own Marxist doctrines instruct it that it cannot win this kind of war of resistance and, therefore, that it should not wage one. But there is also the incorrigible perversity of some men who, unwilling to follow the gods, are dragged by them instead.
Charles Horner is a Senior Fellow at Hudson Institute and author of Rising China and Its Postmodern Fate: Memories of Empire in a New Global Context, Athens, GA: University of Georgia Press, 2009. Eric Brown is a Research Fellow at Hudson Institute.