Of the Party, For the Party

Sixty-four years after a revolution that brought the Chinese Communist Party to power, its current leaders promise a new “self-imposed revolution.” Announcing their goal, the newly elected party secretary and President Xi Jinping as well as Premier Li Keqiang scrupulously avoided mentioning political reform, which they fear could erode one-party rule. But they pledged to invoke the party’s revolutionary spirit to fight the ills that have tainted its legitimacy.

The reforms could set China on a path of more balanced growth and, by increasing consumption, help the global economy. But given the entrenched interests of party plutocrats, the success of this new revolution is far from assured.

The leaders set an annual growth target of 7.5 per cent over the next few years and promised to double per capita GDP and personal income from 2010 levels by 2020. They pledged to fight red tape, conspicuous consumption by officials and “resolutely fight against corruption”. They announced the dissolution of the corruption-ridden railway ministry and imposed curbs on bureaucratic influence by cutting by a third China’s equivalent of ‘License Raj’, reducing the number of projects that require central government approval. Not only will the size of the government be reduced, but ostentatious displays will also be banned. “If the people are to live a good life, their government must be put on a tight budget,” Li said.

Li also promised a fairer distribution of wealth and a better deal for the rural poor and the migrants who flock to the cities in search of jobs. An estimated 252 million farmhands are employed in cities, 158 million of whom are classified as “migrant workers”. These workers and their families are deprived of housing, healthcare and education. “Poverty and backwardness in the midst of clear waters and verdant mountains is no good,” Li observed.

What Li did not mention is that without independent union rights (workers have to belong to government-sponsored unions) the wages of migrant workers have been kept depressed. Low wages have certainly boosted the profits of companies who are often run by party-appointed managers, but have acted as a drag on domestic consumption.

Massive investment in infrastructure and capital-heavy manufacturing has helped transform state-owned enterprises into behemoths, making their party-appointed managers enormously rich. Whereas, lacking trustworthy means to invest, most Chinese citizens keep their savings locked in low-interest bank deposits which are lent out to state-owned enterprises for massive uneconomic investments. As Michael Pettis notes in his brilliant The Great Rebalancing, “the benefits of investment accrue over the immediate future and within the jurisdiction of the local leader who makes the investment decision”. Somebody else is left to deal with the debt burden resulting from non-performing loans.

Meanwhile, by artificially keeping the yuan exchange rate low, the government has effectively imposed a consumption tax on imported goods for Chinese citizens while helping exporters. Thus, over the past decade, while China grew 10-12 per cent annually and the state sector nearly 15 per cent, household income limped along at just 7-8 per cent. The rise of a wealthy state with poor people was highlighted in 2010 when China’s household consumption dropped to 34 per cent of GDP from 50-52 per cent in the 1980s.

While household incomes fell in relation to phenomenal earnings by party bosses and managers, some 18,000 officials simply fled abroad with their ill-gotten gains. But as was reported last month, many of China’s super-rich are staying put to enjoy the perks of political power and privilege at home. There are no fewer than 83 dollar billionaires among China’s current parliamentarians.

China’s poor, its entrepreneurs as well as foreign partners would be anxiously watching how the new leaders save the party from itself with its “self-imposed revolution."