The Hu-Wen Leadership Battles “Warlords” over Economic Policies and Bureaucratic Reform

Publication: China Brief Volume: 8 Issue: 18

PBC Governor Zhou Xiaochuan

For the Hu Jintao-Wen Jiabao leadership, the party is pretty much over. After the coming-out extravaganza of the Beijing Olympics, the Chinese Communist Party (CCP) hoped to extend the festive mood through to late September for the launch of the country’s third manned space flight, the Shenzhou VII, and then the week-long October 1 National Day celebrations. Yet the Politburo under President Hu and Premier Wen will have to face the music during the third plenary session of the CCP Central Committee (CCPCC), which is due immediately after the National Day festivities. The Hu-Wen team’s worst headache could come from CCPCC members from the regions, who will be lobbying aggressively for Beijing to loosen up its tight monetary policy as well as to boost transfer payments and preferential policies for provinces and cities hard hit by economic doldrums, such as the closure of medium-sized factories and falling property prices. Moreover, the “warlords”—a reference to resourceful regional party secretaries, governors and mayors—have continued to resist the central authorities’ (zhongyang) decade-long objective of streamlining the grassroots bureaucracy.

The agenda of the third plenum of the party’s 17th Central Committee is ostensibly to discuss agricultural issues. Yet given the post-Olympics economic downturn, political analysts in Beijing say a major leitmotif of the conclave will be how to ensure that the hard times will not exacerbate already severe “contradictions within the people.” There are signs that the nightmare the CCP leadership fears most may come to pass sooner than anticipated: members of the middle class joining “disadvantaged sectors” such as peasants and migrant workers in staging protests and even riots to vent their grievances. The immediate causes include plummeting prices in the real-estate and stock markets, as well as lack of confidence in the future of the economy. While GDP growth this year is still expected to expand by more than 9 percent, the nation is bracing itself for a prolonged period of bearishness. Fully 130 million Chinese are deemed gumin, or “stocks-and-shares punsters,” most of whom have lost big as the Shanghai Stock Exchange composite index dropped from 6,000-odd points in October 2007 to just over 2,000 points last week, the lowest level in seven years.

Property values in cities along the eastern “Gold Coast” have depreciated by 20 percent or more in the past year. In early September, a mini-riot broke out in the main office of Wan Ke Corp., a major developer in Hangzhou, capital of the affluent coastal Zhejiang Province. To lure customers, Wan Ke has been offering new buyers discounts of up to 25 percent on units in one of its luxurious apartment complexes in Hangzhou. Hundreds of home-buyers who had earlier this year purchased apartments in the same project went berserk when told they were not eligible for the discounts. Some 100 buyers held a protest outside the Wan Ke office, during which furniture and windows were smashed. Police had to be called in to restore order (Ming Pao [Hong Kong], September 6 and 11).

While there are rumors about frustrated gumin venting their spleen by vandalizing the offices of stock brokers, there have been no reports of large-scale disturbances by stocks buyers. Yet it is instructive that in internal circulars about maintaining socio-political stability, law-enforcement authorities had earlier this year asked police in different cities to take precautions against trouble-making by gumin (Apple Daily [Hong Kong] April 17). Moreover, scores of small- and medium-sized real-estate developers in cities ranging from Shanghai to Shenzhen have either closed their doors or filed for bankruptcy (National Business Daily website, September 11). Particularly worrisome are loss-making property companies that have raised capital via “private channels,” mostly through promising investors and depositors returns much higher than those offered by proper financial institutions. For instance in early September, several thousand residents of the small city of Jishou, Hunan Province, who had invested in Fuda Property Development Company, staged a riot after learning that the developer was about to go under. Fuda had promised to pay the tens of thousands of local investors, who had ploughed in some 7 billion yuan (approx. $1 billion), annual interests of more than 70 percent. Hunan authorities had to move People’s Armed Police (PAP) and anti-riot squads into Jishou after demonstrators started blocking railway lines and surrounding government offices (AFP, September 5; The Associated Press, September 8; Yazhou Zhoukan [a Hong Kong weekly] September 21).

At the Central Committee plenum, representatives from both coastal and inland provinces are expected to put intense pressure on the central leadership to bail out the lackadaisical stock and property markets. This is despite the fact that on Monday the People’s Bank of China (PBC), China’s central bank, had already cut the benchmark interest rate by 0.27 percent—the first time that such action was taken since early 2002. The PBC also lowered reserve requirements for all banks—save the five largest commercial banks—by 1 percent (Reuters, September 15). Moreover, the municipal government of the central city of Xi’an was earlier this month authorized to pay a special subvention to first-time home buyers in an apparent attempt to prop up the local property market (People’s Daily, September 11). Other cities may follow suit. There is even speculation that the Hu-Wen leadership may fire a senior minister to placate the anger of millions of Chinese whose fortunes have declined the past year. PBC Governor Zhou Xiaochuan, who sets the country’s monetary policy, is expected to be transferred to the prestigious but much less powerful post of president of the Chinese Academy of Social Sciences after the Central Committee plenum (Ming Pao, September 8).

The Hu-Wen team, however, has good reasons not to yield to the demands of various business sectors and related vested interests to relax the tight monetary policy even further. While the increase in the Consumer Price Index (CPI) in August was 4.9 percent—down from 8.7 percent in February—the State Council has hardly tamed inflationary forces. Also in August, the Production Price Index (PPI), which reflects manufacturing costs and is a powerful indicator of China’s economic futures, rose year-on-year by a record 10.1 percent. An injudicious loosening of credit could again stoke price spirals. The relative slump in the property market is seen by economists as a healthy correction of the bubble phenomenon, which was a result of reckless speculation. Moreover, a good part of the bearishness sweeping the markets is due to global conditions, including doldrums in the United States and EU economies. Against this backdrop, the tug-of-war that will take place between Beijing and the localities at the upcoming CCPCC plenary session is expected to be ferocious.

Apart from economic issues, the zhongyang and regional warlords are expected to clash over Beijing’s long-standing campaign to streamline the grassroots bureaucracy. Upon coming to power in 2003, Premier Wen vowed to lop off the entire stratum of towns (zhen) and rural townships (xiang). Some headway was made in the first few years. Thus, the number of towns shrank from 20,226 at the end of 2003 to 19,522 two years later, while the number of townships diminished from 18,064 to 14,677 (, April 29). However, not much progress has been achieved in recent years. As an incentive for regional cadres, the State Council announced earlier this month that county governments—which administer the towns and townships—would be awarded 500,000 yuan (approx. $73,000) for every zhen or xiang that is abolished. Counties will also get a one-off “bonus” of 4,000 yuan (approx. $584) for every staff that is taken off the payroll (Xinhua News Agency, September 9; CCTV news, September 11). This unprecedented measure of giving monetary incentives for heeding central-government edicts is seen as indicative of a loss of face—if not also authority—on the part of party and government authorities. As Liu Yikun, a commentator for the official X’ian Evening Post, noted that it may be counterproductive to use cash rewards to coax cadres into abiding by unpopular zhongyang dictums. Liu pointed out that this could encourage officials to “file false or embellished reports about their staff establishments” (Xi’an Evening Post, September 10).

Regional-level cadres are also resisting efforts by the CCPCC’s Central Commission on Disciplinary Inspection (CCDI)—China’s highest anti-graft organ—to oblige them to disclose all personal assets. From early next year, a “sunshine regulation” will begin to take effect in selected experimental zones, beginning with Aletai District in the Xinjiang Autonomous Region. Under this clean-government regime, officials must fully state their assets as well as those of close relatives; moreover, this information will be posted on websites run by local anti-corruption agencies. A recent opinion poll of officials in Aletai and other districts in Xinjiang, however, showed that fully 70 percent of respondents were opposed to the sunshine regulation. Merely 10 percent indicated “unreserved support” for the heavy ruling (Legal Daily [Beijing], September 11; CCP News Net, September 12).

At least on the surface, two major post-Olympics disasters might create more incentives for the Hu-Wen leadership to crack the whip on regional bureaucracies. The first is the mass poisoning of babies and small children who have taken milk powder contaminated with the lethal chemical Melamine. More than 1,300 infants have developed kidney stones—and three have died—after imbibing the tainted milk product, which is manufactured by Sanlu, a giant dairy company based in Hebei Province. Given that Hebei police knew about irregularities in the company as early as May, suspicions of a cover-up have focused on senior Hebei leaders. The latter are said to be on good terms with the bosses of Sanlu, which contributed 330 million yuan of taxes to provincial coffers last year (The Associated Press, September 14; Ming Pao, September 15).

The other incident was the death of 254 residents in Xiangfen County, Shanxi Province, in a mudslide earlier this month. The accident was triggered by the collapse of the retaining wall of an illegal mining dump containing tons of liquid iron ore waste. These two disasters have apparently given Beijing the pretext to take action against dereliction of duty and other mistakes on the part of regional officials. Last weekend, Shanxi Governor Meng Xuenong and Vice-Governor Zhang Jianmin were forced to resign to take the blame for the calamity (Xinhua News Agency, September 15; The Associated Press, September 15). Senior cadres in Hebei are expected to also receive heavy punishment.

It is important, however, to note that the weaknesses—and singular lack of foresight by the Hu-Wen team—have also been exposed by the two mishaps. Regarding the infant milk disaster, there is widespread speculation that central authorities were complicit in the cover-up: propaganda officials had in the run-up to the Olympics asked the media as well as regional officials to minimize “bad news” so as not to spoil the gala atmosphere of the Games (Sydney Morning Herald, September 15). As for Shanxi, which was hit by large numbers of industrial and mining accidents in recent years, Beijing has been faulted for failing to appoint competent cadres to clean up the province. Both Meng and Shanxi Party Secretary Zhang Baoshun are ranking members of the so-called Communist Youth League Faction and surrogates of President Hu. In May 2003, Meng, then mayor of Beijing, had to resign to take responsibility for the spread of the SARS virus in the capital. In what may appear to have been a comeback for Meng only ended in more embarrassment for Hu. In light of the recent scandals as well as signs of an economic downturn, the upcoming CCPCC plenary session could provide central and regional cadres with an opportunity to work out better solutions based on a more efficient power-sharing formula rather than a continuation of administrative malaise due to multi-level bureaucratic inertia.