Companies (Page 405)

When President Xi Jinping came to power at the 2012 Party Congress, he had to face serious and systemic challenges to the structure of the Chinese state.

Simply speaking, these challenges were branded “corruption.” But it was far more than corruption; it was the complete disruption of the decision-making process of the state coming after years of festering of long-existing problems.

It was unclear who made decisions, how, and through what process; things could be hijacked at any moment for any given reason. The Chinese state was facing unprecedented fissures that could disrupt the country and, by extension, also create significant problems abroad.

This predicament didn’t happen because of ill feelings or the lousy judgment of past leaders but because China was facing new problems the old state structures had not been geared for since the beginning.

In 1949, when the People’s Republic of China (PRC) was established, the new country was facing issues that were unprecedented in its long history.

Unlike other dynasties established through foreign intervention (like the one founded by the Manchu in 1648) or through “popular revolutions” (like the one that put the Ming Dynasty in power in 1368), the PRC didn’t want to brush up and reenact the feudal dynastic past. That is, it didn’t want to reapply most of the toolkit that made the Chinese state reestablish itself over and over again during the past 20 centuries.

The PRC was founded by a Western-inspired Communist Party that believed the old Confucian thinking was the root of decadence. The fall of the past dynasties was due to imperial thinking and imperial statecraft. Therefore, the new state had to be grounded on different rules. 

However, these rules were not ready-made. China possibly never suffered a similar situation.

Buddhism, like Western influence?

In the third century AD, China was returned after centuries of internal wars that slaughtered most of the population. Amid the vast bloodshed, China also went through an unprecedented cultural and intellectual revolution. 

Buddhism came to China from India and radically changed the Chinese way of thinking about the world. After some five centuries of turmoil and strife, and an uncertain power balance, a unitary China was re-established under the Tang dynasty. And the empire was very different than before.

A similar political and cultural shock swept China in the last moments of the Qing empire through the civil war, the Japanese invasion and the foundation of the People’s Republic. China was searching for a new identity, a new way of thinking and a new way of ruling itself.

The PRC underlined its specific nature by calling on “Chinese characteristics.” These Chinese characteristics were to set apart the Chinese Communist Party (CCP) from the Russian Communist Party and claim that the CCP and, therefore, its PRC were to be quite different from the USSR and how it was managed.

In the first decade or so of the PRC, the influence of the Soviets was paramount in China; still, after less than a decade or so, the PRC started to shed the Soviet influence and tried to move in a different direction, which was not that of Moscow, not the example of Western countries, and not the feudal past of China. 

It was uncharted territory where only the wisdom and the practical sense of the leaders of the time tried to move statecraft and decision-making along.

Without points of reference, however, the Chinese state soon became engulfed in a messy decision-making process that eventually centered only on Mao Zedong, who ruled by basically issuing statements that were to be followed countrywide.

The fledgling structure of the state set up after the republic’s foundation, the Party design that took shape in the anti-Japanese resistance and then the civil war, and the first attempt to manage the country were de facto destroyed by this method of ruling and the systemic punishment and re-education of Party leaders.

In 1976, at the end of Mao’s rule, the Party and the country were in shambles, and it was not clear how they could move forward. Everybody was disillusioned and didn’t believe in the Party any longer. Fortunately, at the time, China was not under heavy external pressure and the demise of Mao’s rule created new hope in the people.

The country therefore managed to move forward. The big step in moving forward was Deng Xiaoping’s reform and opening up, which provided economic inspiration and real fuel for the nation. It motivated everybody and also held the country together because collectively the Chinese felt that they could get to a better tomorrow.

On the other hand, as a system of rule, Deng Xiaoping and his comrades established a new arrangement that tried to bring new order to Mao’s previous autocratic personal rule. They set up an agreement by which Deng was the first among a group of Party veterans called to make important decisions through consensus. This method created some confusion because it divided the power of the party, the power of the state and the power of the army without clear boundaries between their competencies and attributions.

In some Western countries, power is attributed to different parties but each has some borders on its strengths. In the United States, for example, the Federal Reserve can intervene in money supply, but the president cannot. There are some gray areas, but if somebody steps into them, there is a whole array of institutions and procedures to sort them out clearly and fairly quickly.

Yet borders of attributions of power were unclear in China at the time. This lack of clarity contributed to the situation of 1989, when confusing and contradictory orders came from the top to the ordinary people. People didn’t know what to obey and they chose to follow what they liked.

It was also a time when different ideas came from society, and it was unclear how the central government should respond to them. From the late 1970s to maybe the early 1990s, there was talk of the fourth modernization: democracy. 

Until the late 1990s, there were strong voices in the Party—supported by Qiao Shi, then-chairman of the National People’s Congress and president of the Central Party School—claiming that the rule of law should be paramount and should be followed by the Party, and that the Party shouldn’t be above the law but subject to the law.

No democracy, confusion

These drives and confusion over the lack of clear borders in the top leadership led, after 1989, to the decision to concentrate power in one man, Jiang Zemin. At the 1992 Party Congress, he had all the levers of power in his hands. He was president of the state, general secretary of the Party and chairman of the military commission.

Still, this concentration of power was largely formal and not totally real because power was still distributed among elderly veterans who could have influence and essential sway over the decision-making process of the Party and the government. 

Meanwhile, the push for putting the Party under the law never quite worked out, as it conflicted with the notion that the Party had a role in the ultimate leadership of the country. This was difficult to reconcile with the idea of ​​subjecting the Party to the rule of law.

For a spell, Jiang Zemin managed to have greater power than everybody else. After the death of Deng Xiaoping in 1997, he was the unchallenged paramount leader of the Party. Still, the decision-making process remained unclear. 

Because of the rules the Party set up in 1997, Jiang Zemin was supposed to retire in 2002; however, contravening those rules, he stayed officially in power until 2004, and actually he carried on having influence and authority even after that year.

It created a situation in which the following top leader, Hu Jintao, although officially the head of the party, the state and the army, had to juggle different pushes and pulls from Jiang and retired leaders, and also pushes and pulls from members of Politburo and the Standing Committee of the Politburo.

The decision-making process became even more chaotic, confused and disorderly than before, leaving ever-more significant loopholes for corruption and profiteering that were pillaging the country’s wealth. The process was accompanied by massive economic growth, creating unprecedented wealth for everybody but at the cost of growing social disparity, ballooning internal debt and ample chaos in the organization of the Party and the state.

On the surface, it produced the phenomenon of corruption for ordinary people. Junior and senior officials took large amounts of money in return for favors granted to private or public companies. Corruption was just a superficial sign of a much deeper issue: a profound disruption and the messy situation of the decision-making process in China.

How could one make decisions? Ideas come from below and from above, findings come from sides and everything was total mayhem. The two episodes of the ex-Chongqing Party chief Bo Xilai and ex-chief of the Party general office Ling Jihua showed that senior leaders were not following the rules at a very senior level, the Politburo level.

The condition was messy and difficult to understand, let alone set in order. Not only was the Party not subjecting itself to its rules and regulations, but senior leaders were shunting all laws in the name of their pursuit of personal power. It was breaking the Party and the country apart. If the state crumbled, there would be no business opportunities either. It would simply be a time for pirates plundering the spoils.

Xi Jinping came to power with this tricky situation in the background. His answer, correctly so, I believe, was to concentrate power in his hands and establish direct and clear lines of communication and decision-making in the country, bringing borders and limits where the situation was getting muddled and entirely out of hand.

Perhaps even worse than during the time of Mao and the establishment of the PRC, for Xi there were no clear precedents and no clear examples to use. He apparently tried to find some inspiration in the imperial past, but knew very well that the imperial history was just an example, an inspiration, and not something that could be used fully in the new China. 

The other ready-made tool, known to himself and his cadres was the old communist, Soviet-era party organization. The imperial past culture and the Soviet precedent were the two instruments for his consolidation and reorganization of power in China.

Democratic institutions were not present, nor was tradition and thinking. Conversely, some parts of the Party, looking at the present situation in China compared to the United States and India, the latter a democratic country similar in size to China, didn’t understand democracy and came to believe it was unsuitable for China’s dimensions and traditions.

Xi was facing issues that China possibly had not seen since the fall of the Zhou dynasty sometime in the 7th or 8th century BC—that is, the fall of an old “imperial” order and the creation and the birth of hundreds of independent states , each claiming its own tradition and hierarchy.

The 2012 desert

It was a situation of permanent war when states were destroyed and entire peoples were annihilated. Then different pundits tried to bring order by setting clear rules of engagement between existing states, as, for instance, seen under the Confucians or the Mohists.

Eventually, the Qin state managed to eliminate all competing states and established a short-lived tight order that lasted only a few years before plunging the country back into chaos until the Han strenuously managed to piece together a different set of rules in a newly unified empire. That empire became the paragon and example for all realms in the future.

In 2012, there was little or nothing of practical use for Xi and his allies to apply in the new situation. But the example from 25 centuries ago may illustrate the kind of confusion that he was facing. The risks were perhaps not as dangerous, but the intellectual challenges to produce something new without any script to follow were there.

Of course, Xi was not literally facing the disintegration of the state, but the process of its meltdown was in place. He responded that while working on the integration of the state, he had to concentrate power and establish clear channels of organization and decision-making processes.

The anti-corruption fight was the superficial reason for this process, but the deeper reason was the reorganization of the state along more efficient lines. He decided to do that along contours that the official Chinese bureaucracy managed to understand. He took inspiration from the imperial past and ideas from the Soviet tradition.

Both are part of Chinese political culture and could help China quickly reshape itself into an effective administration. Other paths could have been more challenging and might have taken longer with uncertain results.

Xi did it: He uprooted corruption. He established a new set of rules that led up to him and his decision-making, and therefore created an organized system for facing internal and external problems. The system externally may look like the old imperial system. In it, everybody is subject to the law, except the top leader, who can move the needle of the law, if necessary, in one direction or another.

But nobody else can, and therefore he managed to reinforce and isolate power.

However, this seems to be a process that has not been ultimately ended. There are clear challenges to this effective yet rigid way of ruling the country. China established an immense bureaucracy grounded on the 97 million member-strong Party.

While in the imperial times the official bureaucracy organized by Beijing didn’t go below county levels, in modern China, we have two new phenomena. Bureaucracy goes down to the village level, a community which may have only 2,000–3,000 people. They were for millennia ruled by affluent families of landowners who contributed massively to the national treasury with their taxes. Now, private hoarding of land has disappeared.

Moreover, for the first time in Chinese history, the countryside itself, for centuries home to some 95% of the population, is being wiped out. It is happening in two ways: by moving peasants and farmers to the cities, which are now home to over 60% of the population; and by urbanizing the countryside, so that most counties have urban facilities and organization.

These elements created a bureaucracy that is far greater in size than any other bureaucracy in the world in a country with a population far more significant than at any other time in Chinese history. And despite the aid and the support of critical new technologies such as electronics and computers, there is only so much, or so little, that the top leadership can do and decide in any given day.

Timely rain

The challenge for the future is, how can you make the Chinese bureaucracy responsible and proactive in performing its duties?

One answer, of course, is motivational—through political education. However, this may not be enough because of the fear of making mistakes or of doing something wrong. There is also a lack of upside—that is, there will be few or no prizes, or prizes will be extremely rare or questionable if something goes right. 

Therefore, these de facto elements push officials to be loyal but not to take initiative because they don’t know how the top leadership thinks or how they will judge their performance. 

Any judgment at the time could be wrong in the future, and the idea of ​​guessing the intentions of the top leadership could also be risky as it could create conflict and friction with other middle-ranking officials.

It creates new challenges for the present government. However, each new policy solves some problems and, in the longer run, creates other problems. Since ancient times, the Chinese political tradition recognized politics as like timely rain. 

It cannot rain too much; it cannot rain too little. Sometimes it does not need to rain, and sometimes it needs to rain a lot. That is, new policies create new problems, which must be addressed in a new way, opening up new solutions and perspectives for the country.

Xi has effectively concentrated power and has made decision-making cleaner and more direct. However, in directing internal and foreign problems, which are growing more and more complex, he’s facing not wrong decisions, not corruption, but inertia because it is simply tricky to act in such a substantially rigid system.

The lack of proactivity in a country could be tolerated and digested if two other elements did not pressure the country. One factor is that the domestic market economy needs proactive pushes by entrepreneurs and government officials to make decisions on the spot and take risks. 

But if taking risks routinely results in punishment, nobody will take risks. De facto entrepreneurship will subside, and at the same time, the market economy will become less vibrant, with a massive impact on the overall economy.

The second challenge is external. The external situation for China is highly volatile, complex and complicated. Countries around China and Western countries are increasingly  dissatisfied with China and defy China with new issues almost daily.

These issues should be handled systemically and we cannot wait for the top decision-maker to call the shots and move ahead. These internal and external elements were very different two or three decades ago and were extremely important for the development and growth of China’s economy, society and politics.

The vibrant internal and dynamic external markets made it possible for China to open a new road and contribute to the world with great wealth.

It means that the opening internally and externally is essential to China’s welfare and well-being and has contributed to the rise and consolidation of power of President Xi. Therefore, the future of the Party and Xi’s rule is to adapt this Party structure to something that can fit both the internal and external situation. 

If, conversely, it pulls out from the international free market and suppresses the vibrant internal market, the country and the Party will suffer greatly.

The challenges then are how to adapt fast to the internal and external pressures. This is a task that Xi already faced in 2012, coming from unprecedented decisions, and now the Party should study deep and hard, and dare to have bold ideas and make bold decisions that can project the country into the future.

Here, there is an exciting element in Xi’s reforms. He created a clear division of powers between officials and enterprises for the first time. Deng’s reforms transformed all officials into entrepreneurs. In the name of “getting rich is glorious,” some officials ran their administrations, and at the same time, they ran their businesses.

They did it personally at first. When limits and rules were introduced, they did it through family, friends and supporters—and administrative and financial chaos resulted from the system, which went on unregulated and undisciplined. 

Again, there is also a continuity between business and administration abroad, and solutions are not clear-cut and definitive. Still, long-term practices and regulations limit what can and can’t be done. In China, it was far more confusing.

Along with foreign experiences, Xi’s reforms have ruled that officials can’t take a direct role in business, and businesses have only clearly marked venues to deal with officials. This division of competence is one of the hallmarks of modernity. It could be one of the essential venues for solving the new issues emerging from completing the first part of Xi’s reforms.

In the imperial past, private wealth was subject to the goodwill of the emperor, but there was a basic guarantee – imperial power didn’t get down to the county level. Therefore, if someone were only rich at a lower level, the emperor would guarantee “basic affluence.” 

Now the Party can go down to the village and, in theory, strip anybody of all his means. One can lose everything for doing the wrong thing at the wrong time, even inadvertently.

Moreover, modernity sets up laws and institutions that secure the safety of one’s property and market actions. Without these securities, no significant economic activity can take place. 

Foreign and Chinese entrepreneurs can get these securities in other countries and thus expect to get them in China if they have to risk their capital. Otherwise, they can idly spend their money or invest elsewhere, where they can calculate their risks more clearly.

During past “corruption times,” risk calculus was somewhat clear. Short of a clean and transparent investment environment with laws, institutions and procedures, an investor had to get the protection of a significant power broker and know the ropes in navigating the system complex like a jungle. 

The main challenge was finding the right broker and guide in the jungle to provide timely access to necessary permits and ways forward—someone who knew who’s who and how’s how. It was a market for opportunities and people.

The old ways have been banned but no transparent market institutions and guarantees exist. Without them, it could take decades, if ever, to have a large number of entrepreneurs eager to risk again their capital on something that could change overnight, as happened with the Covid crisis, at its onset and end.

There is a trust deficit between the state and entrepreneurs. The trust deficit is presently managed if businesses are already in China and can’t really pull out of the country or if people have access to the top leadership and personally trust them. These are limited numbers and can only increase at a limited speed.

As such, even resorting to a return to the old “corruption ways” could not really solve the present trust deficit. It would lead back to the old risks of state and Party dissolution.

Deng realized the Party’s power was proportionate to the wealth it generated. He let it happen openly, with the direct involvement of Party officials in economic activity, which created chaos that was spoiling wealth creation. Xi addressed the mess, but he cannot put wealth creation at risk. The necessity for orderly process and proactive enterprise must be somewhat reconciled.

Plus, the foreign environment has dramatically changed, which is conditioning the domestic investment climate. Before, it was favorable and relatively easy; now, it has grown more complicated and hostile. For this, China can hope to invent something completely new or just adapt what is already there.

This essay first appeared on Settimana News and is republished with permission. The original article can be read here.

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