A vibrant and chaotic integration
Deng Xiaoping's challenge as an architect of China's reform in the early 1980s was to find a way making the one party political system and state owned economy compatible with the functioning of the free market. Deng's creative solution was to massively deregulate the central control of state-owned enterprises and to make local governments, in effect, economic entities by instituting economic decentralization and at the same time keeping their political functions intact.
Under these guidelines Chinese local governments at several different levels have been given great autonomy. In particular, they can, in exchange for only limited compensation, acquire massive amounts of land from rural and urban residents. They on-sell this land to developers at significantly inflated prices. Wu Jinglian, an influential Chinese economist, in a 2013 speech estimated that Chinese local governments had reaped a huge profit from land sales: 30 trillion yuan (~7 yuan = U.S. $1).
During the period between the 1990s and early 21st century, the capital gains from "land finance" allowed Chinese local governments to create a "low-cost basin" for international and domestic businesses by offering tax exemptions, favourable loans and cheap industrial land. In addition, by selling land occupied by state-owned enterprises in the inner cities, local governments were able to offer redundancy packages to laid-off workers in their millions. These lay-offs had been caused by large-scale closedowns of state-owned enterprises.
Basically, the Chinese approach, characterised by the integration of the one-party political system and the free market, has offered stability and predictability. By managing the introduction to China of the market economy – a process of rapid and continuous economic growth – it has cushioned dramatic social change.
However, the Chinese approach has its downside. China's economic reform is actually a process of reshuffling the control of assets that were once state-owned. An excessive dependence upon government during this process provided the more privileged (powerful people or those close to power) an unfair advantage during the redistribution of wealth.
For instance, it is common for businessmen to bribe government officials in order to win a bid for land for their commercial projects. Many insiders, either from the government or the original management, have bought mines and factories that once were publicly owned at extremely low prices. Many children from the families of high ranking government officials have positions in lucrative industries such as banking, international trade and real estate.
The sheer number of those privileged people who have become wealthy is astonishing. Wang Xiaolu, an influential Chinese economist, estimated in a report published in 2011 that " grey income" which was then about 3-6% of China's GDP, was mainly shared by the 20% of Chinese families of privileged background using illegal, immoral and improper methods. The income differential between the top and the bottom rungs was huge. The top 10% of families had incomes 26 times those of the lowest 10%. This climbed to 65 times when rural residents were included.
At that time, the government's response to the income disparity was mainly to "make the cake larger", in the hope that improved living standards would dilute the problem.
However, the government-propelled economic expansion, locally orientated and focused on housing- and construction-related industries, has intensified the problems of overcapacity and pollution. In addition, the strategy of "making the cake larger" has become unsustainable because China's labour supply peaked around 2012. Since 2011, the minimum wage has risen over 60%, as the government has lifted wages in order to deal with social tensions.
The contraction of the export and manufacturing sectors has now brought the Chinese financial sector into the spotlight. China's total debt is at 260% of its GDP. China's money supply has increased from 47.5 trillion yuan in 2008 to 170 trillion by 2017.
A new era
On taking office in late 2012, the Communist Party's President Xi Jinping faced a serious situation. On the surface, China was on its way to overtake the US as the world's largest economy. But in reality, this economy was under great pressure: Chinese society was highly divided and the level of dissatisfaction was also high.
Millions of disadvantaged people are now effectively denied access to quality healthcare and education while emigration has become fashionable among the rich, who admire the better environmental amenity, better social services and the civic order to be found elsewhere. Millions of Chinese tourists spend billions of yuan abroad on services and products ranging from luxuries to basic white goods. The divorce rate is on the rise as the sexual revolution in China gets under way. Corrupt practices and cheating in business is widespread. Millions turn to Christianity and Buddhism.
Above all, it is the change in the political ecosystem in China that represents the biggest threat. The marriage between political power and capital over the last decades has led to factions and clans within the Communist party. These factions and clans have severely eroded the party's unity and its administrative capacity. If this trend persists, China is in danger of disunity, and the consequent loss of opportunities for societal improvement, as a result of internal clashes between political forces from different backgrounds. A loss of support from the people would bring about a Soviet-Union style collapse in China.
This daunting reality has prompted those of the left wing to openly denounce Deng Xiaoping for a reform approach that has weakened the Communists' power, drained state assets and polarised society. Those of the right wing claim the only way out for China is to totally privatise the state-owned economy, free the media from political control, and set up a multi-party parliamentary system to check the abuse of power.
In the face of this situation, President Xi Jinping has repeatedly emphasized that China should not make the fundamental mistake of discarding the one-party political system. He says China needs the party to be the backbone for these reforms and that only an effective and highly disciplined party can carry out further reforms and be the ultimate mediator for the redistribution of national wealth.
He told Party members that any hesitation in upholding the leading position of the party would open the floodgate to criticism and lead to formidable and destructive organized opposition. On the other hand, Xi Jingping knows that in order to secure the upper hand in the political front he has to address the problems of abuse of power and social disparity. His offensive strategy has been an unprecedented anti-corruption campaign.
Since the 18th National Congress of the party in 2012, Xi has initiated the largest anti-corruption campaign in new China's history. To date, the campaign has "netted" more than 240 high-ranking officials, ranging from government ministers, governors of provinces, senior executives of major state owned corporations to military generals. The disgraced include more than 10 leaders and generals at the very top level. More than 140,000 government officials at medium and lower rank have been indicted for corruption.
This anti-corruption campaign has won President Xi Jinping wide support. First, it has ruled out the possibility of a Soviet Union-style collapse in China; second, it has reinforced the authority of the central government, and ; third, improvements in efficiency and transparency should increase the success rate of the government in tackling inequality.
President Xi Jinping has reinforced his status as China's most powerful leader since Mao Zedong in the 19th National Congress of the Communist Party in October, 2017. He has declared that China has entered a "new era" and vowed to build China into a very powerful county.
His strong political primacy provides a solid foundation for the implementation of President Xi's agendas. However, his success will be ultimately judged on three measures: can China secure a successful upgrade of its economy? Can China keep corruption at bay? And can China also ensure a fair distribution of national wealth? There is still a long way to go.