During the recent trial of Bo Xilai, the ousted leader of the Chongqing metropolis of 30 million people, the People’s Daily, the Communist Party of China’s newspaper, remarked cryptically, “Constant denials [of his crimes] will only bury you [Bo Xilai] deeper in a trap.” How true! Bo is reportedly going to face the rest of his life in jail on corruption charges. In political terms, though, his legacy would persist, having challenged the established system from within. By invoking Mao Zedong’s red flag, he sought to rally people behind him, who feel short-changed by the system that favours the rich and powerful who have built fortunes through corruption and connections. Bo Xilai’s populist message is likely to resonate as China’s economic growth falters. China is still growing at around seven percent but it is not as good as 10 percent and above over the years. China needs a fairly steady high growth rate to soak up unemployment and to improve people’s living standards.
There are broadly two views about the country’s future economic prospects, and consequently its social and political stability. One view is that China has already set in motion a strategy to favour domestic consumption over an export-based economy. The exports and investment (construction) sectors will still remain an important component of growth but that growth will be constrained by slowing demand for Chinese goods in the US and European countries, and overinvestment in infrastructure. As economist Patrick Chovanec, one time professor at Tsinghua University and now an economic strategist with a US asset management company, has reportedly said “…China has been growing for these last several years by adding to its capacity [like Japan did], but for growth to be real, that capacity has to be used.” But the fact of the matter is that, “There’s a lot of empty ports, empty apartment buildings, empty offices, empty airports company.” Unless these assets are productively used with a fair return on investment, they are a serious drag on the banking system.
China’s large economic stimulation package, which helped stave off recession from the global financial crisis, is now creating serious problems for the economy from an excessive growth in credit in the last few years. For instance, it has led local and regional administrations to push ahead with some dubious infrastructure projects. Similarly, easy credit led them to put money into shoddy financial transactions that has overextended the banking system. The debt to GDP ratio is now estimated to be above 200 percent, about that of Japan.
A big chunk of the money went into real estate, creating the potential of a boom/bust cycle, as happened in Japan. Real estate prices are now simply beyond the means of many people. As a result, there are many empty apartment buildings. The easy availability of credit and its shoddy use has entrenched corruption even further. And corruption, especially at high levels, tends to erode the legitimacy of the political system. Indeed, many people are becoming deeply cynical about campaigns at different times to eradicate corruption, as the outcome is always patchy. And when some high level party bigwigs are caught in the campaign, it is generally because they have fallen out of favour with the party headquarters, as is the case with Bo Xilai.
Bo Xilai lost his political battle to the party frontline, and was dumped as party chief in Chongqing and charged with abuse of power, bribery and so on. His wife has already been convicted of murder of the British businessman, Neil Heywood, and was given a suspended death sentence. It is quite possible that he and his family built up a vast fortune through corruption and abuse of power. But so have many others at the top party levels.
Indeed, a New York Times investigation had found that Wen Jiabao’s family, till recently prime minister, had built up a fortune in questionable ways. Another investigation by Bloomberg also dug up corruption material on Xi Jinping’s (the current president’s) family. Whether or not it is true is beside the point. The point is that if a party leader falls out of favour, he/she will pay a terrible price.
Corruption is so entrenched in the system that most party officials, at all levels, are part of it. This is common knowledge and the people’s cynicism is understandable. Even the mighty People’s Liberation Army (PLA) is infected with it. Take the case of Lieutenant General Gu Junshan, till recently deputy chief of the general logistics department who left his post in February last year without any official explanation. He probably would be charged soon with corruption. Senior Colonel Gong Fangbin recently said in an interview with the official Global People, “When corruption has become a type of culture, and has developed to a certain level [at the top], change becomes very difficult.” Its seriousness was highlighted by General Liu Yuan, son of a former (but disgraced) president Liu Shaoqi, at one time number two under Mao Zedong, who reportedly said in December 2011, “No country can defeat China. Only our own corruption can destroy us and cause our armed forces to be defeated without fighting.”
In the midst of it all, the example of western liberal democracy (even with its many faults) is terribly destabilising for China’s political system. The Communist Party rulers seem quite worried about this. In this connection, The New York Times has quoted from a memo referred to as “Doctrine Number 9”, apparently emanating from the top level (s) cautioning Party cadres against the perils threatening the system. These reportedly are: “Western constitutional democracy”, “universal values” of human rights, western-inspired notions of media independence and civil society, ardently pro-market “neo-liberalism” and “nihilist” criticism of the party’s traumatic past. The document goes on to say, “Western forces hostile to China and dissidents within the country are still constantly infiltrating the ideological sphere” as well as stirring up “trouble about disclosing officials’ assets, using the internet to fight corruption, media controls and other sensitive topics…”
An important element in this hypersensitivity is that the country’s economy is now at a critical point. According to Charlene Chu, the senior director in Beijing of the Fitch rating agency, “The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem and potentially into a Japanese-style deflation.” The problem is further compounded from the parallel shadow banking system operating outside the system. As Charlene goes on to say, “There is no transparency in the shadow banking system and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is.”
It is therefore not surprising that the top party leadership is worried at the complex interplay between the country’s economy, social stability and latent threat to the political system. But there doesn’t seem any immediate danger to the party’s rule because the state in China is very powerful, and has all the regulatory and control mechanisms to deploy. Besides, it has deep pockets with an estimated three trillion dollars worth of foreign currency reserves, and its debt is mostly internal.
The writer is a senior journalist and academic based in Sydney, Australia. He can be reached at [email protected]