China Inc. Is Now Open for Business

China’s 16th Communist Party Congress has ended after anointing a new group to lead the world’s most populous and rapidly developing country for the coming five years. Foreign media have noted the significance of the first orderly, peaceful turnover of power at China’s top level in a century but have otherwise suggested that little of importance has actually occurred. Yet, in fact, the congress was the completion of Deng Xiaoping’s victory over Mao Tse-tung. This congress cleared away the remaining policy underbrush from China’s past communist aspirations.

Mao spearheaded a revolution, while Deng sought a politically viable way for China, like Japan and South Korea, to achieve state-directed economic development.

I heard a leading Chinese ambassador declare at a conference more than a year ago that foreigners were mistaken to view China as building socialism because the country now sought nothing so much as to build capitalism.

The 16th congress officially sanctified this goal, albeit to build the kind of state-directed capitalism common in Asia and to wrap this in a thin cloak of socialist rhetoric.

The political succession is also notable. There is a broad consensus among the leaders over the importance of economic development and the overall need to strengthen market forces and China’s interaction with the international economy. But in the last four months, the expected succession arrangements have changed significantly.

The basic shift was to stack the new nine-man Politburo Standing Committee with Jiang Zemin proteges, two of whom (the recent heads of Beijing and Shanghai municipalities) are surprise promotions. Jiang apparently sees himself as emulating Deng’s strategy of resigning from top posts but continuing to guide policy for years to come. In this sense, this succession is incomplete.

Like Deng, Jiang is retaining his leadership of the Chinese military. But Jiang lacks Deng’s level of prestige and unquestioned obedience. His touch will be less certain as he tries to maintain his influence through his protege majority on the standing committee and seriously hem in the few others, including new General Secretary Hu Jintao, future Premier Wen Jiabao and head of domestic security Luo Gan.

Jiang’s maneuvering has increased the chances of an unstable leadership dynamic. Because Jiang will try to meddle from afar but cannot simply dictate, there is now greater potential for political infighting. For example, Hu has been a careful consensus builder, but now that he has the top job he is likely to seek opportunities to build real power to go with his title.

Zeng Qinghong, who has been Jiang’s key strategist since 1989, is now in a position on the standing committee to spread his own political wings. How Zeng plays the power game will markedly affect both Hu and overall leadership cohesion.

The leadership dynamics are important because China faces such a daunting set of domestic challenges in the immediate future. The 16th party congress has effectively declared that the main business of China is business, and it stipulated continued rapid growth as its top priority. Yet the new leaders face issues that will demand extremely difficult trade-offs concerning speed, priorities and approaches.

Addressing the key issues China faces will in the short run make economic growth more difficult and popular discontent more worrisome. Those issues include implementing World Trade Organization-mandated reforms to enhance the openness of China’s market, reducing the size and improving the efficiency of state-owned enterprises, absorbing an additional 100 million migrants from the countryside in the coming decade, developing a social safety net, addressing the huge overhang of nonperforming loans in the state banks, bailing out largely bankrupt county and township governments, reducing pervasive corruption and investing in major environmental projects to meet pressing needs. The concern must be that debates over how to deal with these matters will become caught up in the leadership’s own maneuvering over power and position, reducing the cooperation necessary to reach and implement good decisions.

In this situation, the quality and cohesion of the new leadership can make a decisive difference. The incompleteness of this peaceful and orderly leadership succession may yet come back to haunt Beijing.