The Party: The Secret World of China's Communist Rulers (8 page)

That sinking feeling was widely shared at the time. By the early to mid-nineties, the financial pillars of the communist system and of the central government in Beijing were crumbling. Hu Angang, an outspoken Beijing economist with an eye for a headline, grabbed the attention of the leadership at the time with a comparison chilling for any Politburo member worried about their place in Chinese history. Beijing’s tax take, he said, had fallen even lower than Belgrade’s share of revenues in the former Yugoslavia before its break-up.

China’s myriad economic problems made it difficult for policy-makers to know where to start. In a tour of Sichuan in 1993, economist Milton Friedman gave the then governor some characteristically straightforward advice about how to instantly instil market discipline in an economy dominated by the state. ‘To cut the tail off the mouse, don’t do it inch-by-inch,’ Friedman, the high-priest of the free-market Chicago school of economics, told his Chinese host. ‘To reduce the pain, the whole tail should be cut off at once.’ The governor replied in kind, by extending the metaphor to illustrate how such reforms might not be as easy as Friedman envisaged. ‘My dear professor,’ the governor said, ‘our mouse has so many tails, we do not know which one to cut first.’ According to Steven Cheung, a fellow Chicago school economist at the meeting, Friedman was lost for words in response.

Just as he had in the late seventies, it was Deng Xiaoping who eventually laid down the blueprint for a new model, on this occasion along two connected tracks. On 9 June 1989, barely days after the blood had been scrubbed from the streets surrounding Tiananmen Square, a beaming Deng appeared on television shaking the hands of the military commanders who had blasted the students out of the city centre. The single biggest mistake the leadership had made in the eighties, he said in a pep talk to the troops, had not been opening the economy, as many of his critics had begun to argue forcibly, but a lack of ideological and political education to go with it. ‘We must make sure no adverse trend is allowed to reach that point [of 4 June] again.’

Soon after, the Party began to implement Deng’s plan, to give it an extra line of political defence that had been lacking in the lead-up to 4 June. Political departments were reinforced or re-established inside government ministries, the courts and the military, as an early warning system about potential deviants. ‘They are there to ensure that the Party can have direct control over all important institutions,’ said Jiang Ping, a retired law professor. The Central Propaganda Department was beefed up, lavished with extra resources and given clearer guidelines about how to sell economic reform to a bruised population. And the appointments system, through the Central Organization Department, was refined and tightened, to ensure the loyalty of cadres, not just in government, but throughout educational institutions, the media and multiple bodies under state control.

The second track took longer to lay down. In early 1992, still hemmed in by leftists in Beijing who wanted to keep a lid on liberal economic reforms, a frustrated Deng took a tactical leaf out of Mao’s playbook to rally support for his cause. The Great Helmsman had famously disappeared from Beijing in times of political struggle, only to return at opportune moments to spook his opponents and take charge of the debate. While Deng’s trip echoed his predecessor’s tactics, his target was very different. With his symbolic southern tour to Shenzhen, a business Eldorado bordering Hong Kong and built from scratch out of rice paddies in just two decades, Deng throttled once and for all the lingering Maoist influences on economic policy.

Deng’s formula, boiled down, was simple. The Party would still pursue free-market reforms, but in tandem with recalibrating and tightening political authority in Beijing. Equally, the Party might not own state assets directly, but it would maintain the right to hire and fire the executives who managed them. For the economy to prosper, the huge state firms that communist commissars had once directly managed would have to be turned upside down and the role of party operatives inside them reined in. Instead of simply producing goods to plan and providing cradle-to-grave employment, knowing all along that the Finance Ministry would cover any losses, the state had to make money to survive.

Deng’s market reforms, launched in 1978, had already paid off handsomely for China, generating the kind of indigenous wealth and entrepreneurial energy in the eighties that the oil-dependent Soviet Union had never managed to produce for itself. But 4 June and the collapse of communism in Europe had been a wake-up call, signalling that mismanagement of the free market could bring the Party toppling down as well. The Party’s internal slogan for the new era was simple: ‘On economic matters, relaxed controls; for political matters, tight controls.’

The economy, shedding its sullen, post-June 4 funk, took off in the wake of Deng’s southern tour. Foreign investment poured in. Local entrepreneurs were emboldened. The workshop of the world, the factory belt in southern China that supplies billions of dollars’ worth of goods to Wal-Mart and its ilk across the globe, was beginning to gain critical mass. But along with a surge in growth came a wave of entangled problems, of inflation and social unrest fuelled by mass lay-offs from state companies and anger at official carpet-bagging of the assets left behind. The Party looked anything but in control in the extraordinary upheaval starting in the early to mid-nineties. Far from unifying the country and putting the centre back in control, the initial impact of Deng’s rebooted reforms was chaos.

Over the next ten years, the government would lay off about 50 million workers in state enterprises, equal to the combined work-forces of Italy and France, and redeploy another 18 million into firms which no longer carried the benefits of their old jobs. The ‘three irons’–the ‘iron chair’ of a lifelong job; the ‘iron rice bowl’ of the promise of employment; and ‘the ‘iron wage’ of a guaranteed income and pension–were all dismantled. Workers at centrally controlled urban state enterprises dropped from a peak of 76 million to 28 million in just ten years from 1993. The state sector, which had always been the heart of the Party’s control over the economy, seemed to have been decimated. The hard-nosed implementation of these reforms prompted a backlash against Deng’s policies and doomsday-like warnings that China was on the brink of violent, systemic turmoil.

Overseas, many foreigners thought that the Party had embarked on fundamental change as well, mistakenly equating the state sector overhaul with western-style privatization. Zhu Rongji, the blunt, dynamic Deng protégé who had taken charge of economic policy in the mid-nineties and was elevated to Premier in early 1998, recalled that year being shocked when asked by George Bush Snr. how China’s ‘privatization’ programme was proceeding. Zhu protested that China was corporatizing its large state assets, which was just another way of ‘realizing state ownership’. Bush responded with a nudge and a wink, saying that no matter how Zhu described the process, ‘we know what is going on’. Bush was not the only western leader to misread Zhu, widely seen in foreign circles as someone dismantling the very roots of the state economy. Such depictions, viewed as compliments in the west, exasperated Zhu and placed him on the defensive at home where they could be used by his domestic enemies to undermine him. When he had toured the US as the Mayor of Shanghai he was praised as ‘China’s Gorbachev’. The same phrase, repeated in China, amounted to a grave political slander. An irritated Zhu replied: ‘I am China’s Zhu Rongji, not China’s Gorbachev.’

Zhu faced legions of critics within the Party over his abrasive style and, according to his boss, Jiang Zemin, ‘his inexhaustible capacity to rub people up the wrong way’, but no one was able to pin on him the crime of privatization of large state enterprises. For all their divisions, the top policy-makers in Beijing were largely united over the need to consolidate and strengthen the power of the Party and the state, not let it wither away. The proposal from the Beijing Hotel meeting about direct party ownership had died, but the principle that the Party and the state should maintain control of the commanding heights of the economy lived on.

Zhu, in pithy Chinese fashion, boiled down the blueprint for state enterprise reform to a single phrase at the 1997 party congress–‘grasp the big, let go of the small’. The Party and the state would retain control of the large companies in what were deemed strategic sectors, such as energy, steel, transport, power, telecommunications and the like. In a formula that was rolled out for scores of state companies, a small number of their shares were listed overseas, while the government kept about 70 to 80 per cent of the equity in its own hands. Many foreigners often mistook these sales of minority stakes to be privatization. Smaller, loss-making enterprises in turn were to be sold off or left to be managed by local governments, much as the neo-cons had envisioned six years before. Zhu’s policy largely still holds today, of strengthening the state sector by streamlining it, professionalizing its management and demanding that companies take responsibility for their own balance sheets.

From afar, ‘Boss Zhu’, as he was known at home, gave the impression of being all-powerful. The foreign press tagged him ‘China’s economic tsar’, an odd, pre-Soviet title which was meant to signify his seemingly unfettered authority. Zhu, a master of the stirring soundbite, was famous for his table-thumping rages directed at local officials who he thought were trying to derail his reforms. ‘I have prepared 100 coffins,’ he reportedly cracked after being promoted to vice-premier. ‘Ninety-nine for corrupt officials, and one for myself.’ Zhu later denied this quote, explaining that ninety-nine coffins weren’t enough for all the corrupt officials in the country, anyway. Zhu gave every impression that he could wield the power of the centre to get his way in the rest of the country. In truth, his reliance on the bureaucracy in Beijing was the flipside of his weakness outside of the capital. ‘To survive, he had to launch attacks nationally to firm up support for himself inside the central government. He was harsh because he had no other options,’ said a prominent Beijing academic. ‘Otherwise he would not have lasted long.’

Zhu could not simply wave his magic wand in Beijing to get his way in each of China’s far-flung provinces and cities. Just as the economy had been decentralized in the previous two decades, so too had financial power been effectively devolved to the regions. The demise of central planning had accentuated a similar divide in the financial system. The big banks were national institutions and brand names, but the appointments of senior executives were largely controlled at the provincial and city level. Regulation was localized as well, through the thirty-one provincial offices of the central bank. China did not have a stand-alone national bank regulator until 2003.

Imagine HSBC in the United Kingdom ceding control over appointments of executives to run its branches outside of its London headquarters to local politicians, who could then demand loans in return for their patronage. Similarly, financial regulators in London would be powerless to enforce their writ over regional branches because they had no way of monitoring what was happening away from the capital. Once you replicated this scenario scores of times across a country as vast as China, the scope of the challenge that faced Zhu and the central government becomes clear. Zhu knew that unless he could wrest control of the far-flung branch networks of the big five lenders, the lifeblood of industry across the nation, at the time accounting for more than 60 per cent of all loans, his grand plan for the economy would die in a ditch. From his perch in Beijing, Zhu had long complained that intervention from governments at all levels had turned the banks into virtual ‘ATMs for officials and official businessmen’. From now on, if Zhu got his way, the only state ATMs would be in Beijing itself.

Zhu needed a crisis to galvanize the system. Luckily, in the first year of his premiership, there was one close at hand. The Asian financial meltdown, which began in mid-1997, hit the Chinese economy and its already creaky financial institutions hard. By 1998, more than half–about 57 per cent–of all the loans issued by the Industrial & Commercial Bank of China, the country’s biggest lender, were unrecoverable. For the whole banking system, 45 per cent of loans made before 2000 had gone bad. The legacy of years of poor and often corrupt management of the state banks was now more than just a drain on the exchequer. It was a lethal threat to the entire economy.

With the system in crisis, Zhu quietly reached into his Leninist toolkit to bend the banks to his will. A great centralizer, Zhu persuaded the Politburo to establish two top-level party committees to return the decentralized economic system to Beijing’s control. The two party committees, both headed by Politburo members, took control of the financial system in the late nineties across the country through a very simple mechanism. The party apparatus in Beijing, in tandem with the Central Organization Department, shunted aside local bigwigs by placing the power to hire and fire senior executives in banks and other state enterprises with the centre, no matter where they were in the country. Any regional bank offices which refused to sign up to the Politburo’s programme were threatened with closure. Put crudely, Zhu’s strategy echoed the saying popularized in the Vietnam war to explain the US military’s programme to pacify Vietcong villages. The Party decided it first had to get bank executives by their b***s to enforce Beijing’s writ. Their hearts and minds could come later, if ever at all.

The front stage of the government’s regulatory system remained intact on the surface. The local banks and regional regulatory authorities were outwardly undisturbed. Backstage, however, the Politburo had created an entire parallel policy universe, ‘a powerful yet mostly invisible party body for monitoring financial executives’. Zhu and the Politburo did not bother to give these all-powerful party bodies any legal status, by putting bills through the legislature. Nor did they give them the stamp of government authority by publicly announcing their formation through the cabinet. The fact that these two committees had no lawful basis did not matter. The backing of the Politburo and the direct threat to the jobs of provincial bank executives were more than enough to galvanize local officials to sign up to Beijing’s plan to secure the Party’s economic base.