The Party: The Secret World of China's Communist Rulers

by Richard Mcgregor

  Chen Jnr. and his fellow-travellers considered themselves to be conservatives as well, but of a more modern kind. They backed the gradual introduction of market reforms and western-style institutions, side-by-side with strong party controls and intensified patriotic education. They opposed a return to Maoist policies pushed by people they described as ‘romantics’, or ‘traditional diehard conservatives’. In their own words, they were ‘new conservatives’, a tag inevitably shortened to ‘neo-cons’, years before the phenomenon took root in George W. Bush’s administration in the US. Above all, they supported the pre-eminence of the Party as the only body with the capacity to hold the country together against the ever-present threat of subversion by the west and troublemakers at home. What was once a revolutionary party, they said, should now be retooled, and entrenched in power as the ‘governing party’.

  The main targets of the neo-cons were not the Maoist romantics, who even in the dark days of the early nineties carried little weight. The greatest danger to the Party came from the political liberals, the right wing in the Chinese political lexicon. The neo-cons blamed the liberals’ relentless lobbying in favour of the private economy, and their unstinting criticism of the Party, for inflaming the 1989 protests in the first place. The liberals, the manifesto said, had demanded ‘total reform of the property system and finally set their sights on the political system, focusing on the Communist Party of China, unwilling to stop short of destroying the entire present order’. The neo-cons’ solution was not to back off from this fight, but to up the ante by having the Party take over the ownership of large state assets in its own name.

  Stamping the Party’s name on the title-deeds of state assets would have multiple benefits, they argued. Ownership had been a vexed and confused issue for years. The multiple forms of state ownership, by ministries, enterprises, the military and government entities, plus the murky and entangled rights to different assets and revenue streams on top of that, made it all but impossible to trade and extract value from any public goods. The neo-cons argued that direct ownership by the Party would clarify all of these issues with the stroke of the pen. It would be politically beneficial as well, simultaneously aligning the Party directly with growing state businesses and heading off nascent political competition from entrepreneurs.

  The emerging private sector, the neo-cons noted curtly, ‘had nothing to do with the Party’ and had to be kept in check. As for experiments in privatization and diversifying the ownership of state companies, that was dismissed. Such changes could be restricted to ‘smaller enterprises with severe deficits’. In other words, the dross of the state sector which was beyond salvation could be sold off, with the big companies in key sectors being kept for the state.

  The privileged line-up of the group credited with the manifesto is one reason it was so enthusiastically denounced by their liberal opponents. Along with a long-time party activist, Yang Ping, the main organizer of the meeting was Pan Yue, then a deputy-editor at the China Youth Daily, who spent his days at the paper ‘disregarding his editor’s responsibilities, instead waving around his mobile phone everywhere’. This was in the days when ownership of a mobile phone, then nearly as large as a brick, was a sign either of privilege or of membership of a Hong Kong Triad gang. The first wave of cell-phones in China were known jokingly as ‘Big Bros’, an echo of the title given to Hong Kong mafia bosses. Pan Yue had no underworld connections, but he did have a privileged entrée into the system, through marriage to the daughter of a high-ranking army officer. Pan proved to be an energetic policy entrepreneur in his own right. He retooled himself in the late nineties as the most outspoken voice in the bureaucracy on the environment, before his influence began to wane after the 2007 congress.

  A bevy of the sons of revolutionary immortals and senior leaders attended the seminars organized by Pan and Yang over more than a year, culminating in the Beijing Hotel gathering in late 1991. The final 14,000-character document was later drafted under the patronage of Chen Yuan. The intellectuals and liberal commentators, languishing in internal exile or banished overseas in the wake of 4 June, took delight later at lambasting the pedigree of the attendees. They labelled them ‘the Playboys’ Club’ and the manifesto itself as a ‘White Paper for the Princelings Faction’ in the Party. The proposal, one critic wrote, ‘would, without ado, transfer the assets nominally belonging to 1.1 billion people to a Communist Party making up just 4 per cent of this number’. The criticisms were damaging, and the sponsor, the China Youth Daily, distanced itself from the conference and its papers. But the idea was killed by a more practical political objection–that direct ownership of state assets would send a fatal signal about the Party’s weakness, not its strength. ‘This kind of suggestion could be very risky,’ said one of the meeting’s attendees. ‘If the Party takes over ownership, it’s a signal that it is preparing a safety net, because the ship is starting to take on water and sink.’

  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-fl
ung 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.