Platt Perspective on Business and Technology

China and its transition imperatives 25: rethinking China’s economy and the Party and government policy that shapes it 1

Posted in macroeconomics by Timothy Platt on October 23, 2015

I have been studying and writing about China for a number of years now, and begin this posting by acknowledging that I am still learning, and that I have only scratched the surface of what there is to know and understand about that vast and complex nation.

To bring that admission into focus, I note here that when I first began studying and writing about China’s Golden Shield Project: their Great Firewall, I saw their Ministry of Public Security, and their system of propaganda operations with that assemblage definitely including their Publicity Department of the Communist Party of China as vying for what would perhaps best be seen as ownership control over that resource. Officially, this project for controlling public access to information is operationally managed and maintained by their Ministry of Public Security, but there are always contesting voices and powers involved when a resource of as far-reaching import and impact as this, are under consideration in a centrally controlled system as is found in a country such as China.

Who actually controls what in China, and certainly at a national government and Party level, always carries at least a certain measure of uncertainty. And this is particularly true when “unofficial” but nevertheless very powerful voices are included for consideration, along with more overt powers that be, as represented in formal officially listed tables of authority and oversight. And I begin this posting with this note because the uncertainty that I raise and acknowledge in it, informs the core line of discussion that I would focus on here and now too, as I consider more recent and still rapidly unfolding events. And with that offered as preamble for this posting, I more formally begin it by raising what I see as perhaps the central question coming out of China’s recent overt economic downturn:

• Who actually controls, and as such effectively owns the national economy of China?

This is important as it is the sometimes contentiously competing voices and powers in China that claim such authority, that will determine how this crisis is perceived. And that competitive if largely behind the scenes discourse will shape how this crisis is addressed, and both short-term and long-term. And I begin my discussion of all of this with the fundamentals and with the obvious (though incomplete and perhaps somewhat misleading):

• China as a whole is a tightly regulated and regimented society in which essentially all aspects of life, and both organizationally and individually for its citizens, are centrally managed. And this centralized authority comes from their government, and at all of its organizational levels, from local community on up to the highest national level. And China’s government, and on all levels, is in turn tightly controlled by its one allowed political party, the Communist Party of China. So ultimately, it is that one Party that effectively owns and controls all.
• But neither government nor Party are monolithically functioning or fully consistent, and either in their goals or in their operations. Both are complex systems comprised of vast numbers of individual people, each with their own personal goals and prerogatives and each with their own interests and concerns and their own agendas for achieving them. And that definitely includes their own desires to accumulate and exercise personal authority and power within this overall system, and their personal desires to promote their own individual wellbeing through it too.
• And in this type of system, any oversight that is effectively in place is a responsibility of the same one government and its officials, and of the same one Party and its officials, that would be overseen. Ultimately and for most purposes and contexts any oversight in place is self-oversight with no real outside participation – except of course where examples are being made from on high in this system and with that carried out on a very selective basis. And that essentially inevitably leads to what can best be seen as regulatory blindness, with much simply overlooked and certainly on a day-to-day basis, and at all levels from local community-based governance on up.
• That leads to corruption and to corrupt practices as officials and managers in the system, seek to game it for their own personal benefit. And as balance to that, more senior leadership whose members themselves had risen through the ranks of this system, hold at least periodic show trials to keep all of this at least somewhat in check and limited for its overall impact.
• Officials and agents of this system quickly come to realize that if they act too egregiously and openly in their own self-interest and if they stand out from the crowd for that, they will be made example of. There is a saying in China to the effect that a nail that sticks out is hammered flat. This is definitely a context where that applies.
• Who owns the economy in China? If the answer to that were simply one of determining where debt arises and of who makes the implementation decisions that determine where and when it does, that the Party and national government would hold ultimate responsibility for paying, then it is in the cumulative impact of all of this nationally diffused activity. And local, provincial, and national government and Party agents and officials have in fact built up a total cumulative debt of this sort, that even by conservative reckoning now totals the equivalent of many trillions of US dollars owed. I have touched upon this and the issues that I raise here, many times over the past five years, in this blog.

That set of points offers a very legitimate perspective as to where actual control of China’s overall economy resides. But for purposes of this posting, I would refer to its line of discussion more as representing structurally determined inefficiency and instability, and as discussion of innate system-wide friction. So I offer this primarily as background framework for thinking about the more official organizational structures and agencies in place that would directly claim oversight and even ownership control of the main levers of China’s economy.

That, at least superficially stated, means the systems of official, and of unofficial but nevertheless publically visible control and oversight that arises in the Party in its chains of command and control, and in its organizing bodies for exercising that authority. And operationally, certainly, that means government offices, departments, and agencies that carry out and maintain economic supportive and defining functions. And that brings me to a point of detail that I added to the end of my most recent posting, where I noted in this series’ Part 24: a September 12, 2015 update concerning China’s economy that:

• The PLA is the largest business owning, and even entire industry owning participant in the Chinese economy. And it is essentially certain that they have amassed a very sizable foreign currency reserve of their own, that is entirely separate from the reserves that are generally reported on as being held by Beijing. (Their reserve fund’s existence and scale would be considered highly sensitive, top secret national defense-related intelligence.) So as at least one thread of discussion, I expect to address the PLA’s role in China’s economy and its influence on China’s economic policy and practices, in my upcoming October posting.

I turn to at least begin addressing that here. And I begin doing so by once again, starting with the fundamentals and with the obvious:

• China manufactures for export and both as a mechanism for gaining and increasing overall economic strength, and in order to achieve the political goal of becoming a leading world power.
• And the manufacturing arm of the PLA is very actively involved in this export trade, and both for non-military goods and for directly military and dual use technology goods too.
• And China’s recent and still unfolding economic downturn has done a lot more than simply cause a fall in its stock market. It has very heavily impacted upon that country’s level of manufacturing production too, and on its infrastructure building programs and on essentially everything else that government and Party leadership see as essential for further developing their country.
• To cite one perhaps indicative measure of this, Australia has been a major external supplier of iron ore and related concentrates to China, and that country’s import levels for these raw and partly processed materials have fallen significantly in recent months. See Australia Exports of Iron Ore & Concentrates (1988-2015) and more specifically: Australia Exports to China (1988-2015) And China has also been a significant exporter of more finished iron and steel supplies to Australia in return, and that trade has dropped off correspondingly (see the same references as linked to here, re China import trade levels for their relevant export numbers too.)
• It can be readily argued that this slowdown directly creates the types of risk for the PLA, as their leadership would view matters, as did a lack of direct control over production of goods and materials that they saw as essential for their ongoing national defense capability, that led them to become business and industry owners on such a massive scale in the first place.

The People’s Liberation Army is, among other things, a bastion of Communist Party purity, and certainly in its leadership – and that is by very specific intention. There is, for example, a very definite and I add very relevant reason why Mao Zedong’s sole surviving legitimate grandson: Mao Xinyu was brought into the PLA virtually from day one there as a general officer, and in fact as a major general. And that was while he was just graduating from Renmin University of China as an undergraduate, he did so as a newly minted PhD in the study of his grandfather’s thought. The PLA is a bastion of ideological purity in image and in action, and it has cultivated an image enhancing crown prince spokesperson presence, among other details to directly validate that.

Xi Jinping has been very actively weeding out possible sources of dissent from his rule, and with the types of government and party official-targeting show trials that I made note of above, as well as in challenging and humiliating more private sector-based potential opponents. But he has been careful in how he has acted against the PLA and its leadership in this, and he has in fact given his military a green light to flex its muscles in action, and certainly in the South and East China Seas. As a single new example of that, to add to supporting points of detail that I have already offered in this series, I note that as of this writing, China has now built a third military airstrip on one of its newly built artificial islands, in order to facilitate its military in more effectively projecting force in the region.

Party and government in China actively seek to control their military, and certainly since the early days of Mao’s rule. But their military is always a force to be reckoned with, and with extreme care. And this brings me to some fundamental questions, some of which I repeat from this recent flow of postings to this series, and some of which I bring more into focus here:

• The People’s Republic of China has very intentionally amassed very sizable foreign reserve holdings, that by relatively direct means can be calculated to have topped at well over the equivalent of four trillion United States dollars, with the vast majority of that held in US dollars and in Euros. It is less certain how much of this is left now as their government has been very actively spending their overall reserves down in an attempt to both stabilize their economy and to present an image to the world of their having accomplished that goal. What do they currently have in those reserves? And what does the PLA have in their currency reserves? And what would it mean if a significantly higher proportion of China’s overall foreign reserve holdings were to be held essentially off-books, by their military, as an industrial and economic giant within their country, than had ever been the case before? This set of questions at least potentially, significantly reframes the risk of leadership challenge that their military and its leaders could pose to their civilian leaders, and to Xi as their supreme Party-backed civilian leader. And that raises a lot more questions that could also be added here.
• And given the issues and questions raised there, where would China’s civilian leadership in general, and Xi in particular, see potential challenge arising from and in what form? I pose that two part question with both military and economic issues in mind, and with the potential for covert challenges to civilian rule primarily in mind, where their military might become involved in setting policy and in enacting it.

I have been thinking about this set of issues for a while now, and finish this posting at least up to here on September 20, 2015 – expecting that I might very well add in addendum notes before this goes live on October 23. Right now I am at least tentatively planning on discussing what China has done to try to manage its economic downturn, and how that effort is perceived, and both within their country and globally, in my next series installment.

Meanwhile, you can find this entire series and all of its postings at Macroeconomics and Business as postings 154 and loosely following for Parts 1-12 and for a supplemental posting: Part 12.5. And see Page 2 to that directory for subsequent main sequence and supplemental installments to this. You can also find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too.

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