Hu Jintao and the new China

2006-06-28Asia Times

BEIJING - The biggest factor determining global stability over the next 20 years, simply put, is China. For good or bad, it will shape the world. If everything goes well, China will be integrated in the developed world and will become one of its engines, if not the main engine. If things go bad, there could be a confrontation that makes the Cold War pale in comparison.

All other scenarios are in between these two extremes, including the collapse of China or a war led by the United States. This latter could sap all US forces and energies, thus killing with one stone China and the US and allowing the emergence of a third power.

Chinese President Hu Jintao, of course, is planning for the good scenario, the one where China and the US would go hand in hand. But this strategy is fraught with danger.

With just one year left before the 17th Chinese Communist Party (CCP) Congress in autumn 2007, Hu is shaping his grand strategy that will sail him through the congress, possibly with a new team of leaders all loyal to him. The moment is crucial because the party has to appoint one person or a group of persons to take the lead after Hu's retirement. The congress could also initiate new political mechanisms for the promotion of leaders.

As happened with Jiang Zemin before him, Hu may move decisively to the "right" (very reformist) after an initial period of "leftism" (great political caution). In Chinese politics, traditionally, power is first consolidated with moves that are conservative and "leftist", but then the leader wants to establish his historical legacy, and for that he needs reforms improving the life of the people and boosting the development of the country, material and spiritual.

This is crucial for the political survival of the CCP. Chinese people expect their leaders to improve their lives, that is, ensure more money and more liberty. People have come to accept that change must come gradually, and that nobody should rock the boat. But they also take for granted not only the money and liberty they already have should not be taken away, but that both must be increased. This social pact holds the country together, and no leader can shy away from it.

The late leader Deng Xiaoping recognized that reforms had to be relaunched after the Tiananmen crackdown of 1989, which he did on his southern trip in 1992. Jiang deeply restructured the old system of state-owned enterprises in 1997, laying off millions of workers, and opened up the domestic market to foreign competition with China's accession to the World Trade Organization. Now it is Hu's turn.

In fact, a close look at Hu reveals that the president has all along boldly and cleverly conceived a paradigmatic shift in at least three politically crucial fields: Taiwan, religion and the economy.

Lin Zhongbin has noted the shift on Taiwan policy instigated by Hu [1]. Lin examines the four points of Hu's new strategy and finds that his is very different from past approaches. His predecessors, from Mao Zedong onward, tried to dictate conditions to Taiwan, which Taiwan would reject or ignore, and Mao and his successors would be politically cornered and strategically would lose face. The situation would be frozen.

But Hu does not dictate conditions to Taiwan. Instead he has built channels to influence Taiwanese politics. He has established solid ties with the pro-unification Kuomintang (KMT) and possibly also with the pro-independence Democratic Progressive Party. He has acquired political mobility, which in politics, as in military affairs, is crucial for victory, or at least to avoid defeat. He has done this by being proactive, and not simply expecting Taiwan to come to him cap in hand. Rather, he took a big political risk as Beijing hosted then-KMT chairman Lian Chan, a visit that turned out to be a huge success.

Hu's strategy has paid off beautifully so far. It has shifted the onus of cross-strait relations from Beijing to Taipei. The result was that when Taiwanese President Chen Shui-bian tried to push the envelope, the US restrained him. And now that Chen is caught up in a political scandal, with people taking to the streets chanting for his toppling, Beijing can simply sit back and enjoy the show. Whatever the outcome, Beijing has nothing to lose.

This April 12-15, China hosted an international Buddhist conference in the city of Hangzhou. With that gesture, Hu acknowledged that he recognized the common people's need for religion, and his willingness to channel that need toward institutional faiths.

This pragmatic move was in sharp contrast to the naive mistakes of Hu's predecessors, whose refusal to open up to religion and stubborn resistance to a freer flow of information led people into the arms of apocalyptic sects preaching absurd doctrines about the end of the world. Hu's approach was a signal of non-hostility to religion. It also tied into a large Chinese charm offensive, the opening of Confucius Institute language centers all over the world, starting in such cities as Paris and Berlin (see Beijing's 'soft power' offensive (, May 17).

China, the country with the largest Buddhist population, could make Buddhism an instrument of influence in the world. Without drawing simplistic comparisons, Buddhism could be to China what Christianity had been to the West: a way of creating new value sets in continents and countries distant from the Asian mindset. In this sense the People's Daily argued that religion could be a useful tool to help the world understand China [2].

This new thaw is not confined to Buddhism. Even when relations are very complicated and thorny, with a lot of opposition, Hu has decided not to shut any door, for example with the Vatican. There have been a few clashes between Hu's Beijing and the Holy See, but the situation now is quite different from 2000, when China cut all contacts with the Vatican after the canonization of 120 Chinese saints. Beijing keeps in touch with the Holy See and apparently has even made some progress with its longtime nemesis Joseph Zen, now cardinal of Hong Kong.

The economy
At a conference [3] in Beijing this month organized by the Chinese Academy of Social Sciences, Olivier Blanchard and Francesco Giavazzi [4] presented a paper detailing how China should move to boost domestic demand and public expenditures in the countryside, increase people's real income and, at the end of the process, revalue the yuan.

The paper was in line with what all other Chinese participants were arguing. The point was: move away from an export-oriented model to one where the huge potentiality of the Chinese internal market is tapped. This market would not be subject to the political and strategic restrictions of foreign markets, and potentially would be bigger than all other markets put together.

One part of this project would be to make full use of the huge pool of Chinese savings by moving part of that money from the banks to the insurance companies, which could provide better services for individuals. Now large savings pools are used by individuals as a hedge against accidents, unemployment and disease as well as retirement funds and all other services that could be provided by insurance.

As well, the conference heard, insurance companies as well as banks must put their funds to better work financing prudent and worthy projects. Such projects so far are mostly state-owned enterprises, producing about 20% of total gross domestic product, but sucking in about 70% of all outstanding bank credit. The SOEs are responsible from almost all non-performing bank loans. But pension money has to be put to good use, neither wasted on risky businesses that could lose the fund, nor invested with undue caution, thereby providing returns that are too low.

Non-state companies, if possible, try to avoid taking money from the banks, even if interest is relatively low. They do not want to be exposed to possible financial and tax controls, and are willing to pay 30% interest or more to moneylenders, loan sharks and pawnshops, to whom they can reveal their wealth without fear that the information will be passed on to some state officials.

Banks are also unwilling to lend to private firms: if an SOE doesn't pay up, the bank official will not be held responsible - the bank will extend the credit terms. But if a private company doesn't pay up, then the official could be go under review to establish if he had any dealings under the table with the failed company.

Thus the goal should be to bring to the banks the non-state companies that are now able to pay 30% interest and still grow. If their interest payments could be reduced to 5% they would grow even faster, more money would used, and possibly these companies, now largely responsible for the growth in pollution, would have the extra cash to pay for better and cleaner processes.

But as just stated, such companies currently prefer to deal with a loan shark, despite the exorbitant interest compared with that of a bank. In the first place, they often they can't produce for the bank well-documented proof of their activities and properties; and second, if they have such proof, they do not want it passed to the police, who might use their financial history to show that they bribed, stole, or tax-avoided their way to wealth.

The ideal cycle would be the following: (1) An efficient private company gets a loan at 5%, leaving it more cash for better, more efficient, energy-saving and cleaner equipment. (2) The bank has fewer bad loans and more cash in circulation, hence better profits. (3) The improved profits will allow better insurance services to clients for less cost. (4) With better insurance coverage, people will have to save less and thus have more to spend on consumption, thus boosting economic performance and the profits of the company at Step 1.

Without this path there is no increase of domestic demand, no better life for the poor people living in the countryside, no yuan revaluation and ultimately no economic development.

Therefore two things are necessary to improve the quality of credit and the quality of investment, which in turn can mobilize savings, moving them from bank accounts and mattress linings to insurance companies, and in turn increasing the service provided to low-income people, who then could have more cash to spend and improve their quality of life.

The two conditions are a law on property and some form of amnesty for past economic crimes. These are important, sensitive, yet crucial steps for China: without them, things could grind to a halt and ultimately make the country burst open, as only development and change can keep the social balance holding.

1. Lin Zhongbin, "Xin hu sidiande shenceng jiedu", Zhong guo shibao (Taiwan), May 1.

2. Zhao Chuandong, "Xinling duihua: Rang shijie liaojie zhongguo zongjiao", People's Daily, June 7, Page 4.

3. The Beijing Conference on China and the Global Economy, June 5-6, was organized by the Institute of World Economics and Politics, the Chinese Academy of Social Sciences, the Banking and Finance Research Institute, and the People's Bank of China, and sponsored by the Hong Kong Monetary Authority and the Monetary Authority of Singapore.

4. "Rebalancing Growth in China: A Three-Handed Approach", Olivier Blanchard and Francesco Giavazzi, September 16, 2005. (2006-06-28 Asia Times)


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