Can China's centre hold?

Next year, China’s leadership changes. But as Chinese scholars, experts and officials are constantly reminding me, we should not expect any sudden or major shift in government policy. The rigid structure of Chinese government means that policy decisions are locked into place before leaders get a chance to shape them. And former leaders retain positions of influence and power behind the scenes.

Xi Jinping will likely become the international face of the Communist party, but Hu Jintao will, like his predecessors, retain a powerful position within the Chinese system. World leaders will find themselves dealing with a new character, though, as a Shanghai-based scholar told me: “leaders are not that important in foreign policy formation.”

Beneath this smooth exterior, however, there are fierce debates within the party about new “interest groups” in the system. This is shorthand for the growing fractionalisation in Chinese policymaking, a result of an increasing diffusion of power throughout the country. On the face of it, China remains a one-party state ruled by a central Politburo Standing Committee of nine men, but in reality an increasing number of actors influence the decision-making process.

Understanding the different roles these actors play is a parlour game among China watchers, but the trend is undeniably important. In a report late last year, entitled Inside the growth engine: a guide to China’s regions, provinces and cities, British bank HSBC advised: “anyone hoping to conclude a business deal in China…don’t assume you only have to deal with decision-makers in Beijing.”

A few months after the report came out, I met a local business representative from a European company in China. He described business in Shanghai and nearby provinces where his company had operations as typically opaque: what happens on the ground often differs substantially from the official line issued in Beijing. As the old Chinese saying goes: “the hills are high and the Emperor is far away.”

The regions’ newfound power is not all that surprising. China’s growth, after all, is mostly generated in a few coastal provinces. Guangdong, the nation’s powerhouse, accounts for over ten per cent of GDP and almost 30 per cent of the country’s exports (according to 2010 and 2009 figures respectively). This gives the regional governor a certain amount of power both domestically and on the international stage.

In October last year, Guangdong Governor Huang Huahua made a trip through Egypt, Israel and India in which he signed deals worth $9.12 billion and was hosted like a visiting state leader. During the trip he met with Israeli President Shimon Peres who “spoke highly of Guangdong’s energetic economy,” according to the official press release, and the two discussed ways that Israel and Guangdong could cooperate better on high technology development.

In some cases, provinces seem to be resisting central rule. On a trip to the Xinjiang province in China’s far west last year, a local guide told me how weak the current leadership in Beijing was and how the then Xinjiang Communist Party chief Wang Lequan would refuse to pay money earned in resource-rich Xinjiang to Beijing. I have been unable to confirm the details independently, but they resonate with a strong sense of independence from the center I found in the province. In a separate instance, a foreign researcher friend told me how Beijing policymakers had taken an interest in a project they were working on, which provided insights into the regional government in Yunnan province capital Kunming—they were grateful for insights on what was happening in the southern province.

State-Owned Enterprises (SOEs) are also an increasingly powerful counterweight to the central government. They control about a third of total enterprise assets in China. The largest are under the direction of the State-Owned Assets Supervision and Administration Commission (SASAC)—a body the Chinese government established in 2003 to try to rein in the SOEs, which accounted collectively for about 60 per cent of GDP in 2009. Usually run by senior Communist party members, the sheer size of the SOEs gives their leaders disproportionate importance and in some cases seems to put them beyond state control.

Liu Zhenya is a particularly well-placed SOE head: he is CEO of China’s State Grid Corporation, the world’s largest utility company, ranked 7th in Fortune’s list of the top 500 global corporations. Having worked his way up through Shandong’s electricity industry, Liu turned the power companies into conglomerates managing billions in assets. During his time as head of Shandong Electric Power, he diversified the company’s portfolio into finance and securities, IT, business travel, real estate, culture and a local football team.

When State Grid took the same approach outside China, its attempts to move into copper mining in Chile were blocked. According to company insiders quoted in the Financial Times, it was Chinese regulators who blocked the deal, saying that State Grid was not a mining company. Characterised in the Chinese press as a “Frankenstein” company, State Grid has become almost a state within a state. Fleets of limousines shuttle executives around high-end compounds where they dine at private restaurants and consider the fates of their one-and-a-half million staff.

The People’s Liberation Army (PLA), meanwhile, has also emerged as a strong force on the global stage. As well as rhetorical sparring with the United States, it has started to assert itself along China’s sea borders with its south east Asian neighbours, much to their and others’ concern. An academic from the Party School suggested that the PLA’s assertiveness in recent years stems from a bargain they made with political leaders under Deng Xiaoping.

According to the Party School professor, when Deng was pushing his economic reforms through in the 1980s and 1990s, he asked the military to accept tighter budgets while the party focused on the economy. Now that the economy has picked up, the PLA is having its moment in the sun and flexing its muscles. When former US defence secretary Robert Gates visited China in January this year, the PLA Air Force showed off their new stealth fighter jet, in an apparent display of one-upmanship. It put Hu Jintao in an awkward position: he was apparently as surprised as his American guests when the subject came up in a meeting.

The key lesson here is that nine men in Beijing are increasingly finding the current political system difficult to control. The booming economy has brought prosperity to China, but it has also meant that there are more powerful actors in the country than before. Without the checks and balances that a free press or a more open political system would provide, it is difficult to keep track of them. Although the internet could (and in some limited cases does) fill this gap, strict government controls mean that it is not a completely reliable watchdog. Now the Politburo Standing Committee finds itself struggling to balance an ever more complex set of power networks around the country, as it tries to keep control at the centre.