China's '$2.7 bil­lion prob­lem' says ev­ery­thing

“The con­flicts of in­ter­est Li may carry to the top of Chi­nese power is a mi­cro­cosm of what is wrong with the most- pop­u­lous na­tion.”

The Pak Banker - - Front Page - Wil­liam Pe­sek

SAVVY in­vestors eye­ing the next big thing in China should con­sider cig­a­rettes, nico­tine gum and can­cer-treat­ment providers. That is the up­shot of a new Brook­ings In­sti­tu­tion re­port that raises burn­ing ques­tions about the fam­ily of Li Ke­qiang. He is expected to be named China's next premier at a Com­mu­nist Party congress that be­gins on Thurs­day. Li's brother, Li Kem­ing, is deputy di­rec­tor at China's State Tobacco Mo­nop­oly Ad­min­is­tra­tion, which dom­i­nates an in­dus­try that some health of­fi­cials es­ti­mate will kill 3.5 mil­lion peo­ple each year in the coun­try by 2030.

The con­flicts of in­ter­est Li may carry to the top of Chi­nese power is a mi­cro­cosm of what is wrong with the most­pop­u­lous na­tion. They are en­demic to al­most ev­ery chal­lenge fac­ing China's next lead­ers as they con­front the weak­est econ­omy in 30 years.

Is it re­ally plau­si­ble to think China's No. 2 of­fi­cial, the man charged with pub­lichealth af­fairs, will clamp down on an in­dus­try in which his brother plays such a piv­otal role? To an­swer "yes" ig­nores the all-in-the-fam­ily dy­namic im­per­il­ing China's fu­ture. One place where there is a dif­fer­ent re­sponse is the bl­o­go­sphere, which keeps re­fer­ring to China's "$2.7 bil­lion prob­lem," or "2.7B" to get around gov­ern­ment cen­sors fran­ti­cally try­ing to pre­vent peo­ple from read­ing an Oct. 25 New York Times ar­ti­cle about Li Ke­qiang's pre­de­ces­sor, Wen Ji­abao.

Wen's care­fully honed per­sona is that of a sim­ple man. The gov­ern­ment's fa­vored de­pic­tion is "Grandpa Wen" -- a car­ing, com­mit­ted and self­less pub­lic ser­vant. The Times piece de­scribed a darker sce­nario, one in which Wen's fam­ily came to con­trol as­sets of at least $2.7 bil­lion. China's re­sponse was as quick as it was de­fen­sive, dis­miss­ing the story as a po­lit­i­cally mo­ti­vated bid to pro­voke in­sta­bil­ity. The Wen ar­ti­cle fol­lowed a June 29 Bloomberg News re­port on the ac­cu­mu­lated wealth of the fam­ily of Vice Pres­i­dent Xi Jin­ping, who is likely to be in­stalled as party gen­eral sec­re­tary this week.

China should pay equal at­ten­tion to the causes of the can­cer eat­ing away at its po­lit­i­cal sys­tem and econ­omy, not just the symp­toms. Long­time Asia hands know that blam­ing for­eign me­dia of­ten is a smoke­screen or, worse, a sign of des­per­a­tion. Try as it may, China is hav­ing trou­ble con­trol­ling the nar­ra­tive, es­pe­cially in cy­berspace. Bar­ring Twit­ter, Face­book and YouTube only en­er­gizes ac­tivists and so­cial-me­dia out­lets to beat re­stric­tions on ex­pres­sion and dis­sent. If only Chi­nese in­dus­try dis­played the same en­tre­pre­neur­ial en­ergy in at­tack­ing the gov­ern­ment's in­sis­tence on censorship. The thing is, this story is out in the open. The scan­dal sur­round­ing Chongqing politi­cian Bo Xi­lai was tan­ta­liz­ing enough when it only fo­cused on his wife mur­der­ing a British busi­ness­man. It be­came dan­ger­ous, though, once pub­lic at­ten­tion turned to the mas­sive wealth amassed by Bo's fam­ily -- and how it was em­blem­atic of the vast riches swelling bank ac­counts of lead­ers who are com­mu­nist in name only. Bloomberg's web­site has been un­avail­able in China since the June story about the fam­ily riches of Xi. The in­ter­ests of Xi's ex­tended fam­ily, the ar­ti­cle said, in­clude in­vest­ments in com­pa­nies with to­tal as­sets of $376 mil­lion. That brings us back to Xi's likely right-hand man, Li Ke­qiang. Brook­ings se­nior fel­low Cheng Li (no re­la­tion to the Li broth­ers) ar­gues that Li's brother should be re­moved from his post at China's tobacco mo­nop­oly. The think­ing is, if you be­lieve China took a light touch to reg­u­lat­ing cig­a­rettes dur­ing the past 10 years, just wait un­til the next 10. That hardly bodes well for the in­ter­ests, or health, of China's peo­ple.

Steer­ing China be­tween 2013 and 2023 is ar­guably the tough­est job in the world. Re­ally, if Barack Obama and Mitt Rom­ney think fix­ing Amer­ica's troubles is a tall task, con­sider what awaits Xi and Li.

China's new lead­ers must do what Wen and Pres­i­dent Hu Jin­tao failed to: re­bal­ance an econ­omy pow­ered by a shaky mix of ex­ports, cheap la­bor and over­in­vest­ment; learn to grow with­out chok­ing amid cli­mate change; nar­row a dan­ger­ous gap be­tween rich and poor; rein in North Korea's worst im­pulses; re­visit the one- child pol­icy to ad­dress a fast-ag­ing pop­u­la­tion; head off an un­sus­tain­able pref­er­ence for boys that feeds a fright­en­ing gen­der gap; as­suage Asian neigh­bors fear­ful of China's rise and ex­pand­ing ter­ri­to­rial claims; ease state con­trol of banks; im­prove the ed­u­ca­tion sys­tem; find a use for $3.3 tril­lion of cur­rency re­serves; and achieve some sem­blance of do­mes­tic food se­cu­rity. None of these changes is pos­si­ble un­less China does two things. First, it must sort out how to hand over power to a new gen­er­a­tion of elites with­out the be­hind-the-scenes in­fight­ing that dis­tracts at­ten­tion from en­act­ing vi­tal re­forms. Sec­ond, China must tackle the toxic re­la­tion­ship be­tween money and power and the in­evitable cor­rup­tion it breeds.

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