Xi is tossed between economy and party

Top executives of major state enterprises retain positions on the communist party’s central committee

When President Xi Jinping of China took power almost five years ago, he quickly gained control of the commanding heights of the Chinese partystate, taking charge of the military, foreign policy, domestic security and a fearsome anticorruption commission.

In centralising decision making in his office, Xi also grabbed hold of something his two immediate predecessors never did during their lengthy stays in office: He placed himself in charge of economic policy.

Xi’s authoritarian instincts have served him well politically. Chinese leaders from Mao Zedong onward have always had rivals among senior leaders. As he looks ahead to securing a second five-year term at the Communist Party Congress in the fall, Xi appears to have none.

With this enormous power, Xi has pushed through once-in-a-generation changes in military structure and personnel, built a new national security council, pressed China’s claims in the South China Sea and overseen the largest antigraft campaign since the 1949 Communist Revolution.

When it comes to economic policy, though, Xi hasn’t been nearly as tough and adventurous as he has on the political front. Understanding why provides insight into the enduring weaknesses of Xi and the Communist Party: For all of its success, the economy remains an uneasy hybrid of Mao and markets that is difficult to recalibrate without substantial risk to single-party rule.

The Chinese economy has developed great strengths that have allowed it to defy the doomsayers since the 1990s. Property rights have been liberalised to permit home-ownership, and behind the party’s formidable internet firewall, entrepreneurs have built a politics-free, app-friendly economy that even apparatchiks can like.

The most profound change has been the growth in the private sector. While employment in state businesses fell by 63 per cent in the decade since 1998, according to a recent study, jobs in private and foreign companies rose by 644 per cent and 202 per cent respectively. In other words, business has supplanted the state as the main driver of growth and employment, and incomes and consumption have risen.

Still, despite the private sector’s growth, the state remains at the heart of China’s economy, accounting for at least one third of industrial output, much of it from companies that struggle to stay open on commercial grounds alone.

Keeping alive many of the so-called zombie companies has a huge cost, for China and the rest of the world. In place of consumption, the system retains a bias toward investment, and along with it, overcapacity, which then spills out into the global economy.

China’s zombie companies are not generally household names. They are usually smaller businesses, away from the thriving coastal areas, in the northern and central provinces, clustered in industries like steel, cement, coal, metals and glass.

“The more they lose, the more they can borrow — that’s the only way they can survive,” wrote economist He Fan, referring to zombie companies, who estimates that at least 10 per cent of all locally listed companies are like the “walking dead.”

The determination to keep the state sector going underpins the economy’s chronic ailments: an addiction to debt to maintain high growth and the administrative state’s reliance on the state sector for stimulus when private investment falls.

Over the past year, at a time when the economy was slowing, the state sector has been resurgent, with investment up nearly 25 per cent year-onyear, while private companies managed a rise of only roughly three per cent.

Xi has displayed little stomach for taking on the state sector. The most obvious explanation is ideological: As a career Communist, he retains a bias toward state ownership as a form of political control.

The state sector is a powerful special interest in its own right, entangled deeply in the political and economic systems in ways that make it harder to challenge and scale back.

A party cadre might be running a state-owned oil company one day, and then be appointed as a provincial governor the next. The top executives of telecom and energy companies have swapped jobs overnight in recent years at the party’s direction, the American equivalent of the CEO’s of Sprint and Verizon waking up in the morning running one company and going to bed in charge of its competitor.

Many zombie companies would have closed long ago if China had a financial system that allocated capital according to an enterprise’s viability. But for Xi and the Chinese political leadership, commercial viability is just one consideration. Just as important is the political stability of the localities in which they reside.

Some of Xi’s supporters argue he has subordinated economic reform to party consolidation and anticorruption in his first term for good reason. By building a stronger and cleaner Communist Party, they say, Xi is laying the foundation for substantive economic reform in his second term.

But party consolidation does not bode well for economic or legal reform, whatever the sequencing may be. The opposite is the case. Xi’s party consolidation instinctively pushes economic policy-making in a more conservative direction.

Put another way, Xi is not softening the party up to share power more broadly beyond the anointed few. Ahead of a second five-year term, due to start at the end of the year, he is hardening the system to make sure that it survives into the future in the elite’s hands, an outcome that will only hurt the economy.

Ultimately, Xi will need to decide whether he wants to be a political strongman or an economic reformer. He can be one or the other, but not both.

President Xi has displayed little stomach for taking on the state sector. The most obvious explanation is ideological: As a career Communist, he retains a bias toward state ownership as a form of political control