China’s Divided Authority

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Source: The Economist

 

By John Richardson

ONE of the blog’s Indian friends said last week, as he worries about his country’s political failings: “I sometimes wish were more like China, where, when the Politburo says ‘do this’ it is done.

“Here we, perhaps, have an excess of democracy. If we want to get a bridge or a power plant built it can take decades.”

But the blog is beginning to think that this might not be that straightforward a comparison.

During the supercycle, when all the economic stars were aligned in China’s favour, the various actors in China’s political system maybe found that it was in their interests to pull in the same direction.

Local governments, for instance, made a fortune from acquiring land for free or for next to nothing from rural residents, as state-owned enterprises (SOEs) made equally big piles of cash from strengthening their hold over the economy.

Now, though, China is at a crossroads as it seeks to reform its economy.

The problem is that the “vested interests” have strong motives to keep things as they are; and because of an opaque and complex political system, they could have a great ability to do so.

“Central ministries rank equal to provincial governments. So do many large SOEs, a fact which, according to a study by America’s Congressional Research Service, leads to vast regulatory difficulties,” writes The Economist in this article.

“SOEs, it said, sometimes outrank party and state leaders in their locales, and so are not bound by their orders. China’s five largest banks have comparable rank to the banking regulator, allowing them to resist oversight.”

(See the above chart explaining the power relationships between various different levels of government).

Local authorities may, therefore, be able to continue to build wasteful and inefficient infrastructure, while continuing to seize land to sell to property developers.

And the SOEs might add more wasteful industrial capacity, while continuing to channel money to companies set up on the side. SOE officials routinely carry several business cards, one for their official jobs and the others for their private businesses.

All of these scenarios seem likely to persist if Beijing, as it did in May-September, launches more economic stimulus packages because of worries about growth slowing due to economic reforms.

Meanwhile, China’s big state-owned banks, as we discussed yesterday and last week, may successfully resist efforts to reign-in financial speculation. This could substantially add to China’s bad-debt problems.

Much of the focus during the leadership handover was about which faction within the Politburo would gain the greatest control, as this was thought to be an important indication of China’s economic direction.

Was this the wrong focus?

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