Feb 24

Internal Divisions and the Chinese Stimulus Plan

Written by Steve on Tuesday, February 24th, 2009 at 9:29 pm
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I ran across this article today on Stratfor, the geopolitical global intelligence service. It discussed a side of China’s political and economic situation that we have touched upon here and there but never delved into that deeply. It highlights some of the intraparty differences within the CPC and expands on the philosophies of those factions.

I’d like to hear everyone’s comments, and especially those from our bloggers living in China, about how they view the two primary economic factions and their strategies within the party. There are several links within the article that take you to further analyses of those particular subjects.

Internal Divisions and the Chinese Stimulus Plan

February 23, 2009
By Rodger Baker and Jennifer Richmond

Due in large part to fears of dire consequences if nothing were done to tackle the economic crisis, China rushed through a 4 trillion yuan (US$586 billion) economic stimulus package in November 2008. The plan cobbled together existing and new initiatives focused on massive infrastructure development projects (designed, among other things, to soak up surplus steel, cement and labor capacity), tax cuts, green energy programs, and rural development.

Ever since the package was passed in November, Beijing has recited the mantra of the need to shift China’s economy from its heavy dependence on exports to one more driven by domestic consumption. But now that the sense of immediate crisis has passed, the stimulus policies are being rethought — and in an unusual development for China, they are being vigorously debated in the Chinese media.

Debating the Stimulus Package

In a country where media restrictions are tightening and private commentary on government officials and actions in blogs and online forums is being curtailed, it is quite remarkable that major Chinese newspaper editorials are taking the lead in questioning aspects of the stimulus package.

The question of stimulating rural consumption versus focusing the stimulus on the more economically active coastal regions has been the subject of particularly fierce debate. Some editorials have argued that encouraging rural consumption at a time of higher unemployment is building a bigger problem for the future. This argument maintains that rural laborers — particularly migrant workers — earn only a small amount of money, and that while having them spend their meager savings now might keep gross domestic product up in the short term, it will drain the laborers’ reserves and create a bigger social problem down the road. Others argue that the migrant and rural populations are underdeveloped and incapable of sustained spending, and that pumping stimulus yuan into the countryside is a misallocation of mo ney that could be better spent supporting the urban middle class, in theory creating jobs through increased middle-class consumption of services.

The lack of restrictions on these types of discussions suggests that the debate is occurring with government approval, in a reflection of debates within the Communist Party of China (CPC) and the government itself. Despite debate in the Chinese press, Beijing continues to present a unified public face on the handling of the economic crisis, regardless of internal factional debates. Maintaining Party control remains the primary goal of Party officials; even if they disagree over policies, they recognize the importance of showing that the Party remains in charge.

But, as the dueling editorial pages reveal, the Party is not unified in its assessment of the economic crisis or the recovery program. The show of unity masks a power struggle raging between competing interests within the Party. In many ways, this is not a new struggle; there are always officials jockeying for power for themselves and for their protégés. But the depth of the economic crisis in China and the rising fears of social unrest — not only from the migrant laborers, but also from militants or separatists in Tibet and Xinjiang and from “hostile forces” like the Falun Gong, pro-Democracy advocates and foreign intelligence services — have added urgency to long-standing debates over economic and social policies.

In China, decision-making falls to the president and the premier, currently Hu Jintao and Wen Jiabao respectively. They do not wield the power of past leaders like Mao Zedong or Deng Xiaoping, however, and instead are much more reliant on balancing competing interests than on dictating policy.

Party and Government Factions

Hu and Wen face numerous factions among the Chinese elite. Many officials are considered parts of several different factional affiliations based on age, background, education or family heritage. Boiled down, the struggle over the stimulus plan pits two competing views of the core of the Chinese economy. One sees economic strength and social stability centered on China’s massive rural population, while another sees China’s strength and future in the coastal urban areas, in manufacturing and global trade.

Two key figures in the Standing Committee of the Politburo (the center of political power in China), Vice President Xi Jinping and Vice Premier Li Keqiang, highlight this struggle. These two are considered the core of the fifth-generation leadership, and have been tapped to succeed Hu and Wen as China’s next leaders. They also represent radically different backgrounds.

Li is a protege of Hu and rose from the China Youth League, where Hu has built a strong support base. Li represents a newer generation of Chinese leaders, educated in economics and trained in less-developed provinces. (Li held key positions in Henan and Liaoning provinces.) Xi, on the other hand, is a “princeling.” The son of a former vice premier, he trained as an engineer and served primarily in the coastal export-oriented areas, including Hebei, Fujian and Zhejiang provinces and Shanghai.

In a way, Li and Xi represent different proposals for China’s economic recovery and future. Li is a stronger supporter of the recentralization of economic control sought by Hu, a weakening of the regional economic power bases, and a focus on consolidating Chinese industry in a centrally planned manner while spending government money on rural development and urbanization of China’s interior. Xi represents the view followed by former President Jiang Zemin and descended from the policies of Deng. Under that view, economic activity and growth should be encouraged and largely freed from central direction, and if the coastal provinces grow first and faster, that is just fine; eventually the money, technology and employment will move inland.

Inland vs. the Coast

In many ways, these two views reflect long-standing economic arguments in China — namely, the constant struggle to balance the coastal trade-based economy and the interior agriculture-dominated economy. The former is smaller but wealthier, with stronger ties abroad — and therefore more political power to lobby for preferential treatment. The latter is much larger, but more isolated from the international community — and in Chinese history, frequently the source of instability and revolt in times of stress. These tensions have contributed to the decline of dynasties in centuries past, opening the space for foreign interference in Chinese internal politics. China’s leaders are well aware of the constant stresses between rural and coastal China, but maintaining a balance has been an ongoing struggle.

Throughout Chinese history, there is a repeating pattern of dynastic rise and decline. Dynasties start strong and powerful, usually through conquest. They then consolidate power and exert strong control from the center. But due to the sheer size of China’s territory and population, maintaining central control requires the steady expansion of a bureaucracy that spreads from the center through the various administrative divisions down to the local villages. Over time, the bureaucracy itself begins to usurp power, as its serves as the collector of taxes, distributor of government funds and local arbiter of policy and rights. And as the bureaucracy grows stronger, the center weakens.

Regional differences in population, tax base and economic models start to fragment the bureaucracy, leading to economic (and at times military) fiefdoms. This triggers a strong response from the center as it tries to regain control. Following a period of instability, which often involves foreign interference and/or intervention, a new center is formed, once again exerting strong centralized authority.

This cycle played out in the mid-1600s, as the Ming Dynasty fell into decline and the Manchus (who took on the moniker Qing) swept in to create a new centralized authority. It played out again as the Qing Dynasty declined in the latter half of the 1800s and ultimately was replaced — after an extended period of instability — by the CPC in 1949, ushering in another period of strong centralized control. Once again, a more powerful regional bureaucracy is testing that centralized control.

The economic reforms initiated by Deng Xiaoping at the end of the 1970s led to a three-decade decline of central authority, as economic decision-making and power devolved to the regional and local leadership and the export-oriented coastal provinces became the center of economic activity and power in China. Attempts by the central government to regain some authority over the direction of coastal authorities were repeatedly ignored (or worse), but so long as there was growth in China and relative social stability, this was tolerated.

With Hu’s rise to power, however, there was a new push from the center to rein in the worst of excesses by the coastal leaders and business interests and refocus attention on China’s rural population, which was growing increasingly disenfranchised due to the widening urban-rural economic gap. In 2007 and early 2008, Hu finally gained traction with his economic policies. The Chinese government subsequently sought to slow an overheating economy while focusing on the consolidation of industry and the establishment of “superministries” at the center to coordinate economic activity. It also intended to put inland rural interests on par with — if not above — coastal urban interests. When the superministries were formed in 2008, however, it became apparent that Hu was not omnipotent. Resistance to his plans was abundantly evident, illustrating the power of the entrenched bureaucratic interests.

Economic Crisis and the Stimulus Plan

The economic program of recentralization and the attempt to slow the overheating economy came to a screeching halt in July 2008, as skyrocketing commodity prices fueled inflation and strained government budgets. The first victim was China’s yuan policy. The steady, relatively predictable appreciation of the yuan came to a stop. Its value stagnated, and there is now pressure for a slight depreciation to encourage exports. But as Beijing began shaping its economic stimulus package, it became clear that the program would be a mix of policies, representing differing factions seeking to secure their own interests in the recovery plan.

The emerging program, then, revealed conflicting interests and policies. Money and incentives were offered to feed the low-skill export industry (located primarily in the southeastern coastal provinces) as well as to encourage a shift in production from the coast to the interior. A drive was initiated to reduce redundancies, particularly in heavy industries, and at the same time funding was increased to keep those often-bloated industrial sectors afloat. Overall, the stimulus represents a collection of competing initiatives, reflecting the differences among the factions. Entrenched princelings simply want to keep money moving and employment levels up in anticipation of a resurgence in global consumption and the revitalization of the export-based economic growth path. Meanwhile, the rur al faction seeks to accelerate economic restructuring, reduce dependence on the export-oriented coastal provinces, and move economic activity and attention to the vastly underdeveloped interior.

Higher unemployment among the rural labor force is “proving” each faction’s case. To the princelings, it shows the importance of the export sector in maintaining social stability and economic growth. To the rural faction, it emphasizes the dangers of overreliance on a thin coastal strip of cheap, low-skill labor and a widening wealth gap.

Fighting it Out in the Media

With conflicting paths now running in tandem, competing Party officials are seeking traction and support for their programs without showing division within the core Party apparatus by turning to a traditional method: the media and editorials. During the Cultural Revolution, which itself was a violent debate about the fundamental economic policies of the People’s Republic of China, the Party core appeared united, despite major divisions. The debate played out not in the halls of the National People’s Congress or in press statements, but instead in big-character posters plastered around Beijing and other cities, promoting competing policies and criticizing others.

In modern China, big posters are a thing of the past, replaced by newspaper editorials. While the Party center appears united in this time of economic crisis, the divisions are seen more acutely in the competing editorials published in state and local newspapers and on influential blogs and Web discussion forums. It is here that the depth of competition and debate so well hidden among the members of the Politburo can be seen, and it is here that it becomes clear the Chinese are no more united in their policy approach than the leaders of more democratic countries, where policy debates are more public.

The current political crisis has certainly not reached the levels of the Cultural Revolution, and China no longer has a Mao — or even a Deng — to serve as a single pole around which to wage factional struggles. The current leadership is much more attuned to the need to cooperate and compromise — and even Mao’s methods would often include opportunities for “wayward” officials to come around and cooperate with Mao’s plans. But a recognition of the need to cooperate, and an agreement that the first priority is maintenance of the Party as the sole core of Chinese power (followed closely by the need to maintain social stability to ensure the primary goal), doesn’t guarantee that things can’t get out of control.

The sudden halt to various economic initiatives in July 2008 showed just how critical the emerging crisis was. If commodity prices had not started slacking off a month later, the political crisis in Beijing might have gotten much more intense. Despite competition, the various factions want the Party to remain in power as the sole authority, but their disagreements on how to do this become much clearer during a crisis. Currently, it is the question of China’s migrant labor force and the potential for social unrest that is both keeping the Party center united and causing the most confrontation over the best-path policies to be pur sued. If the economic stimulus package fails to do its job, or if external factors leave China lagging and social problems rising, the internal party fighting could once again grow intense.

At present, there is a sense among China’s leaders that this crisis is manageable. If their attitude once again shifts to abject fear, the question may be less about how to compromise on economic strategy than how to stop a competing faction from bringing ruin to Party and country through ill-thought-out policies. Compromise is acceptable when it means the survival of the Party, but if one faction views the actions of another as fundamentally detrimental to the authority and strength of the Party, then a more active and decisive struggle becomes the ideal choice. After all, it is better to remove a gangrenous limb than to allow the infection to spread and kill the whole organism.

That crisis is not now upon China’s leaders, but things nearly reached that level last summer. There were numerous rumors from Beijing that Wen, who is responsible for China’s economic policies, was going to be sacked — an extreme move given his popularity with the common Chinese. This was staved off or delayed by the fortuitous timing of the rest of the global economic contraction, which brought commodity prices down. For now, China’s leaders will continue issuing competing and occasionally contradictory policies, and just as vigorously debating them through the nation’s editorials. The government is struggling with resolving the current economic crisis, as well as with the fundamental question of just what a new Chinese economy will look like. And that question goes deeper than money: It goes to the very role of the CPC in China’s system.

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17 Responses to “Internal Divisions and the Chinese Stimulus Plan”

  1. poster Says:

    Classic rich vs. poor. In every society.

  2. DJ Says:

    For background information, the following is a copy-and-paste of my translation of the ten-point summary of the Chinese stimulus plan last November.

    1. Accelerate housing development for disadvantaged populations by increasing government support for low-incoming housing, accelerating redevelopment in communities of shacks, building permanent residence for nomadic population, expanding trial programs of overhauling dangerous buildings in rural areas.
    2. Accelerate rural infrastructure development by increasing efforts at bio-gas, safe drinking water and rural road developments, improving rural power network, accelerating major water use projects such as the south-north water transfer project, reinforcing dangerous reservoir dams, strengthening large scale irrigation systems, and expanding poverty alleviation and development efforts.
    3. Accelerate major infrastructure developments such as railroad, highway and airports by focusing on a number of passenger and coal transport lines and railroads in the western China, improving the highway network, building airports in central and western China, and accelerating urban power network overhaul.
    4. Accelerate development of medical, cultural and educational fields by strengthening medical service at community level, speeding up rural school building overhaul in central and western China, and promoting development of special education schools in those areas.
    5. Enhance ecological environment development by building more urban sewage and garbage treatment facilities, speeding up control and treatment of water pollution, strengthening protection of forest resources, and supporting key energy saving and emission reduction projects.
    6. Accelerate innovation and structural adjustment by supporting high-tech industry development, improving manufacturing technologies, and supporting development of the service sector.
    7. Accelerate various reconstruction projects in the areas affected by the Sichuan earthquake.
    8. Increase the income of urban and rural residents by raising the minimum grain purchasing prices next year, increasing various agricultural subsidies, improving social security services for low-income groups, increasing subsidies for insurances, and continuing increase the level of basic pensions provided to retirees and subsistence allowances standards for qualifying citizens.
    9. Implement value-added tax reform and restructuring in all industries and in all regions to encourage technical improvement and retooling in enterprises and to reduce burdens on them by 120 Billion RMB.
    10. Increase financial sector support to the economic growth by lifting restrictions on loans provided by commercial banks, expanding credit by reasonable scale, strengthening loan support for major projects, agricutural work, median and small enterprises, mergers and acquisitions, and cultivate consumer consumption credit growth.
  3. Steve Says:

    Thanks for posting your translation, DJ. It fits in nicely with the content of the article. Where do you feel the majority of the money will go, to rural or urban areas?

  4. DJ Says:


    It’s difficult to tell, quantitatively, the breakdown of money to be spent in the plan. Personally, I would like to see a strong effort to improve incoming level and living standard in the rural and west China. It’s not only the right and long overdue thing to do, but also necessarily a prerequisite for long term growth in China. In particular, I feel the health care system in China needs major overhaul to give all citizens, rural or urban, a sense of safety in cases of major illness and injuries. This alone will go a long way towards encourage people to save less and spend more.

  5. Charles Liu Says:

    I have heard the Chinese government is giving voucher to rural household to subsidize appliance purchase, and stimulate consumption.

  6. TonyP4 Says:

    @DJ. #2.

    In general it is quite good. Just like to throw in some ideas before I go to sleep after watching the great speech from our president on similar topic.

    # We should have more laws/enforcements: inspectors on quality of food, export goods… , inspectors on pollution control.

    # fight corruption – local and central government.

    # business incentives is a two-blade sword. A business cannot depend on incentives for ever.

    # national grid system to transport electricity to the next level.

    # transportation of coal is still most effective via water way.

    # some airports are over-built. It is not the most cost effective way to move people.

    # HSR is effective for China due to the population density. SH to Beijing is expected to speed up construction due to the stimulation package.

    # A lot of new laws/enforcement that we learn in past disasters, like building codes for earth quake zone area.

    # Resolve energy cost problem. It is not a problem now when a barrel of oil is less than $40, but this price could more than double in a year.

    # how to re-deploy the re-migrated workers.

    Just random thoughts.

  7. foobar Says:

    #5 Charles,

    It’s an ongoing program that started before the crisis began, when people in China were still worrying about the economy overheating.

    I’m not sure how much info you can get from the official website, but here it is

  8. TonyP4 Says:

    Only see one comment after I wake up. Business may not be a popular topic here beside human right, Tibet…

    General summary.

    Building is not everything (same as the tallest building in the world, etc).

    – Build what are safe (withstand earthquake, no new bridges/sub ways to be collapsed)

    – Quality inspection. Saying pennies in milk, toy could collapse the entire industry not to mention the prestige of Chinese products.

    – Maintenance is important. A new road cannot be used during winter time due to no snow removal is not a good road.

    Yes, it would boost the spirit of its citizens by more and more building. However, they’re more cost effective ways to get the return with less expenses.

  9. Steve Says:

    I found it very interesting that Wen’s position was in jeopardy when commodity prices were so high. I never considered he was in any trouble.

    I just wonder if Xi is definitely “in” as the next Chairman or if Li has a chance, with Hu’s support, to take the #1 position. And how can they work together running the country if they have completely different outlooks for China’s future? Would whoever initially becomes Chairman consolidate power and ultimately sack the other? Is this a intra-party struggle in the making? If the economy gets worse and there are demonstrations and riots, whose future prospects does that hurt more, Xi or Li?

  10. Inst Says:

    I’ll be some sort of stupid simplificationist. Technocrats (pro-export) for growth, populists for stability. What does China need at this point, or what can China afford? I’m nonplussed that a princeling is sitting at the head of the technocrats, unfortunately, but it would be best for the development of the CPC if the technocrats and populists alternate roles. On the other hand, what I’m hearing from the foreign media is that the social situation in China is nearing its breaking point, and regarding the recession, it’s not the fall that kills you, it’s the angry unemployed at the end.

  11. Inst Says:

    In retrospect, no matter which faction wins out, they should at least have the civility to give the premier slot to the loser. Putting the premier to be a populist would be pretty good, as allowing a cult of personality to form around the chairman is fairly dangerous.

  12. Inst Says:

    Oh my god. Xi Jinping is insane! He ran his mouth off with an anti-Western diatribe while in Latin America! He definitely can’t be allowed to touch the Chairman position if he’s planning to put China into conflict with the United States; the United States expects a conflict in the 2010-2015 timeframe, the PLA is a shambles, the Chinese economy is one-fifth the size of the United States’, China’s international image is on the wane while Chairman Obama is much beloved across the European capitals…

    Yes, you can resent worldwide anti-Chinese sentiment, but you don’t have the rhetorical capability to, as this website attempts, move mountains.

  13. uln Says:

    Steve, thanks for that article, I don’t know how it has taken me so long to see it.

    This is the eternal discussion about who really rules China, and there is some useful info in this article. However, even more useful would be to have the souces on which it is based. I have the feeling that the writer is for the most part tea leave reading like every one of us.

    The thing is, fair enough, many of the newspapers are writing different opinions about the crisis and about how to deal with the stimulus package, and myself I got excited in the past by some of these articles. But in reality, each of them is not necessarily dictated by high ranking CPC ganbus. If you read sources like China media project and the likes, you will see that actually editorials in the Chinse newspapers have some leeway to speak about politics, as long as they don’t go against “the four unchangeables”, “the three represents” or the “five unmistakeables” (I forget which is which)

    Don’t know, I guess the day we start seeing radically contradicting articles in the Peoples Daily we can begin to worry. In the meantime, the 9 guys in the standing comitee will continue to decide everything behind closed doors and nobody has a solid basis to know what is really going on in there. The article says “decision making falls on Hu and Wen”, but even this is not at all sure. There is a balance of power in the Politburo, and I imagine that Hu, like all the others, needs to see that he has his supports in the party and in the army before taking any important action.

    Related to this, it is interesting to see that Wen looks for support in a rather unprecedented way: by making a popular hero of himsef. It it is true that Wen Jia Bao has been seriously contested in the party, mainly for some of his statements about human rights and other sensitive issues. Elite Politics BLog had some interesting info about this some time ago. Do a search there.

    An interesting point here is that, if finally the power shifts in the politburo and they decide to oust Wen Jiabao, that might be the trigger, the “spark” for country wide revolts that I was talking about some time ago. But of course, this will not happen now, the present social economic situation is far from being critical, and the people are not nearly desperate enough.

    You see, this is what I mean by tea leave reading, and seriously, I think that is what the guys at Stratfor are doing too. Except that they earn big bucks for their guesses and I don’t 🙂

  14. uln Says:

    Another detail makes me think this guy has not been in China for a while:
    ” In modern China, big posters are a thing of the past, replaced by newspaper editorials.”

    Well, not really. China is still full of those 大字报,sure not as violent as during the cultural revolution, but still with political content. Let’s build a harmonius communist society, let’s have a sustainable blah blah, the 3 represents, the 4 unimaginables, the 5 disreputables, etc.

    Again, the day we start seeing more precise signs pointing at contradictory policies, perhaps that day we should also start to worry. And hoard 2 months worth of canned tuna.

  15. Steve Says:

    Hi uln~

    Thanks for the comments. I think in predicting the future, everyone who tries is “tea leaf reading” as you say. I like Stratfor for a couple of reasons:

    1. They look at the world in a geopolitical fashion without getting emotional or ideological. Click on the “Tibet” link in the body of the article for what I think is a very accurate portrayal of Chinese interests in both Tibet and Xinjiang, which get past a lot of the emotional and historical claptrap that passes for discussion about those areas. I think Stratfor’s reasons for Chinese behaviour are more in line with the reality of decision making in Beijing.

    2. They’ll go against the tide of analysis other publications are spewing and say things that no one else is saying. They stay away from the “us vs. them” simplifications.

    Stratfor’s business model is to take all the analysis and distill it into a readable summation of a current situation. Their online readers aren’t looking for footnotes, though I believe they are available if you are a paying customer. These are not university research papers.

    As far as your other points, I think they are excellent and I agree with your ideas. Stratfor IS paid to read the tea leaves but I guess if their readings have been accurate in the past, that’s a good reason to keep seeing what they have to say. We all draw upon various sources, but too often I read the same thing from most of them and think they just copy from each other. Stratfor tends to have their own viewpoint so at least it gives me a new perspective to consider.

    I never saw many (if any) posters in China, but I also didn’t spend much time in Beijing. Where in China have you seen them? Thanks again for the input~

    “And hoard 2 months worth of canned tuna.” Ugh, I think my wife would hoard two months worth of those salty little fish that are smaller than sardines and are silver with their little bug eyes. I think I’ll just fast. 😉

  16. uln Says:

    Ok, I will follow your advise and give a try to Stratfor, perhaps I like them after all. I have to admit that up to now I haven’t read anything from them, apart from the article above.

    As for the propaganda posters: I don’t mean the beautiful artistic ones with pictures of the proletarian forces, those are long gone. I just meant the big long signs in white/yellow characters on red plastic that you can find all over the place, even sometimes in central Shanghai.

    Some of them don’t have political content, but some do. For example:

    “Let’s all work to build a harmonious society and a prosperous Xujiahui district”
    “Support the communist party, support the thought of Scientific Development”

    OK, I don’t have the signs in front of me right now, so I wouldn’t stand for the accuracy of the 2 examples above, I might be mixing things seen on different signs. But you get the idea.

  17. TonyP4 Says:

    Economically, today (3-14-09) is a date for Chinese to remember.

    The higher hope of Chinese stimulus plan drives the Asian markets up and even the US market is up 3.5% (still half an hour to go). 20 years ago, what it happened in China had no influence on the global economy. What a nice change! And we’re all proud of it.

    All the sectors in the world that would benefit from the Chinese plan rise such as steal, oil, commodities… Hope China leads the world to move us from the global recession. Hope in a hopeless world.

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