Contact is taking a holiday!

A picture of Chinese President Xi Jinping on display at a military museum, Beijing, Oct. 24, 2016 (AP photo by Andy Wong).

world politics review, 15 November 2016

Standing at about 6 feet tall, Chinese President Xi Jinping cuts an imposing figure, especially compared to the famously diminutive Deng Xiaoping, the transformative leader who, after Mao Zedong’s death in 1976, guided China through monumental reforms from 1978 until his formal retirement in 1989. Xi’s baritone and precise Mandarin, surprisingly uncommon for former top Chinese leaders, projects added self-assuredness and gravitas. This aura of confidence seems only appropriate for someone of Xi’s political stock: a princeling descended from communist revolutionaries who were present at the creation of modern China under Mao.

Perhaps that is why many commentators have deigned Xi a Maoist, pointing out that he has created a cult of personality and abandoned the collective leadership model of rule by consensus that has characterized the Chinese Communist Party (CCP) since Deng’s days. While Xi has certainly amassed significant political power—and is perhaps now the strongest leader since Deng—such comparisons are overwrought and largely inaccurate. Xi is no revolutionary like Mao, and in fact, hews closer to Deng’s vision of China’s future than he is usually given credit for.

Like Deng, Xi is audaciously pursuing a platform that can be simply distilled as “Make China Great Again.” This isn’t some Trumpian sloganeering or an attempt to fabricate a dystopian vision of the current state of the nation or an imagined past. Instead, Xi is an earnest disciple in a continuous line of leaders who sought to recapture the greatness of China that many inside the CCP believe had been stifled over the past two centuries. Put another way, Xi wants to shepherd a Chinese renaissance to regain the “wealth and power” that, according to scholars Orville Schell and John Delury, once defined China’s status in the world.

Since taking office in November 2012, Xi has so far pursued the Make China Great Again project with discipline, basing his strategy on three pillars: fixing the party, transforming the economy, and asserting China as a global player. An agenda of this scope and ambition is unlikely to be completed during Xi’s tenure, which theoretically will last a decade. Even so, Xi appears to believe that realizing the vision of a powerful and prosperous China demands a “disrupter-in-chief” at the helm.

Indeed, from the moment he assumed power, Xi hinted strongly that he was intent on shaking things up, particularly when it came to the CCP itself. In the four years since, Xi and his administration have clearly disrupted business as usual across the political, economic and foreign policy realms to an extent that few anticipated.

Rejuvenating a 95-Year-Old Party

Ever since Deng’s rule, governance and growth have been the main preoccupation of China’s leaders. For the better part of the past 25 years, the emphasis was placed squarely on growth as the primary source of legitimacy for the ruling CCP, while governance became inextricably linked to economic growth. In other words, the party instilled a performance culture centered on getting the economy right, and promoted its members based on clear metrics, or key performance indicators, in consultant-speak.

The pre-eminence of the so-called growth mandate meant that China invariably had to rely on market-capitalism precepts, which rendered any fealty to communism—at least in terms of an economic theory—a farce. When former Chinese President Jiang Zemin, who led China through the 1990s, rebranded the CCP as business-friendly, he effectively completed the realignment of the CCP with Chinese capitalists.

Consequently, CCP members saw vast opportunities to profit from the growth machine that was being built. Party elites and those associated within its extended network could easily use their political power, or proximity to it, to take their share from the booming economy, including via the state-owned enterprises (SOEs) they controlled. Needless to say, corruption became rampant, and the line between governance and growth was blurred. The Chinese public, and particularly the private sector, took notice and began complaining that the party was getting out of control.

The watershed moment arrived in 2012, when the shocking downfall of former Chongqing Party Secretary Bo Xilai rattled the leadership transition to the Xi-led government, which was already underway. The now well-known and explosive circumstances that led to Bo’s purge from the CCP only further exposed to the Chinese public the kind of corruption that significantly tainted the ruling elite. In their eyes, the CCP’s credibility was badly damaged. Something had to give.

Unbeknownst to most at the time, when Xi was formally anointed the top leader in late 2012, he came into office with very different priorities than his predecessors, who had largely coasted on growth alone. He had inherited a party that had lost its way, and he believed that all of China’s major challenges, whether related to the economy or to governance, hinged on the CCP restoring itself as a legitimate governing body. As a result, governance became the paramount issue, at the expense of the growth mandate. The performance metric, too, began shifting from growth to the performance of the CCP itself.

In fact, Xi foreshadowed what was about to come when, in his inaugural speech as party secretary, he warned that “to forge iron requires that we steel ourselves first.” That phrase has since become something of a battle cry for the most ambitious anti-corruption and party-cleansing campaign seen in perhaps a generation. The fight against corruption has essentially defined Xi’s first five-year term, making it one of the most intensely politicized periods in recent decades.

Questions regularly emerge about how long such an effort can last and what ends it serves. Common answers offered generally fall into the categories of Xi’s “Maoist sympathies” or “power grab.” While there is certainly truth to Xi’s desire to consolidate power, his corruption campaign likely also serves broader purposes that are not immediately evident.

Such a risky gambit, which involves confronting a very powerful party establishment, is not for the faint of heart and, if mismanaged, could lead to political instability. Xi and his team surely knew what they were getting into, which certainly required substantial support and a fairly clear strategy.

Starting with shock and awe, the campaign brought down several so-called tigers, or very high-ranking CCP officials, including a former Politburo Standing Committee member, a People’s Liberation Army (PLA) general and the chief of staff of former President Hu Jintao. The element of fear has been palpable. For instance, Xi’s confidante Wang Qishan—head of the Central Commission for Discipline Inspection (CCDI), the vastly empowered party organization charged with implementing the campaign—has repeatedly warned CCP cadres that the Sword of Damocles is hanging over them.

The anti-corruption effort moved through phases, and at the outset appeared to have directly affected parts of the economy, as Xi’s government banned lavish banquets and other indulgences that were typical perks for a CCP official. The impact of these prohibitions led to dips in consumption of high-end goods and services, such as restaurants, hotels and liquor. Over time, the campaign also rolled out another component under the code name Operation Fox Hunt, which aimed to repatriate corrupt officials who had escaped abroad.

Perhaps most important, the ferocity of the corruption hunt had a chilling effect on the bureaucracy, down through the provincial governments. This was in large part because the campaign began hitting specific agencies, such as the energy regulator, and resource-rich provinces, such as Shanxi, shortly after the tiger-catching phase. Much of the decision-making power on the economy, for instance, has been moved into new leading groups created under Xi—a centralization of authority that is aimed to contain the usual bureaucratic turf wars and limit local autonomy.

Such a political climate suppressed temerity and bred timidity among bureaucrats, particularly when it came to policymaking and implementation. Local officials reportedly chose inaction in certain cases because they weren’t certain whether prospective infrastructure or housing projects would be considered corrupt under the new norms that the center wanted to impose.

Despite periodic hopes that the party cleansing would soon taper off, Xi’s administration does not seem to be letting up on disrupting the norms of party-member behavior. Meanwhile, the CCDI has been gleefully publishing data on the scope of the anti-corruption effort—336,000 cadres had been disciplined and 14,000 expelled or placed under judicial review as of 2015—in a bid both to be more transparent and to demonstrate to the Chinese public that the central government is serious. So far, the anti-corruption campaign has remained generally popular.

Ultimately, as someone with strong Leninist, rather than Maoist, proclivities, Xi is a staunch believer in the party as the only organization that can and should govern China. But he has also recognized that the CCP he inherited was weak and peripheral, which could pose a governance crisis. Preventing this potential crisis, in Xi’s view, can only be accomplished under a strong, unified and revitalized CCP. In this context, it is not surprising that Xi spent the better part of his first few years in office cultivating loyalty in the PLA, forming a significant and necessary power base.

For Xi, restoring the party’s relevance and control is the sine qua non to achieving his economic and foreign policy goals. It is through this prism that China’s economic reforms must be viewed.

Refashioning a New Economy

Despite Xi’s Leninist view of the primacy of the CCP, the Chinese president is not particularly anti-market, nor does he seem to have trouble reconciling a generally pro-market stance with strengthening the party’s control over specific aspects of the economy. Part of this seeming contradiction may be shaped by Xi’s own experiences. He not only witnessed how markets propelled China’s economic development throughout his entire adult life, but also governed two of the most dynamic and entrepreneurial coastal provinces, Fujian and Zhejiang, on his way to the top.

How long this contradiction can persist is anyone’s guess. For the time being, Xi certainly appears to think both a strong market and party control over aspects of the economy are necessary to realize the goal of becoming a “moderately prosperous society” by 2020. In more concrete terms, the Chinese government has set the twin targets of doubling 2010 levels of GDP and per capita income by 2020, which means reaching a per capita income of $10,000 by 2020.

The economic legacy Xi hopes to leave behind is not only the largest aggregate economy in the world, but one that is much more efficient and innovative, with high value-added exports, a robust services sector and higher domestic consumption—in other words, somewhere between a high-tech export powerhouse like Germany and an innovative and consumption-driven United States.

Restructuring the economy was supposed to begin by implementing the expansive, 60-point economic reform plan that was unveiled at the CCP Third Plenum meeting in late 2013. In it, the Chinese government called for making the market more “decisive,” which many took as a significant signal to liberalize large swaths of the economy, particularly the state sector.

But let’s be clear: The CCP fundamentally holds an instrumentalist view of the market. That is, the market is merely a useful tool to be leveraged for the greater objective of enhancing China’s power, not an end in itself. In today’s China, one would be hard-pressed to find any market purists. For Xi, China simply needs the market, among other tools, to achieve its economic objectives.

In this context, the CCP is increasingly exerting more control over state assets, rather than withdrawing from them, to the chagrin and disappointment of many observers. Since the Third Plenum, this trend has been particularly pronounced for the central SOEs that are considered the commanding heights of the economy, making the prospects for dramatic market reforms and privatization in this area increasingly dim. In certain strategic sectors, such as aviation and telecom, private-sector players are effectively shut out of competition with the massive SOEs.

Yet the private sector still constitutes the majority of the Chinese economy, and some liberalization of energy prices and interest rates, as well as a more market-based exchange rate, have been obscured by the fixation on whether and how the Chinese government will deal with its SOEs. For instance, in the midstream and downstream natural gas industry, private players can enter the market and compete, and the service economy is replete with private players. The Chinese government has in fact pledged to open up more sectors, such as financial services, to domestic and foreign private companies, and has emphasized lowering administrative costs and entry barriers, including through tax cuts.

Still, increasing CCP control of key state assets is the reality. The underlying logic appears to be that once the party is cleaned up, it will become a capable steward of SOEs, without the past tendency to pilfer from state assets; several of the fallen corrupt tigers were heads of major SOEs. The party members sitting atop the SOEs will then run the firms as competent managers to compete with private-sector players. In this way, the private sector will continue to grow relative to the rest of the economy, while the state sector will remain bounded across several key industries and operate in parallel with market participants.

Xi and his team appear to be doubling down on this dual model in a forceful way. But whether it will be economically efficient and deliver the kind of dynamism and innovation that China needs to move from a middle- to high-income country is far from assured. At the moment, China’s accumulating public and private debt problem, now estimated to be nearly 300 percent of GDP, has much to do with corporate debt. And many of the most over-leveraged firms are concentrated in the state sector, particularly in legacy industries such as steel and cement. Recent asset bubbles forming in the property market, yet again, could increase household leverage, a phenomenon that might prove more worrying.

Using state resources as a backstop to keep these firms afloat and service their debt could be a significant drag on the economy, at a time when growth has lagged. It also begs the question of whether the state should be devoting its limited resources to areas of potential future growth and vitality, instead of sustaining vitiated industries of the past.

The immediate challenge for Beijing’s economic mandarins will be to manage the extent and pace of deleveraging while stabilizing growth. That’s because in order to achieve the goal of doubling GDP, the Chinese economy has to avoid dropping below a growth floor of 6.5 percent through 2020. That target has become something of a political mandate, which means that economic managers that prioritize deleveraging and reform will need to figure out how to balance it with generating an acceptable level of growth. Such a contradiction has yet to be reconciled, and as a result, deleveraging and economic reforms have proceeded in fits and starts, at best.

This isn’t the first time in which political mandates collide with economic reality, nor will it be the last. But the Xi administration is apparently comfortable in having both the market and the party thrive in what it believes to be distinct spheres of the Chinese economy. The Chinese president is betting on the fact that a disciplined and rejuvenated CCP can manage the state sector just as effectively as the market can be decisive for the private sector.

Reviving Old Ideas

Nowhere have Xi’s disruptions drawn more attention and concern from the United States than in the foreign policy realm. On the eve of his ascension, it was widely assumed that Xi would continue the low-profile and incremental foreign policy that had been adopted by all his predecessors. As articulated by Deng, it was essentially a “China first” strategy: Summarized by the dictum “hide your capabilities and bide your time,” it cautioned the party leadership to address the country’s numerous domestic challenges rather than engage in costly adventurism far beyond China’s borders.

It soon became clear that Xi was willing to break with that consensus and establish a bigger footprint and role for China globally, which in all fairness was something that the United States and other major powers had urged. Perhaps even more surprising, when it came to the key maritime territorial disputes that previous leaders had set aside to adjudicate in the future, Xi decided to make them an issue early in his first term.

For the Chinese president, the future is now. This is in large part because China’s naval capabilities have improved dramatically since the 1990s, and from the Chinese leadership’s perspective, those capabilities need to be tested and deployed, rather than collect dust. Demonstrating advanced military hardware is also a testament to China’s general ability to climb the technology ladder. For Xi, this makes political sense as a means of shoring up the PLA’s crucial support, even as he is hitting the military with the anti-corruption campaign and reducing its size. As the commander-in-chief, ensuring absolute loyalty from the PLA is essential for Xi’s consolidation of power—something his predecessor, Hu Jintao, never quite achieved.

While maritime disputes, particularly in the South China Sea, will continue to generate rancor between China and the United States, Xi also has not been shy in proposing Chinese ideas and new institutions, and is eager to behave more like the leader of the world’s second-largest economy.

But other than maritime issues along China’s immediate periphery, virtually all of Xi’s major initiatives revolve around some form of economic diplomacy. From the One Belt, One Road (OBOR)—his wildly ambitious Asian economic-connectivity project to remake a 21st-century Silk Road, unveiled in 2013—to the establishment of the Asian Infrastructure Investment Bank (AIIB) in 2015, Xi’s projects fall under the basic strategy of “talk softer and carry a large purse.”

Checkbook diplomacy has become a fixture under Xi because it is the area in which China currently has the most leverage, not only in terms of its ability to invest abroad but also because of its own formidable market power. The idea isn’t complicated: China has the capacity to build the infrastructure for less developed countries on its periphery, which would then make it easier to send Chinese products to those new markets, thereby increasing economic activity from Central Asia to Europe.

For instance, over the past decade, while many focused on China’s energy and infrastructure investments in African countries, Chinese tech firms such as Huawei have quietly established a foothold in those markets as well. In certain African markets, it is probably more common to see Chinese consumer products today than their American counterparts. In similar fashion, the OBOR project could allow Chinese products to gain significant market share in countries that simply do not have the manufacturing capacity and comparative advantages to make those products.

While these initiatives are bolder than any China has put on the table to date, none of them are particularly new. Reconnecting the Silk Road has been discussed in China for years, and the United States floated a similar idea for Central Asia under former Secretary of State Condoleezza Rice as far back as the mid-2000s. The AIIB, too, had been in discussion for some time, and largely stemmed from Beijing’s assessment that existing multilateral institutions were no longer adequately funding developing countries’ need for infrastructure.

Like the once-shelved maritime territorial disputes, Xi has dusted off these old ideas and is intent on executing them. Some of them, such as the AIIB, did not sit well with Washington, while others, like the OBOR, are often dismissed as an expensive boondoggle.

Of course, the outcome of any of these long-term ambitions cannot be ascertained. But what is largely certain is Xi’s willingness to pursue them for the rest of his time in office. More than ever, China appears to believe that, having been a poor developing country only a generation ago, it now has experiences from which other developing countries could benefit in formulating their own economic development strategies.

A Case for Cautious Optimism?

As significant as Xi’s disruptions to the Chinese political economy have been, the CCP still resoundingly endorsed his first-term agenda. The Chinese president was elevated to the status of “core leader” of the party, a key outcome of the Sixth Plenum of the 18th Party Congress that ended in October. More than just an informal title—which was conferred on Mao, Deng and Jiang, but not Hu—the honorific signals broad validation of Xi’s Make China Great Again platform that is simultaneously rebuilding the party, rebalancing the economy, and reasserting China’s influence abroad.

Xi’s new status also lends him greater authority over key personnel in the upcoming political transition in late 2017. Whether he will keep top officials on the Standing Committee beyond the retirement age of 68, a norm for the past few political cycles, is subject to speculation. But what is clear is that he will certainly elevate CCP officials who are committed to his expansive agenda, as well as those whom he can trust to carry out the urgent priority of remaking the CCP.

The Chinese president is under no illusion that this will be completed in a single term. So the party rectification and anti-corruption effort will go on, though perhaps in a slightly different form that relies more on the judicial process and internal discipline rather than relentless purges. The possibility of modestly institutionalizing the anti-corruption effort makes sense because by the end of 2017, Xi will likely have placed people in positions of authority and consolidated his power. Few will doubt his commitment to molding the CCP into a better version of its current self.

Having built this stock of political capital, Xi has to cash it in at some point and toward some end. For the most bearish, that end will basically be a reversion to stronger state interventions in the economy, continued information suppression, and a never-ending cycle of politics that takes precedence over properly managing the economy. In short, what you see now is what you will get for the remainder of the Xi administration.

For the cautious optimist, on the other hand, this could mean that whatever lingering dissent and resistance that still exist within the party will weaken, settling into a more consensus phase of implementing the multiple and substantial initiatives that have been rolled out in the first term. Xi’s political capital will thus be cashed in on maintaining the political consensus to tackle the tougher economic reforms, because after all, reform at this point is fundamentally political. That was precisely Deng’s genius: He had the clout and power to hold the political consensus on “reform and opening up,” despite fierce resistance from various factions within the party.

If so, a case can be made that a first term that was defined so much by politics may yet yield to a second term focused more directly on the economy, which has so far frustrated reformers and clouded China’s future economic prospects. After all, Xi has touted the argument that fixing the CCP is the precondition to actually pushing through the reforms he wants and that he believes China needs.

Indeed, if Xi banks on that pledge, he may be gearing up for a surprising second act that few expected.

Damien Ma is a fellow and associate director of the Think Tank at the Paulson Institute. He also serves as adjunct lecturer at the Kellogg School of Management. He is the co-author of “In Line Behind A Billion People,” and the editor of “The Economics of Air Pollution in China.”