Market Analysis

Infernal Affairs

An in-depth look at China’s political infighting.

Of all the statements Chinese Premier Wen Jiabao could have uttered on live, state-run television, this to me seemed most unlikely: “Without a successful political reform, it’s impossible for China to fully institute economic reform and the gains in these areas may be lost, and new problems that popped up in the Chinese society will not be fundamentally resolved, and such historical tragedies as the Cultural Revolution may happen again in China.”

Then, not one month later, something even more improbable: Bo Xilai, a hugely popular Communist party standout, was expelled from the Central Politburo. The heir apparent to current security chief Zhou Zongkang’s leftist faction and a party “princeling”—the son of Bo Yibo, one of Mao Zedong’s eight advisers, the so-called “immortals” who founded the People’s Republic—was deposed.

Add in an internet blackout, rampant rumors of coups and assassinations and an international murder plot, and you get election-year politics, Chinese style.

We’ve frequently written of Chinese officials’ focus on maintaining stability during the upcoming party leadership transition—potentially a theater for pro-democracy demonstrations and popular unrest. But even more critical is suppressing internal succession battles—and that’s exactly what’s happening now. Political war is raging between Wen and President Hu Jintao’s modernist contingent and Zhou’s New Left.

As far as Communists go, Hu and Wen are moderates. Wen’s the more politically liberal of the two—he’s twice been censured for vague calls for democratic reform, while Hu led the long-running social media blackout and recent dissident clampdowns—but both are economic reformers. They’ve opened some financial markets, liberalized industries and promoted the overall socio-economic development that began under Deng Xiaoping 30-plus years ago.

Many observers see this as progress, and the millions of urban Chinese who’ve benefited agree. But Zhou, Bo and the New Left believe opening markets brought huge wealth disparities, belying communism’s egalitarian ideals. (Note: Fretting wealth inequality may seem American as apple pie, but it’s a fully global phenomenon.) As Communist party leader in mega-city Chongqing, he implemented populist policies and reasserted state economic control in an effort to close the wealth gap—changes he wants effected nationwide. He also led mass sing-alongs of Mao-era anthems, which resonated with the working class and more than 20 million farmers, many of whom yearn for a return to traditional communism and Maoist ideals. While the West is well familiar with Mao’s unspeakable atrocities, Chinese history books don’t perpetuate the horrific memories of the Cultural Revolution; many Chinese thus practically deify Mao, who they believe lifted them from imperial serfdom. In Bo, the masses on Chongqing saw the second-coming—to them, the political prince, born of privilege, was a working class hero.

With his pedigree, popularity and party standing, Bo was armed for a run at China’s leadership. Hu and Wen are thought to favor Xi Jinpeng and Li Keqiang as the next President and Premier, but they don’t have all the say. The 24-man Central Politburo oversees the party and nominally appoints the leaders, including the President and Premier. But the real power is concentrated in the nine-man Standing Committee—as they go, so goes China, and seven of nine members retire this year. Only Xi and Li return, giving the modernizers an apparent advantage. But Bo seemed a shoo-in thanks to Zhou’s backing, which would give the New Left a powerful footing and influence over the party narrative for the next 10 years. Their purported goal was the modernists’ worst nightmare: Bo’s ascension to one of the top two posts, where he might hijack the economic and political agenda and steer China back to socialism.

Autocratic tendencies notwithstanding, China’s moderate leaders realize a hard left turn would upset the delicate balance they’ve cultivated. Many Chinese up-and-comers know their civil liberties are horribly limited, but as long as they make money, popular theory says they don’t have much incentive to press for change. But if a leftist regime takes over and tries to redistribute their wealth, all bets are off. Thus, Wen’s seemingly off-narrative call for reform was really a warning to the Standing Committee: If you give Bo power, you set the stage for a popular revolt that could dwarf the 1989 Tiananmen uprising—and a potentially violent crackdown in response. Cultural Revolution, redux.

Apparently, they listened—it seems a leftist purge is afoot. After weeks of speculation on Bo’s whereabouts and continued existence, the government announced he’s out, and a whopper of a scandal seals his spectacular fall from grace. To warn those who’d dare protest Bo’s ouster, the party ran a nationwide editorial imploring citizens to “conscientiously follow party discipline and national laws.” By some reports, Zhou, too, will soon fall.

Meanwhile, in an apparent confirmation of the moderates’ continued dominance, economic reform is heating up. As this saga unfolded, the government announced a rash of pro-market measures—including one that could be game-changing: Liberalizing the financial system and legitimizing private lending, which could end the big state-run banks’ monopoly and improve small businesses’ and entrepreneurs’ access to credit. This is a pilot program for nationwide reform, and if successful, it would be a positive and important step in China’s ongoing economic liberalization.

Now, let’s be clear about where China stands—reform is slow, and the nation has a long, long way to go to reach Western-style economic freedom. The country still lacks firm private property rights, free-flowing information, goods, services and capital, and intellectual property rights, to name a few. And never mind political freedom—the freedom to live, spend and work as people choose—which has historically brought more growth and prosperity than command systems ever could. For now, that seems a pipe dream for China.

Still, progress is progress—and with the New Left seemingly weakened, continued progress seems ever likely. And while we probably haven’t seen the last of Chinese political infighting, for now, at least some of the uncertainty surrounding the upcoming transition is perhaps lifting.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.