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29 October 2012

China’s economic civil war

Next month, the leadership of China’s Communist Party – and therefore of China – passes to a new generation. These transfers take place once a decade and are carefully choreographed affairs, but this time round there are signs of a power struggle – as most clearly seen in the spectacular rise and fall of Bo Xilai, a regional boss who had been set to become a key member of the new Chinese politburo.

The details of the Bo Xilai scandal are lurid to say the least – including, as they do, a violent crackdown on organised crime, Maoist revivalism and the conviction of Bo’s wife for the murder of a British businessman.

But there’s much more to all of this than an almighty clash of personalities. The real power struggle in China today is over economic interests – and, in particular, the fate of China’s state owned enterprises (SOEs). In an important article for Reuters, Charlie Zhu and David Lague explain just how central the SOEs are to the Chinese – and therefore the world’s – economy:

  • “Today, SOEs and affiliated businesses account for more than half of Chinese economic output and employment. Of the 70 mainland companies on the 2012 Fortune Global 500 list, 65 are state-owned. State Grid is the world's seventh-biggest company. Oil giants Sinopec Group and China National Petroleum Corp, parent of PetroChina, rank fifth and sixth, respectively. The total profits of CNPC and state-owned China Mobile Ltd were higher than those of China's 500 largest private firms combined in 2010, according to government figures.”

Unfortunately, the SOEs are also holding China back:

  • “The SOEs have grown so dominant that economists accuse them of stifling innovation and restricting opportunities for private companies, which now account for almost all employment growth, according to government figures.”

The Chinese leadership is attempting to shake things up – beginning with the banks:

  • “Reformers made some progress in June, when state-owned banks were given more flexibility in setting interest rates for deposits and loans, increasing the scope for competition for deposits and clients. Chinese interest rate spreads -- the gap between lending and deposit rates -- are among the fattest in the world.
  • “…it was Premier Wen Jiabao leading calls for change when in April he criticized the banks for ‘making money far too easily.’ However, days before the decision was announced on June 7, the move faced strong resistance.”

Crucially, this resistance to reform comes from within the Chinese Communist Party, because inevitably the SOEs provide lucrative jobs for various party princelings and apparatchiks. What’s more, they appear to be hitting back.

Allegations have surfaced in the New York Times that it is Premier Wen and his family that are ‘making money far too easily’ – having allegedly amassed a fortune of $2.7 billion. Obviously, the Chinese Government has denied the story – and has banned all mention of it back home.

Still, the unmistakable impression is of an economic civil war between rival vested interests – and, in the absence of democracy, one shudders to think how that will turn out.


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