The New York Times has a good piece discussing how difficult it will be to loosen the grip of state-owned enterprises in China’s economy. Meanwhile, over at the Wall Street Journal‘s China Real Time Report, Bob Davis cites an unexpected argument for China’s continued growth. Both pieces are worth reading and have more to do with each other than they seem to at first glance.

The standard bearish position on China’s economy is this:  as China’s capital stock grows and returns to investment diminish, inefficiencies and corruption in the country’s “state capitalist” system will threaten to tear the economy apart at its seams. In order to ensure a smooth transition to a low-growth model, China has to institute significant economic reforms, such as encouraging the growth of the private sector and domestic consumption. Unfortunately, these reforms are unlikely because of the way incentives are arranged in the Communist Party government. Therefore, China is “trapped”.

The WSJ piece points out why this day of reckoning may be a ways off. In the poorer, inland provinces, China’s capital stock is so minimal that the economy is still mired in an earlier stage of development, so there remains significant room for growth using the old state-capitalist investment model. The still-tremendous returns to investment, therefore, are likely to continue to mask inefficiencies for the foreseeable future.  For all the talk of how China over-invests in infrastructure, any visit to rural Yunnan or Sichuan reveals just how much more work there is to be done.

China’s economy is often compared to the United States, but a better analogy might be the European Union. Provinces like Guangdong, Zhejiang, and Jiangsu are akin to France, Germany, and Britain*, but provinces like Guizhou and Gansu are more like Romania and Bulgaria. China is less a “single market” than a collection of fragmented region in which local political leaders play a major role. The gap between, say, France and Bulgaria is far wider than the gap between New York and Mississippi. But the gap between Guangdong and Yunnan is much wider than either. Overall, that fact is less a case for optimism than a belief that China’s problems won’t reach critical mass for a long time.

* Just to be clear, I don’t mean Guangdong, Zhejiang, and Jiangsu are as wealthy or developed as France, Germany, and Britain but rather that they represent an analogous role within the wider Chinese economy.

 …

One of the most memorable moments of the 2nd presidential debate was when President Obama scolded Mitt Romney for his business dealings with China. “You’re the last person who’ll get tough on China,” Obama zinged. As an unabashed Obama supporter, the line thrilled me- I was delighted that finally, the president was lashing out at Romney and forcing the Republican to play defense. But, sadly, the small voice in my head that cares about policy recoiled. For all of Mitt Romney’s sins, outsourcing jobs to China ranks pretty close to the bottom of the list. The transfer of manufacturing jobs from the United States to China, blamed so often for our economic decline, has actually been a net positive for both countries.

The unemployment crisis in the United States has many causes. There’s financial under-regulation for starters, but also a badly skewed tax code, absurdly lenient mortgage lending, and, more esoterically, the persistent lack of middle-class wage growth that has led so many Americans to make risky financial bets. In a perfect world, both presidential candidates would campaign exclusively on fixing these problems and restoring the American economy. But elections are won on politics, not policy, and a byproduct of that reality is cheap demagoguery on China.

Politics go both ways, of course. In China, the Communist Party attributes American complaints about currency manipulation as an unvarnished desire to hurt the country’s feelings. China’s leadership knows better, of course, but understands that maintaining a sense of national victimization is essential to keeping its grip on power. American politicians find it useful to remind struggling voters that there are factories full of Chinese workers doing their old jobs for a small fraction of the pay. And, whether or not half these factories are now located in Vietnam or the Philippines or Mexico or wherever, pointing a finger at China resonates far more deeply since China is seen as the United States’ primary rival on the international stage.…

The New York Times‘ obituary of Norodom Sihanouk, the former Cambodian king who died yesterday at the age of 89, is fascinating and well worth a read. During his reign, Norodom cultivated a close relationship with China, the country in which he spent much of his time in exile. China, alas, factored into the most controversial part of Sihanouk’s life:

Convinced that the United States had been behind the overthrow, King Sihanouk allied himself with the Khmer Rouge at the urging of his Chinese patrons, giving the Cambodian Communists his prestige and enormous popularity. Their victory in 1975 brought the ruthless Pol Pot to power, with King Sihanouk serving, for the first year, as the figurehead president until he was placed under house arrest and fell into a deep depression. Over the next four years, the Khmer Rouge regime led to the death of 1.7 million people and nearly destroyed the country.

Criticized throughout his life for these dramatic shifts in allegiances, King Sihanouk said he followed only one course in politics: “the defense of the independence, the territorial integrity and the dignity of my country and my people.”

In fact, he skillfully manipulated the great powers, usually with the support of China, to ensure his survival as well as his country’s independence.

(Emphasis added).  In recognition of this very close relationship, China noted Sihanouk’s death with effusive press coverage and a telegram of condolence from President Hu Jintao. The two countries continue to have a close economic and diplomatic relationship today, with Cambodia refusing to cooperate over territorial issues in the South China Sea at an ASEAN summit meeting in July in apparent deference to China. In return, China has pledged $500 million in soft loans to the impoverished Southeast Asian country.

I don’t think anyone can blame the Chinese alone for the Khmer Rouge, the radical Communist movement whose reign of terror almost completely destroyed the country. The secret U.S. bombing of Cambodia during the Vietnam War also had a fair amount to do with it, as well as forces within the country itself. Nor is there anything untoward about the present relationship between China and Cambodia. Yet the recent history between the two countries is a wonderful example of how China’s vaunted “non-interference” policy is nothing more than convenient fiction. Like all other powerful states, Beijing seeks influence along its periphery and meddles in the domestic affairs of other countries. China may be indifferent to the political composition of its allies and trading partners, but it certainly pays attention to what policies these countries pursue.

The obituary of Sihanouk says less about the man himself than about the fact that, as leader of Cambodia, he was largely at the mercy of powerful outside forces. Such is life in small, strategically important countries.…

Time Magazine has a cover story (subscription required) profiling Xi Jinping, China’s putative next president and the man the magazine has cleverly dubbed “the leader of the unfree world”*. The piece, written by Beijing bureau chief Hannah Beech, nicely lays out  the implications of China’s leadership transition but inflates the importance of the presidency in China’s political system. Contrary to the magazine’s assertion, I would argue that Xi’s ascension to the presidency matters even less than the result of the U.S. presidential election.

* I know this isn’t Beech’s fault, and I know that magazines like Time have to compete with the increasingly histrionic Newsweek. But leader of the unfree world? Really? This isn’t the Soviet Union, presiding over a republic with fifteen member states and satellites and allies around the world. Yes, China is the world’s largest and most important authoritarian state, but Beijing does not control an axis of dictatorships that works in tandem to thwart Washington’s international agenda. It’s time for everyone to cast aside their lazy Cold War analogies when thinking about international affairs.

China’s highest governing body is the Standing Committee of the Politburo, which at the moment consists of nine men. The two members of the Standing Committee with the most de facto authority are the President and the Prime Minister, positions currently occupied by Hu Jintao and Wen Jiabao. However, other members of the Standing Committee are of near-equal influence. The composition of this body depends on the horse trading that goes on among varying political factions in China. These factions include princelings, typically children or descendants of elite early members of the Chinese Communist Party, and tuanpai, leaders who emerge from the powerful Communist Youth League. Resembling a sort of “balanced ticket”, China’s next President (Xi Jinping) and Prime Minister (Li Keqiang) represent the princeling and tuanpai factions, respectively. Any policy decision that emerges from Beijing will derive from extensive negotiation, just as in democratic countries.

To an American audience, the best analogy is this: imagine the Chinese leadership as a version of Supreme Court, with the President serving as the Chief Justice. Now imagine that the formation and all the activity of the Court occur in secret, and that every decision made by the Court is presented unanimously. The president (Chief Justice) is the most powerful single individual in the Chinese system, but faces enormous constraints based on the need for consensus with the other eight members. In a previous era, when China was ruled by revered men like Mao Zedong and Deng Xiaoping, individual whims mattered greatly. But since Deng’s retirement in the early 1990s, China’s leaders are, by design,  bland functionaries lacking personal ambition. Even if Xi secretly harbored a desire to turn China into a giant version of Singapore, any sudden moves he’d make in that direction would come up against instant, mass opposition from his fellow committee members.

So while I’m delighted that a mainstream American publication like Time has devoted a cover story to Chinese politics,  I wish that the piece would emphasize just how little personal power Xi Jinping will have when he assumes office. The real story will be the identity of the other members of the Standing Committee, for that will indicate which policy choices the Communist Party make in the coming years. Policy choices that, as Time correctly points out, will be just as important as ones made by Barack Obama or Mitt Romney.

UPDATE: A friend e-mailed to say that, while the President and Prime Minister have the most de facto authority in the Chinese system, they don’t actually have the most titular authority. I’ve amended the text to reflect this fact.

 …

But first, an obligatory baseball note. Yesssssssssssssssss!

• The U.S. presidential election will be held on Tuesday, November 6th. The 18th Party Congress of the Communist Party of China, as noted below, will begin on Thursday, November 8th. This is the first time then in very many years that the two largest economies in the world will host major political events in the same week. The U.S. election marks the culmination of years of campaigning, television advertisements, stump speeches, debates, and the entire circus that is American politics. The Chinese event, meanwhile, will occur entirely out of public view. The winner of the U.S. election will be announced at the earliest possible moment by a feverish group of televised talking heads. The formation of the Standing Committee of the Politburo, China’s highest governing body, will be known only when the members appear in pre-determined order to salute the country. The differences between the two systems aren’t exactly unprecedented; after all, a similar contrast existed during the Cold War. But the outcome of that week in November will be an interesting glimpse into what decisions both countries make.
• Bill Bishop’s Sinocism e-mails are indispensable for knowing what’s going on in China these days. Therefore, I was pleased to note that the New York Times Dealbook will be publishing a weekly version of the e-mails. Here’s a link to the first one.  For a full list of key China-related blogs and Twitter feeds, please see the “recommended reads” section above.
• Tonight marks the lone debate between Vice President Joseph Biden and Republican Vice Presidential nominee Paul Ryan. How much will they talk about China? It’s hard to say. China-bashing was mainly absent in the first debate between President Obama and Mitt Romney, but Romney did get in a few jabs about how we should stop relying on China to pay for certain government programs. Put that way, one could think China was holding America economically hostage. The truth is of course far more complicated, as China needs the U.S. just as much (if not more) than the U.S. needs China. Such nuances, though, aren’t suitable for the febrile world of televised presidential debates. Vague references to the Chinese threat do, however, work well as “political red meat”. Expect more of it going forward.
• Last week Harvard Business Review published a piece about moving around without losing your roots, something which any expatriate in China can relate to. These days it’s never been easier to live in a different country, learn a different language, and travel the whole world. But at what cost? Is having a firm sense of ethnic or national identity important? Oddly enough, I never felt more American than when I was in China, but I did feel a strange, disorienting confusion when I moved back here. I don’t feel the slightest remorse for having spent so many years out of the country, but I do tell people now that I’m tired of “moving around”. It takes its toll.

 …

On Monday, I wrote the following regarding the fate of Bo Xilai:

Most likely, the Party will wait until after the conclusion of the 18th Party Congress- expected to be held next month- to deal with Bo. Even then, Bo may remain in limbo since Beijing will have its hands full with the political transition, a process fraught with tension in China even in the best of times. The Party may prefer to keep the status quo until the issue recedes from public memory. If there’s one thing China does well, it’s disappearing inconvenient personnel.

Hopefully nobody put any money on my prediction. This morning, the Communist Party leadership took action:

China’s rulers have made a forceful show of unity after the country’s biggest political scandal in decades, kicking Bo Xilai out of the Communist party on myriad charges that could lead to the death penalty for the disgraced former high-flying politician.

The announcement that the former party secretary of Chongqing has been accused of taking bribes, improper sexual relations with multiple women and other unspecified crimes comes six months after he was purged following revelations that his wife had murdered a British businessman.

We also learned that the 18th Party Congress will begin on November 8th, not in October as I had previously speculated. It’s quite unusual for the two largest economies in the world, with vastly different political systems, to be planning political transitions in the same week.

 …

Some recent changes to the site, which is still very much a work-in-progress…

• I’ve added a section to the top called “recommended reads”, which lists all the China-related blogs and Twitter feeds that I pay attention to. This list is by no means exhaustive, so if you think of any that I should add please send me an e-mail at matthew.schiavenza (at) gmail.com. A section for Chinese-language bloggers is forthcoming but recommendations more than welcome!
• Back in 2011, I interviewed several of my friends about the cities they called home. These results, which I posted serially on the blog, are now located under “city series” on the front page. More of these to come, by the way!
• A link to my resume is now available next to the “about” on the front page.

…

Amy Qin has an excellent piece at ChinaFile explaining why we shouldn’t think Weibo will be affecting real social change anytime soon.  Qin lays out statistics on current internet usage in China:

In the absence of detailed information about the demographics of Weibo’s user base, looking at the makeup of China’s netizen population as a whole serves as a useful reminder of just how skewed the Chinese netizenry still remains. According to the 29th Statistical Report on International Development in China [PDF], released by the China Internet Network Information Center earlier this year, at the end of 2011, the overall Internet penetration rate in China still hovers around 40 percent, or 513 million netizens in a population of 1.3 billion. The netizen base is dominated by city-dwellers, with rural users making up only 26.5 percent of the total Internet population. A mere 7 percent of the population of people age fifty and above and 25 percent of people in their forties are online, compared to 73 percent of citizens in their twenties and 70 percent in their teens. As far as education goes, 96 percent of the population of college-educated citizens are online, whereas fewer than 10 percent of those who have received only primary school education or not even that have access to the Internet. The netizenry is also heavily skewed toward the eastern, more economically developed provinces. In Beijing, the Internet penetration rate is 70 percent, whereas in Yunnan, Jiangxi, and Guizhou it is less than 25 percent. And of this 513 million strong population of netizens, only about half, or 48.7 percent, use the Internet to access microblogs.

Everyone already knew China’s Internet population was overwhelmingly young, urban, and educated, but these numbers are still striking for two reasons. First, statistical trends in the country suggest that China is only becoming more urban and more educated. And while the country is becoming older in the aggregate, as time passes a larger percentage of the population will have experience using the Internet.  It’s safe to assume, therefore, that Weibo will increasingly be the vanguard of grassroots public opinion in China in the coming years.

Second, the micro-blog penetration rate of 48.7 percent is really high. By contrast, only 15 percent of American Internet users now use Twitter. That’s a significant difference. Far more Americans use Facebook, but Twitter is much more analogous to Chinese micro-blogs.

It’s interesting to think about where the political center of gravity lies in China. Right now, it may be a recent internal migrant from Sichuan or Henan working at a Foxconn plant. In ten years, it may be a young- and still struggling- urban resident with a college degree and a Weibo account. That has to be a nagging thought in the back of Xi Jinping’s mind.

 …

The Associate Dean of Undergraduate Studies at the University of San Francisco School of Management has quit for an unusual reason: there are too many Chinese students there with poor English, so the school has to go to unreasonable lengths to accommodate them:

Some of the new students’ language skills, however, were so poor that they were given headsets for English-to-Mandarin translation during orientation.

Business school Dean Mike Webber said in his Sept. 8 letter to staffers announcing Smith’s exit that the “considerable increase” in foreign students this year is not in and of itself a cause for concern.

“But given that so many of these students have weak English skills and are disproportionately from one country, we are going to be faced with some unique pedagogical and cultural challenges,” he wrote.

This story represents the combination of two seemingly unrelated trends. First, wealthy Chinese people are obsessed with American higher education, since the prestige gap between U.S. and Chinese universities remains very high in China. Second, American universities are too expensive for most American people, so in order to avoid dispensing huge sums in financial aid, universities must turn to foreign students who are willing and able to pay full fare. Many of these are, of course, in China.

The arrangement seems to benefit everyone, so much so that it doesn’t even really matter that many of these students can’t speak English well and thus can’t actually complete their degrees. If this sounds like a farce, well, it is!

Unfortunately, these stories are only going to become more common. Even with the economic slowdown in China, the country is growing at a fast clip and will continue to produce wealthy people with big ambitions for their children. Secondly, university tuition costs seem poised to rise well in excess of actual U.S. economic growth- not to mention middle-class wage growth- so a smaller proportion of Americans will be able to afford college tuition without aid. Barring a sudden and unexpected improvement in the quality and prestige of Chinese universities, more Chinese students will be turning up at Americans schools with gobs of cash…and not much English.

 …

A Chinese court sentenced Wang Lijun to 15 years in prison today, which, when you think about it, is a relatively light sentence for a high-ranking official who attempted to defect to the United States. No doubt Wang provided an enormous amount of information to the government in exchange for leniency, and it’s anyone’s guess how much of his sentence he actually will serve.

With Wang- and Gu Kailai- out of the picture, the only issue left to be resolved is the fate of Bo Xilai, from whom we’ve heard absolutely nothing since his ouster from the Politburo some months ago. Most likely, the Party will wait until after the conclusion of the 18th Party Congress- expected to be held next month- to deal with Bo. Even then, Bo may remain in limbo since Beijing will have its hands full with the political transition, a process fraught with tension in China even in the best of times. The Party may prefer to keep the status quo until the issue recedes from public memory. If there’s one thing China does well, it’s disappearing inconvenient personnel.

If this really is the last we’ve seen of Bo Xilai, I wonder whether another Bo-like figure will emerge in the normally staid world of Chinese politics. What made Bo unusual wasn’t his revival of “red” campaigns, but rather his ability to channel popular energy into promoting his policies and personal ambitions. The vast majority of Chinese officials are mere functionaries, tapped to inhabit a particular role and little else. Bo’s downfall may force other politicians to rein in their ambitions and keep a low profile, at least in the short term. It wouldn’t surprise me, though, if in some years a new type of Chinese populism might emerge.…