China’s National People’s Congress Deals with a New Mao

With the dual meeting of the National People’s Congress and the Chinese People’s Consultative Conference, which runs through March 16, China confronts a phenomenon it has not seen since the days of Mao Zedong.

President Xi Jinping is consolidating power through the creation of steering committees that oversee reform, the internet, legal affairs, national security and military reform, awakening a certain amount of alarm among the apparatchiks. Whereas Xi's predecessor, Hu Jintao, was "first among equals," the current president wants to be the core of the party's leadership.

The NPC meets the new year with an undeniably flagging economy. Nonetheless, the two-week gathering will not be characterized by the give and take of western-style parliaments. There will be no challenging the leadership or questioning its decisions. It will not play a role in creating the fiscal budget presented by the government although some grassroots concerns may be aired. Instead, the 171-member Standing Committee, which is controlled by the Communist Party, will hand down laws and plans for the coming year.

The main purpose of the NPC is to endorse the next five year plan, whose goal is to double China's GDP and per capita income over the next decade.

How China handles the following five key issues will influence the outcome enormously:

Issue No. 1: The first key issue, as it has been for two decades, is state-owned enterprise (SOE) reform. When we refer to SOE reform, we mean just how decisive the market's role in the economy should be. While Xi and the other leadership have called for “supply side reforms” – code for cleaning up the SOEs – and his corruption crackdown has taken down hundreds of thousands of cadres ranging from mayors up to leaders like Bo Xilai, the onetime governor of Chongqing, and most of the hierarchy of the state-owned energy industry, that is only the tip of the iceberg. Instead of slowing down, Xi Jinping is promising to increase the pressure on the cadres. However, it is starting to appear that the president has much to gain from the expanded campaign – perhaps going more after his enemies, many of them said to hail from the party faction headed by Jiang Zemin, than the common crooks.

The Central Commission for Discipline Inspection (CCDI), the Communist Party's top anti-graft agency, has promised more than 100 major inspections, far more than any previous year. Xi has also toured each of the country’s major media institutions, Xinhua, the People’s Daily and CCTV, with an ominous message, stressing the need for the news media to demonstrate absolute loyalty to the party. As with Mao Zedong, that is being read as unquestioned loyalty to Xi himself. State media have taken their cues, heaping praise on Xi and the party.

The SOE sector remains entrenched, soaking up enterprise capital that could be devoted to private industry. As the South China Morning Post’s Wendy Wu pointed out on March 5: "The government claims to be serious about letting the market play a decisive role in the economy, it also says the party should strengthen its grip on state firms, thus confusing observers." She puts some meat on the bones by noting that "There has been little progress in several key areas, including adoption of market-based recruitment of senior executives rather than having them appointed by the party, matching their pay to private sector levels and ensuring that remuneration is tied to performance."

Another reform area has to do with mergers: "There have been mergers reported in competitive areas such as travel booking, shipping and railway equipment. But analysts say such tie-ups have yet to generate synergy." Another unresolved issue in this tug of war between how far the state keeps its mitts in the operation of the market: Local governments continue to subsidize loss-making state firms, underscoring the pain of laying off workers as overcapacity is reined in."

Issue No. 2: The tax regime: After years of sluggish progress in tax and fiscal reforms, a growing reliance on fiscal pro-growth policies may push Beijing to make breakthroughs in restructuring the value-added tax (VAT) scheme as part of its drive to reallocate fiscal resources and responsibilities between central and local governments. Since 2011, "restructuring" has meant shifting from the current reliance on business taxes to greater dependence on VAT. This shift already has occurred in the following sectors: transport, postal, and businesses operating in the cultural field. Finance Minister Lou Jiwei wants to bring others into the fold this year: finance, construction and consumer services. Another tax reform will be to cut the VAT in the manufacturing sector. A third reform issue centres on the introduction of a property tax, which hitherto has been implemented only in Shanghai and Chongqing. Wendy Wu goes on to write that "On the fiscal side, Beijing wants to seek a more balanced division of revenue between central and local governments, bolstering the independence of local governments."

Issue No. 3: On Aug. 11, 2015, the People’s Bank of China, the central bank, ended the yuan’s soft peg against the US dollar, eliciting howls of protest particularly from that congress of vote-hungry baboons on Capitol Hill, wailing ignorant Cassandras about "depreciation," thereby priding themselves on their arrogance of ignorance.

In fact, however, the central bank, while seeking to keep the renminbi stable after promising to allow it to float against a basket of currency, has caused market chaos over the past year with weeks of instability that many trace to the PBOC’s intervention. Uncertainty over the currency has led to huge capital flight into the US dollars. That in turn has shaken the effort to internationalize the currency, a major Beijing goal.

Issue no. 4: The stock market routs last summer and the unsuccessful government intervention, according to the South China Morning Post analysis, “underscored the urgent need to improve financial regulation to better ward off systemic risk. Government economists said current talks between the Central Bank and regulators for banks, securities and insurers were more an exchange of information rather than an attempt to tackle big problems. There have been suggestions of merging the regulators and giving the Central Bank a greater supervisory role for the financial sector. But insiders say broad reforms will be difficult due to strong objections from vested interests."

Issue no. 5: Here, progress has been made: but while the "One Belt, One Road" initiative has taken off, and the Asian Infrastructure Investment Bank is a reality, both face problems. It seems unlikely that any of the belt/road initiatives are going to pay for themselves. The ADB and the World Bank say they are constrained by finding viable and non-corrupt projects to invest in in Asia. The AIIB is likely to run up against the same constraints, unless the bank, in its inexperience sprinkles money on white elephants ridden by newly rich rajahs. It has happened before in China with great consistency.

By one calculation Belt/Road now encompasses about 65 countries with a population of 4.4 billion. Others simply include the various places where China has promised to commit money to land or sea transport infrastructure, mainly railways, pipelines and ports. Others still include anywhere in Eurasia, island Southeast Asia and the east coast of Africa.

The land route is relatively straightforward, at least in theory. Thus it includes Mongolia, Russia, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, Pakistan, Afghanistan, Turkmenistan, Iran, Azerbaijan, Armenia, Georgia, Ukraine, Belarus and perhaps even the eastern members of the European Union, Poland, Latvia, Lithuania and Estonia before terminating in Germany. Some of these are contiguous but in practice they mostly involve a Russian-dominated rail and road system, and some projects which make no sense without great harmony, particularly in the Caucasus, which currently hardly exists.