China's Priorities on Display

The debate at the National People's Congress (NPC), China's highest legislative body, over the country's first private property law spilled over into the public sphere at the NPC’s annual meeting which ended on March 16, exposing internal debates around the opposing forces of capitalism and communism.

And, despite the fact that China's leaders are paying increased attention to the social and economic divides between the rural, inland provinces and the booming, coastal cities the fact is that the rural-urban divide is likely to continue to worsen. Much of the legislation passed will benefit the upper and middle classes in the cities far more than the poor rural areas.

Targeting the Wealth Divide

Premier Wen Jiabao set the tone for the meeting in his opening remarks, asking China's provincial leaders not to focus purely on economic growth figures, but rather on the quality of growth. To this end, he set a targeted growth rate at eight percent, much lower than the double-digit rates China has come to expect. Wen and President Hu Jintao, however, have set similar targets for the economy in the past, only to have the directives ignored at the local level. This is unlikely to change this year.

The rural-urban divide is worsening and with it the social strains. Rural incomes average 3,465 yuan (US$448) a year, or about one-third of those in the coastal areas. A much cited and disputed figure puts the number of rural protests in 2005 at 87,000, compared to 11,000 a decade ago. This division set off the largest mass migration in modern history as rural residents seek a better life in the coastal areas, with or without proper authorization.

Last year's NPC focused on reducing the tax burden of rural residents by eliminating agricultural and livestock taxes. This year, the focus was on improving social services and infrastructure in the western provinces. Spending on rural areas is to be expanded by 15.3 percent over last year's level to 391.7 billion yuan ($50.6 billion). As part of this initiative, 10.1 billion yuan ($1.3 billion) will be used to expand medical coverage to more rural areas, almost doubling the amount from last year. However, many do not participate in the state co-op medical system because they do not trust their local authorities.

To calm migrant worker protests, a new law will give some representation to supplement meager legal protections. Provinces and municipalities with large numbers of migrant workers will set aside a delegate quota for next year's NPC for the migrant groups living in their jurisdiction. Nevertheless, because many migrants do not move with permission of the authorities, it is unlikely that they will be given accurate representation.

While much of the talk focused on social issues, the majority of the legislation dealt with matters of economy and security. The spending approved also demonstrates the priorities of the ruling party. While spending on rural areas was increased by 15.3 percent, the defense budget was increased by 17.8 percent.

Matters of business taxation and private property consumed much of the NPC's attention, even if the outcome of these debates was predetermined by the party leaders. As a result, it is unlikely that the rural-urban divide will improve much in China. In fact, it will probably continue to worsen. China's leaders know that conditions must improve for rural residents, but they believe that maintaining rising living standards on the coastal areas will eventually lead to the wealth spreading inland. Also, while rural protests are a concern for the Chinese Communist Party, avoiding the development of a mass urban protest movement is critical.

The Debate over Private Property

Private property has enjoyed some protections since the early 1990s in China, and a much-debated constitutional amendment gave private ownership the same legal weight as public ownership in 2004. The constitution, however, does not have the same legal weight as it does in the United States, for example, and without a law approved by the NPC, legal uncertainties about the legal status of private property would have remained.

The NPC came close to passing a similar law last year, but the party's old guard sparked a public debate and the bill was pulled before it could be voted on. This year, Wen and the leadership curtailed public debate on the subject -- Wen did not mention the law in his opening address, and a financial magazine that ignored a press ban on the issue was promptly pulled from the shelves -- and forced the passage of the law.

The issue is controversial because it challenges the communist nature of the state. In China, the ruling party is called the Public Property Party. If private property is given the same legal weight as that of the public, the old guard fears that the authority of the state will be undermined. However, others in the ruling party, led by the business elites who have been admitted since 2002, argue that the legal status of private property must be guaranteed if the economic boom is to continue. In the end, the leadership decided to play lip service to the concerns of the old guard, while appeasing the demands of the business elite. While the Communist Party can withstand criticism from leftist scholars, it does not wish to take on business leaders or the emerging middle class that has emerged from their enterprises.

The new private property law that was passed on the closing day of the NPC will do little to alter the existing status quo, but it will provide legal certainty to owners in urban areas. While all of the Chinese mainland will remain under the ownership of the Communist Party, urban usage rights will be granted for up to 70-year periods, with a guaranteed renewal in most cases. Usage rights for rural land, however, will only be granted for periods of up to 30 years, and while new protections are granted for renewals, it will be up to the local officials to enforce them. Most of the complaints over forced land seizures have been directed at corrupt local leaders, and the law will do nothing to resolve these disputes.

Revisions to the Business Tax Code

Another important law passed at the NPC will revise the tax code to put domestic and foreign companies on equal footing. For nearly 30 years, China's tax code has encouraged foreign direct investment by offering a better tax rate for foreign firms over domestic firms. Foreign companies have paid as little as 15 percent, where as domestic firms were taxed at up to 33 percent. Also, domestic firms often used the law to avoid paying the higher rate by "round tripping" their profits out of mainland China to the British islands and other tax havens, then back again.

Going forward, with some exceptions for high-technology companies and "low-profit enterprises," all firms will pay the same 25 percent rate. This will be phased in over a period of five years, with the taxes on foreign firms rising no more than two percent each year. While the practical effects of the bill will be negligible, the symbolic value is immense. It signals an end to the period in which foreign management and technology was given preference over China's domestic offerings.

The main beneficiaries of the law will be China's state-owned banks. The timing of the law's passage is important for this sector because they are to come under increased pressure from foreign banks as China implements the World Trade Organization's mandates for inclusion.

Defense Spending Increased

A bill that faced little internal debate was probably the most controversial measure with foreign governments. The NPC passed a bill to increase military spending by 17.8 percent. This was the 19th year of double digit increases for defense spending, but the largest increase in five years. The increase will pay for higher salaries for incoming soldiers and the retirement of about 200,000 low-ranking soldiers who are to be replaced by improved technologies. The increase is also likely to improve information systems for "networked" warfare and moving the navy toward "blue water" status.

Outside of China, the critics were not so much concerned about another increase in spending -- after all, uniformed military make up about ten percent of the NPC -- but, rather the increase was used as another excuse to criticize the lack of transparency in China's military spending. Washington, Tokyo, Canberra, and Taipei all criticized Beijing for not disclosing how the defense budget will be spent or the strategic goals of China's military build-up. Officially, the increase will bring China's defense spending to 350.92 billion yuan ($45.32 billion), but most estimates put the figure closer to double this amount once large-scale weapons purchases and military research and development expenditures are included.

Another reason for concern is that the announcement comes on the eve of a reshuffle of the U.S. command. The current U.S. Pacific Command chief, Admiral William J. Fallon, is being moved to Central Command in the Middle East. He has been a driving force for closer contact with the Chinese military; he increased the frequency of dialogue with his Chinese counterparts; and he was involved in the first joint-training exercises with China in 2006. He claimed success for this approach when China contacted him shortly before North Korea tested an atomic device last year. Admiral Timothy J. Keating will replace Fallon at the end of March. His public statements indicate that he will continue to build upon Fallon's approach, but China may interpret some of his criticisms surrounding its anti-satellite test as too harsh.

Within Washington, China's military is often cited as the reason for increased spending on expensive defense projects, especially for the navy and air force. It remains to be seen if the United States will move toward closer military cooperation with China, or if it will continue to drift toward competition. The lack of transparency in Beijing's defense spending also increases the risk that a conflict could be sparked between the United States and China because Washington lacks a clear vision of Beijing's strategic goals.

In sum, although President Hu and Premier Wen have positioned themselves as defenders of the downtrodden, they have not reversed the trends of the previous leaders toward economic growth led by capitalism. As such, social spending for the rural areas will increase less than that of the military, which is being developed to protect the shipping lanes on which China's manufacturing industry depends.

Wen's ability to force through the private property law at this year's session, while putting the spotlight on the measures designed to tackle the urban-rural divide, seems to ensure that his position as premier will remain intact after the upcoming 17th National Congress to be held this fall. While the NPC provides an annual glimpse into the inner workings of China's government, it is at the National Congress where power is determined every five years. President Hu is likely to re-nominate Wen after his performance this year at the NPC More important to watch will be who Hu and Wen position to become the next generation of leaders in the Chinese Communist Party.

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