Cleaning Out China's Augean Stables

China’s 18th Communist Party Central Committee Congress wrapped up today on a triumphant note, with Xi Jinping named the country’s new leader as expected. The 59-year-old Xi is being cast as a reformer to attempt to move a sclerotic party into a new era.

China-watchers in particular have noted that that Vice Premier Wang Qishan has been the new head of the Central Commission for Disciplinary Inspection, giving him the portfolio of the Communist Party’s graft watchdog. Wang is an acolyte of one of China’s most striking figures, the onetime premier Zhu Rongji, who served from March 1998 to March 2003 and who made it his mission to clean graft out of the party. Because of Wang’s aggressive character and no nonsense style, many have called Wang “Little Zhu Rongji”.

It was Zhu who personally took command of the effort to break up the ring run by Lai Changxing, a businessman and entrepreneur who headed the lucrative Yuanhua Group in Xiamen, smuggling great quantities of cars, cigarettes, chemicals, VCDs and oil and an array of other materials into China. At one point in 1997 and 1998, 3,700 oil wells were shut down because so much refined fuels were being smuggled in.

Zhu, with Wang Qishan as his right hand man, was instrumental in breaking up Lai’s ring. He ordered the establishment of an anti-smuggling police force under the oversight of the customs and public security authorities which largely broke the back of smuggling, although it undeniably continues.

Wang’s appointment, according to sources in Beijing, means that Xi Jinping is taking seriously the uphill battle against corruption. A shrewd, no-nonsense Wang leading the anti-graft watchdog agency is designed to serve as a major deterrent to corrupt officials. And indeed, given Wang’s style, he surely won’t let big fish slip away easily.

But the fact is that the fish in the Communist Party are so big that catching them may be impossible. The problem is that corruption is so endemic to the system, and those who have profited from using their positions as party leaders are so entrenched that getting rid of them through a change in the system may be the only answer. But that is not a change that Xi Jinping intends to make. It is clear that he means to attempt to reform the system within the communist party, not by any switch to western-style democracy.

Hundreds of party members are now millionaires. The delegates to the 18th party congress, chastened by Netizens after last year’s March conclave, left their expensive bags, suits, cigarettes and other luxurious appurtenances at home this time. But published figures show that the wealthiest 70 delegates to the National People’s Conference had a combined fortune of US$90 billion in 2011. The top 70 in the Chinese People’s Political Congress were even richer at US$100 billion. It is fair to assume that they all didn’t come by that money honestly.

The 18th Party Congress set two targets: doubling both GDP and people’s incomes by 2020 compared with 2010. These are quantitative goals. To achieve them, the new team must ensure annual growth of at least 7.5% for both GDP and incomes in the next eight years. If they fail to do so, discontentment, which generated an estimated 500 protests of various kinds per day during 2011, is expected to grow.

In fact the new leaders come to power at a difficult time. While the Chinese economy may be bottoming out, the forces driving growth remain weak. They have few cards to play. Another 4 trillion yuan stimulus package is not on the cards. The last one has been blamed for causing a property market bubble, inflation, more corruption, such as that which swept the national fast-train program, and more debt as exemplified in the trillions that local governments borrowed through third-party vehicles.

Xi and his prime minister, Li Keqiang, 57, cannot dramatically ease monetary policy as this would offset efforts to bring down housing prices and boost inflation, although some slight cuts in interest rates and the bank required reserve ratio (RRR) may be expected. He cannot stem the export slowdown because foreign markets are beyond the government’s control, although some measures are possible, such as cutting export tariffs or giving subsidies.

So Xi and his team will have to resort to boosting domestic consumption. They are expected to start reforming wealth distribution, aimed at increasing low-income people’s incomes and curbing those of the high-net-worth individuals. This is certain to become a political issue, offending vested interest groups within and outside the party. There inevitably will be strong resistance.

Thus to attain the GDP and income growth goals, Xi has no other choice but to reign in the vested interests. Behind these interests are often corrupt officials. So to rein them in will require a crackdown on official corruption. They are two sides of the same coin.

Wang’s appointment as chief of the disciplinary inspection commission thus symbolizes the party’s stepped up efforts to fight against corruption. The appointment also shows Xi and his team were not happy with the performance of the disciplinary inspection commission in past years. Ma Wen, 64, minister of supervision and No. 3 leader of the agency, who practically ran daily operations, was voted out of both the new Central Committee and the commission itself although before the party meeting, she had been rumored for promotion into the Politburo to the agency.

Ma is known to be a close friend of Premier Wen Jiabao’s wife, the two described as being “like sisters.” Wen Jiabao, of course, was the subject of a spectacular story in the New York Times alleging that his relatives including his mother had amassed a fortune of US$2.7 billion. A Bloomberg story earlier this year alleged that hundreds of millions of dollars in assets were held by Xi Jinping’s own family.

Zhu Rongji once expressed his determination to curb official corruption with these words: “I’ll have 100 coffins prepared. Ninety-nine are for corrupt officials and the other one is for myself.” But he was unable to contain corruption despite his strenuous efforts to do so. That is because the root of corruption lies in the Chinese system itself. Whether Wang can or will design a system to set up effective anti-graft mechanism remains to be seen.

(Steve Wang is research director and economist for the REORIENT Group Ltd investment bank.)