Need To Know: June 13
No. 1 and his distant No. 2
We pointed out the ripples under the water; now the tensions within the Chinese Communist Party are surfacing.
The first sign of a split seems innocuous.
Chinese Premier Li Keqiang — the country’s number two leader on paper, but not in reality — on May 28 suggested allowing the return of “hawkers.” These roadside vendors peddle everything from fruit to small appliances on sidewalks and other public places.
“The street vendor economy and small business economy are an important source of jobs,” Li told the owner of a food stall in Shandong province, last week. “They are China’s life force as much as high-end businesses.”
In a minute, you’ll better understand the deliberateness of Li’s quote.
However, the CCP has waged a 20 year war to reduce the number of hawkers, and in the most modern Chinese cities like Beijing and Shanghai, they are very rare. Less than a week after Li’s proposal, the party’s official mouthpieces poured cold water on his idea, making it clear a hawker revival will not happen. Given the media are under the direction of Xi Jinping, the ultimate source of the rebuke to Li is obvious.
The second sign of rancor is overt. Xi was allegedly riled by Li's remark at the annual National People's Congress last month that China still has 600 million people living on a monthly income of 1,000 yuan (US$141), a reminder of the country's ongoing struggle to lift its people out of poverty.
In essence, Li was needling Xi over his mismanagement of the economy. At NPC, for the first time in 26 years, the Chinese Communist Party did not set a GDP growth target.
Why?
Yes, Covid-19 has created a severe global rescission. But Xi has badly bungled relations with the United States, China’s biggest customer, getting into a damaging trade war that escalated over 24 months.
China gets 4 percent of its gross domestic product from exports to the U.S., while the U.S. earned only about 0.6 percent of its GDP from exports to China. Xi had little leverage in negotiations, but acted like he had the better hand. Trump called his bluff.
The trade deal signed in January commits China to buying $200 billion in American goods it can’t afford. And while it halves the American tariff rates ultimately imposed on US $120 billion worth of Chinese goods, most of the higher duties — which affect another US $360 billion of Chinese goods — remain in place. If China welches on its commitment to buy those American goods, the tariffs go back in place on all Chinese goods.
Then out of Wuhan came Covid-19. Even before the pandemic, the trade war fallout had western companies exploring alternatives to producing in China.
China’s shady actions, including Xi’s blundering propaganda apparatus threatening to withhold drugs and protective gear from countries demanding an inquiry into the origin of the virus, has many companies in industries like pharmaceuticals looking to move before their governments order them to. Japan is already paying companies to leave China.
China’s rivals are waiting with open arms. India has created two new special economic zones, both bigger than Luxembourg. Indonesia has relaxed rules in its SEZs. And the EU and Vietnam just signed a free trade deal that’s expected to result in European firms leaving China to set up there. So future investment in China is now uncertain.
Totaling the damage: Xi’s trade war has made the engine of China’s economy, its Chinese factory owners and their workers poorer.
Western companies will leave China. The real question is not if, but how many will go.
And by deterring more investment in China, he has hurt the 600 million Chinese still living on less than US $141 a month. The Chinese economy needs growth of 7% plus a year to create jobs for them. That’s why the GDP growth target matters so much.
Li just publicly punched Xi in the nose by pointing this out.
As we said, while Li is the number two man on paper in China, he has been completely sidelined by Xi.
That’s because Xi and Li represent rival wings in Chinese Communist Party. In a party with 90 million people, there are several factions and sub-factions. But the easiest way to understand politics within the CCP is to consider it having an “elitist wing” and a “populist wing.” The two coalitions represent different socio-economic and geographical constituencies.
Xi leads the “elitist” wing. The core of Xi’s group is the “Zhejiang Clique” after the eastern province of Zhejiang where be built support when he was governor and party boss from 2002-2007.
Most of the top leaders in the elitist wing are “princelings,” leaders who come from families of veteran revolutionaries or of high-ranking officials. Many have family who went with Mao on the Long March. These princelings often began their careers in the economically well-developed coastal cities.
The elitist wing usually represents the interests of China’s entrepreneurs. It also includes the “Shanghai faction” of former president Jiang Zemin.
Li leads the the “populist” wing. It was headed by previous President Hu Jintao and Premier Wen Jiabao.
The faction is made up of current and former members of the Youth League, the Communist Party’s youth wing with 88 million members aged between 14-28.
Most leading figures in the populist wing come from less-privileged families. They also tend to have accumulated much of their leadership experience in the less-developed inland provinces.
These populists often voice the concerns of vulnerable social groups, like farmers, migrant workers and the urban poor. That’s why Li’s quote above about the hawkers was no throw-away line.
As China approached its last leadership change in 2011, the party generally felt a change of direction was needed.
Hu was a compromise choice reflecting the tensions between the two wings, and not an especially strong President. He and Wen were often checked by resistance from other members of the standing committee, generally those from the elitist wing appointed by Jiang.
After the 2008 financial crisis left China’s distorted economy with even more structural problems, Hu and Wen staggered to the end of their term.
Recognizing a stronger leader was needed, the Party agreed the next President needed more control. The leader would come from the elitist wing and the Premier from the populist wing for the appearance of balance.
But once he became President, Xi went on a power grabbing tear, and tried to diminish the populist wing as much as he could without completely breaking the party.
He launched a massive crackdown under the guise of anti-corruption on any competing factions, and arrested 120 high-ranking officials along with 100,000 others. Most of those people were in the populist wing. He’s engineered being anointed by the party to Mao’s level without having commanded troops or won battles. Last year he made himself ruler for life — ending the 10 year limit China had imposed on its president since the 1990s.
China has a huge number of loans (estimates are 15%) not being repaid. There is more debt held in murky “wealth management products” tied to real estate than held by banks. For too many companies, growth is high, but profits are low or losses are massive (and the books are being cooked. See Luckin Coffee).
Chinese invest whatever they can abroad; if China was a wonderful investment, its own people should be plowing their money into it. That they put as much as they can into foreign assets like real estate tells you what they think of the Chinese prospectus.
But not only has Xi not fixed any of these issues, his handling of the American situation has made China’s position worse.
His chest-thumping nationalism may make some average Chinese feel better about the Century of Humiliation (which Chinese schools teach endlessly), but as we’ve pointed out, this approach damages China’s position abroad.
His Belt and Road Initiative is corrupting venal elites all over Asia, which is a win for China. But his foolish assertion of China’s aggressive and generally ridiculous territorial claims under international law alienates their public. It also makes BRI deals potential sources of regime change where China loses the local allies it has cultivated as it has in Burma, Malaysia and Sri Lanka.
Xi has also driven India — a country very skeptical of alliances generally and America particularly — to carefully consider a proposed naval alliance with the U.S., Japan, and Australia. If India joins the so-called Quad even informally, it’s an unmitigated disaster for China, since in a conflict, India is in the best position in the world to cut-off China from the oil it needs from the Middle East.
Xi may be the worst geopolitical tactician since Germany’s Kaiser Wilhelm. In the run up to World War I, the Kaiser managed to get Britain and France to set aside 1,000 years of rivalry and war to form an alliance to check Germany; by insulting the Tsar, he then added to the Franco-British coalition the absolute monarchy of Russia, which had a very dim view of the example democratic France and Britain set for the Russian people.
Wise leaders know the following: creating the appearance of omnipotence is dangerous because there are so many things you can’t control and events are unpredictable. Six months ago Donald Trump looked like he would be reelected. Then came Covid-19 and George Floyd.
Focus on a handful of problems where you can make a difference with the right policies, and deflect blame for the ones you can’t fix. Above all, don’t make new problems for yourself by letting your ego distract from your interests.
Xi has made himself the equal of Mao without Mao’s achievements, while making China’s problems worse and creating new ones.
It’s no wonder Li and the populist wing feel their time may be coming.