Sleeping Dragon Becomes Crouching Tiger

From: Grant Callaghan (
Date: Thu 14 Nov 2002 - 21:13:36 GMT

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    A major meme change for the Communist Party in China From the Far East Economic Review


    Jiang Ensures Party Endures

    Before he leaves, Communist Party boss Jiang Zemin unveils a raft of reforms to please business and foreign investors. His legacy lies in his dismantling of ideological barriers to the party's survival

    By Susan V. Lawrence/BEIJING

    Issue cover-dated November 21, 2002


    -- The party will allow private businesses to compete on a more level playing field with state-owned firms.

    -- Private capital will be allowed in more areas.

    -- Discriminatory rules on investment, financing, taxation, land use and foreign trade will be revised.

    -- Fuller legal protection for private property.

    FINALLY, PRIVATE-SECTOR tycoons got invited to a Communist Party ball, and they wanted everyone to know they had arrived. Men such as Jiang Xipei, who made a fortune producing power cables, and Qiu Jibao, whose Feiyue sewing machines racked up $100 million in exports last year, sneaked out of staid, stuffed-armchair meetings at the party's 16th congress to speak to scrums of reporters in hallways. They energetically handed out name cards and company publicity, and even held press conferences to propound, a little recklessly, their interpretations of party doctrine.

    Of the 2,114 delegates to the congress, which meets every five years to endorse the party's policy blueprint and approve a new leadership, Jiang and Qiu were among a handful from the private sector. But as the first private businessmen to be delegates to a party congress, they were the most high-profile people there after the political leaders, headed by outgoing General Secretary Jiang Zemin.

    The party's goal in inviting such irrepressible capitalists to its premier political event was to highlight a significant stage in China's transformation from impoverished icon of collectivized farming and inefficient state industry to the world's most dynamic economy.

    In his report to the congress, which will guide his successors for the next five years, Jiang said the party intends to allow businesses to compete on a more level playing field with state-owned firms. Private capital will be allowed into more sectors. Discriminatory regulations on investment, financing, taxation, land use and foreign trade will be overhauled. Private property will have fuller legal protection.

    The embrace of capitalism isn't total. State-ownership, Jiang said, should still play the "dominant role" in the economy. Expanding the state sector and having it control "the lifeline of the national economy," he said, "is of crucial importance in displaying the superiority of the socialist system." In a November 10 press conference, Li Rongrong, director of the State Economic and Trade Commission, said the party would, in fact, put private businesses on a completely equal footing only with foreign business, not with state-owned firms.

    But by dismantling many of the remaining ideological barriers hindering growth of the private economy, Jiang's report opened the way for legal and regulatory moves that promise to change the business landscape of China.

    For foreign business, it is undoubtedly good news. With the private economy powering China's growth and responsible for the bulk of new job creation, foreign investors are looking to the private sector's continued rapid expansion to keep China an attractive place to invest.

    Foreign institutional investors eagerly await the listing of a large group of private companies domestically and eventually on foreign exchanges, through which they can invest in China's growth. So far, official bias against the private sector meant almost all companies that qualified for listings were state-owned. But Jiang's report looks set to change that.

    He first raised many of the same ideas he outlined at the congress in a speech in July last year for the party's 80th birthday. But he did not first run the proposals past the Central Committee for approval, and they provoked heated controversy within the party. The significance of Jiang's report to congress is that it makes them official party policy, which his successors must commit to carrying out.

    Boston University political scientist Joseph Fewsmith, who closely follows China's ideological battles, said Jiang's speech last year now looked like an inspired move. "You put all that stuff out front, and then you work you way up to the 16th party congress and it doesn't seem so startling," he says.

    In fact, Jiang's speech was the finale of a long intellectual journey for the 76-year-old who became party chief in the aftermath of the Tiananmen Massacre in 1989. Back then, Jiang appeared to subscribe to the view, inherited from Marx, that anyone who harnesses the labour of others for private profit is by definition "exploiting" them, and that wealth derived from anything other than one's own physical labour is illegitimate. He insisted to a party meeting in 1989 that private business owners were
    "exploiters" who could never be allowed to join the party because if they did, "what kind of party would we be building?"

    Then, in 1992, leader Deng Xiaoping urged the nation to stop asking whether policies were "surnamed socialism or surnamed capitalism." He set off a surge of economic activity that stunned everyone--Jiang included.

    So by the 15th party congress in 1997, Jiang recognized just how much economic dynamism could be unleashed through a well-thought-through ideological fudge. His contribution to China's economic transformation in his congress report that year was the notion that state ownership could be exercised through majority or even minority stakes in companies, rather than 100% ownership.

    A corollary was that selling off the state's stake in struggling companies was an effective way to preserve state assets, which would otherwise haemorrhage away. In addition, bringing outside shareholders into other state firms was seen as a useful method of expanding state assets, because the outsiders would invigorate the company's management and the state's share would grow in value.

    The result of that set of ideas was on display when delegates from China's largest state enterprises met during the congress. After an obligatory few minutes praising Jiang, Li Yizhong, president of oil giant Sinopec, reported on the company's progress since the 15th congress. Stock listings in Hong Kong, New York, London, and Shanghai, he told them, raised 40 billion renminbi ($4.83 billion) and "more importantly" diversified ownership, so the group itself now controls only 55% of its shares.

    Sinopec has lined up some of the world's most powerful companies as strategic investors, laid off 21% of its workforce, or 260,000 employees, joined the Fortune 500 in 1999 and last year was ranked No. 86, Li reported. His presentation wouldn't have sounded out of place at a corporate board meeting.

    Jiang's big fudge this year is that those employed in the private sector, including bosses, contribute to China's prosperity, and so should be treated for ideological purposes as fellow "builders of socialism with Chinese characteristics." He is "saying that the interests of the whole society are uniform," Fewsmith says. "The elimination of class struggle, as an element of what socialism is about, is really fundamental."

    For those who complain tycoons shouldn't be in the party because they aren't members of the working class, Jiang has adjusted the party's stated identity. It is now the vanguard not just of the working class, but "also of the Chinese people and the Chinese nation."

    On the ground, Jiang's report, combined with revisions to the party charter, should produce stronger protection for private property. And that should encourage bankers to lend to private businesses, says Andy Rothman, China head for CLSA Emerging Markets. That matters because the lack of access to formal lines of credit is the biggest constraint on private-sector growth in China. Private-property protection will also make it easier for private firms to list on stockmarkets and eventually issue bonds, he adds.

    Jiang's words should also deter corrupt local officials from preying on private firms with the idea that they had no official protection, Rothman says. Also look for a greater willingness by local governments to sanction the sale of stakes in state enterprises to private companies. The private sector has complained bitterly in recent months that the state has allowed foreigners to buy stakes in once-sensitive parts of the state sector, such as banks, while barring domestic private capital from doing the same.

    Writing in a leading financial newspaper on November 11, an official with the State Council's Development Research Office argued for speeding up the privatization of state enterprises by selling assets to both private domestic and foreign investors. Highlighting the uneven state of privatization, he noted that 80%-90% of state enterprises in Chongqing city in western China had either sold stakes to nonstate actors or privatized entirely since the 1997 congress. In the central province of Anhui, however, only 15% of 472 state enterprises had undergone similar reforms, with only 5.5% ending majority state ownership.

    The flamboyant private-sector delegates were a very visible reminder at the congress of the degree to which the party has changed its stripes. Qiu Jibao, the sole private-sector delegate from private-economy-dominated Zhejiang province, began his press conference by distributing copies of his in-house newspaper. It boasted of his delegate status, quoted him as saying the responsibility was "heavier than Mount Tai," and touted the company's new meat slicer as an unlikely "gift to the 16th party congress."

    Qiu said: "The Chinese Communist Party and the Chinese people are not just giving this honour to me, Qiu Jibao. It is showing its trust in entrepreneurs all over the country."

    Then he took a punt at explaining the party's revised membership policy. He joined in 1988, when his firm was registered as a local government affiliate so as to receive policy breaks denied to private companies.

    "The party isn't just the vanguard of the working class. It is also the vanguard of the Chinese people and it is the vanguard of the Chinese nation," Qiu began. He then plunged on with an answer bound to anger the party's Organization Department.

    "As I understand it, so long as you are on Chinese soil, or in fact on soil anywhere in the world, and are of Chinese descent, so long as you accept the party's programme and will make contributions to the Chinese nation, the party will welcome you."

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