Political reform in China taking place through economic channels

The missing component to the story of China's cash crunch is political. The losers in this case are the corrupt bureaucrats and party insiders who are leveraged to the hilt. These are the insiders who stopped reform in 2005 and took control in 2008, using the central bank as their personal piggy bank. Growing wealth helped secured their political position. Reformers such as Li Keqiang, who want to build a middle class, have to break the grip of these CCP insiders before they can have a free hand to reform. This is why I remain long-term bullish on China, even if I believe there very likely will be a short-term economic crisis. The crisis is actually a political transition.

Scalpel in hand, Chinese Premier Li stirs reform hopes
"Welcome to Doctor Li Keqiang's surgery," analysts from Standard Chartered said in a note.

"We had suspected that Premier Li would want to drive significant reforms. We underestimated, however, his apparent willingness to make policy choices that would risk putting further downside pressure on the economy."

Here is what I wrote more than a year ago in Socionomics Watch—The battle for China
Ask Chinese citizens and they may tell you Wen Jiabao is just playing "good cop" in a show for the people, but from what I've read of Li Keqiang's policy ideas (one of which I covered in China tax reform), he appears to be putting some of Wen's ideas into practice, albeit in economic policy, not politics.
Exactly what we see unfolding today. Even Chinese disagreed with me when I told them Li Keqiang is a reformer (though some of that may be cynicism born of experience), but the facts now speak for themselves.

A few weeks after that post I also wrote: Liberals aim to unleash new wave of reform, which looked at the censoring of leftists. A month after that, I wrote Why is Wen Jiabao criticizing the banks?
Wen Jiabao is targeting the banks because they are the linchpin of the centrally planned economy. The state-owned banks lend to state-owned companies controlled by high ranking party members. Political reform in China has failed because financial reform in China has stalled. Fresh off a political victory, Wen Jiabao is pressing for financial reform and he does not expect to see any changes. What he is doing is paving the way for Li Keqiang to follow through on his rhetoric.

People who are surprised at what is happening in China have not been paying attention. And most people who are paying attention, do not understand what is taking place. This is as much political as economic.

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