The Battle For China Continues On All Fronts

Early in 2012, I wrote posts such as Socionomics Watch—The battle for China and Wen Jiabao's Revenge. These posts, among several others, looked at the political battle taking place within China between the different factions within the party. The reform camp was a winner in the Bo Xilai saga, but the conservatives (generally favor the political status quo) led by Jiang Zemin also came out winners, with some younger reform camp politicians blocked from rising in this latest transition. Still, Li Keqiang is a reformer, Wen Jiabao's chosen successor, and Xi Jinping is more reform oriented than many people realize. This is why the PBOC (one of the strongholds of the reform camp, as opposed to the Ministry of Finance), for example, has been storming back to power, winning back control and kickstarting reforms that were blocked by party insiders from 2005 to 2012. (See: SAFE and PBOC Battle For Control, also Political reform in China taking place through economic channels)

The big story of late is the corruption scandal at Chinese national oil companies, which is filled with political overtones. First some background. Last year, I wrote Bo supporter Zhou Yongkang fades from power, looking at the fade from power of Zhou Yongkang. With Bo being taken down, his Red faction lost power and supporters such as Zhou Yongkang were quickly sidelined. However, the faction still had influence and power, which is why there is now a more thorough rooting out of this faction.

Former oil company chief and protégé of ex-security tsar Zhou Yongkang is latest graft probe target
The head of a cabinet agency overseeing the 100 largest state-owned enterprises is being investigated for corruption in what appears to be a widening probe into the state oil industry - a key powerbase of former senior party leader Zhou Yongkang.
In order to be promoted within the party, for the most part members need high level positions in major cities, provincial government, or large state owned enterprises. Different factions cultivate power in various branches and geographic locations: Jiang Zemin leads the Shanghai clique; lately some smaller corruption probes have ensnared officials in Dalian, Bo Xilai's redoubt before his promotion and move to Chongqing; Wen Jiabao and Li Keqiang come from the Communist Youth League. The corruption probe of the major oil companies is a attack on the leftist/Bo Xilai faction of the party designed to permanently weaken them.

The investigations have been seen by some analysts as a move by Xi and Premier Li Keqiang to weaken state monopolies in strategic industries.

Li, who heads the State Council, has reportedly sought greater competition in the industries, but has met resistance from powerful state-owned enterprises.
This is why I disagreed with analysts who said reformers lost with the rise of Xi Jinping, they did not understand that while the conservatives took more power than expected, they are not the ones blocking economic reform. Rather it was a combination of corrupt insiders who seek to control state owned companies and banks for their personal profit (the post 2008 lending spree was directed by these insiders who had stalled reforms in 2005 and increasingly took control over economic policy through the expansion of the Ministry of Finance), along with the leftists who seek to elevate Marxism and/or Maoist thought.

A good background to this story of reform is Red Capitalism. I have touched on the stalling of reforms in 2005 in various posts, such as Why is Wen Jiabao criticizing the banks?, in which I wrote:
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.

The Wenzhou pilot program cannot be overlooked because it is a very bold proposal. It is a common-law style advancement: allow the underground banking sector to become legal. Instead of prosecuting the booming gray market business, China has legalized it and after it succeeds, will spread it across the country. A private financial system will compete with state-owned banks for deposits. It will pay higher interest rates and charge higher rates for loans, to better credit risks, while the state-owned banks continue make bad loans to politically connected firms. Eventually, this will start impacting the state banks and instead of being regulated by politics, they will be regulated by markets. The old way to reform the banking sector was top down reform of the state-owned banks. This failed, the PBOC was blocked by the Ministry of Finance, and everything went back to business as usual after 2008. Now, a new reform effort is taking place, a bottom up approach that is more likely to succeed and far greater impact on the Chinese economy.
One cannot look at China's cash crunch or interest rate reforms without considering the political background. This is why those who only focus on economics may miss with their forecasts, because they are not factoring the political gains that may accrue via economic pain.

Getting back to the Zhou Yongkang story: Senior Chinese Official Falls Under Scrutiny as Some Point to Larger Inquiry
The Chinese Communist Party announced Sunday that a senior official responsible for overseeing state-owned corporations was under investigation, and people with knowledge of that case and many others said that, according to senior officials, the inquiries were part of a larger corruption investigation encroaching on the retired chief of the domestic security apparatus.

The former security chief, Zhou Yongkang, stepped down last year from the Politburo Standing Committee, the party’s top decision-making body, after years as one of the most powerful and divisive figures in Chinese politics. The investigations swirling around him appear to be part of the boldest efforts yet by China’s top leader, Xi Jinping, to consolidate his authority, convince officials he is serious about deterring corruption and extinguish Mr. Zhou’s lingering influence.
Yes, Xi Jinping is serious about cleaning up the party, but he's starting with his political enemies.
Mr. Jiang’s downfall appears to follow a pattern related to anticorruption inquiries against officials who rose in the footsteps of Mr. Zhou, 70, who worked at the China National Petroleum Corporation and in Sichuan, also the scene of an expanding corruption investigation. Four people with knowledge of the inquiries, each citing comments by senior officials, said those investigations were linked to a larger, secretive inquiry in which officials had detained or questioned a son and associates of Mr. Zhou.

“It makes logical sense that this is aimed at Zhou,” said Chen Ziming, a political commentator in Beijing. “It’s all too concentrated, all follows this same line to him. China National Petroleum Corporation and Sichuan are both places he worked. It’s a step by step process, questioning people associated with him, former secretaries and so on.”
There have been corruption scandals in Dalian and Chongqing, fallout from the Bo Xilai scandal. Now his chief supporter, Zhou Yongkang is seeing the noose fitted, with corruption investigations in Sichuan and at state oil companies.

Finally, don't forget about the banks. Don't forget about the strict audit being carried out, which will conclude in October or November, or the cash crunch from June. A rising tide lifts all boats, but it also lifts all corrupt endeavors. When the tide goes out, you not only see who has been swimming naked, but who was using corrupt methods to boot. A little economic slowdown can go a long way to revealing corrupt practices, and eventually this will lead to the state owned banks, where the key to future economic reform lies.

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