China's Corruption Drive Still Clearing the Decks for Reform; Why 2008 Stimulus Will Not Be Repeated

Special Report: The power struggle behind China's corruption crackdown

The billionaire head of the privately-held Sichuan Hanlong group of companies is the first high-profile casualty of a power struggle wrapped in a corruption crackdown that is convulsing the senior echelons of the ruling Communist Party. A verdict is expected Friday after Liu's sensational trial on charges of murder, gun-running, fraud, extortion, illegal gambling and a string of other offences. He has denied all the charges.

Liu’s most serious offense, however, could well be political: He was caught up on the wrong side of a titanic power play, multiple sources say, because of his business partnership with the son of former domestic security chief, Zhou Yongkang. In a campaign unprecedented in modern China, Xi is determined to bring down Zhou for making a behind-the-scenes grab for power, the sources say.

This post from last year has a lot of links going back to the 2012 leadership battle. The Battle For China Continues On All Fronts

Here is the original post from 2012: Socionomics Watch—The battle for China. Reuters is now reporting the Bo Xilai and Zhou Yongkang made a power grab; I assumed at the time that they were cleaning out the Marxist/Red faction to pave the way for reform. In any event, the result is the same.

From February of this year: Behind the Scenes in China

Zhou's power bases were in the police, the oil sector and Sichuan, and it is an open secret that he has close links with fallen Chongqing party boss Bo Xilai.

If you read into the details of most high profile corruption cases, they almost all link back to Zhou or Bo. The PetroChina scandal (PetroChina vows more capex cuts as corruption probe widens):

PetroChina and its parent firm, China National Petroleum Corp (CNPC), are at the centre of one of the biggest corruption investigations into the Chinese state sector in years, launched by the government half a year ago.

The probe, part of a nationwide anti-corruption campaign led by Chinese President Xi Jinping, is still expanding and there are no signs it will end soon.

Zhou declined to give details about the probe but said the company had been through “unprecedented challenges”.

More recently: Corruption Probes Hit State Grid as Zhou Yongkang Takedown Continues

The way the party factions work in China is they take over some departments or SOEs. The Li Keqiang reformers/liberals control the Communist Youth League, which is why there is the total irony of the Beijing Youth Daily Calling For the Market to Regulate Housing. The PBOC is also in the reform camp, which is why within days and weeks of Bo Xilai being arrested, the PBOC started up reforms that had been delayed for years by the Ministry of Finance. Lately the PBOC is winning all of its turf battles. Also see SAFE and PBOC Battle For Control.

There's a lot of corruption drives targeting Bo Xilai's personal allies. Here's a Chinese article on more corruption in Chongqing: 重庆富豪吴旭因宋林案被查 或牵连原副市长, but the major push into the state oil companies is aimed at destroying Zhou Yongkang's power base. The SOEs, like a ministry, serve as a path to promotion for party members. The fewer ministries or SOEs you control, the fewer chances you have to advance in the party.

Many outsiders see Xi Jinping's corruption drive as a way for the party to maintain stability, but the Chinese assume all the leaders are corrupt; the real target is political enemies. No doubt SOE reform will also hit political enemies. Interest rate liberalization? Looking back, I can see a a straight line from Wen Jiabao's (Li Keqiang's mentor) attack on the banks to PBOC head Zhou Xiaochuan brushing off complaints by state-owned banks that Alibaba's Yu E Bao was hurting them. Meanwhile, don't forget that the 2008 stimulus was the brainchild of the Ministry of Finance, which seized a lot of power from the PBOC in 2005. (Read Red Capitalism for the full story.)

China is often seen as a centralized monolith controlled by the CCP. In reality, it is a very decentralized country where local officials often ignore central government mandates. Despite being a one party system, there are different factions within the party, and the Marxists have been taking it on the chin for sometime. Here's another story that has a lot of relevance to today, yet few people remember:

Will Mao Zedong's philosophy live on in party constitution?

The omission of Mao Zedong's name from a recent Xinhua statement has triggered speculation as to whether the Communist Party's 18th congress, which begins on November 8, will make a historic decision about how much emphasis to accord one of the party's founding fathers, as the practical impact of Mao's legacy on the party wanes.

......Zhang Ming , a political scientist at Renmin University, said it had become imperative, and therefore likely, that the party would reach a decision on whether to acknowledge Mao's ideology, particularly after the Bo Xilai saga this year.

Bo, a high-flying Politburo member until his recent downfall, had gained considerable popularity through his Maoist revival campaign.

"The party as a whole is extremely averse to the idea of another Mao appearing, and they understand that China's future depends on overcoming its attachment to Mao," Zhang said.

More detail here: Mao Thought conspicuously missing from Xinhua report in China; is it dumped?

Mao Thought isn't a major policy issue, but it does tell you about the relative power of various factions that it was even debated in 2012. Reformists are a lot stronger only 18 months after Mao Thought was first being discussed in this manner, and a lot of Mao fanatics are now in jail. The ongoing corruption drive and reform efforts will increase the reformers' relative strength. This is why I remain "bullish" on China sticking to the reform plans. The only reason for them to fall back is if they don't have enough support or control over the party. As Pettis' said, Xi must consolidate power.

When reading all the talk of China's economy, reform and stimulus, remember there is a also show taking place behind the scenes. China 2014 is not China 2008; the players have changed and their relative power has changed. In prior years, much reform talk was talk because the reformer couldn't implement policy. Today, talk is increasingly followed by action.