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How tight is China's Communist grip?

October 8, 2010

Lindsay Vincent
Money Observer
October 2010 edition

The transformation of China is a global event
without parallel. In August, just nine years
after the country joined the World Trade
Organisation, China triumphantly became the
world's second-largest economy. In an uncertain
world, one certainty is that its rate of economic
expansion will continue to outstrip that of the West.

Yet this economic powerhouse, the lifeblood for
one fifth of humanity, remains an emerging
market, while the Chinese population has an
annual per capita income of less than $1,000
(£640). For investors, the key consideration in
emerging markets is politics. They should be
mindful that Beijing doesn't play its political
hand close to its chest but behind its back.

To consider, for even a millisecond, that Rupert
Murdoch might be easily duped, stretches the
imagination. However, at a small private dinner
in the 1990s, the media baron rather naïvely
revealed that he had yet to meet a Communist
during his visits to China. Murdoch, who recently
turned his back on the country, has been far from
alone in misinterpreting the situation there.

Most Western businesspeople, and many fund
managers, fail to fully recognise the reality of
Chinese communism when they make deals with, or
invest in, a Chinese company. The country is
awash with money, hope and consumer products. And
there is an unmistakable swagger in the step of a
nation on the up. It's easy for Westerners to
overlook the fact that China is a one-party state with a command economy.

To outsiders, the party has such a low profile
that it is hardly visible. Westerners may find
themselves in a room full of local businessmen
ready to sign and shake hands on a deal, but it
is the party official, anonymous in the corner, who wields real power.

"The party is like God. He is everywhere. You
just can't see him." These words, from a Beijing
professor, set the tone for a powerful and
important book on China, The party: The Secret
World of China's Communist Rulers. Its author,
Richard McGregor, was formerly Beijing bureau
chief for the Financial Times. McGregor has
uncovered fascinating details never published
before. The book offers a riveting and
unprecedented glimpse into the reality of Communist China.

What does it mean to say China is a Communist
state? Chen Yuan, president of China Development
Bank, replies: "We are the Communist party and we
will decide what communism means."

China, McGregor reveals, is run by 300 people, a
collective known as the Central Committee of the
Communist party of China. Top of the heap is the
all-powerful, nine-strong standing committee,
headed by the most influential man in the land,
Hu Jintao, the outgoing general secretary.

Outside China, he is effectively president and is
"a familiar face, if not a familiar personality",
says McGregor. Between the standing committee and
the central committee lies the 25-strong politburo.

To Western observers, Chinese communism seems
enlightened, benign and, now that the horrors of
the Mao Tse-Tung era have faded from memory in
the West, almost fit for purpose from a business
point of view. Underneath the surface, however,
says McGregor, the Chinese model is Leninist.

The party has 90,000 cells in the army alone, one
person for every 25 of the army's 2.3 million
personnel. Every company of importance has its
own committee and ultimate control rests with the
party secretary of that committee.

To get ahead, companies need a "red cap" or state
endorsement. McGregor uses a graphic image of the
red telephones that sit on desks in the top 300
companies to make his point. Part of a secure
network to the top, if one rings, a Chinese
company jumps. McGregor describes how a judge who
questioned the party's interference in a legal
case was told by an official: "You call it
interference. We call it leadership." The same
mentality applies in the corporate sector.

Many people in the West associate the
extravagances they see in China and the hundreds
of new billionaires they read about with the
private sector. But this is a mistake. The
private sector is miniscule and, as McGregor
tells Money Observer, it has a lot of trouble
accessing capital. "They have to self-finance from profits," he says.

In his book, McGregor says the party's distrust
of the private sector was not about money or the
contradiction between individual wealth and the
official Marxist and Maoist pantheons. "The real
threat for the party was the danger that the
foreign and private sector might become a political rival."

However, an unprecedented partnership between a
Communist party and a capitalist business holds.
It remains an uneasy alliance, but one that has
turned more than a century of conventional wisdom
on its head. "A broad consensus has now developed
at the top of the party that, far from harming
socialism, entrepreneurs, properly managed and
leashed to the state, are the key to saving it."

McGregor doesn't subscribe to the view that
China's massive stimulus package, and the
inflationary consequences, will throw the broad
economy off course. "Urbanisation is still
growing and it has some way to go. The economy
will grow at between seven and 8% a year for the
next five, and possibly 10, years, but that is
not the real story. The present model has to
change. It can't last, and that is a worry," he says.

He suspects that party policy will leave the
currency unchanged against the dollar, so as not
to tamper with the export market. McGregor
believes China has no alternative but to keep
buying US Treasury bonds - vendor financing, in effect.

He says: "They have a poor view of the euro, and
the yen is not considered stable. What else can
they buy?" Weakness in the dollar, however, is
not taken lightly. "The politics of it is
potentially incendiary,' he says. "It is a
pressure point and it won't go away. The US is in
a greater funk: the [renminbi revaluation] policy
conflicts with the China interests of US companies."

McGregor thinks the main challenges facing the
party in the short term are internal. "Tibet and
Xingjian [the Muslim province] are running
sores," he says. Sustaining water supplies to
service massive economic growth and protecting
the environment are also a concern. He adds:
"There is always a problem with new or existing
diseases. The country is a great incubator for disease."

McGregor says that, since the recent financial
crisis, the regime is getting "cockier". He
points out: "The Western brand is damaged. The
Iraq war has shown that the US engages in
torture. It can hardly accuse China of the same.
China has also got through every major financial
crisis since the 1990s, while the US is still
suffering from the last crisis. And China is the master of US reserves."

McGregor's book does not cover the post-1997
handover of Hong Kong to China by the UK. But he
says the party operates underground there. "It
will not even declare its existence." Beijing
bling and Shanghai flash seem to be indicative of
deep corruption in China. But, as McGregor points
out, corrupt regimes can last a long time.

He writes: "The Chinese officials who do get
arrested for graft generally fall into one of two
categories, sometimes both. They are the losers
in the political struggles or their corruption
becomes so outrageous that it embarrasses the
system and jeopardises the game for everybody else.

"Corruption in China seems to operate more like a
transaction tax that distributes ill-gotten gains
among the ruling class. In that respect, it
becomes the glue that keeps the system together."?

The party: The Secret World of China's Communist Rulers,
by Richard McGregor,
published by Allen Lane, £25.
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