Why China's political calendar is bad for reform
Rulers in autocratic regimes are commonly seen as enjoying much greater freedom of action in policymaking than leaders in democracies because they are not hampered by electoral cycles. For those wedded to this alleged superiority of dictatorships, it is natural to conclude that autocratic regimes are more capable of implementing painful economic reforms as a result of their lack of accountability to voters.
However intuitively appealing this proposition is, the reality is quite different. While it is true that autocrats do not have to worry about winning elections, we should be aware that they have much less freedom of action than is often assumed. Indeed, they are just as constrained by the influence of interest groups and the dictates of their political calendar.
Nowhere is the tyranny of the political calendar in an autocratic regime more apparent than in China today. With record-high financial leverage (China's total debt-to-gross domestic product is approaching 240%); massive overcapacity in manufacturing industries; a colossal real-estate bubble; and countless zombie companies sucking the blood out of its economy, China's only viable option is to embrace short-term pain to avoid long-term stagnation. In other words, Beijing would be far better off if it killed off the zombie companies, recognized the huge amount of bad loans in banks, and recapitalized the banking system.
These drastic measures will, unavoidably, result in a painful recession. But the long-term reward would be a more balanced and healthier economy.
If the conventional wisdom about the autocratic superiority in economic reform was right, we should expect the ruling Chinese Communist Party, now led by General Secretary Xi Jinping, arguably the strongest leader since the late Mao Zedong, to adopt these reforms.
Alas, judging by Beijing's recent economic policy, it should become evident that Chinese leaders have little appetite for such intense short-term pain. Instead of these necessary reforms, Chinese leaders have kept open the credit spigot to support zombie companies and further inflate the real-estate bubble while taking baby steps in reducing overcapacity.
There are several explanations for their reluctance. For one, Beijing is fearful that aggressive deleveraging could trigger chain debt defaults, a financial panic, and the collapse of growth. Such fears should not be dismissed lightly. Another possible explanation is that Chinese leaders themselves think they have ample resources to deal with the country's mountain of debt. For instance, several Chinese economists argue that the value of China's assets, such as state-owned enterprises, land and mineral resources, is worth more than its total debt, suggesting that the government has no need to worry about piling on more borrowings. A third justification for inaction is that China is unlikely to suffer a catastrophic financial crisis because it has a high savings rate: The government controls the banks and most Chinese debt is denominated in its own currency.
While such defense of Beijing's policy may have some merits, its advocates ignore one inconvenient fact: The CCP's political calendar makes it inconceivable that top Chinese leaders would risk a recession ahead of another critical leadership succession.
The next CCP National Congress, the 19th in its history, is scheduled for the fall of 2017, roughly 15 months from now. Between now and then, Chinese leaders will be consumed by political jockeying ahead of the event.
Politics versus economics
The stakes cannot be higher. For Xi, this is his first chance to shape the top leadership. If things go well, he could place his supporters on the Politburo and, most importantly, on the Politburo Standing Committee. Under the existing, albeit informal, rule of mandatory retirement, five of the seven members of the PSC are slated to step down next year. Evidently, if Xi could appoint three of his loyalists to the PSC, he would control the party's top decision-making body. There is also speculation about even more consequential changes at the next party congress, such as the end of the informal rules on term and age limits and the practice of appointing a successor-to-be five years ahead of the anticipated succession. If a successor to Xi is to be anointed, it will occur at the 19th congress.
But what does all this political maneuvering have to do with economic policy? The short answer is -- everything.
The popular notion that the CCP is a top-down dictatorship in which its most powerful rulers can impose their will on those at the lower levels of the regime has no basis in reality. The present CCP regime is an elitist coalition consisting of numerous factions and interest groups. To be sure, one particular group or individual in this regime may be more powerful than any of its or his individual competitors, but even this dominant group or individual can seldom completely disregard the unified opposition of the other groups.
What complicates the political calculus of today's top Chinese leaders, particularly of Xi, is that the party's leadership selection process is constrained by formal and informal procedures in which subnational leaders, in particular provincial party chiefs and governors, could exert real influence. Between now and the 19th congress, the most crucial event in determining the line-up of the next Politburo would be an informal gathering of the Central Committee and a group of retired senior leaders (former Politburo members) in June next year.
It was at such a gathering in June 2007 that the party anointed Xi as the successor to Hu Jintao. If this process is to be repeated in June next year, the members of the Central Committee (a body of roughly 200 full voting members, including nearly all the 62 provincial party chiefs and governors) could play a decisive role because they can vote in secret ballots, as was the case in the selection of Xi in 2007.
Imagine how upset this group would be if Beijing should start an aggressive campaign of financial deleveraging and economic restructuring. Such a fateful move would hurt many provinces, especially those with a high concentration of heavy manufacturing industries. Since provincial party chiefs themselves want to deliver a superior record of economic performance to gain promotion, the last thing they want is a recession in the year of a leadership succession.
Besides antagonizing powerful provincial interests, the top CCP leaders are also concerned about the overall political mood and optics in the year of a national party congress. Ideally, this should be an occasion to celebrate their achievements. But if a restructuring-induced recession were to accompany the 19th party congress next year, the gathering would resemble a wake more than a festival. Bitter recriminations would fill the hallways of power in Beijing. In such an environment, no leader, however powerful he may be, can guarantee that his preferred succession plan would receive sufficient support in June next year, let alone the party congress in the fall of 2017 when more than 2,000 delegates will attend.
The simple political logic laid out above suggests that few should expect China to change its current policy of sustaining growth at any cost before the spring of 2018, when the succession process is over and a new group of leaders assumes power. Most market observers believe that the Chinese economy would be in far worse shape by that time without policy change and the costs of the eventual clean-up of the financial sector would be much bigger. For top Chinese leaders hemmed in by their own considerations of power, however, these concerns may merit their attention - but will not change their minds.
Minxin Pei is a professor of government at Claremont McKenna College and author of "China's Crony Capitalism: The Dynamics of Regime Decay" (Harvard 2016).