For change, look to China's non-state sector

24 January 2013

The Bund district in Shanghai, China.
The Bund district in Shanghai, China.

Kerry Brown says China's successful transformation into a middle-income country will depend largely on the performance of its next growth driver - the private sector.

When an American president is elected or re-elected, there is a wave of speculation about who will be on his governing team. Who will he appoint to the State Department, the National Security Council and defence? This is a key way in which he offers clues to how he might exercise power and what policies he might follow.

The Chinese leadership transition gives no such clues. New Communist Party boss Xi Jinping might be at the heart of the group, but exactly what say he has in the appointment of key figures around him is open to speculation. The usual explanation for portfolios given to newly promoted figures is that they belong to the camp of former leaders Jiang Zemin or Hu Jintao.

Patronage, at the start of a new era in Chinese politics, belongs to the generations before. A classic case is the publicity (that's propaganda in the old terminology) slot in the full Politburo which was given to Liu Qibao. He, we are told, is Hu's man. But, for the sake of balance, he will report to Liu Yunshan, who is Jiang's man. In the 21st century, we still use terms in Chinese elite politics from medieval fiefdoms.

We want to know what policy direction these new leaders might take - and yet, in the era of "collective leadership", looking at the formal line-up of top figures gives little help. They are as uniform and grey in their worldviews as they appear in person - all men, all over the age of 50, all Han Chinese. Has a diverse country ever been led by such a narrowly rooted elite?

To work out the policy issues, therefore, we look not at the figures, but at the facts. We look at the predicament that China faces as a country in the coming decade as it travels towards middle-income status - a per capita gross domestic product by 2020 of around US$10,000, double what it is at the moment. We know from the experiences of other countries that this is a treacherous path, when economic issues get tangled up with social and political ones, and contention in society intensifies.

For China, the scale and speed of this transformation will be unique, but not the experience. These leaders, whatever their patronage links, need to steel themselves for this transition.

The way the power system in the Communist Party is configured now, the key political priority is to create consensus. The sole consensus point in the party and the wider society in the past two decades - since the shock of Tiananmen in 1989 - has been GDP growth at all costs. Hu's undisputed historic achievement is that he presided over the golden age of growth. In his decade, China quadrupled the size of its economy. These were the fat years.

China is not about to enter an era of austerity under Xi, but it is going to hit lower growth. That has already happened. Growth has fallen from the giddy heights of late 2010 . This was prefigured in the 12th five-year plan, the canonical macro- economic blueprint the new leaders are committed to until 2015.

The political issue now, however, is that growth in the future will be derived from efficiency. Capital investment must fall, consumption must rise, saving rates must fall, and export-led growth must change. All this has been densely discussed. The leadership is moving from a decade of flamboyant growth to a greyer period of efficiency. And at the heart of this is the role of state-owned enterprises.

When premier Zhu Rongji was taking the knife to the vast state enterprises in the late 1990s, no one would have believed that, within a decade, they - reformed, slimmed down and restructured - would become hugely profitable. But since 2008, that is what they have been.

They are the source of almost half the central government's revenue. Their taxes are the cash cow of the modern party. Their return to political favour is marked out by the former Politburo singing their praises as bulwarks against the international capitalist system when it imploded in 2008. The return of the state-owned enterprises proved that socialism was great.

There is one structural problem now. They are hugely inefficient, with problems in their management, labour productivity, deployment of capital, and in their transparency and loans. We simply don't know what sort of rot lies at their roots. In the boom years, this doesn't matter; with leaner growth, it will.

The new leaders have one clear ally in their fight to reform the state-owned enterprises - the private sector. And this is one ally Western companies and governments should also warm to. The non-state sector in China will almost certainly be the source of new jobs and innovation in the coming decade.

Entrepreneurs were brought in from the cold under Jiang in 2002, when they were allowed to join the party. Do we see, in Jiang's appearance on the final day of the 18th party congress, a tacit sign that the policy he supported might be in for some re-energising?

The non-state sector is the natural ally for Western capitalism because these companies are politically uncontentious in China, ripe for globalisation, and diverse. They are lean and loan-free, and many of them are highly innovative.

If the Communist Party wants growth, then this is the group that will deliver it. They produce three-quarters of the new jobs, and as much as half of all GDP growth now. In the fundamental battle to deliver efficiency, they will be, and already are, absolutely vital.

So any foreign governments scratching their heads and wondering what to make of this new, grey line-up of leaders who look just like the ones they have replaced can at least settle on this: working to support the non-state sector as investors, innovators, partners, employers and joint research collaborators will be the most efficient, least contentious way to achieve our common aim - a stable, prosperous and integrated China in the coming years.

Kerry Brown is executive director of the China Studies Centre and professor of Chinese politics at the University of Sydney.

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