The Party's Not Over

Foreign Policy
http://www.foreignpolicy.com/articles/2009/09/28/the_partys_not_over

On Sept. 16, the blockbuster film The Founding of a Republic was released to commemorate the 60th anniversary of the founding of the People's Republic of China, which occurs Thursday, Oct. 1. Featuring more than 100 big-name mainland and Hong Kong actors including Jackie Chan and Jet Li, one of the more poignant moments occurs when the actor playing Mao Zedong holds back tears and emotionally proclaims on the eve of the rise of a new and independent country, "The Chinese people have stood up." The film then awkwardly hurries forward to December 1978, when Deng Xiaoping heralds the era of "opening and reform" in the Middle Kingdom. It is undoubtedly a propaganda film, as would be expected of anything conceived by the Beijing Municipal People's Political Consultative Conference. But the ambitious sweep of events over six decades is a reminder of something else: The reform period since Deng took power will be nearing the completion of its 31st year -- more than half the age of modern China.

This is significant because China's leaders since Deng have been telling the world that the Chinese Communist Party (CCP) will soon relinquish its dominance over the Chinese economy and society, and is assiduously laying the groundwork for fundamental economic and political reform, and eventually democracy -- but only after it recovers from the chaos and destruction of the Mao years. After all, Deng famously declared that democracy was "a major condition that emancipated the mind." But the reform period of 31 years has exceeded Mao's 27 years of terrible rule. The excuse that the party will "let go" its economic and political power but for the ghost of Mao and his terrible legacy is wearing thin.
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So, first things first. Why should the party "let go" more power and instead work toward building institutions that will aid political reform and eventually democracy in China? Because in one important respect, authoritarian China is failing: While the Chinese state is rich and the party powerful, civil society is weak and the vast majority of people remain poor.

But aren't China's leaders doing a magnificent job of at least leading the country toward prosperity? After all, since Deng's reforms, Chinese GDP has grown 16-fold. And isn't this ultimately for the benefit of most of the country's people? Not in China's model of investment-led state corporatism hatched after the 1989 Tiananmen protests to preserve the economic power and relevance of the party.

Surprisingly, the greatest contributor to Chinese growth since the 1990s is not net exports but domestically funded fixed investment used to buy machinery or construct buildings and infrastructure such as roads and bridges. For example, this constituted more than half of GDP in 2008 and more than 45 percent of GDP growth in that year. Due to this year's massive $586 billion stimulus, about 75 percent of growth this year -- now touching 8 percent -- has been achieved through state-led fixed investment.

But not just the high reliance on fixed investment is striking. Where the capital goes is also all important. China is unusual in that bank loans -- drawn from its citizens' deposits funneled into state-controlled banks -- constitute about 80 percent of all investment activity in the country. Although state-controlled enterprises produce between one-quarter and one-third of the country's output, they receive more than three-quarters of the country's capital, and the figure is rising. Revealingly, state-controlled enterprises received more than 95 percent of the 2009 stimulus money. The Chinese state sector currently owns at least two-thirds of all fixed assets in the country.