Fixing China social contract key to Communist Party survival

April 16, 2015 11:36
President Xi Jinping has seen quite clearly that the social contract must be brought back to balance for the Communist Party to survive. Photo: AFP

Many people are talking about China’s structural reform these days. But seldom have they discussed the linchpin of the structural reform program.

At the heart of President Xi Jinping's reform vision is the need for strengthening the foundations of the Communist Party's grip on power. To do that he needs to reconstruct the nation's social contract which Beijing has been using to govern the country since economic reforms started in 1978.

For the people, the deal is for the Party to retain monopoly on power in exchange for economic freedom that has delivered unprecedented economic growth and poverty reduction. For the Party, the "red line" is anything that it perceives as a threat to its survival.

The 2008 Beijing Olympics, the 2010 Shanghai World Exhibition and more recently the initiatives to set up an Asian Infrastructure Investment Bank and launch the “One Belt One Road” investment program were designed by Beijing to warm the hearts of Chinese citizens, while impressing the world and feeding its people with a rich diet of nationalism.

However, things have changed, leading to the breakdown of the social contract. Years of lopsided economic growth has deepened income and wealth inequality, creating a big “economic divide” between the rich and the poor.

This has raised the awareness of the grassroots population that corruption and incompetence of local officials are only a small part of the problem that bars them from sharing the benefits of economic reform.

The major problem is rooted in the higher policy level. This has, in turn, prompted the intellectuals and the wealthy to take more interest in politics and the reform process, either to fight for their interests or to exploit rent-seeking opportunities to enrich themselves.

President Xi has seen quite clearly that the social contract must be brought back to balance for the Party to survive. He and the Party are very conscious of the “Gorbachev syndrome”. When Xi hands over power to the next generation of Chinese leaders in 2023, the Communist Party will have ruled China for 74 years, exactly the same length as the rule of the Communist Party of the former Soviet Union before it disintegrated.

Signs of China's social contract fracturing are ample, including yawning inequality between the rich and the poor, rampant corruption, life-threatening environmental damages and human rights abuses.

Thus, the key objective of Xi's administration is to reconstruct this social contract. Although this is a question of life and death for the Party, reforms will be much more difficult than ever before because they result in winners and losers.

The losers are the vested interests that have benefited from the past economic liberalization that has created the current rent-seeking and corrupt system. They will endeavor to block changes that will take away their privileges.

This includes state-owned enterprises, state-owned banks, local governments, Party officials, many government ministries and interest groups that have cozy relationships with the powers.

Xi has demonstrated a clear determination to change. But the reform process will require a complex legislative and implementation process, which could threaten the Party’s viability.

For example, structural changes that improve economic efficiency will take away subsidies from the state-owned enterprises (including the requirement to pay higher dividends), force state-owned banks to operate on a more commercial basis and destroy rent-seeking opportunities.

Beijing’s anti-corruption campaign aims at cleaning up the system at the roots in order to cement the country together again. This project of reconstructing China's social contract involves a combination of some letting go on the economy and society on one hand and exerting more political control, as recent arrests testify, on the other.

Playing into Xi's hands are developments in the United States and other developed countries in recent years which have undermined the moral authority and attractiveness of these systems – developments from the global financial crisis to the US government spying revelations.

This has indirectly strengthened the Chinese government's social contract with its people by showing the dark side of the advanced democracies that, presumably, would help strengthen Xi’s control to push through deeper reforms in the coming years.

Opinions here are of the author’s and do not necessarily reflect BNPP IP’s.

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Senior economist of BNP Paribas Investment Partners (Asia) Ltd. and author of “China’s Impossible Trinity – The Structural Challenges to the Chinese Dream”