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China: new leadership strengthens its grip

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The third full meeting (or “plenum”) of the 18th Central Committee of the Chinese Communist Party, which met in Beijing last week, marked the consolidation of the power of the faction around President Xi Jinping and the Premier, Li Keqiang who eventually emerged victorious at last year's Party Congress.

After a year of purging their opponents, symbolised by the imprisonment of the Bo Xilai but extending far beyond his circle, Xi and Li not only secured the adoption of their political and economic programme but also created two new powerful institutions through which they mean to ensure that their programme is actually implemented.

Both the faction fight and the expectation of more battles to come underline the strategic importance of that programme. Its purpose is to remove major obstacles that prevent Chinese society as a whole from being dominated by the dynamics of capitalism, in a word, the law of value. Although bureaucratic command planning was abolished with the restoration of capitalism after 1992, China today still exhibits huge unevenness within both economy and society, reflecting its unique combination of features inherited from its time as a degenerate workers' state and those of a modern capitalism, indeed, imperialism.

As a result, the overall structure of both economy and society, their internal relationships, their geographical disposition, the proportions between agriculture and industry, between different industries, the structure and stratification of the population and so on, are not by any means determined by what is best for capital.

That explains the scope of Xi's programme, which includes not only a restructuring of the banks and financial system and the still dominant state owned sector of industry but also land use and ownership, birth control, local government, the judicial system, population movements and even forced labour camps.

Nonetheless, despite its broad range, it is the economic measures that will attract the most immediate attention, and with some justification because it is in this sphere that the first and, perhaps, the decisive, battles will be fought within the ruling strata.

Initial reactions from the business sector to the decisions of the Central Committee were actually quite negative. The Shanghai Composite Index slumped 1.8 per cent, the Hang Seng Index fell 1.9 per cent and the China Enterprises Index of Hong Kong-traded Chinese shares slid 2.7 per cent.

This was an over-reaction encouraged by earlier media comments from high-ranking figures ramping up the importance of what was to be decided. In the event, as is usually the case, the final communique of the meeting was couched in very general and rather bland terms. This sent the wrong signals to a business community now used to even the most trivial product variation or minor policy development being presented as of world-historic importance.

By the end of the week, all the losses had been wiped out as the potential meanings of those bland formulae were worked out, and wiser counsels prevailed. No doubt when the full text of the plenum's decisions is seen there will then be an opposite over-reaction and the new programme will be hailed as the solution to the international crisis of capitalism. Two sentences from the summary, in particular, will be seen to carry huge implications for future policy:

"The focus of the restructuring of the economic system... is to allow the market to play a decisive role in the allocation of resources" and "Both the public and private sectors are equally important components of a socialist market economy and the important bases of our nation's economic and social development."

The first of these goes right to the heart of those remnants from the days of bureaucratic command planning, when resources were allocated for “policy” reasons and profitability was simply not a consideration. Within individual firms, whether they were once state owned or not, managers are now guided primarily by the profit motive but, within the economy as a whole, and especially in respect of the major, and still dominant, State Owned Enterprises (SOE's) and their relations to the banks and local government, other considerations apply.

No doubt these include the lining of the managers' own pockets and the furthering of their families' fortunes but, in addition, it means mutually beneficial deals with other agencies. This does not necessarily prevent the firms involved being profitable but it practically guarantees that resources are not allocated to what is most profitable across the economy as a whole.

For example, the country had 976 million tonnes of crude steel production capacity at the end of last year, according to the China Iron and Steel Association. A further 44 million tonnes of capacity has been planned or is currently under construction. Yet, with just 717 million tonnes of output last year, capacity utilisation stood at 73.5 per cent. That has to be compared to a utilisation rate of some 83.4 per cent across the rest of the world. It also explains a net profit margin of just 0.13 per cent as against 5.4 per cent for Chinese industry as a whole.

Now that China is a world power and having to plan to compete with other world powers, “across the economy as a whole” becomes crucially important.

As long as state banks, SOEs and local government can decide between themselves what and where to invest, there is no real means of assessing profitability with the degree of accuracy required for maximisation. SOE's obtain very cheap credit from the banks, naturally that means they can easily make profits because they have lower overheads than private companies paying commercial rates – but it certainly does not guarantee that they are efficiently managed. The same is even true for the banks making the loans.

In this context, “allow the market to play a decisive role in the allocation of resources” means dismantling that entire network of relationships and ways of working. No wonder Xi anticipates further battles – and there is no guarantee he will win. Even to begin the process is difficult because there are few objective criteria for efficiency within the heart of the system, no examples of “how it should be done”. That is why Xi's programme includes provision for allowing foreign capital to play a role in the restructuring of the Chinese financial system.

As with the Special Economic Zones and the “joint ventures with foreign partners”, the purpose of the exercise is to use foreign expertise and techniques in selected areas to establish benchmarks that can then be applied more generally. This does not necessarily mean applying the “joint partnership” model to, say, banking. The launching of the Shanghai Free Trade Zone, in which foreign banks are allowed to open their own branches, which will compete with Chinese banks, is another way of achieving the same end. What can be virtually guaranteed, however, is that foreign capital will not be allowed any possibility of domination. The Chinese know a bit about foreign domination and the ruling Communist Party's legitimacy depends on preventing it.

The second policy prescription, “the public and private sectors are equally important components of a socialist market economy” also has far-reaching implications but some limits have been set to them. Elsewhere, the communique also confirms that the state sector will remain “the mainstay of the economy”. Clearly, this is a logical contradiction, if they are equally important then one cannot be more important than the other, so what are we to make of this?

The most likely meaning is that, for the duration of this leadership's term of office, the next nine years, the state, that is, the ruling bureaucracy and its party, will continue to hold a controlling interest in the core industries and institutions – but that could be via a majority shareholding in an otherwise “privatised” company. In other words, this is a reassurance to the people who make up “the bureaucracy” that they still have a future – after all, all imperialist powers have huge bureaucracies that straddle business and state institutions.

In practice, what the formula means is that the systematic disadvantaging of private businesses in everything from planning applications to interest rates is to go. This is a crucially important change, if it can actually be carried through, because it reflects the obvious class interest of the burgeoning bourgeoisie within China itself. If banks and the bigger corporations that dominate energy supply, transport, communications and other key industries can be forced to deal equally with private companies then competition from those companies will help to enforce “market discipline” on the state firms themselves.

If the purpose of the “economic” and “financial” proposals of the programme is to improve the “allocation of resources”, that is, the free movement of capital, then many of the other measures relate to the corresponding free movement of labour and, indeed, its supply. This is what lies behind changes in such varied areas as birth control, most families will now be allowed two children, not just one, the “household registration system”, the “hukou”, under which everyone is registered either as an urban or a rural citizen, with very different rights as a result, and the laws governing ownership and sale of land for different purposes.

If implemented, these measures will have a profound impact on Chinese society and, since all of them are guided by the need to maximise the return on capital, profit, their effect will be to increase exploitation of the working class and to strip small farmers of their assets. The capitalist rationalisation of administration will also threaten many in the lowest levels of the bureaucratic machine who could not be considered parts of the ruling caste.

There can be little doubt that there will be resistance to the programme at all levels. After the Plenum closed, the party issued a call to all members to recognise that, now policy had been decided, it was their duty to ensure its implementation – a principle of which they should hardly need reminding and a clear indication of continued divisions within the party itself. That is why, alongside the programme itself, the Plenum also created a new body to ensure full implementation, headed by Xi himself but probably under the day to day control of premier Li, and a very powerful new “defence and security” commission, directly under Xi's control, which, for the first time, pulls together the armed forces, police, paramilitary police, intelligence services and diplomatic agencies.

The establishment of such a body has been proposed before but was never adopted because of departmental resistance. The fact that it has now been agreed not only underlines Xi and Li's dominance but a general recognition that stormy times lie ahead. Anyone who thought that greater reliance on the market in the economic sphere would necessarily imply greater liberalisation politically was wide of the mark. In the thinking of the Chinese Communist Party, such large scale “reforms” mean that it needs even greater control over society.

However, as Trotsky once pointed out, the laws of history are stronger than any bureaucracy, and in the turmoil that will be created by any systematic implementation of the new programme, we can expect a variety of different political currents to emerge, all representing in however confused a form, the interests of the fundamental classes; the emerging bourgeoisie and the still growing working class.

Both the different bureaucratic factions and the more direct representatives of capital will have to try to win support among the biggest classes, the working class, urban and rural, and the peasantry. Against all attempts to divide those classes and to mobilise them, or sections within them, in support either of continued bureaucratic rule or of more openly capitalist forces, the working class needs its own, politically independent organisations. Above all this means trades unions and a workers' party committed to an even more far-reaching programme than that of Xi and Li, a programme for the overthrow of capitalism and the building of socialism, in China and internationally.