How China is Tackling its Water Challenge

Introduction

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China faces a severe water shortage. Its current water per capita is one quarter of the world average. This per capita water availability will decrease in the coming decades as China’s population peaks at between 1.4 and 1.5 billion people by 2030. China’s water usage per capita may be low by international standards, but it is expected to grow by between 40 and 50% by 2030. Factors such as higher living standards, increasing urbanization and further industrialization are driving water demand.

The water that China does have is often badly polluted. An estimated 70% of China’s rivers and lakes are currently contaminated and 300 million people drink water tainted with inorganic pollutants such as arsenic, excessive fluoride, untreated factory wastewater, agricultural chemicals, leaching landfill waste, and human sewage. China’s water is also inefficiently consumed, compounding its water challenges. 45% of water destined for agricultural use is lost before it even reaches crops. Only 40% of its industrially used water is recycled, compared with 75% to 85% in developed countries and water lost from urban plumbing leaks accounts for 18% of total urban water withdrawals.

Moreover, China’s water is unequally distributed throughout the country. The Yangtze River basin and areas to the south receive 80% of China’s naturally available water resources to support only 54% of its population, 35% of its arable land, and 55% of its GDP, while the north gets just 20% of China’s water. Deforestation, overgrazing and unsustainable agriculture have destroyed local ecology in many parts of China, affecting China’s overall rainfall, and exacerbating China’s age-old challenges of drought and flooding. To meet its growing water demands, especially in the north, China is depleting its underground aquifers, lakes and river systems at untenable rates. As water becomes scarcer, competition for water is increasing between agriculture and industry as well as among China’s growing cities and different regions of the country. This trend will only continue in the coming years; by 2009, surveys revealed that 58.3% of river water, 49.7% of lakes, 79.5% of reservoirs and 38.7% of wells were of quality necessary to be deemed adequate water sources. China remains particularly opaque and is reticent about releasing regular and up-to-date water statistics.

China has tried to solve its flooding, drought, and water scarcity problems through hydro-engineering projects such as the Three Gorges Dam and the South-North Water Diversion Project. Yet hydro-engineering alone will be unable to create sufficient water supplies to meet China’s future demand. China will need to improve the management of its water resources and the legislation governing its use. Perhaps most importantly, Beijing will need to increase the price of water to better reflect its scarcity value, allowing for the economic restructuring that this higher cost will cause. Repairing China’s ecology will also be essential. A healthy ecology will not only aid the prevention of desertification, with all the water loss that such environmental damage causes, but it will also help to maintain upstream eco-systems, which are essential for the long-term supply of good water sources. China will also need to upgrade the efficiency of its water delivery systems to agriculture and to its cities, and to improve the efficiency utilization rates in industry. Environmental protection will be essential in ensuring the water that China does have is potable. China must clarify its environmental protection laws, improve enforcement and increase fines. Without implementation of such measures, water scarcity risks limiting China’s future economic growth. Water scarcity could also challenge China’s political and social stability. Increasing illness caused by polluted water is driving up healthcare costs and generating more internal dissent. In 2005, the Chinese government acknowledged that 50,000 environmentally related “mass incidents” (a euphemism for protests) occurred, many of which were sparked by water degradation.

Interestingly, the Chinese Committee of Political and Legislative Affairs also acknowledged about the same amount of “mass incidents” (about 50,000) in 2013 as they did nearly a decade ago. The reality, however, is that environmental mass incidents have been steadily increasing: from 1996 to 2011, environmental protests increased at an average rate of 29% per year, spiking up nearly 120% in 2011 alone. The scale of the protests is also increasing, with around half of all “mass incidents” involving 10,000 or more people.

The South-North Water Diversion Project

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Historically, China has sought to solve its water scarcity problems through reliance on large infrastructure projects. Indeed, many of China’s top leaders are trained engineers, including Hu Jintao, who is a trained hydraulic engineer. Mao Zedong is reputed to have said in 1952, “the south has a lot of water, the north little. If possible, it is okay to lend a little water”, apparently acting as the spur for building what is now called the the South-North Water Diversion Project. When completed in 2050, the $62 billion mega-aqueduct is projected to divert 44.8 billion m³ of water yearly from the Yangtze to the north. The project will follow three routes. The eastern route will transfer 14.8 billion cubic meters of water yearly from the lower Yangtze, via the ancient 1800 km Hangzhou to Beijing canal, to Jiangsu, Anhui, Shandong and Hebei provinces as well as to the city of Tianjin. It is now projected to be completed in 2013 or 2014. The central route, begun in December 2003, will divert 13 billion m³ of water from the Danjiangkou reservoir on the Han River (a Yangtze tributary) to Beijing, Tianjin and other cities. It is scheduled to be completed in 2014. The western route would transfer water from the upper reaches of the Yangtze tributaries across the Qinghai-Tibet Plateau through the earthquake prone Kunlun Mountains via a network of tunnels into northwest China. Given its technical difficulty, the western route has not yet been given official approval and it is possible that it will be quietly shelved. It is expected that as many as 400,000 people might be displaced by the projects overall, though this would be fewer if the western route were scrapped.

Overall, the South-North Water Diversion Project faces many logistical challenges, the most important of which is ensuring that the water that does reach the north is sufficiently pollution-free to be usable. The eastern route, for instance, crosses 53 heavily polluted river sections. Clean-up efforts and water treatment facilities on this route alone will account for about 40% of the total aqueduct cost. If effectively implemented, it will be one of the most comprehensive water clean-up operations ever seen. 379 pollution control projects including wastewater treatment plants and wastewater recycling facilities are slated to be constructed, and major sources of industrial pollution such as paper mills are being shut down. Nevertheless, the clean-up process continues to be challenging.

Water Desalinization

China is also investing heavily in water desalinization in order to increase its water supplies. Research into water desalinization began in 1958 and more than 20 seawater desalination projects have been constructed which currently desalinate 600,000 m³ of water a day. China aims to produce as much as 3 million m³ of desalinated water daily by 2020, mainly for use in the north of the country. Desalination, however, is expensive and energy-intensive, and also requires water for its production. For these reasons, it cannot be considered to be a serious solution to China’s water shortages.

In 2012, the Chinese government outlined their policy goals for the next three years, ending at the conclusion of 2015. The government hopes to reach 2.2 to 2.6 million cubic meters or water per day, a far cry from the 660,000 cubic meters currently produced per day in China, but still possible given that plans exist to bring another 1.4 million cubic meters of water production online in large-scale desalination plants.

As of 2014, China had expanded its efforts in water desalinization with a total of 75 desalination plants, with nine more under construction. Though this technology may not be the most efficient at providing coastal cities with drinking water, these plants supply water that is used in coastal factories, sewage, and other wastewater management solutions, thereby allowing more drinking water from lakes, rivers, and reservoirs to be directed towards individual use. In the last decade alone, 60 desalination plants were built to run on seawater reverse-osmosis technology, producing 348,000 cubic meters of water per day, and an additional 11 plants were designed to utilize low temperature multi-effect distillation and produce a further 222,300 cubic meters per day.

Water Management

Ultimately, China will need to tackle its water scarcity issues not just by generating more supply, but by more efficiently managing and using its existing water resources. China’s water resource management system is highly fragmented. Multiple institutions have responsibility for China’s water resources, including data and information collection, hydro-infrastructure construction, environmental protection, and agricultural, urban and industrial development. There are frequent overlaps between these departments which raise administrative costs and exacerbate water’s “Tragedy of the Commons” problem. In other words, while China recognizes nationally the need for clean, well-managed water, it is in the interest of each user locally to consume water in whatever way will maximize their own short-term economic gain. This frequently gives China’s water management agencies conflicting priorities. Regional governments, for instance, often sacrifice water quality to protect local industries and jobs; they tend to focus on the water within their administrative areas, while failing to look at China’s water needs as a whole. Those considering water use in agriculture are often focused on accessing the water necessary to maintain agricultural yields. Those looking at the environmental protection of river basins try to limit the water drained from the river eco-systems. A failure to address the problem in a joined-up way persists.

This individualistic approach to the water supply in China, combined with local government corruption, has led to large-scale industrial dumping into lakes, rivers, and other aquifers. Often these waste products are, or are in large part, made up of heavy metals like cadmium or chromium that have been linked to increased risk of cancer. A recent scandal in 2011 involved the Lüliang Chemical Industry Company, which was found to be storing 288,400 tons of untreated chromium byproducts only a few feet from the Nanpan River, whose waters flow west and eventually join with those of the Pearl River. The company had been disposing of waste in this manner since 1989, and had gone as far as hiring divers to secretly dump metal into mountain reservoirs in order to reduce metal treatment and detoxification costs. Chromium levels in the river were 2,000 times China’s legally permissible standards. Effective progress in water management remains relatively slow due to ongoing and pervasive corruption that still sways local officials.

Water Legislation and Enforcement

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Not only are water governing authorities fragmented, but laws governing the management of China’s water resources are still being developed. Historically, China’s water laws have been ambiguous and lacking in effective enforcement mechanisms. They have had a bias toward decentralization, with local government agencies often having a determinative voice in water issues within their region. This has resulted in widely varying levels of water-law enforcement, corruption and confusing standards for industries. Indeed, some water legislation reformers have been advocating greater centralized regulation. They point to the success of centralized management in helping to restore at least some perennial flow in the Yellow River delta. In the late 1990s, its downstream flow disappeared annually for over 200 days, because upstream provinces were drawing on the river too heavily. Beijing began limiting water allocations to each of the provinces, so downstream provinces had sufficient water. Today, the entire length of the Yellow River is monitored in real-time by data collection from dozens of monitoring stations along the length of the river. The system is designed to check and manage pollution, drought and flood control, while enforcing fair distribution of scarce water resources among the nine provinces that share the waterway. Engineers can regulate the river’s flow by opening or closing a network of automated sluice gates and monitoring devices. This system is currently undergoing an upgrade which will make it the most advanced water rationing system in the world by the time of completion which is expected to be around 2015.

Indeed, recent water legislation stresses a greater move toward a unified management of water resources. This legislation emphasizes the importance of a balance between water resources, the still-growing population, economic development and the environment. It also focuses on improved efficiency in water use and it strives to set a foundation for greater transparency, equity and efficiency in the access of and payment for water by all levels of the economic spectrum. It advocates that allocation, distribution and regulation of water resources should be increasingly made through water-drawing permit systems where users are allocated and charged for water according to sector quotas, taking into account annual water-availability conditions and the sustainability of river basins, lakes and groundwater. The legislation also attempts to make clear distinctions as to who is responsible for the quality of water in each of China’s regions and to ensure that each of those responsible works to minimize pollution and improve overall water quality. To achieve improved water quality, recent legislation also specifies the need for setting up data and information systems at all levels, and to make data gathered available to stakeholders. Indeed, in 2007, Beijing’s Institute of Public and Environmental Affairs launched its online water database, allowing public access to water quality and pollution data, including corporate regulatory breaches. Yet, this move toward better information access has been tempered by Beijing’s conflicting and simultaneous instinct to prevent the independent gathering of information on China’s water, especially regarding its trans-boundary rivers, ostensibly to safeguard China’s national security.

The 2008 Law of the People’s Republic of China on Prevention and Control of Water Pollution ties the performance evaluation of public officials, at least in part, to their meeting of water and environmental targets. It also increased monetary sanctions against enterprises discharging wastewater illegally and specified the amount of chemical oxygen depletion caused by agricultural run-off allowed in waterways. In a significant legal development, it also allowed, for the first time, class action suits to be brought against polluters.

Several decisions made at the Third Plenum also show a greater commitment in dealing with corruption in local and village governments. Officials in environmentally damaged areas will no longer be expected to meet the same GDP targets as those in other provinces, and local government actions will be monitored in an attempt to reduce the prevalence of companies bribing towns to look the other way as they pollute rivers and water sources that ultimately make their way into China’s largest rivers.

Water Pricing, Water Rights and Efficiency

Ultimately, the most important step in solving China’s water scarcity will be raising the price of water. Water is highly subsidized by the central government, often making it effectively almost free for users, creating no incentive to save water. In 2009, the average price of water per cubic meter was $3.01 in Germany, $2.37 in the UK, $1.02 in South Africa and Canada, $0.74 in the US and $0.31 in China. Of 19 major economies, only India had cheaper water tariffs. Five years later, the price of water per cubic meter rose to $3.18 in Germany, $2.41 in the UK, $2.05 in Canada, $1.46 in the US, and $0.38 in China. Prices do not seem to be ending their upward trend anytime soon.

Higher water prices are likely to generate a significant restructuring in China’s economy. Higher water prices will encourage farmers to plant crops that are less water-intensive and will encourage more efficient irrigation. Indeed, growing urban and industrial water demands may eventually lead to the elimination of winter wheat in northern China as the higher cost of water forces the shift to higher-valued uses that produce more jobs and income per water unit. Currently, 1000 tons of water produce 1 ton of wheat worth $200, whereas industry yields $14,000 of economic output for the same amount of water. Reducing China’s grain production would reflect a significant shift in the decades-old policy of 95% self-reliant grain production, and would have a real impact on global grain markets. It would also spur urbanization as farmers migrate to cities in search of new employment.

Higher water prices would also encourage factories to recycle more of their water. In the special case of the North China Plain, it is likely to check the overexpansion of some high water consuming industries. Currently the region produces 20% of China’s steel, 10% of its power, and 14% of its paper, all industries which use water heavily and cause severe pollution. This would also make the cost of water treatment more feasible as it would become more economical to process and recycle water than to dump it untreated into the rivers. Higher water costs would also make living in water-scarce cities more expensive, potentially discouraging immigration into these areas. It would foster improved efficiency of its water delivery systems to agriculture and to cities.

Such a move may also check pressure on Beijing to tap new coal supplies, particularly the enormous coal reserves in the dry north. Without further water transfer schemes, such as the controversial – and possibly unachievable – western route of the South-North Water Diversion Project, there will not be enough water to mine the northern coal reserves and still develop the modern cities and manufacturing centers that China envisages for the region. The fresh water needed for mining, processing, and consuming coal accounts for the largest share of China’s industrial water use, over a fifth of all the water consumed nationally.

Higher water prices will also help control the scale of the South-North Diversion Scheme, serving to minimize the impact on the Yangtze River. Having the cost of the scheme added into the price of water for end-users will encourage them to use the water more sparingly. Ma Jun has estimated that the cost of cleaning up the northern Huai River system and of running its industry sustainably was greater than the total annual value in production that the industry within the Huai River system generated. Economic progress has brought more people to the river valleys, so that the area now supports 1.5 times the national average. After 1949, mainly for flood control, 5100 large and small-scale reservoirs were constructed along the upper reaches of the Huai waterway and more than 10 major flood control retention reservoirs were built. Without the huge hydro-engineering in the Huai River Basin, the area would not have been able to sustain so many people. Rapid development, however, made previous hydro-engineering projects inadequate. Beijing responded by building new hydro-projects to expand water supplies further. In what has become a vicious cycle, Beijing now faces the need to divert water from the southern Yangtze to support the people and the economy in the area. Ultimately, China’s desire for development is infinite, but its water resources are finite. Unless water pricing reflects its true scarcity value sooner rather than later, China’s lack of water will put the brakes on its rapid economic development.

Enforceable water rights will also be important to reducing China’s overall water wastage. Currently, even with the recent legislation, it is still not clear who holds many water rights and what benefits these rights provide. Ideally, China needs to establish a nationwide water rights program, leaving enough clean water so its eco-systems and aquifers are sustainable. Permits should be issued to each water user, with pricing at a level which encourages increased water productivity. Creating a market to sell or lease these water rights will advance water productivity further. Those who do more to protect the river and other water basins should have greater rights. This includes those provinces and regions near the waters’ sources. The provinces could then profit by selling rights, instead of wasting water on parched land and inefficient industrial projects. Appropriate incentives for water saving technologies and behaviors also need to be developed. For instance, a tariff system could be implemented in which people pay higher bills when they consume more than a set quota.

Authorities have been slow to raise water prices because of their fears about how the higher costs will affect China’s poor. Recent research has shown, however, that lower income Chinese often get little benefit from subsidies as, ultimately, low water costs mean that they frequently receive water that is highly polluted. Nevertheless, the government remains concerned with inflation, always a hot issue in China, and this adds to the pressure to maintain low water prices despite the arguments in favor of raising them; it is unlikely that the poorest in society would welcome a price increase even if it were in their own long-term benefit in terms of improving the quality of their water supply.

Pollution

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Despite China’s efforts over the last three decades, water pollution has spread from the coastal to inland areas and from the surface to underground water resources. Essential to controlling China’s water pollution is the strengthening of law enforcement to improve compliance by industries and other polluters. Overall compliance with China’s environmental laws remains low. Yet, strengthening environmental protection is a multi-faceted process which not only requires raising water prices and establishing clearer water rights, but also necessitates the continued development of water protection legislation, the further advancement of China’s judicial system, greater financing and staffing of China’s Ministry of Environmental Protection (MEP), and making public a more rigorous collection and analysis of water data. Economic incentives such as pollution levies and fines have to be rigorously enforced. Overall, pollution fines should be increased. Lawsuits should be initiated against polluters and those most hurt by damaged public goods such as river basin ecosystems should have greater rights to demand compensation. State subsidies could be given to small towns and villages to help them to construct adequate water treatment facilities. Those waste-water treatment facilities that are constructed need to be continually monitored to ensure they remain operational and in compliance. China’s Tenth Five-Year Plan (2001–2005) mandated, for instance, the construction of thousands of new waste water treatment plants, yet a 2006 survey by SEPA (the State Environmental Protection Agency, the forerunner of the MEP) revealed that half of the new plants actually built were either not operating or were operating improperly. Corruption will also need to be tackled. Lax environmental codes are often rarely enforced and easily avoided by bribing officials. Tackling corruption will likely be done most effectively by linking compensation and performance figures to environmental protection as well as economic achievement. This would make it in the personal interests of officials to perform in the environmental arena, mitigating the “Tragedy of the Commons” conundrum, though this would also represent a significant shift in government behavior.

Future Trends

China’s water challenges are becoming too big for Beijing to ignore. China’s Twelfth Five Year Plan (2011-2015) projects record levels of water use, rising to 620 billion m³ by 2015, up from 599 billion m³ in 2010. Its traditional response to growing water demand – building large hydro-engineering projects in order to increase supply – will no longer be sufficient to meet the water demands of China’s agriculture, industry and cities in the coming decades. As a result, China will begin to implement new policies in order to better manage its water resources and to reach its 2015 goals of cutting water consumption per unit of value added industrial output by 30%, reducing arsenic, lead, cadmium, chromium and mercury levels by 15% from 2007 discharges, reducing ammonia nitrate fertilizer runoff by 10% and its corresponding chemical oxygen depletion by 8%. The plan also targets the construction of water conservation structures, improved irrigation, and commits to investing in the clean-up of rivers and lakes through the construction of wastewater treatment and recycling pipes.

At the heart of these new policies will be the gradual raising of the price of water throughout China. This trend is already in evidence in many cities across the country. Shanghai, for instance, increased residential water prices 25% in 2009, and another 22% in 2010. Beijing raised the price of commercially used water by 50% in 2010 and expects to raise its water charges to residential users by 24% in stages by 2013. China’s water users have not accepted the rises without discontent and some government officials fear that higher water prices could lead to social unrest, particularly as China is concurrently struggling with inflation. This unrest is due both to poor public education about the extent of China’s water challenges and to public skepticism that higher costs will translate into more effective water management.

Fixing the quality of China’s water will also be a growing priority for Beijing in the future. China needs to improve its water pollution record both by government investment and by encouraging private investment in the water treatment and management sectors. In 2011, for instance, China allocated $606 billion to clean up water and water infrastructure over the next decade. Larger, wealthier cities had already started investing in the water treatment sector, but without government support, smaller cities and rural areas have lacked the means and incentives to make much-needed investments.

Beijing is also explicitly encouraging foreign participation in China’s water markets. Foreign firms invested about $1.7 billion in China’s water sector between 2004 and 2009, with over $500 million being spent in 2009 alone. The investments were in waste-water treatment, municipal and industrial water supply sectors, and in direct investments in China’s water companies. This involvement will continue to expand in the near future.

China will also begin to move more aggressively against significant water polluters. In 2007, maximum fines to individuals or companies who discharge highly toxic pollutants into drinking water resources were raised fivefold to 500,000 RMB (approximately $80,000). Fines for companies who dump industrial residue urban waste into drinking water resources or who store solid waste or other pollutants below the water lines along rivers and reservoirs increased 20-fold to 200,000 RMB (around $32,000). While these are significant increases the fines remain relatively low and there is room for an expansion in this area. Increasingly, enterprises will also be responsible for bearing all costs to contain water pollution accidents and may face fines as high as 30% of the direct economic loss, according to the severity of the incident. Historically, pollution levies have been so low that it has been cheaper to pay penalties rather than to treat discharge. There is a growing realization that this cannot continue.

Litigation against water polluters will also increase, with rulings to progressively penalize those fouling China’s water systems. In 2009, for instance, an Asian Development Bank study determined the number of environmental lawsuits filed in China has increased an average of 25% annually since 1988. Since 2009, the Supreme People’s Court has been encouraging China’s maritime courts to adjudicate water pollution cases brought on behalf of a public interests. Additionally, three specialized environmental courts have been established in the provinces of Guizhou, Jiangsu and Yunnan.

China’s water challenges are daunting and urgent. The array of measures that are needed to more effectively manage its resources is huge. Still, China’s leadership is well aware of the importance of water to continued economic growth and to the health and well-being of its people. Poor water management has toppled many a Chinese government throughout the millennia, a risk to which the CCP is not immune. While progress toward solving China’s water challenges is likely to be uneven, overall it is expected that China’s water management will improve on most fronts over the next five to ten years.

Economics

Sino-US Trade: Mutual Benefit, Mutual Problems

Introduction

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The US has run a trade deficit with China since 1973. The deficit increased from $10 billion in 1990 to $266 billion in 2008. It dropped to $227 billion in 2009, and then grew to $295 billion in 2011 but dropped again in 2012 to $262 billion. The Sino-US trade deficit consistently accounts for more than 40% of the US’ overall deficit in its global trade.

Some in the US argue that this large deficit with China is caused by the competitive advantages China gains from practices such as keeping its currency artificially depreciated, having lax environmental and health and safety legislation, poorly protecting intellectual property rights, not comprehensively implementing WTO obligations, and widely employing industrial policies and discriminatory government procurement practices which work to subsidize and protect domestic Chinese firms at the expense of their foreign competitors. Critics argue that these practices have in turn caused the US to unfairly lose manufacturing and other jobs to China.

Others have argued that Chinese economic policies, which have enabled China’s GDP to grow 9% annually over the last two decades, have provided many advantages to the United States. For instance, China’s rapid economic growth has generated significant demand for US exports. For the last 10 years, China has been the US’ fastest growing export market. In the future, this market is expected to further expand as China’s domestic demand develops, as the living standards of its citizens improve, and as a sizable Chinese middle class emerges.

US consumers have also benefited from cheap Chinese imports, both because they increase US consumer purchasing power, and because they act to keep inflation low. US firms have profited from China’s competitive workforce, either by using China as a low-cost assembler of its manufacturing components or as a source of inexpensive components to be assembled in the United States. As importantly, by purchasing US treasury securities – nearly $1.2 trillion as of September 2012 – China helps keep US interest rates low, which in turn spurs domestic US economic activity.

Since the financial crisis of 2008, trade relations between the US and China have come under greater scrutiny by government and business leaders from both countries. Some members of the US Congress have recently ratcheted up their complaints about what they consider to be China’s distorted trade policies, given the US’s persistently slow US GDP growth and high unemployment. This trade friction is likely to intensify as the current sovereign debt crisis faced by Western countries places a new spotlight on US debt levels.

US Exports to China

The US exported $90 billion of merchandise to China in 2012, down from $104 billion in 2011 but still more than 30% higher than 2009 levels. US exports to China account for around 7% of total US exports, up from to 2.1% in 2000. The largest exports to China included oilseeds and grains, waste and scrap, semiconductors and electronic components, aircraft and parts, and resins and synthetic rubber and fibers. It is expected that US exports to China should continue to grow rapidly in the future. This export growth will be driven by factors such as the continuing modernization of Chinese infrastructure, by increasing domestic demand from its growing numbers of middle-class and affluent consumers, by the growth of its transportation industries, particularly its rising need for airplanes, trucks and cars, and by its increased imports of food products.

China’s Exports to the US

Yet, despite the success the US has made in increasing exports to China over the last decade, Chinese exports to the US still dwarf US sales to China. In 2012 China’s exports to the US were worth $351 billion, which was down from $399 billion from the previous year. The top 2010 Chinese exports to the US were apparel, manufactured goods such as toys and games, computers and communications equipment and parts, and audio and video equipment. The mix of Chinese exports to the US is shifting. Throughout the 1980s and 1990s, the majority of US imports from China were low-value, labor-intensive products such as textiles and toys. Increasingly, however, more of US imports from China are comprised of advanced technology products, reflecting China’s growing international competitiveness in the assembly and manufacture of high-technology.

Skewed Accounting of International Trade

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One of the principal drivers of the US trade deficit with China is the worldwide increase in global production sharing, from which China has benefited enormously. Many products that used to be entirely made in such places as Japan, Taiwan and Hong Kong, are now being made or assembled in China as those countries have shifted all or parts of their production to China in order to take advantage of its low-cost labor. For instance, the US International Trade Commission estimated that in 2002, 99% of computer exports to the US from China were sold by foreign firms manufacturing in China. Taiwan, a world leader in information technology manufacturing, now produces over 90% of its information hardware equipment in China. Similarly, many US technology companies outsource their manufacturing to Taiwan, which in turn outsources this production to its facilities in China. Yet, these exports, even if they are commissioned by US firms, are credited against China when calculating the US trade deficit as China is the place from which the products were shipped to the US. To illustrate this, it is worth considering that while US imports of computer equipment from China rose 620.5% between 2000 and 2010, the total value of US imports of computers worldwide rose only 41.9%.

Similarly, China now has more than 40% of all international processing or assembling trade. The iPod, for example, is assembled in China by the Taiwanese firm Foxconn, from parts produced globally. A 2005 study by the University of California estimated that it costs approximately $144 to make each iPod unit, yet only about $4 of the total cost is generated by the Chinese workers who assemble it. Yet, when China ships the iPod to the US, it increases the Sino-US trade deficit by the full $144 cost of the unit, not by the $4 of value that China earned assembling the different components. In similar fashion, the iPhone trade has increased the US-Sino 2009 deficit by $1.9 billion. Yet, if the trade were measured through value added in China, the US trade deficit would have decreased by $48 million. Likewise, each unit of the iPad 2 increases the deficit by approximately $250. On the day of its release, the iPad 2 was estimated to have contributed $130 million to the Sino-US trade shortfall.

As shown with the Apple example, international trade data struggles to accurately account for component processing. In its trade numbers, China is credited with the full value of the finished exported goods, regardless of the origin of the component parts. For example, if Japan supplies the original components to China and then China does nothing but assembles the components and then ships the finished product to the US, Japan’s US trade balance is unaffected, but the US’s trade deficit with China increases by the full cost of the finished good. This distorts trade data, giving a skewed impression of the total value of the goods originating from China. As China’s trade has increasingly shifted away from the production of textiles and other primary products to the manufacture and assembly of technology goods, this skewing has increased.

The services trade is also equally difficult to quantify. Most trade data does not take account of the value added to a product by services, such as IT, financial, or management consultancy services. As the largest supplier of these services worldwide, the US generates income by effectively employing its advantage of human capital. The incomplete accounting of these services in world trade data means that the overall US deficit appears larger than it is in actuality.

An Undervalued RMB?

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Another important driver of the trade imbalance between the US and China is Beijing’s pegging of the RMB to the dollar at what is deemed by many to be a substantially discounted rate. While many agree that the RMB is undervalued, few concur on the actual level of distortion with estimates ranging from 15% to as much as 50%. The depreciated currency increases the competitiveness of Chinese exports, leading many US companies to import from China over domestic or other international suppliers. China’s currency has not always been undervalued. In the early 1980s, for instance, it was greatly overvalued, with 1.5 RMB per USD, a rate set to allow China more easily import the goods it needed to develop its economy. There have been numerous revaluations of the RMB-dollar exchange rate since the 1980s. Between 1994 and 2005, the rate remained stable at around 8.3 RMB per USD. Though generally resistant to international pressure, particularly regarding key domestic interests, the CCP has since allowed the RMB to appreciate, albeit very gradually. The most significant appreciation occurred between 2005 and 2008 when the rate shifted from 8.27 RMB to 6.81 RMB per USD, an appreciation in value of the Chinese currency of almost 18%. However, it remained at or around that rate for another two years, before a further gradual appreciation was allowed to begin in 2010. By June 2012, it was valued at 6.36 RMB to the USD. China is able to maintain this low rate of exchange through vast purchases of US treasuries, which helps keep the dollar strong; as of November 2011, China held approximately $1.3 trillion dollars in reserves, equating to around 40% of its enormous foreign reserves.

This implicit subsidy to Chinese exporters has meant that US manufacturers have struggled to compete against Chinese products, causing US manufacturing industries to suffer and US unemployment to increase. Some estimates have put the number of additional US unemployed because of China’s devalued exchange rate at 2.4 million between the years of 2001 and 2008. Yet, what is often forgotten in debates on US unemployment figures is that the average US citizen has benefited from cheaper consumer products and, consequently, a greater disposable income. Recent estimates suggest that the average American household is $625 per year better off as a result of low-cost Chinese trade.

Beijing insists that its foreign exchange policy is vital to domestic economic security; the stability of its society and its monopoly on power is very much dependent on its ability to provide economic prosperity to its people. Additionally, an appreciation in the RMB also means that its US dollar holdings will buy less in its own currency. For example, an appreciation of the RMB by 41% would result in a value of $672 billion effectively being wiped off China’s US securities’ holdings in terms of what those holdings would be able to purchase if converted into its domestic currency.

Implications of China’s Large US Dollar Holdings

Some US analysts contend that China’s holdings of US debt give it a potentially powerful tool which it can use as leverage against the United States. Yet, China’s economic reliance on the US economy as an export market and its substantial holdings of US securities means that any effort to sell large volumes of dollars would likely hurt China as much as it would damage the US. A large sell-off of dollars would cause the currency to sharply depreciate against global currencies, diminishing the value of China’s remaining dollar holdings. Additionally, as long as China continues to pursue a depreciated currency policy, it has no choice but to purchase US dollars, thus making the likelihood of a large Chinese sell-off of the currency highly unlikely.

China has its own concerns about its large US dollar holdings. It fears that high levels of US debt, and the potential implementation of expansionary monetary policies by the US government could spark inflation in the United States which would result in a sharp depreciation of the dollar. To offset this risk, China has argued for the creation of an alternative reserve currency, such as through the International Monetary Fund’s special drawing rights system. Yet, most expect that the creation of an alternative reserve currency is not likely not to occur in the near future. In the absence of such a solution, China has sought to diversify its foreign currency reserves, notably through purchases of Japanese yen and Euros.

China and the World Trade Organization

TheChinaFile

China became a WTO member in December 2001. US policymakers supported China’s accession as they believed WTO membership would spur deeper market reforms, encourage the rule of law, diminish the government’s role within the Chinese economy, further assimilate China into the world economy, and enable the United States to use the WTO dispute resolution mechanism to resolve trade disputes between the two countries. In the first years after China’s accession to the WTO, it made great strides in opening its economy to both trade and FDI. Its ratio of imports to GDP – a common measure of how open an economy is – has now surpassed 30%, which is twice the level of the United States and three times that of Japan.

Yet, by 2008, government and business officials had begun to note that Chinese efforts to liberalize its markets appeared to have slowed. With the tougher global economic environment many argue that China relies more on state intervention in markets to gain China a competitive advantage. This has caused some friction between the two within the WTO. As of January 2013, the United States has brought 16 trade complaints against China whereas China has brought 8 cases against the US. Of these 24 disputes, 5 were raised in 2012 making it the most fractious year to date.

A key area of WTO complaints by the US has been the violation of intellectual property rights within China, and the US has brought two cases against China over this issue. The US International Trade Commission estimated that US firms with significant intellectual property interests lost $48.2 billion in sales, royalties and license fees in 2009 because of international property rights violations in China. The International Intellectual Property Alliance estimated that business software piracy in China alone cost US forms $3.4 billion in lost trade in 2009. However, these figures have been questioned by some economists who point out that the calculations are based on an assumption that genuine products would be purchased if all counterfeit goods were eliminated. Given that the price in China for a counterfeit DVD is usually around $1.50, compared with in excess of $12 for an authorized version, it is highly unlikely that an elimination of counterfeit products would have no impact on the overall sales figures of these products. It may not be possible to give a wholly accurate figure for the losses that the widespread IPR-infringements cause. US critics feel that, even when IPR enforcement is in place, fines and punishments for IPR infringements are often not sufficiently punitive to deter Chinese companies from piracy. Some estimates suggest that between 15% and 20% of all products made in China are counterfeit, equal to about 8% of China’s total annual domestic product. Under pressure from the US, in late 2010, China launched a six month campaign against IPR abuse and counterfeit goods.

Future Trends

Although it is understandable that Beijing is somewhat protectionist in its exchange rate policy, a revaluation of the RMB is essential if current imbalances are to be eased. China cannot continue to purchase US securities indefinitely – indeed it has already shown that would prefer to diversify away from its overwhelming reliance on the dollar – and the US cannot continue to get deeper and deeper into debt to foreign creditors. To resolve the situation, China needs to stimulate domestic consumption and allow its exchange rate to appreciate. A key to increasing Chinese domestic consumption will be shoring up its healthcare and pension systems that were largely dismantled when the Chinese privatized large sections of its state-owned industries. A stronger currency will decrease the international competitiveness of Chinese products, but will reduce pressure on the US, China’s largest trading partner. This will lead to greater global economic stability, which is ultimately in China’s interests. Thus while China’s manipulation of the RMB is expected to continue, in the long-run, a slow appreciation of the RMB would be expected as a more balanced trade environment is in the interests of both China and the US. In fact, between September 2010 and December 2012, China allowed the RMB to appreciate 7.4% against the dollar. Though China needs to take action on this issue, 2012 Presidential Candidate Mitt Romney’s vow to declare China a “currency manipulator” on his first day in office had he win the election, is not the sort of tactic that should be employed. Such a move would have made it politically more difficult for the Chinese to act in the way that the US would like them to do.

At the same time, in order to reduce its trade deficit, the US needs to stimulate domestic manufacturing and become more internationally competitive. Investment in infrastructure, education and the creation of a national industrial policy with taxes and other incentives to spur the development of strategic industries would enhance the ability of the US to continue to design and produce products that would be in demand internationally. The challenge for the US is that the increasingly divergent views of its two main political parties has made it progressively more difficult for it to take the necessary legislative steps to invest in economic competitiveness.

While both the US and China have benefited substantially through closer economic ties, the trade imbalance has increasingly become a political concern. To date, no concrete plan has been formulated to bring the deficit back into balance. However, some steps have been taken to increase economic cooperation between the two nations. The annual US-China Strategic and Economic Dialogue (S&ED), established in April 2009, is intended as a forum to discuss “long-term strategic challenges”. However, in the 2011 session there was no consensus as to the future of the trade imbalance between the two countries and it received mixed reviews from American business leaders and government officials.

The issue of the amount of US sovereign debt held by China is of huge political significance. On a positive note, China’s extension of credit has helped decrease US inflation and, hence, to maintain domestic economic stability. Yet US indebtedness to China is seen by many American thinkers to be a real risk; China and the US only formally resumed diplomatic relations in 1979, having been at ideological loggerheads since the founding of the PRC in 1949. Even today, the US and China disagree on many international issues. There are numerous domestic political ramifications of your largest creditor also being traditionally perceived as an ideological competitor. The amount of US debt held by China means that it would be incredibly difficult to offload all at once, and would trigger a huge devaluation in its remaining holdings. Such a situation is unlikely and would be particularly unwise, but shows the extent of the economic power China holds over the US. Yet China is increasingly using that economic power it holds over the US as leverage over contentious political issues, such as Taiwan and its human rights record. This trend should be expected to continue.

The reality is that the fates of the economies of China and the US are closely entwined, each reliant on the health of the other. China has been recording a substantial trade surplus with the US over the past 20 years and there has been a considerable decline in the US manufacturing sector. We have seen, however, that China’s trade surplus with the US is more a product of the system of trade-data collection than of a mercantilist strategy to undermine US manufacturers. The imbalance is, of course, a concern for both countries, but it is in neither country’s interests for the other’s economy to fail. The deficit must be addressed through mutual cooperation and dialogue in order for both countries to prosper and will, in turn, lead to a more balanced and secure global economy.

China’s New Leaders: The Fifth Generation

Introduction

TheChinaFile

In the autumn of 2012 Beijing will host the 18th National Congress of the People’s Republic of China. Held every five years, it is here that the new members of the Central Politburo Standing Committee of the Communist Party of China (PSC) will officially be chosen. These new leaders will spend serve a maximum of two five-year terms at the heart of China’s policy-making process.

The Politburo is China’s highest and most important decision-making body, which determines domestic and international policy at a strategic level. As is widely documented, those chosen for leadership are not directly elected by the Chinese people, but by those in the Party Congress itself – over 2,000 people. However, even these 2,000 people do not have an entirely free vote on the matter, with outcomes ordinarily predetermined through negotiation and compromise long prior to any vote. It is for this reason that factions are of particular importance in Chinese politics, as the journey to the Politburo requires decades of allegiance forming and political jockeying. The two major groups in Chinese politics are commonly thought to be the Beijing and the Shanghai factions, with the traditional powerbase of the former being the Communist Youth League, and that of the latter being the South, i.e. the area below the Huai River.

Within the 25-member Politburo, power is concentrated in the 9-member Standing Committee (originally a five-member committee it has had several different forms, with the most recent expansion to nine members occurring in 2002). Although the exact process in which decisions within the committee are taken is not well-documented, a general consensus is normally sought rather than relying on a majority vote for any decision to be confirmed. The Standing Committee of the Politburo is therefore of the utmost importance both to Chinese domestic policy and on the international arena; these nine individuals – who have been exclusively male since the inception of the Standing Committee – will shape the policy of the world’s most populous country over the next five years.

This highest echelon of power is based in Beijing and meets weekly to direct domestic and international governmental policy. Election to the committee officially takes place at the Party Congress, which meets every five years. Realistically, most of those elected to the PSC will serve two terms, meaning that those newly-elected in November 2012 will likely rule the country until 2023.

The Fifth Generation

China’s leaderships have generally been referred to in ‘generations’, with each generation associated with the particular leader of their era. Thus, the outgoing leadership under Hu Jintao is considered to be the fourth generation, following Mao Zedong, Deng Xiaoping and Jiang Zemin (though China has had three other leaders since 1949 – Hua Guofeng, Hu Yaobang and Zhao Ziyang – they were not in power for long and have been largely airbrushed out of official Chinese history). This Fifth Generation of leaders is exceptional in that it is the first generation in which there has been no clear successor groomed for leadership by one powerful individual, but rather will be a consensus decision amongst party leaders. Whilst the stage has been readied for Xi Jinping to ascend to the presidency for the past five years, this is more a product of his political maneuvering than his being personally groomed for the role by his predecessor. Indeed, it is widely believed that Hu Jintao would have preferred Li Keqiang to take the role.

The PSC has become increasingly important over the past 30 years, as the Chinese decision making process has moved away from the Maoist era concentration of power in the hands of one powerful leader towards a situation in which a consensus needs to be reached amongst a group of powerful politicians. During his tenure as president, Hu has been an advocate of ‘intra-party democracy’, and the recent downfall of Bo Xilai is testament to the view that the party is now always bigger than the individual.

It is expected that seven of the nine current members will step down from the Standing Committee as they will be over the age of 67, the age at which members are required to retire from the PSC. The highest echelon of the Chinese Communist Party will, therefore, welcome seven new faces, making this the biggest change in make-up of the committee since the founding of the PRC in 1949.

In this article, ChinaFolio takes a look at some of China’s leaders, potential and all-but confirmed, for the next half-decade, and analyses how each would shape the future of East Asia’s most powerful nation. It is worth noting that the positions each member might expect to be appointed to carry differing levels of importance but none officially guarantees Standing Committee participation.

Xi Jinping

Current Position: Vice President, Vice Chairman of the Military

Potential position in 2013: President

TheChinaFile

An engineering graduate of Beijing’s famous Tsinghua University, Xi Jinping looks certain to take the top spot during the leadership transition next year. Having been promoted to the Standing Committee in 2007 and named vice-chairman of the Central Military Commission in October 2010, it would appear that he is being groomed to follow the same path taken by Hu Jintao.

Son of Xi Zhongxun, a veteran of the Long March and a founder of the Communist guerrilla movement, he is part of China’s generation of ‘Princelings’ – sons or daughters of leading CCP cadres. Having held provincial leadership roles, his route to the top was aided by his appointment as party boss of Shanghai, allowing him to align himself with the traditional power base that helped launch Jiang Zemin to power in 1989. Xi’s almost inevitable victory can thus be seen as a victory for the Jiang faction over the Hu faction, as Hu hasn’t managed to endorse a protégé capable of securing the support needed to replace him.

Although not much is known about Mr Xi’s political views, it is said that he chose to survive by becoming ‘redder than red’, gaining a first degree in Marxism and a second in Chemical Engineering. He has kept his political cards close to his chest, and little is known of his foreign policy sympathies. In an unguarded moment in 2009, however, he was reported to have condemned “foreigners who have stuffed their bellies and have nothing to do but point fingers” – a thinly disguised swipe at Washington policymakers. He has been seen on several foreign trips in recent years, including a visit to the US in February 2012 where he met with President Obama.

Xi was previously overshadowed by his wife Peng Liyuan, one of China’s best loved opera singers, who has an official civilian rank within the PLA equivalent of Major General. Xi’s association with Peng has led some to suspect that he has more character to him than the famously dour Hu. This being said, as a career politician and a disciple of Jiang, it seems unlikely that Xi will rock the boat. Instead, he is predicted to continue Hu’s policy of China’s ‘peaceful development’ and hold to his predecessor’s mantra of stability as paramount.

Li Keqiang

Current Position: Vice Premier and Deputy Party Secretary of the State Council

Potential position in 2013: Premier

TheChinaFile

Previously a favorite for the top spot, but now ranked lower than Xi when they were both promoted to the Standing Committee in 2007, Li Keqiang now looks destined to succeed Wen Jiabao as Chinese Premier. Unlike some other members of this list, as the son of a low-level official from Anhui, Li comes from a humble background. Having been ‘sent down’ (i.e. sent to the countryside to ‘learn from the peasants’) in the Cultural Revolution, he became one of famous ‘Class of 77 – the first group of students to enter university after the end of the Cultural Revolution– when he won a place to study law at Peking University.

A popular figure on campus, he was interested in discussion of western political ideas and theories, mingling with future leaders of dissident circles. Although these democratic sympathies may have hampered his route to power, his intellect and political nous has ensured that he overcame the challenge of Wang Qishan for the vice-premiership. He holds a PhD in Economics, and was given the task of presenting China’s economic vision to international onlookers at the World Economic Forum in Davos in 2010, and also during a European tour in January 2011.

Li appears dedicated to combat corruption, and was revealed in Wikileaks cables to be skeptical of government economic data. He has a very tough act to follow in ‘Grandpa Wen’, the popular prime minister who comforted the victims of the 2008 earthquake, yet he appears to have the intellectual and political clout to rise to the challenge.

Wang Qishan

Current Position: Vice Premier in charge of Financial Affairs

Potential position in 2013: Chairman of National People’s Congress (NPC) or Executive Vice Premier

TheChinaFile

Having seemingly lost out to Li Keqiang in the struggle for the premiership, Wang, a history graduate of China’s North Western University and an ex-governor of China Construction Bank, seems set for either the Chair of the NPC or the wide-ranging role of Executive Vice-Premier. He was highly praised for successfully steering China through the Asian Financial Crisis in 1997, and is described by US Treasury Secretary Henry Paulson as, “decisive and inquisitive”, as well as having a “wicked sense of humor”.

His economic credentials are impeccable and ought to point to a position that makes use of these skills, yet his political connections – boosted by his tenure as Mayor of Beijing from 2004-2007 – may see him rewarded in the more influential position at the head of the NPC. The position of Chairman of the NPC is particularly important, as it is the holder of this position that steps in for the president, should he fall ill or be deemed politically unsuitable for leadership, as happened with Zhao Ziyang following the Tiananmen Square protests in 1989. It should be noted, however, that such an occurrence is extremely unlikely, given that no one individual holds supreme power and influence comparable to Mao, Deng or Jiang – the decision making revolves around a far more collective process. Whether it is as the helmsman of Chinese macroeconomic policy or at the centre of the party itself, there is little doubt that Wang will have a pivotal role in China’s next standing committee.

Zhang Dejiang

Current Position: Vice Premier of the State Council

Potential position in 2013: Chairman of NPC or Executive Vice Premier

TheChinaFile

A fluent Korean speaker and an economics graduate of Kim Il Sung University in Pyongyang, Zhang’s links with North Korea may prove to be of strategic importance during the potentially difficult period following the leadership transition in the rogue state. Zhang is in direct competition with Wang Qishan for the NPC chairmanship with the runner-up likely to receive the position of Executive Vice Premier.

Zhang is another member of the Jiang Zemin faction, and held strategic provincial roles in Jilin, Zhejiang, and later Guangdong. During this last post, his decision to clamp down on the circulation of information during the SARS epidemic in 2002 which allowed the disease to spread to Hong Kong and then abroad was widely criticized in China. yet by and large he has recovered from this embarrassment.

Zhang’s fortune has been greatly aided by the downfall of Bo, as he was made interim mayor of Chongqing. Evidently he was seen as a steady pair of hands by party elders, and an antidote to the boat-rocking Bo.

Relatively little is known about him personally, but his appointment in Chongqing would indicate that he is regarded as an effective leader who will tow the party line. Regarding his North Korean experience, it would seem unlikely that these connections will alter Beijing’s stance regarding its petulant ally, though his ability to communicate with counterparts in Pyongyang effectively could be enormously beneficial to China in the coming years.

Liu Yandong

Current Position: Vice Chairman of Chinese People’s Political Consultative Conference (CPPCC), Head of United Front Work Department

Potential position in 2013: Chairman CPPCC

TheChinaFile

Liu is the most powerful woman in the CCP and seems destined to be the first female member of the Standing Committee in its history, a feat that passed by even the hugely influential Wu Yi, who retired from the Politburo in 2008. Liu is a graduate of Tsinghua University and a close ally of outgoing President Hu, which has led some to believe that her sympathies lie with a more progressive or reformist route.

Her future position as Chairman of the Chinese People’s Political Consultative Conference (ostensibly an advisory and consultative body that is composed of representatives from various parts of Chinese society, but which has very little real power over the decision making process) is strengthened by two decades of experience at the United Front Work Department, during which she also received a Masters in Sociology and a Doctorate in Political Science.

It will no doubt be interesting to see how the Tsinghua clique, of which Liu is a part, interacts with a politburo set to be led by a majority of ‘princelings’.

Liu Yunshan

Current Position: Director of Publicity Department (formerly named ‘Propaganda Department)

Potential position in 2013: Head of the Publicity Department

TheChinaFile

A graduate of the CCP Central Committee Party School, Liu has spent a large proportion of his career in Inner Mongolia. Having been ‘sent down’ in his early 20s, he was later a reporter for Xinhua, the state run news agency, where he became a specialist in public relations. After gaining an expert knowledge of the official state news agency, he became party secretary for Inner Mongolia in the late 1980s.

He is a close ally of Li Changchun, the outgoing propaganda and ideology tsar who was cited in a Wikileaks cable as overseeing the 2009 cyber attack on Google, and is consequently viewed with suspicion by many international observers. The increasing number of internet users in China will complicate Liu’s task. As information circulates more freely, it is Liu that will oversee the upkeep of China’s internet security measures, ‘The Great Firewall’. This is an increasingly controversial issue both in China and abroad, making his position potentially more important than it might previously have been.

Though not a ‘princeling’ himself, Liu is grooming the next generation for wealth, if not power; his son, Liu Lefei runs the CITIC private equity fund which has capital of around 9 billion RMB ($1.4 billion). As head of the propaganda department, Liu Yunshan follows in the steps of Xi Zhongxun, Xi Jinping’s father, though exactly how close he is to the president-elect is unclear.

Li Yuanchao

Current Position: Head of CCP Central Organization Department

Potential position in 2013: Executive Secretary or Head of Central Discipline Inspection Commission

TheChinaFile

Once considered a potential candidate for the presidency, rival only to Li Keqiang, Li Yuanchao now looks like a candidate to take a lower-ranking position. Having graduated from Shanghai’s Fudan University in Mathematics, he later received a Masters degree from Peking University in Economic Management, and a Doctorate in Law from the Central Party School.

Li is another of China’s fifth generation of ‘princelings’, as both his parents were revolutionary leaders. But he has indeed shown a remarkable knack at ingratiating himself with the Communist Youth League (CYL), and is indeed popular within both camps.

He spent his early career as a teacher, and later became a favorite of Hu Jintao’s in the CYL. Hu’s endorsement is believed to have fast-tracked Li to becoming party secretary of the booming coastal province Jiangsu where he made his name. His political capital was particularly enhanced by China’s export boom in the 1990s.

Though he may have lost out in the race to the presidency, as executive secretary Li would still has the opportunity to be a very important figure in China’s next Politburo Standing Committee.

Meng Jianzhu

Current Position: Vice-Premier of Public Security

Potential position in 2013: Head of Political and Legislative Committee. Internal Security

TheChinaFile

A graduate of Shanghai Mechanical Engineering Institute as well as a capable economist, Meng looks poised to take over the role currently occupied by the highly contentious Zhou Yongkang.

His power is firmly rooted in the South, having held multiple roles in Shanghai before becoming party chief of Jiangxi – a promotion that was aided by his connection with Jiang’s close ally and former vice-president, Zeng Qinghong.

Meng’s résumé boasts harsh criticism of the Tibetan uprisings, which he called “the Dalai Lama clique’s intentional and secret efforts to separate the motherland and undermine Tibet’s harmony and stability”. With Meng in charge, it seems unlikely that China’s internal security policy will undergo any significant changes in the years to come.

Wang Yang

Current Position: Party Secretary of Guangdong

Potential position in 2013: Vice Premier and Deputy Party Secretary of the State Council

TheChinaFile

Having previously held Bo Xilai’s post as party secretary of Chongqing, Wang transferred to Guangdong in 2007. He is known to favor economic and financial liberalization, and has encouraged greater reliance on market forces rather than the state in Guangdong province. This move away from the planned economy has earned him the title of ‘young Marshall’ amongst his supporters, referring to his tendency to challenge the status quo. Wang has also developed a reputation for political liberalization, most notably in his response to the protests of 2011 in the village of Wukan; after a ten day standoff with villagers a resolution was reached under which the village was permitted to hold direct elections in March 2012.

Wang holds political clout as a particular favorite of both Wen Jiabao and Hu Jintao, who will no doubt seek to ensure that their supporters are rewarded with positions of power in the next generation. Enjoying wide public appeal owing to his charisma and empathy, Wang appeared to be in direct competition with Bo Xilai for a place on the standing committee. Though he embraces media outlets to a greater extent than most Chinese politicians, Wang kept a lower profile than his rival. The relationship between the two was in many ways the most interesting of any two in this list, as these rivals came to praise each other’s very different leadership style, with Bo saying that he was ‘brimming over with true feelings’ after meeting with Wang in 2010. Wang didn’t go as far as his rival, but did express his strong admiration for Bo’s implicit role in continuing Chongqing’s modernization process.

In March 2012, when Bo’s fate was finally sealed, it looked like Wang had won the battle between the two. With Bo’s attempt to foster a cult of personality in tatters, it now seems evident that to future political aspirants that attempting to become bigger than the party is ultimately a self-destructive ambition. Wang’s decision to focus on economic development over political rhetoric appears to have been one of the deciding factors in his success, though Bo’s downfall was at least as much of his own making. With the ‘Guangdong Model’ having seemingly triumphed over the ‘Chongqing Model’, Wang may well be rewarded with a position as Chairman of the NPC.

Bo Xilai – The one that got away?

Current Position: none

Previous position: Party Secretary of Chongqing

TheChinaFile

The son of Bo Yibo, a former CCP revolutionary leader, Bo Xilai was once hailed as China’s first political rock star. Since the death of his father in 2007, after which he lost much political clout, he embarked on a widespread crackdown of organized crime along with a promotion of Maoist ideology in his jurisdiction of Chongqing. Residents received so-called ‘red texts’ – quotations from Mao Zedong sent directly to their mobile phones – and television commercials were replaced with revolutionary soap operas.

His apparent revolutionary sympathy received no comment from the highest-ranking members of the CCP, Hu and Wen, who do not court the media, and favor a more bureaucratic approach. Xi Jinping, however, did praise Bo’s tenure in Chongqing, which led some to suggest that Xi was trying to form his own clique composed strongly of ‘princelings’, the self-professed legitimate heirs to CCP leadership. Bo was popular in Chongqing where the reduction in the crime rate was widely acknowledged to be his biggest achievement.

As we have seen, his great ambition proved to be his downfall. As this smooth-talking showman tried to become bigger than the party, forces within Beijing worked to bring him crashing down. On March 15th 2012 he was formally dismissed from his post as mayor of Chongqing, and he is now implicated through his wife, Gu Kailai, in the apparent-murder of the British businessman Neil Heywood.

His ‘Red Revival’, once much praised in China, is now seen to have been nothing but a ploy to get a seat on the PSC. The entire episode has sent shockwaves through the Chinese political decision-making process, and with loyalty to the party now paramount it seems impossible that Bo will ever reach a position of political power again. Whether or not Xi himself has been damaged by the limited association he had with Bo remains to be seen, but Bo’s downfall is certainly the result of a behind-the-scenes power struggle that Xi would no doubt have preferred to have avoided at this crucial time.

Trends

The very nature of Chinese politics makes it incredibly hard to predict how the next generation of leaders will affect Chinese domestic and international policy; the only way to get to the top, as the Bo episode has demonstrated, is to tow the party line and keep your cards close to your chest. However, it seems reasonable to posit that the next generation of Chinese leaders will continue China’s modernization and economic liberalization process, and will continue to keep the focus on a balance of economic growth and domestic stability.

Although his wife may be one of China’s best-loved entertainers, Xi appears to be quite happy out of the limelight, and is more focused on delivering results than political rhetoric. With Bo gone there appears little chance of a return to personality politics, and the Chinese political system appears to be progressing towards the intra-party democracy advocated by Hu. If the transition is relatively stable, it will cement the process by which a leader serves for a decade before handing over the reins to the next generation. While this model is a long way from any form of democracy that those in the West would recognize, it would be a stable and formalized system that prevents a return to Mao-style one-man dictatorship. An interesting contrast is in nominally democratic Russia, where Vladimir Putin has returned to the presidency after four years as prime minister; if he serves the full twelve years he is now constitutionally entitled to he will be in power after Xi Jinping leaves office and his reign will have coincided with four ‘generations’ of Chinese leaders.

A crucial aspect of this progression towards a stable transition process will be whether or not the Chairmanship of the Central Military Commission (CMC) is handed over from Hu Jintao to Xi Jinping at the same time as the presidency and position of General Secretary of the CCP. When Hu succeeded Jiang Zemin, he did not gain the chairmanship of the CMC until more than twelve months later as Jiang sought to retain some influence and power. As themilitary is not directly controlled by the state, but is actually answerable to the party, this post is crucial for any leader to consolidate their position.

With the next 5-year plan already in place, the first years of China’s new leadership will see a continuation of the policies already put in place by their predecessors, but the contents of the next 5 year plan, to be decided by this new generation and implemented in 2016, will depend on multiple external and internal factors.

Towing the party line and peaceful development are likely to be two of the key themes of this generation, but as the Bo episode has illustrated, the wind can very quickly change in the Chinese political field.