Does China’s leadership transition signal the start of a period of political change to match the economic reforms that have been unleashed in the country? Or does it herald a spell of political instability at a time when China can least afford it? Marsha Vande Berg analyzes the prospects for political, economic and social change in China – and the implications for China’s international relationships –

The Chinese leadership transition that started in November last year was billed as the first in modern China’s 53-year history in which the supreme party leader had not been purged or died in office. Nevertheless, it fell short of demonstrating the leaders’ ability to practise good governance. The process was cloaked in secrecy and, for the most part, took place behind tightly closed doors.

It also means that the new generation of leaders has been left holding a mixed bag of social problems, and facing divisions at the top which are deeply distracting at a time of dramatic economic change.

It is clearly in the interests of the rest of the world, particularly for the US and Europe, to ensure a positive outcome to the daunting changes that will sweep China in the next few years – and to advance political, economic and cultural links. China’s international partners should seize the opportunity to work with the Chinese in promoting additional reforms that can open the country up on all fronts.

China is starting to make its presence felt beyond its borders, on issues ranging from global security to world trade. Asia’s dominant force is starting to apply as much realpolitik to international trade policies as it demonstrated it was capable of wielding last autumn in its support of the Bush administration’s war on terror.

It is clear that the world’s most populous country needs trade and investment flows to succeed in its evolution from a poor, collective agrarian society into a global economic power.

By the end of 2002 Beijing had slapped import tariffs on foreign steel, prompting complaints from Japan, South Korea and the European Union. It had pushed its first proposal in the World Trade Organization (WTO), calling for lower overseas market barriers on farm exports – in the process, perhaps even finding common cause with Washington and poorer countries too. And it reached deep into its regional backyard, showing interest in a free trade zone.

The government also began liberalizing its capital account by allowing qualified foreign investors to buy Chinese shares traded on the Shanghai and Shenzhen exchanges, which had previously been off limits to foreigners. The move took effect on December 1 last year and acknowledged Beijing’s newly declared interest in joining the international capital market in parallel with its increasing participation in the global trade of goods.

However, one must ask whether this push is born of heightened concern about the system’s ability to sustain the current momentum. If so, does it mean that the opportunities for concurrent political reforms are pushed back? Or is Beijing capable of subtle and sustainable change on both fronts?

Beijing’s trade and foreign investment ledger continues to show some favourable tendencies. China is now the United States’ fourth largest trading partner and western Europe’s third largest. Its largest European trading partner is Germany, which is also Europe’s largest economy. Conversely, its expanding commercial ties translate into the largest and most worrisome trade deficits for both Washington and Europe.

Over the past two decades foreign companies have poured $806 billion into 411,495 Chinese enterprises. The US tops the list of investors, followed by Europe, even though Europe’s primary focus these days is on opportunities in the US and the European integration process.

China is the number one preferred destination for foreign investments, surpassing the US for the first time in 2002. One in three executives in the world’s largest 1,000 firms – accounting for 70% of global foreign direct investment (FDI) – prefers China when making a decision to invest abroad for the first time. The second choice is the US, followed by Russia, according the latest FDI Confidence Index published by AT Kearney.

With cheap labour and production costs as primary assets, the country’s growing appeal as the world’s “factory floor” is attracting a swelling list of technologically sensitive industries, notably computers, electronics, telecommunications equipment, pharmaceuticals, petrochemicals and power generating equipment. A growing Chinese economy also holds increasing appeal for foreign investors who want to build production facilities to supply the domestic market.

The foreign investment boom has helped boost China’s economy into eighth place in the world, surpassing Italy in 2002. While exports represent nearly a quarter of China’s GDP, partly or wholly foreign-owned firms account for half of its imports and exports.

China’s leaders calculated correctly when they decided in 2000 to open up their isolated economy to foreign trade and investment. When they joined the WTO at the end of 2001, they also banked on top-to-bottom reorganization to stimulate growth and create jobs with the help of international investors eager to enter a market of more than a billion people. They also understood that if China is to succeed, its economy must continue its evolution within the context of an increasingly interdependent and technologically demanding 21st century.

What is not as clear is the extent to which the leadership’s emphasis on top-to-bottom reorganization excludes the possibility of political reforms to balance this restructuring.

When the new leadership began taking shape last year, prospects for political reform were circling around efforts by Jiang Zemin, still party general secretary at the time, to allow business people and entrepreneurs to join the Chinese Communist Party. Since then, reports on the results of the 16th National Party Congress suggests a party that gives but also takes away. It appears that those who join must also agree to set up party cells with influence over operations in their companies.

Perhaps the new leaders, like their predecessors, fear that if they open up the political process beyond the non-party elections that are now allowed at village level, they will be inviting the same fate that befell the communist parties in eastern Europe and Russia in 1989 and 1990. Even if such an inclination exists, the top priority of the current configuration of leaders has to be sustaining economic reform and the authority of the Chinese Communist Party at the centre of government.

A close second priority is the jockeying for power that must now take place in an atmosphere clouded by the succession process, which will continue through March with the naming of leaders to top government posts. This means there is a possibility that the current leadership is transitional, which has implications for the pace of reform, if not for its shape.

The longevity of the leadership line-up, as it appeared on stage in order of seniority in the Great Hall of the People on Tiananmen Square, first came under question with Jiang’s plan to retain influence over government and party patronage from the sidelines. In November last year the general secretary resigned his party position, under the unwritten rule that no Chinese leader should serve after turning 70. Jiang is 76.

In his place is Hu Jintao, 59, a moderate and mild-mannered cadre hand-picked by the late “paramount” leader, Deng Xiaoping, as Jiang’s successor. Hu is also expected to receive the title of president in March.

Jiang, China’s leader of 13 years, successfully – some say cynically – orchestrated a division between potentially competing camps in the party’s upper reaches and in the government that the party controls. At best, that split in the new nine-member Politburo Standing Committee will produce something like a triumvirate of leaders who must find ways of working together – with Jiang in the background – to rule China into the future. Such a trio would comprise Hu, Wen Jiabao – the 60-year-old vice-premier expected to take over from the retiring premier Zhu Rongji in March – and Hu’s chief rival, 63-year-old Zeng Qinghong.

However, there is still a problem around the inherent potential for weakness caused by timidity and indecisiveness at the top. As things stand now, even with a triumvirate of power, Hu will effectively hold the necessary titles.

But the split favours Jiang’s so-called Shanghai faction and the influence of five or six members of the new Standing Committee. Included here is Zeng, the former head of the party’s organization department, who is touted as a skilful political operator. He has Jiang’s support and is expected to take over leadership of the Shanghai faction.

Hu’s network, on the other hand, includes the reform-minded Communist Youth League faction and possibly Wen, along with Wu Guanzheng, the 64-year-old party secretary of the rich coastal province of Shandong. Wu is the new chairman of the important Central Commission for Disciplinary Inspection, the party’s highest anti-corruption agency. Both Wen and Wu are new Standing Committee members.

Also problematic is Jiang’s likely influence as chairman of the Central Military Commission (CMC). While there are precedents for a retiring party chief to retain the post of CMC chairman, one of three titles traditionally held by China’s paramount leader, Jiang has effectively ensured his own influence across government and the party on military matters.

He also retains the support of three generals who are key to the organization of the military into three dominant departments. The three were named to the party’s Central Committee in November.

Jiang’s role with the CMC is also noteworthy from the perspective of the military’s interest in strengthening the link between party ideology and government at a time when the party is concerned about its loss of credibility among the Chinese people. It was Jiang who initiated the campaign in 1998 to reassert the party’s control over the military and strip it of its business dealings. That process of unwinding business from military interests continues today and is designed to clean up systemic corruption in the armed services.

Since 1998 China’s military, the self-appointed guardian of sovereignty issues including China’s claims to Taiwan and Tibet, has managed to get double-digit budget increases for its programme, including technological modernization.

Taken together, these circumstances mean that if Hu is to succeed in putting his mark on China’s future he must act quickly to consolidate his power or face a rival who would oust him, or take a diluted role as part of a governing triumvirate. The sorting-out process could take as long as five years – until 2007, when the next party congress is supposed to meet.

Until then, the leadership will remain unanimous about the importance of economic reforms, but only economic reforms. The rest will be up for grabs.

Marsha Vande Berg
Marsha Vande Berg is the editor of The World Report and a member of the Council on Foreign Relations.