The reactions of Thailand’s commanding northern neighbour have been heavy on the minds of Western media during the events of recent weeks.

As the BBC noted in the aftermath of the protests that postponed the ASEAN Summit:

Mr Abhisit had to make a grovelling phone call to apologise to Premier Wen, who, despite diplomatically saying he understood the prime minister’s actions, must have been thinking: ‘This could never happen in China.’

Yet an attempt to calculate exactly what Grandpa Wen thought of the events in Thailand is difficult. Coverage of the Thai situation in the Chinese media has been fairly limited. The august China Daily, and Xinhua have shared the same daily stories (usually a brief 300 word coverage of the respective event) for the past week with stories on 13 April (‘Water Festival not so happy’); 14 April (‘Protesters go home’); 16 April (‘ASEAN summit must be held – Abhisit’); 17 April (‘Yellow-Shirt leader shot; Thai gov’t says additional loan needed to boost post-political-crisis economy’) and 19 April (‘Thai PM: time for solving political crisis, not for cabinet reshuffle’).

Of these stories, the clear focus is on the economic impact of the turmoil. Stories such as ‘Thai gov’t says additional loan needed to boost post-political-crisis economy’ focus on the economic impacts of the crisis above all else, spelling out how:

Following the recent scattered rioting due to anti-government rallies, the Thai economy was estimated to contract as much as 5 percent for 2009 as the political chaos has tremendously affected investors’ confidence, according to the Finance Ministry. The cabinet meeting also decided not to lift a state of emergency as it would be lifted only when peace was fully restored.

Note the order of importance.

Similarly, stories around the earlier events in the crisis centered largely upon the effects on tourism and what the correspondent termed ‘normal life’:

…violent confrontations were sporadic, at least till the Songkran Festival Friday afternoon. But sadly enough, the conflict sent tourists fleeing back home and some countries and regions, such as Australia, Russia and Hong Kong of China have issued warnings against travel to Bangkok and Thailand. This would undoubtedly affect tourism, the backbone sector and a major foreign currency earner of Thailand, which has already been reeling from the cancellation of the ASEAN summits politically.

Indeed, the official media line has been somewhat relaxed about the protests, including this gem from the China Daily:

Despite all these (referring to ‘violent protests’ in previous para- ed.), life goes on. Just several blocks from the rallies and excited protestors, a couple of kids and youngsters were enjoying their Songkran Festival, soaked, with each armed with a huge water gun. To them, all the fuss had better be left to those adults to take care of. It’s new year coming, so let’s just have fun!

Thailand related stories have generally been given short shrift in state media. In the past two weeks, no story on Thailand has (to the best of my knowledge) appeared in the front sections of major newspapers, nor been on the ‘most viewed’ or ‘most emailed’ lists. To give a flavour for what has instead been preoccupying Chinese state media, the following stories have, on the other hand, all been placed in far more prominent positions: ‘Chinese, Bahrainian leaders exchange congratulatory messages on anniversary of ties’, ‘Albanian PM arrives in Hainan for Asian Forum’
and the riveting ‘Would-be world’s tallest man receives foot surgery’.

Chinese media is always going to be wary around this period. It marks the 20th anniversary of the death of Hu Yaobang, a noted reformer forced out of power in 1987 whose death is often thought of as precipitating much of the student-led part of the protests which led to the Tiananmen Square demonstrations and deadly crackdowns of early June. The absence of any discussion of Hu’s death has dominated Chinese dissident blogs and related Western trackers (see here and here).

Another reason for the blandness of the coverage is the ubiquity of certain viewpoints presented in China: the majority of in-depth pieces are all coming through Xinhua correspondent Zhang Qiulai (including not only his syndicated pieces for Xinhua, but also interviews in Nanfang Zhoumo and Sina.net).

Hence, Zhang’s perspective tends to dominate coverage. He is relatively positive, seeing the situation as stabilising somewhat and being a test for the Abhisit government rather than anything else. Many of his reports discuss the ‘contradictions in Thai politics’, and he believes that the crisis is much more about ‘breaking the vicious cycle of Thai politics’ than anything else.

This view is common in major media in China. Sina, for example, argues that Thailand faces the ’4 difficults’:
1. The military forces have difficulty retaining control (attributed to the split in support in the forces)
2. The government has very little scope to act
3. Thaksin will find it hard to return
4. The dispute will be hard to bring to an end.

In this way, most of the media coverage over the past two weeks has centered upon the dispute between ‘red and yellow shirts’ and the instability of Thai politics. The structural and historical factors behind the chaos has been often swept up in the rubric of ‘instability’, with the reasons for Thailand’s disputes attributed to Thailand’s ‘historical instability’ . It is difficult to read an in-depth news piece in Chinese without reading that Thailand has had ’18 military coups since 1932′.

A recent argument is that followed by both iFeng journalist Zhao Lingmin and RedNet, who both argue that Thailand’s current instability is a representation of the limitations of Thai democracy. Rednet, for example, posits that:

Although democracy is a ‘good thing’ (terminology is from a famous Chinese speech a few years back), different countries are not able to institute it immediately. Thailand’s democracy has not succeeded, it still lacks many of the requirements for success and it faces a long road ahead.

Zhao Lingmin takes this a step further and links a class-based analysis into his critique of Thai democracy. An annotated translation of his argument follows below:

At the surface, the Red shirts deserve to take the blame for the demonstrations, but a deeper examination shows that it is difficult to separate the coup leading to Thaksin stepping down and the current disorderly situation. Thaksin is Thailand’s only post-war Prime Minister to complete a 4 year term, and he ‘implemented measures relieving the burden on the poor, improved the conditions of a deteriorating society and earned the respect and praise of the lower-to-middle class that makeup 70 per cent of the Thai population’.

To the upper classes (note that these are referred to with some derision) Thaksin only had his mandate through ‘toadying’ (讨好) to grass-roots voters, and was actually damaging the interests of the middle class. This opposition, the article argues, had considerable influence- comprising some 80 per cent of the economy, and having even greater influence on public opinion. As such, they were able to ‘band together’ (组织起来) and thus were ‘always able to launch large-scale attacks on the majority-elected government’.

Samak is then seen as Thaksin’s logical successor, and one who was ‘groundlessly’ dismissed. Somchai was Thaksin’s ‘puppet’ according to the elite, and the loss of tourist revenue noted as a major factor in his dismissal for bribery. Abhisit is ‘in a dilemma’. He is thought to have underestimated the Red Shirts, and is now unable to crack down on them too heavily as Thai history indicates that many coups start from police or military suppression of dissent. Moreover, economically, they think he has ‘done nothing’ with the economy projected to shrink 4 per cent.

However, the real victim is ‘the Thai democratic system’. Though Thaksin had ‘blemishes from a corruption perspective’, the toppling of a government through military coup is merely piling more damage upon a country whose democratic system has yet to solidify. This, he argues, is like ‘opening Pandora’s box’. The demands of the protesters on the street are thus seen as ‘legitimate’, but the methods ‘illegal’, and ‘an abuse of their own rights and responsibilities.’ Both Yellow and Redshirts are thus ‘contravening democracy’- however, the yellow shirts are seen as the ‘originating party’ breaking the ‘rules of the game’. Although the Red Shirts follow the same pattern — that of an eye for an eye and a tooth for a tooth — the real problem he thinks is that Thai democracy is too immature.

Structurally, this means that ‘popular rule and military control are destined to continue cycling in and out of fashion, that rule will continue to change hands and that the Constitution will continue to be ignored. Thai political powers do not have enough reverence for, or belief in, democracy. They haven’t studied how to compromise, nor realized that compromise involves two parties. Democracy is seen as a tool for serving themselves. This is just not a failure of Thai democracy, it represents the principle cause of the failure of democracy in most 3rd world countries.’

Interestingly, since Zhao’s article, a considerable amount of Chinese press has focussed in on this idea of a failure of Thai democracy. The RedNet article above, for example, was released 3 days after Zhao’s piece.

Finally, it would be remiss to not note what is clearly lacking from discussions in the past two weeks.

The first notable absence is discussion of the role of the king, and his high profile, status and influence upon Thai politics. As opposed to discussions on New Mandala and other sites, the ‘uneasy compromise between the people, the military and the palace’ is left completely unmentioned.

The second notable absence is a discussion of the influence of the rural-urban socio-economic divide in Thai politics. Sheridan, for example, argued recently in a similar lament about Thai political governance in The Australian that ‘in Thailand, governments are made in the countryside and destroyed in the city due to Thailand’s central fault line between rich Bangkok and the rural poor’. With the notable exception of the Zhao Lingmin piece above, which makes an oblique reference at best, there is no discussion of any form of rural-urban socio-economic divide. Given China’s own problems in this area, this probably isn’t all that surprising.

This post originally appeared on New Mandala, and the original may be found here.

1. Some Chinese reactions to the Thai situation
2. Thai Rak Thai 3.0
3. Thai elections: The unseen hand

A recent article by Sun Liping has attracted considerable attention on the blogosphere (thanks to China Digital Times for the link, and initial translation. I have retranslated the text).

CDT highlighted the piece as interesting because of Sun Liping’s links with current rising star Xi Jinping: as an aside, I am somewhat sceptical about this, given that Dr. Sun is a sociology professor and Xi an engineer.

But it is the content of Sun’s article that makes it explosive. In particular, he argues that:

It is difficult to achieve the double goals of maximizing vested interests and keeping the society operating steadily…we will pay a high price in the long-term for safeguarding vested interests.

This part of his argument is a common one, and is interlinked with Sun’s broader point on the lack of social cohesion and ’society’ within China.

But it is his conclusion that is fascinating:

The fundamental cause of social decay is the form of the interaction between powerful individuals and capitalism. In the past, many believed there was a sharply defined contrast between the market and power – yet in modern day China, these two things are now seen as being fused together, like two people fundamentally unsuitable for each other not only marrying but flourishing together.

In the past, it was believed that power was limited when market conditions were present, yet today it is the emergence of the market that provides an arena to exercise even greater power. The greater the marketisation, the higher the price vested interests can seek. Today, at the very centre of the market is power, and vice versa.

Sun’s argument is that the very thing that is meant to encourage greater autonomy and free choice – the market – has become synonymous in Chinese eyes with the ‘powers that be’ and, specifically, local vested interests.

It is important here to note that Sun is not using this to argue for a return to collectivist governance, nor that he is pushing an anti-reform agenda. Quite the opposite. His article outlines clearly his belief in universal rights and political reform.

Rather, he is pointing out a falsehood often spouted in discussions of contemporary Chinese politics: the idea of a dichotomy between ‘local vested interests’ and ‘forces of reform’. This idea generally puts forth that the market (a globalised force, and one embraced by ‘reformers’) is fighting against ‘local vested interests’. Sun argues that this concept is incorrect. The local vested interests are the very forces that have co-opted market principles.

There are two points to take away from this. The first is that loosely floated models of western-oriented, liberal reformers versus insular vested interests may not match the reality in China. If marketisation is seen as aiding vested interests, then we have a conundrum whereby politically liberal reformers (such as Xi Jinping) may find economically more ‘open’ policies counter-productive.

The second is that a downturn in growth may have different repercussions to those imagined. At the moment there is a school of thought arguing that, should the economy tank, the (central) Government will suffer a loss of legitimacy.

Accepting Sun’s argument means this is not necessarily the case. Should there be a downturn in growth, expect much of the blame to be placed on local government officials and not the centre. As with labour market disputes today, the centre will argue that it is holding China together, but that, as the mountains are high and far away, any blame for inefficiency can be put on local cadres.

There is, of course, an international stake in this. A Chinese state open to trade and ‘western influence’ is generally considered a Chinese state likely to also adopt more liberal political values. This may not be true.

Moreover, if, in an economic downturn, the centre is forced to place the blame on local interests, we may see a turn away from free market principles. This, particularly given the need to bring China into the tent as much as possible, would be harmful to the global community.

1. Whaling: What can law add to science, economics, ethics and politics?
2. Thailand: Divisive politics but economics-almost-as-usual
3. The tragedy of US-China high politics

Amongst the flood of articles arguing whether we are now Keynesians or otherwise, the Chinese stimulus package unveiled in response to the economic downturn has not gone unnoticed.

As Meng notes, the current economic crisis may even have a positive effect on health care in China. The government may see the health sector as conducive for supporting economic recovery and invest more accordingly.

A recent argument outlined that:

there is a lot that expansionary fiscal policy in China could achieve, through stimulating domestic demand. Especially if it included a good fix on Chinese health care and the insurance industry in general.

There is no doubt that getting a ‘good fix’ on health care in China would be a considerable boon to China’s farmers. Recent surveys of attitudes in the countryside towards China’s development have all focused on health care as the primary source of dissatisfaction.

The problem is that spending China’s fiscal stimulus on health care appears highly unlikely to cause any form of multiplier effect through the economy.

This has the problem not only of being a considerable waste of useful cash, it may also, as Meng noted, have a worse effect on health sector reform in the long run – as investments in other programs that promise higher returns for economic recovery will look more attractive.

The theory that fixing health care will lead to an economic stimulus assumes that China’s high savings rate is due (to some degree) to a lack of effective insurance. It also assumes that the central government will be able to mobilize adequate finances for the reforms under the current economic crisis.

An effective social safety net will indeed encourage people to reduce their savings rate and shift to higher consumption. But the stimulus package proposed for China’s health system won’t lead to lower savings, despite the RMB 100bn p.a. proposed for the new CMS system.

This is because – in spite of the far higher levels of funds that will soon be in the system – the new CMS remains fundamentally flawed as an economic stimulus for two reasons.

The first is that the new CMS makes them pay to see the doctor up front, then be reimbursed. You can pump as many trillions of yuan into insurance as you want, but if you have to pay up front you still need to save enough money to pay for your health care before being reimbursed. Thus, the new funds, in spite being 37 per cent of the total budget, are unlikely to affect savings rates.

Secondly, due to the fact that the new CMS remains the only social health insurance scheme in the world which is voluntary, healthcare costs are likely to also rise under the new stimulus package. 

The other major tenet of the new system is that the central government will completely subsidize the delivery of an ‘essential public health service’. There will be a mandated level of services for all citizens across China, whilst local governments can add public health services to this package based on the local economic situation.

The issue with this as an economic stimulus is that it merely reinforces the existing, dramatic, horizontal inequities within the Chinese public finance system. Prior research already tells us that in public fund-starved rural areas providers often charge for goods mandated as free and basic: immunisations are a good example.

The announcement of greater funds going to health care is a significant bonus. An increase of public funds and attention in this area is of undoubted benefit to China. Improving public good provision may go someway to rectifying China’s equity problems. Moreover, no-one doubts that the establishment of social health insurance takes time: most studies argue an average of 20 years.

The one part of the new health care policy statement that may make a difference is the statement that ‘all level(s) of political leadership should put health care as a priority on the party’s agenda’. Should this anodyne statement be reflected in the opaque world of cadre zhibiao (performance criteria), then health care may see some dramatic improvements.

However, expecting this form of public spending in the current health care system to invoke any form of economic stimulus is, at best, wishful thinking.

1. Reviewing the arguments against fiscal stimulus
2. China’s new health deal?
3. Why the world needs fiscal stimulus

The recently concluded Third Plenary outlined what Willy Lam is calling a ‘New Deal with Chinese characteristics‘. With significant growth in tax revenue from what has been a booming economy, China plans to inject an additional US $38 billion of government funding – the equivalent of 1.5% of GDP – into health.

The goal of this ambitious ‘Chinese New Deal’ will be the provision of free or nearly free universal basic health care.

The health policy released recently said that this would be achieved by increases in primary and secondary prevention, primary care in outpatient clinics, maternal and child health care, home health services for the disabled and elderly, emergency hospital services, and essential drugs.

This, of course, is quite the laundry list. Yet, in spite of the big talk, the fundamental problems of Chinese health care appear to have not been addressed at all.

The new health care policy, aside from being vague and difficult to comprehend (in both English and Chinese), fails to address the very simple question of exactly what kind of health-care system China has or wants.

The current system is, largely, the traditional model, where the central government (usually through the Ministry of Health, although sometimes using other departments) directs mandates and allocates funds to the provinces, who then filter the money, and the mandates, downwards.

The MOH also, theoretically, manages and regulates public facilities, through which much of China’s health care treatments are provided. However, in reality, the burden for this is also mainly passed down to the lower levels of government.

The MOH favours this approach because the extra funds coming into the system will vastly increase its fiscal power, personnel slots, and appointment power.

Yet there is still no solution to any of the structural problems. Firstly, there is no resolution of the problem of unfunded mandates. The centre possesses most of the revenue. The lower levels do most of the spending. The numbers, generally, don’t add up- particularly in poorer provinces.

A funding shortage means that providers almost always have to charge for services. Yet, providers do not have to compete for patients and therefore have little incentive to pay attention, or respond, to patients’ preferences, needs, and satisfaction. The government is also a pretty poor purchaser. It has no ability to contract with providers on metrics of service quality, nor price. Neither is it able to control price inflation.

To get around this, the government instituted an insurance fund, on the basis that universal health insurance would allow individuals to choose their provider and then be reimbursed by the state. Yet the governments running the fund’s primary concern has been to ensure that the insurance fund does not run a deficit. Thus, to avoid financial risks. they instituted highly conservative spending plans, and no money goes through the system.

Even worse, the insurance scheme is designed to be fee-for-service, with the government reimbursing patients some of their up-front costs. So people who are too poor to pay upfront in the first place remain… too poor to pay. And people who can afford it are given 10% back, thus providing providers with further incentives to raise their fees, which then makes health care even more difficult to access.

Prevention, primary health care and the provision of drugs are all wonderful services which have great societal benefit. But the real problems seem simple: there is no real competition, there is no real concept of how the system will work on a macro level, and the most promising program (health insurance) has an ideological predisposition towards upfront payment that renders it ineffective.

The next time a health care plan comes out, a few well-chosen sentences on the structural macro-issues of China’s health care policy are likely be more effective than a few hundred extra pages on the institution of new programs.

1. CASS gets with the fiscal program
2. China’s health care and the fiscal stimulus
3. China’s search for a new deal

Lord Patten’s recent article argues that China’s ability to have economic growth outside of the United States’ secured, liberal order is a beacon to wannabe authoritarians everywhere. China, then, is a threat to democracy due to its economic success.

There is some reason to what he says. Undoubtedly, the recent economic successes of both China and Russia have altered many of the tenets of democratic growth theory. Democratic growth theory, in a nutshell, argues that as an economy grows, the middle class demands more of a say in its affairs, leading to more democratic institutions and often political transition.

Yet, as Robert Kagan has recently argued, there is a considerable international appeal to autocracy, and if this can be combined with a successful economic model, then suddenly a new model of development appears.

As Kagan says, ‘Thanks to decades of remarkable growth, the Chinese today can argue that their model of economic development, which combines an increasingly open economy with a closed political system, can be a successful option for development in many nations.’

Moreover, he says, considerable other examples of this already exist in history: Chile under Pinochet. South Korea under General Lee.

It’s not surprising that, as Buruma has recently argued in the New Yorker, Third World dictators should be attracted to this model. Who wouldn’t prefer to make deals in a country without independent trade unions? Who would turn down the chance to redesign entire cities without public interference?

The recent manifestation of this phenomenon is perhaps most perceptively discussed in current international events by Remnick’s writing on modern Russia.

Russia today, he argues, is ‘deeply apolitical and immensely more supportive of Putin than it ever was of Yeltsin or Gorbachev. Masha Lipman calls this Putin-era phenomenon the country’s “non-participation pact”: the public agrees not to meddle in politics in exchange for the chance to take part in the consumer benefits of the Russian energy boom.’

Any form of trade off between political rights and economic success is of course a chimera. Russia’s recent economic success appears more due to the price of natural gas rather than a discovery of a new political economic model. Yet, the significant part of this shift is its impacts on the ideology of the state. Remnick cites Albats, a Russian radio host who notes : ‘You can call Putin or Medvedev a fool, which, of course, was totally impossible in Soviet times, but you might get into trouble if you look into their pockets. You cannot say you’ve heard that So-and-So has sent x trillion dollars to this or that offshore account. These people are total conformists, total pragmatists, they have no interest at all in ideology. They care about their power and their assets.’

This in a nutshell is Patten’s argument. A non-participation pact with citizens makes a mockery of the values that states wishing to “buy into” the current order are supposed to have.

Patten’s remedies for this situation are somewhat contradictory. He sees regional participation as being a possible remedy for the situation, believing that a responsibility to protect is currently absent in Asia, and that regionalism aids that. He forgets, of course, that the nation currently most important to any regionalist agreements (China) is one of the staunchest supporters of the ideal of non-intervention.

However, his overall theme of a need for regional economic cooperation as a basis for agreement due to the only concordance of ideals in Asia being that of a relatively liberal trade agenda seems far more plausible than any belief in a concordance of ideals in the security arena. The question then becomes one of whether the world can simultaneously stomach the discord between acceptance of liberal trade regulations and rejection of liberal political ideals that Patten also identifies.

1. Will it be hot economics and cold politics domestically in China too?
2. China and India: High on octane, low on clean
3. China and incentives for sustainable development

A brief skim of Chinese newspapers recently would give the casual reader a fairly good idea that China managed to have a man walk in space. Woe betide this same reader should they then reach for a skim milk though. Not that you would know from a casual scan of the Renmin Ribao.

Yet, for us, juxtaposing the recent space crisis with the powdered milk incident provides a valuable perspective of the nature of modern China.

Look at me kids! Now drink your milk... (from yesterland.com)

In the red corner, we had Colonel Zhai wearing his 265-pound, US$4 million, Chinese-made “Feitian” space-suit for a jaunty space stroll, the success of which has sent Chinese propaganda “hitmen” such as Yu Feihong into a frenzy.

An editorial run in major newspapers said the success of the Olympics and other such “nation-building feats” demonstrated the superiority of the Chinese political system to the democratic West’s “corrupt, divisive and inept policy-making”. “Its advantages are increasingly evident,” it said. “Western countries are mired in low growth, and the United States’ recent severe financial crisis is a manifestation of the dead-end of liberalism.”

At the same time contaminated milk powder, laced with the industrial chemical melamine in order to make it appear more “full of protein” for Chinese consumers, has been blamed for causing the deaths of four infants and sickening more than 54,000 others. Chinese authorities stated that dairy farmers added melamine, usually used in plastics, paint and adhesives, to watered-down milk. The practice was apparently widespread in the industry, with government investigations finding 37 Chinese dairy companies, including the most reputable brands, had sold tainted products.

How, it must be asked, can a nation of such current resources, power and influence that it is banging on about the evils of liberalism be simultaneously suffering from an inability to do something as simple as ensuring that it can test milk powder for children?

Largely, because the centre is able to do things far more efficiently than the levels of government that people actually see and interact with everyday. If a project is big, glitzy and demanded by the central government, it shall be done, and done well.

Yet on the day to day level, China suffers from the dilemma of unfunded mandates making the provision of public services incredibly expensive and inefficient. I have written earlier on the impact that this has had on the public health system in China.

Chronic fiscal shortages don’t just have an impact on health service delivery. They affect all elements of people’s lives. China’s regulatory bodies are famously underfunded. Its regions are also famously underfunded. Funnily enough, its regional inspection bodies are… underfunded. Over years, this begins to wear down the provision of simple public services. (Indeed, it is noteworthy that all babies suffering symptoms of poisioning from the milk powder were offered “free treatment at the Beijing First Hospital”. What about treating them in Henan, where they actually fell sick? Oh.)

Yet when something becomes a political priority from the centre, such as the space walk (or the Olympics), it is done with astounding efficiency and brio.

To be clear, I am not arguing that these things are not vital for Chinese national unity and cohesion. That said, you need some bread to go with your circuses. A greater concentration on resolving the fiscal shortage problem, and improving the capacity of local government in particular will never make the front page of the papers. But it would make a considerable difference to people’s lives.

1. Local versus central governance in China: Providing basic public services
2. Consequences of melamine-laced milk for China, NZ, Japan and beyond
3. The US in Southern Asia: power versus influence

A recent report in the Sunday Times argued that “Wen Jiabao, the prime minister [of China], has become a target for Communist party hardliners and could be forced from office.”

Kaifang (Open) has said that “rivalries inside the party have broken out behind the facade of unity erected for the Olympic Games… hardliners in the party’s propaganda department and at the People’s Daily newspaper had orchestrated a campaign of abuse directed at Wen’s supposed support for universal values such as democracy and human rights.”

“China’s ship of reform is on the rocks and risks sinking,” Kaifang said in its analysis. “The party needs to find a scapegoat.”

So, if you need to find a scapegoat for having insufficient reform, why do you sack a noted reformer? Very little of this article seems to match with common sense.

Obviously, the first problem with this article is that it is all based on the Kaifang, whose major argument is based on an article in the People’s Daily. Rather than using the source (the oblique criticism in People’s Daily), Sheridan has instead pinched the argument holus bolus from Kaifang. By the time you have finished this game of Chinese whispers, what was actually written in the first place becomes obscured.

This probably explains why it seems so incorrect. Apparently, the public sign that Wen is on the nose is that the land reforms did not go through as expected. What “land reforms” didn’t go through? Which part?

Moreover, I find it curious that the same people pushing the land reforms were the People’s Daily – this would be the same People’s Daily whose editorial pages are simultaneously using their space to allow Chen Kuiyang to pressure Wen.

This coincides with a number of People’s Daily editorials proclaiming the need for a higher living wage for farmers, to be achieved through higher government purchase prices for wheat. This reform, recently instituted, is of course of exactly the loose “left” persuasion that Wen has been most strongly identified with. In other words, this reform has his fingerprints all over it. You don’t let a man about to get the axe take credit for a big reform.

Which leads to probably the strongest reason that this article doesn’t wash. The CCP aren’t going to chop Wen now, as he has a whole bunch of “public apologies” promised if many of the rural reforms enacted in the past few years don’t work as planned. If he is going to be made a scapegoat, it will be after the “public apology” sessions. In the meantime, he is far too useful in the media. Like Paris Hilton, you’re never sure what he is exactly doing there, but he is always on the front page of the paper.

Given this, the belief that Hu Jintao would be happy to jettison his prime minister because it would alter the balance of power between factions and fortify his own position may be worth examining. According to nameless “political analysts” Li Keqiang, the colourless vice-premier, would step up if Wen was forced out.

One part of this makes sense: the graduation of Li Keqiang to the post would indeed mollify the Shanghai clique, somewhat quiescent since the arrest of Chen Liangyu. This would free up Xi Jinpeng to take up Hu’s post and allow him to elevate another cadre loyal to him up the ladder.

Yet, again, this doesn’t quite square. Why use Chen Kuiyang to lead the attacks on Wen? Why use someone so closely tied to the Shanghai clique to enact criticism which leaves another Shanghai clique member as the primary beneficiary?

Given the general opacity and difficulty predicting Chinese politics, clearly it will still pay to watch this space. But I expect to see Grandpa Wen gracing CCTV for a fair while longer yet…

1. Reading tea leaves for signs of China’s recovery
2. Obama leaves Korea without KORUS: Heart but no Seoul
3. Political reform in China: Wen will it happen and Hu will lead it?

Albert Edwards, Societe Generale’s global strategist, has recently issued a ‘China alert‘, urging investors to ‘dump shares of banks exposed to the Far East’. Now, we have pointed out a number of problems in China’s development lately, with public finance being top of the hit list.

But dumping shares of banks “exposed to the Far East” is completely ridiculous. Recent events have seemed to support the argument for China’s macroeconomic situation being stronger, rather than weaker. Foreign trade and FDI now account for less than 20% of China’s recent growth – this is important, as China is somewhat insulated now from adverse international trends, although not completely protected (eg. see impact of higher international petroleum, commodity and food prices on China’s inflation rate in the first half of this year). Yes, the World Bank recently predicted that Chinese economic growth (GDP) for this year would probably come out at above 9% p.a., down from over 11 % last year. But this is a necessary slowdown, as 12% p.a. is widely recognized as being unsustainable and inflationary.

The special thing about China is that the domestic market and domestic consumption are now driving economic growth, whereas the years from, for example, 1998 to 2005 were driven by excessive investment, FDI and foreign trade. Moreover, this growth is being driven by a long term but significant diversification of the economy towards the service sector and private small and medium enterprises (SMEs).

The high end property market is diving, particularly in Shanghai and Shenzhen. Yet this is, given the recent bubble, probably a good thing, and and is attributable to excessive costs, affordability, credit restrictions, and recent measures to stop imported speculation on RMB-based assets. It is also a result of the deliberate Chinese Central Government/People’s Bank of China credit squeeze to slow the economy, control speculative property development, and reduce tenseness in labour and supplies which are causing inflationary pressures. Similarly, the construction industry overall is slowing down, rather than declining.

Labour-intensive employment is experiencing restrictions, mostly due to supply constraints, migration, institutional impediments and a more discerning labour force seeking better conditions and higher costs. This has led to up to 30% of Guangdong factories experiencing labour difficulties, with many closing amidst mounting costs. What you have to look at is how many are shifting location inland or to another city, or amalgamating or rationalizing in response to these changes. Hopefully, for both environmental and congestion reasons, the auto industry will also slow.

Yet these, under the present tense economic, credit and supply circumstances can all be seen as economically positive factors, rather than negatives.

In contrast, the banking arguments that SocGen has raised are bizarre, and sound illegal. This might be what the China Banking Regulatory Commission’s President Liu Mingkang made reference to (in respect to cracking down on illegal lending activities) at last weekend’s World Economic Forum in Tianjin. Moreover, the SocGen arguments just don’t match reality, and forget the seminal importance of the black credit market. More than 70% of small and medium enterprises, the driving force in China’s economy, operate outside the banking system, a practice that is tolerated by the PBOC.

Dumping your shares of banks exposed to the Far East might be the right thing for one’s individual investment strategy or risk appetite. But it shouldn’t be based on the flawed, scare-mongering claptrap that came out of this SocGen report.

1. G20: Time to institutionalise it and focus on main issues
2. Ageing populations in Asia: Issues and myths
3. Climate mitigation options and issues in India

Some friends of mine at grad school have a great saying: “using the word normative does not automatically improve your argument”.

Having read Josh Kurlantzick’s latest piece, I am tempted to change that to “using the words ‘middle class’ does not automatically improve your argument”.

Kurlantzick argues that “in country after country, democratic reforms are in retreat. The surprising culprit: the middle class”. A prime example, he argues, is Thailand, which was once the poster child for a successful switch to democracy until the rise of Thaksin Sinawatra.

To quote Kurlantzick’s thesis:

In 2000, Thailand’s middle class faced a problem it might not have anticipated – a politician who actually canvassed the poor for votes. Thaksin Shinawatra, a billionaire telecommunications tycoon turned pol, traveled the rural hinterlands, spewing populist promises unlike anything the country had ever seen: cheap, government-backed healthcare, loans to every village, and many more. When I traveled with Thaksin on the campaign trail, villagers welcomed him like a kind of god, gathering in packs to listen and try to touch him. And the rural poor, who make up the majority of the country, voted.

His next point, that the countries often lack institutions strong enough to constrain the power of the leaders, is a valid one. But his conclusion seems somewhat bizarre:

in many of these weak democracies, members of the middle class place their hopes in the very men they once deplored, realizing they trust the army officers, who tend to come from the same elite backgrounds, more than they trust the newly empowered poor.

Now, the last time I checked, the middle class didn’t come from the “same elite backgrounds”. Indeed, if we look at some recent research from the MIT, a ‘middle class’ person is defined as someone who is holding down a steady job. To quote Duflo, the characteristics of a middle class citizen are:

a salaried job with steady paychecks provides enough stability to encourage people to start investing for the future. They spend more on healthcare, which enables them to keep working. They keep their children in school, helping the children land middle-class jobs later on.

These are not the urban elite that, Kurlantzick argues, flock to similarly elite military institutions when they don’t like the cut of the democratically elected leaders’ jib.

This gets us to the crux of the problem with Kurlantzick’s argument: it has nothing to do with the middle class. Instead, what seems to drive it is a dislike for the fact that the leaders of these nascent democracies often have a populist bent. Kurlantzick then isn’t doubting the efficacy of democracy in delivering benefits to poorer voters. Rather, like a lord of the manor forced to mix with the hoi polloi, he is turning his nose up and sniffing at the nouveau riche elements of democracy that are emerging. His distaste for the Thaksins of the world is based on a premise that countries don’t just need democracy, they need democracy led by certain types of people.

Buying this line of argument is risky. It is right to condemn the attacking of institutions, the co-option of free media and difficulty in instituting rule of law in a democratic state. But democracy itself should not be trashed simply because we think its new leaders aren’t simply the servants of an imaginary “middle class”.

1. Do Thais lack spirit for democracy?
2. Is Thai democracy really so bad?
3. The destruction of Thai democracy

Rowan Callick’s piece in the Australian discussing a protest from disgruntled shareholders in Jishou makes a number of insightful points. His thesis that China faces economic challenges which require reform is indubitable. But his central argument that all of this will be solved through the magic of the ‘party accepting limits to its power’ rather than through the tussle and interaction between Chinese civil society and markets seems to put the cart before the horse.

Callick argues that reform in China is too slow, and that ‘in the 19th century, the polity of most of Europe changed massively importantly, through governments and large corporations becoming answerable to courts and accountable to broad groups of the population.’

Indeed. But it was this very ability of broad groups in the polity to coalesce and develop a unified agenda that forced change. No political party voluntarily gives up power, a maxim that appears to hold almost as universally in democracies as under any other form of government.

So Callick’s thesis that all China needs to do is fix the courts and the reform pressures will ease is implausible. His belief that political reform will then improve economic performance thus also appears improbable.

It seems far more important that China embrace economic change that can lead to broad civil coalitions forming as the foundation for an agenda of political reform. And one way forward is through state-owned companies being forced to comply to the disciplines of the market.

In response to Findlay and Drysdale, Callick suggests that this cannot occur due to the lack of transparency in the way that SOEs operate. But where on earth will this transparency come from other than the market?

Indeed, his example of the flaws of the Chinese market system, ICBC, has a capitalist pinup boy from Goldman Sachs on its board, has open listings of its capital reserve, non-performing loan and asset ratios (through the central bank) and releases annual reports not dissimilar to those of most Western banks. Why? ICBC’s need for foreign expertise encouraged it to sell a 10 per cent stake to Goldman and other foreign investors prior to its float on the HK and Shanghai stock exchanges.

Similarly, Callick’s claim that SOEs are not subject to the discipline of the market appears contrary to current evidence. The success of Chinese ‘national champions’ such as Haier and Lenovo was predicated on their ability to compete in the cutthroat Chinese domestic market. China’s accession to the WTO has given it a far more open domestic market. The days when foreign companies were forced to accede to onerous joint venture regulations in order to access the Chinese market are increasingly dated.

It is this movement towards greater competition and openness that needs to be encouraged. The more China embraces markets and competition, the more likely that moribund SOEs fall behind and be replaced by successful Chinese firms. The success of these firms increase their need to access capital, further bolster nascent Chinese capital markets, and allow Chinese citizens to become integrated in the process through share ownership. The protests in Jishou are in some ways a positive sign for China, and demonstrate how the populace has begun to decouple concepts of economic prosperity from party rule.

To be clear, I am not arguing that the shift from rule by law to rule of law is not essential, nor that one party rule is in any way desirable or aiding China’s development. Rather, it is more realistic that we understand first on how incentives for political reform develop through participation in the market and involve Chinese citizens in leading the push for reform.

1. The market, state owned enterprises and Chinese reform
2. China’s response to America’s financial meltdown
3. Does the Global Financial Crisis need a Domestic or International Response?