The 19-month U.S.–China trade dispute has led to a realignment of global supply chain and exacerbated China’s economic woes.
But as a side effect, senior Chinese officials have taken a break from fighting corruption and Chinese Communist Party (CCP) leader Xi Jinping has finally changed his idealistic “zero tolerance for corruption” to a more moderate “tolerance for errors.” This “tolerance for errors” policy is not only aimed at private entrepreneurs whose past transgressions have not yet been investigated but also a tolerance for officials who are “less” corrupt.
Xi has changed from imposing heavy-handed penalties to imposing heavy-handed demands by using the discipline inspection and supervision system to force local officials to search for economic growth strategies.
A Task Force to Grow the Economy
Let’s start with the news.
An article in the pro-Beijing media outlet DuoWei News published on Dec. 9, 2019 wrote, “On Dec. 6, the CCP General Secretary Xi Jinping chaired a meeting of the Politburo of the Central Committee [a group of … a task force comprised of the disciplinary inspection and supervision departments [CCP’s internal anti-corruption agencies] will adopt a ‘carrot and stick’ policy to supervise the implementation of reforms through mechanisms of tolerance for errors, incentive, and punishment.”
This “tolerance for errors” policy in essence is Xi allowing regional officials to redeem themselves.
DuoWei News stated: “According to Xi’s speech at the Politburo meeting, the main problems of China’s economy neither come from the external pressure of the U.S.–China trade war, nor from basic economic problems such as decreasing returns and population aging as suggested by some so-called economists. The CCP knows very well that the problem behind the so-called economy is still its personnel. In China specifically, it is the issue of local officials.”
Traditional economists theorized a lot last year about the difficulty of restructuring China’s economy, and earlier this year about the scourge of African swine fever. They thought these are the root cause of China’s economic difficulties. Even state media outlet Xinhua highlighted “zero tolerance for corruption of inaction” some time ago, now the “emperor” found the root cause himself: the so-called economic problem is the problem of local officials putting their thoughts and interests above the country’s.
In Xi’s “carrot and stick” strategy, the so-called “carrot” is the promotion of certain officials. The “stick,” which are the anti-corruption agencies, is naturally prior evidence of corruption, violations of the law, and other transgressions.
The CCP Central Committee is currently tolerating these officials. If they behave well and carry out Xi’s orders, they will be promoted to a higher rank and excused. Zhou Bo, an executive vice mayor of Shanghai who received a stern warning from the CCP for violating the Party’s rules, has been appointed Deputy Party Secretary of Liaoning Province instead due to his ability to turn around the economy.
This is superficially similar to former CCP leader Deng Xiaoping’s thinking when he famously said: “It doesn’t matter whether the cat is black or white, as long as it catches mice.”
During Deng’s time, corruption was more behind the scenes. During former CCP leader Jiang Zemin’s regime things had changed. Jiang permitted cats to catch mice as well as steal food, finally evolving into the situation that many big and small cats hide billions of dollars in cash, and cats with social connections even opened accounts in offshore financial centers. After Xi came to power, his anti-corruption campaign has made it impossible for cats to cheat publicly. Most of the surface grafts were banned, and the cats have lost their enthusiasm to catch mice or carry out their official duties. The CCP Central Committee has bemoaned for years about the inactions of some local officials. Today, Xi has finally figured out that the “stick” must be accompanied by a few carrots or incentives, and the main incentive is to waive past corruption.
Chinese government officials at all levels know very well how to “develop the economy” within China’s institutional environment and are good at learning. Guangdong Province and coastal areas developed through introducing foreign investment, and the entire country immediately began to attract outside investments. Yet foreign investors do not have the same affinity for China’s central and western regions, so poorer provinces can only gaze at, for example Guangdong’s foreign capital, and sigh. Some provinces, prefectures, and cities used real estate development to drive the economy, and soon the whole country became popular with real asset finance.
Housing prices soon became some of the most expensive in the world; Shanghai and Beijing even entered the list of world’s top ten expensive cities. When it comes to building subways, more than 30 Chinese cities have spent more than 600 billion yuan ($88 billion) to build urban rail transit, including subways, but only a few have broken even on their rail projects. There are several so-called “grey rhinos” (known asset bubbles) in the Chinese economy, one of which is acknowledged to be the huge debt incurred by the government’s investment in infrastructure construction. As for finance, thanks to the central government’s failure to delegate power to local governments, otherwise P2P (peer-to-peer lending) and other personal finance products won’t be the only ones to collapse across the country.
As a result officials have been less active in recent years, developing less real estate and investing less in so-called infrastructure to reduce bad debts in the financial system. This structural problem of China’s economy could have been adjusted a decade ago, but the global financial crisis of 2008 was a turning point.
I wrote at the time that if they missed the final window of adjustment in 2008, there would be no hope to change it in the future. During the U.S.–China trade war, the United States wants China to make structural changes and stop subsidizing exports by state-owned enterprises. China can’t say yes to this requirement, because to do that would be suicidal.
Under Xi, officials are allowed to redeem themselves by good service. If the economy catches up, their previous crimes will be atoned. If the economy fails to catch up, anti-corruption agencies may come knocking at the door.
‘Original Sin’ of Private Companies
Remember that the State Council issued a guidance on Sept. 12, 2019 which stipulated that whistleblowers should be set up in companies and other institutions to encourage insiders to expose violations by their institutions.
The government is doing this because China’s private companies are guilty of the “original sin” of wandering through gray areas to accumulate wealth. This fact is due to China’s extremely adverse institutional environment.
When government officials treat all public functions as tools to grow the Chinese regime’s revenue, if private enterprises want to survive and grow, they have to form political and business alliances with bigwigs and obtain industry licenses, land, and bank loans through bribery. Tax evasion is a commonplace phenomenon.
The Chinese regime thus has an interest in feeding such corruption and leveraging such “sinners” to grow its economy. By using the whistleblower system and threatening to expose private companies’ “sins,” authorities force them to toe the Party line.
Chinese authorities are well-aware that private enterprises will not survive long if they subsume such companies under its direct control as state-owned firms. So by allowing private entrepreneurs to keep operating and hiring staff, the companies can pay more taxes, create jobs for the economy, and contribute to the country’s GDP.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.