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From meisenscher@igc.org Thu Mar 16 13:01:39 2000
Date: Tue, 14 Mar 2000 12:38:51 -0600 (CST)
From: Michael Eisenscher <meisenscher@igc.org>
Subject: Power Shift in China: Opponents of Reform Gain A Major Victory
Article: 91172
To: undisclosed-recipients:;

Power Shift in China: Opponents of Reform Gain a Major Victory

STRATFOR.COM Weekly Global Intelligence Update, 13 March 2000


In recent weeks, the world has focused attention on Beijing's threats against Taiwan and deteriorating relations with the United States. But both are merely symptomatic of a larger shift within China itself: traditional leaders of the Communist Party are dramatically gaining the upper hand against pro-Western economic reformers. The government has executed the highest-ranking official in decades, a top official in an economically significant province. And an old face - Li Peng - has returned to power. If these victories hold, there will be a sharp reversal of China's economic and foreign policies.


In recent weeks, the world has focused attention on China's threats toward Taiwan and the steady deterioration of relations with the United States. But both of these international events - while important - are merely symptomatic of a deeper issue and a broader Chinese context. There has been a deepening and serious power struggle in China. And it now appears to us that Li Peng, the 71- year old head of the National People's Congress and a leading opponent of reform, has won a major political victory one that could redefine Chinese domestic and foreign policy.

China's economy has deteriorated severely since the Asian economic crisis of 1997. This, in turn, placed severe pressure on the system created by Deng Xiaoping - the successor to Mao - and Deng's heir, President Jiang Zemin. The Deng era was a remarkable turnabout from that of Mao, in which central planning gave way to a sort of market economy, with strong links to international sources of capital and technology. The primary justification for this strategy has always been practical: the strategy worked, allowing China to undergo dramatic economic growth.

But there was always a built-in tension and it has come to a head in recent months. If Deng's policies no longer worked and Mao's brand of communism was irrelevant, what would hold China - a vast and disparate nation - together? The result has been a power struggle that has pitted these two diametrically opposed factions against each other. On one side, there are those who think that the solution to China's problem is to extend economic reforms dramatically, essentially reforming the country out of its current malaise. On the other side are those who advocate turning back the clock, if not to Maoism then certainly to a more traditional, centralized and oppressive Marxist-Leninism.

Former Prime Minister Li Peng leads this faction and last week it appeared that Li had won a major victory. If his victory holds, it will likely represent another sharp reversal, this time overturning the policies of the Deng era and returning to something more akin to the late Mao era of the 1970s. Li has always been a member of the party's old guard and rose to the zenith of his power in the late 1980s, (insert link to sidebar bio here). But because of his role in the massacre at Tiananmen Square in 1989, his power declined. As economic reforms took shape - and figures like Jiang Zemin and Zhu Ronghji took center stage - Li faded into the background of Chinese politics. He remained prime minister but Qiao Shi, who headed the National People's Congress that is China's parliament, exercised greater influence.

Li's first step toward comeback took place in 1998, when Qiao, an arch-reformer, stepped down and Li replaced him. Qiao was the first political victim of a deepening economic crisis and as it deepened in 1999, it became ever more apparent that the social cost of economic reforms were not merely high - leading to labor unrest in many instances - they threatened China's very stability. Li advocated slowing and even reversing the reform process, a call that gained popularity both within the Communist Party and in the country as a whole.

All along, President Jiang Zemin has attempted to stay on top of an evolving situation. But the price has been quite large: he has been forced to tack toward whatever faction was strongest at the time. Throughout 1999, the balance of power fluctuated rapidly as Jiang tried to balance between Li and Zhu Ronxi, the chief representative of reform following the fall of Qiang. In late 1999, there was an important shift. At the National Day celebrations in October 1999, Jiang donned a Mao suit rather than his normal, western-style garb. This move was highly evocative, symbolizing Jiang's attempt to reclaim some of the legitimacy of Mao. It also symbolized the growing power of the Li faction.

Today, it is clear that Jiang wants most to preserve his legacy. In the short term, he wishes to remain the head of the Communist Party and the Central Military Commissions. He also would like one of his proteges to succeed him as president in 2002. Over the long term, Jiang wants to attain the same status as Mao; he also wants China to attain the status of a great power. His interest in membership in the World Trade Organization and close ties with the United States are only vehicles for this latter ambition. Now tilting toward Li, Jiang protects his personal position while moving toward great power status - now through confrontation, rather than cooperation with the United States.

Across the spectrum, Jiang appears to be moving toward a heavier dependency upon Li, as well as on the central organs of the military and the security apparatus. These are forcing him to make substantial concessions in order to guarantee their support. The People's Liberation Army (PLA) is an excellent example. Jiang called for increased funding for weapons and the recent military budget increase has provisions for reimbursing the People's Liberation Army for losses suffered when the PLA was ordered to stop operating business enterprises on the side. This order embittered the PLA's commanders and had a devastating effect on morale but was part of a campaign to limit corruption and increase market operations.

The decision to reimburse the PLA for losses suffered, as well as provisions for paying troops for back wages, was both a concession to Li and a move that strengthened Jiang's position. Jiang pre- empted critics, who felt that he had been too late and too weak in opposing Taiwan during the 1996 elections. Most recently, Jiang himself kicked off the anti-Taiwan campaign. But now the military is emphasizing its utter loyalty to the Communist Party under the leadership of Jiang Zemin.

Most recently, Li's powers have increased dramatically. The constitution has always made the state council subordinate to the National People's Congress; in reality, the State Council set its own agenda. This changed last week. A new law was called the Legislation Law makes legal what is already constitutional and now both the State Council and the judiciary will report to the NPC rather than to the party. The law also blocks local and regional authorities from passing laws that run counter to the position of the NPC. In effect, this places the state apparatus, at the national, regional and local levels, under the control of Li Peng, who effectively controls the NPC. This gives Li increased control over all aspects of China's national policy, including negotiations with the West over WTO and other economic issues.

On the face of it, Li Peng ensures that the NPC continues to express its unquestionable loyalty to the Chinese Communist Party under the leadership of Jiang Zemin. Li has explicitly subordinated himself and his institution to Jiang. But it is Jiang who, in practical political terms, is dependent upon Li. It appears to us that as far as policy is concerned, Li and his allies will be driving China's policy, in return for which, Jiang will get to keep his job and preside over the shift.

In the midst of this maneuvering, a wave of serious purges appears to have begun. This appears to be an intensification of the anti- corruption campaign that was put in place by the reformers trying to save the market economy. At the moment, it is no longer clear which faction is in charge of the campaign, although it appears that Jiang is taking a direct hand in it, indicating that Li may be increasing his control.

Extensive arrests and trials are being carried out, focusing particularly on officials in areas where economic growth has been the strongest. Most striking of all has been the case of Hu Changqing, former deputy governor of eastern Jiangxi province, which had been a center of economic reform and growth. Hu was recently executed, ostensibly in connection with corruption charges. Hu was also a member of the State Council's Religious Affairs section, indicating that Hu's death might also have had to do with the Falun Gong. In any event, he was the highest-ranking Chinese official executed since the founding of the People's Republic, indicating how intense the purges might become.

The execution coincides with a new, Go West, campaign, focusing on shifting investment and economic development away from the coastal regions toward the less developed interior. Li's antagonism toward the unbridled capitalism of the coastal regions is taking hold. And Beijing, fearing instability and opposition in the coastal areas, is pursuing a traditional path of Chinese communism, trying to anchor the regime in the support of peasants and poor workers in the interior.

Matters are far from settled, however. Even Li Peng is not immune from the anti-corruption drive. A handpicked Deputy NPC Chairmen, Cheng Kejie, has been absent and is reportedly under investigation for corruption. Interestingly, the head of the Party's Central Commission for Discipline Inspection, Wei Jianxing, who is in charge of all the investigations, is a protege of Qiao Shi - an appointment of reformists in an effort to maintain influence. Both sides will wield the corruption issue as a weapon.

Some of Li's closest supporters will probably be sacrificed. But it seems clear to us that Li is in the ascendancy. It is also clear that the anti-corruption campaign is going to become a political purge designed to break the back of reformers by destroying their political base among those who benefited the most from reform. In due course, economic activities that had been sanctioned under Dengism will be defined as corruption, and a general attack will be launched on the infrastructure of market reforms.

If this takes place, it will shatter relations with the West, whose massive investments in China's coastal regions are now at risk. There is a natural affinity between Western investors and Chinese coastal businessmen on the other hand. Beijing is asserting its control over all local governments. The burning issue now is whether the coastal regional authorities will be able to resist. Certainly, last decades big winners in China are about to become the major losers. But these losers are not without resources.

Beijing is placing them in a desperate position. Beijing has tried to shore up its support in the PLA, trying to make certain that coastal military forces are split from coastal political leaders. If this works, we are facing a centralized, xenophobic and hostile China. If it does not work, we face the possibility of massive regional instability. In either event, we believe that the China of Deng and the reformers is dying. What replaces it will change the world.