Governing China - Caught between right and left, town and country

March 8, BEIJING, The Economist

A new law on property rights defines the ideological struggle at the heart of China's economic reform

FOUR years of double-digit growth, soaring government revenues, low inflation and a manageable budget deficit might be cause for celebration in other countries. But China's leaders are anxious. Inequalities are growing, corruption is rampant, grumbling widespread. Ideological battles between free-marketeers and left-wingers threaten to impede reform.

In his annual address at the opening of China's parliament, the National People's Congress (NPC) on March 5th, the prime minister, Wen Jiabao, studiously avoided mention of the most controversial item on the 12-day meeting's agenda. It is a new law on property rights which is mainly intended to reassure the country's fast growing middle class that their assets are secure. Three years ago China added a clause to its constitution saying that private property was “not to be encroached upon”. But efforts to translate this into law have aroused unusually fierce and open debate about the direction of China's economic reforms.
Chinese leaders are now struggling to silence it.

The debate has raised embarrassing questions about whose side Mr Wen and President Hu Jintao are really on. Do they support China's left wing, which fears the country is turning too capitalist, or the right, which sees market forces as a sometimes painful but necessary cure to developmental problems? Since Mr Hu took over as Communist Party chief in 2002, and Mr Wen as prime minister the following year, the two men have shifted official rhetoric and policy to the left and have boosted central-government support for the poor and marginalised. Last month the official media published a speech by Mr Wen on the need for “social justice”—a term dear to the left which believes that the poor are being trampled upon.

As the party prepares to hold its five-yearly congress this autumn, the first to be presided over by Mr Hu and a crucial test of his authority, the leadership's record is coming under closer scrutiny. The NPC session is focusing attention on how much has really been done for the poor under Mr Wen's premiership. Mr Wen's five-year term of office ends next year. He is all but certain to be reappointed for another term (he and Mr Hu appear to get on well), but he will want to mark the occasion by pointing out what he has achieved.

Not nearly enough say those on the left. Direct criticism of leaders is still virtually taboo in China. But the drafting of the property law has provided an outlet for critics of government policy to air their grievances. Mr Hu and Mr Wen do not appear to face concerted opposition among party officials. But a vocal body of intellectuals and retired officials has denounced the property law as a betrayal of the country's socialist principles. It will, they say, protect the fortunes of corrupt officials and the ill-gotten gains of crooked businessmen. Further, it will hasten the demise of China's remaining state-owned industries and the creation of a plutocracy.

The leadership has been put on the defensive. Although it is often ready to lash out at critics on the right, it is usually more cautious in handling the left (China is still, after all, officially socialist). In this case, the left's criticisms have been particularly difficult to suppress because the leadership itself invited discussion by publishing a draft of the law in 2005—a very unusual move in a country that normally keeps its legislative processes shrouded in secrecy.

A law professor at Peking University, Gong Xiantian, took advantage of this to write an open letter calling the proposed bill unconstitutional. His criticism was widely reported in the Chinese media and fuelled an acrimonious debate on Chinese websites. Officials revised the law and planned to have it adopted at last year's NPC meeting. But the controversy continued to rage and they were obliged to pull it from the agenda.

Since then, three more drafts have been circulated among senior legislators, the latest in December. The leadership retreated into secretive mode. Copies were not made public until after the NPC session began. Mr Gong says officials have made it clear in recent weeks that they want the law passed at this year's NPC session. Newspapers have been ordered to play the issue down. Mr Gong says he has had no choice but to turn to the foreign media in order to get his views across. Han Deqiang, another Beijing academic and critic of the bill, says officials told him to remove an online petition he had organised opposing the legislation.

But an NPC spokesman said consensus about the law had emerged and it was wrong to call it unconstitutional. Its passage on March 16th, the closing day of the NPC, is now all but secure. Opinion polls of delegates—who owe their positions to party patronage—are never published.

Dissenting votes have become increasingly common in recent years. But it would be unprecedented for delegates to reject a bill.

For all its pro-left rhetoric—Mr Wen's speech to the NPC was suffused with it—the leadership realises that it also has to keep on side a growing urban middle class whose tolerance of party rule is particularly vital to its grip on power. On this, Mr Hu and Mr Wen are of one mind with their predecessors, Jiang Zemin and Deng Xiaoping. It was Mr Deng who decided in the early 1990s that only rapid growth, fuelled by the unfettering of the private sector, could save China from the fate of the Soviet block. In the final years of his presidency, Mr Jiang invested enormous political capital in promoting the abolition of the party's ban on recruiting private entrepreneurs. In 2002, when he stepped down as party general-secretary in favour of Mr Hu, Mr Jiang secured—despite strong complaints from the left—a revision to the party's charter that, in effect, legitimised his welcoming of capitalists.

The more left-leaning approach of Mr Hu and Mr Wen has often been portrayed as evidence of a policy rift between them and Mr Jiang, who remained influential in Chinese politics until he stepped down from his last position as the party's military chief in 2004. But their efforts to please the property-owning middle class suggest they have a lot in common. The constitutional revision three years ago and recent attempts to silence opposition to the proposed property law have been central to these efforts.

Neglecting the middle class would be even more perilous for the current Chinese leadership than it was perceived to be by Mr Jiang and Mr Deng. Sweeping privatisation of housing since the late 1990s has radically changed the social and political fabric of urban China. Property rights have become a topic of critical interest to urban residents anxious to protect their new assets from the whims of the state.

They are also of vital interest to private businesses, which have continued to grow rapidly in number and scale under Mr Hu and Mr Wen. Official figures show investment by the private sector in fixed assets such as factory buildings and machinery grew nearly threefold between 2000 and 2005 (see chart). As a proportion of total fixed-assets investment the figures suggest little change (14% to 16%). But if investments by collective enterprises (many of which are private) are included in the private share, it has risen from 42% to 60%.

Farmers, too, are finding property rights of rapidly growing interest (and their concerns matter more to the left). The large-scale appropriation of farmland in recent years for housing and factory construction has rendered millions of farmers landless. Many have been given little or no compensation. In the countryside and in the cities, property and land disputes have become a leading cause of social unrest. A senior official said in January that the number of “mass incidents” in China had fallen to about 23,000 last year from 26,000 in 2005. But such figures are ill-defined and subject to political distortion. Since 2004 leaders have vowed to build a “harmonious society”, making it risky for low-level governments to report data suggesting that unrest is growing.

The proposed law's provisions (to judge from the draft released on March 8th) range from general statements of principle to specific clarifications of certain grey areas. These include, for instance, the ownership of parking spaces around high-rise flats: the draft says that the spaces belong to the flats' owners, not the developers. China's fast-growing cohort of car-owners will be pleased with that.

Many of the law's provisions are contained in other regulations issued in recent years. But supporters of the bill say that combining these elements into one law enacted by the country's top legislature would give them additional weight. Yin Tian of Peking University says the law will be a mark of the government's respect for private property and could help to reinforce social stability by reducing disputes. The draft tries to streamline the registration of property sales and make it easier for interested parties to check details. The difficulty buyers have in getting such information results in frequent ownership wrangles after deals are completed.

Farmers, whose main concern relates to land-ownership rights, would also have something to gain. The good news is that the latest draft, unlike the 2005 version, gives farmers the right to renew their land-use leases after they expire. Unlike urban land, which is state-owned with usage rights granted for periods of between 40 and 70 years, rural land is “collectively” owned. Farmers are given 30-year leases (though often no supporting documents) to use plots of land. But the law will put no new limits on the government's powers to appropriate land. It also says that village committees represent the collective. These are supposedly democratically elected but party regulations still give unelected party chiefs the final say over village affairs. Most important, the ban on mortgaging farmland will remain.

Again according to the draft, a person would be considered the owner of real estate if his ownership was registered with the government, or of movable property if he was in possession of it. Ownership could be challenged, but critics worry that it would be difficult to do so for former state-owned assets or for land-use rights that had been sold off in shady deals. The timing of the earlier draft's publication in 2005 was bad for the bill's supporters. It followed an upsurge of debate about the frequent sale of state-owned enterprises at rock-bottom prices to their managers. In response, the government banned management buy-outs of large state enterprises. But there was also concern about its sales of strategic stakes in state-owned banks to foreign investors.

The left was irritated in 2005 and remains so. A recent petition to the NPC by influential left-wingers says privatisation is accelerating and causing a widening gap between rich and poor. It says the sale of state assets to corrupt officials, the super rich and foreign multinationals is illegal and unconstitutional. Among the more than 3,200 signatories are seven former government ministers or deputy ministers, five former provincial leaders, a sprinkling of retired senior military officers and about 50 professors at the party's Central School, an academy for top officials.

The government has tried to assuage the left by stressing the limits of reform. In December it announced that state-owned enterprises under the central government would remain in control of industrial sectors considered crucial to national security and economic welfare: military equipment, electric power, oil and petrochemicals, telecommunications, coal, aviation and shipping. But the number of centrally owned state enterprises would continue to decline from 161 at the end of last year to between 80 and 100 in 2010. Among these, the government hopes that 30-50 internationally competitive conglomerates will emerge. State-owned enterprises with no hope of turning a profit will “exit the market” by 2008. In other words, sell-offs to the non-state sector will continue.

At the NPC session, officials have continued to emphasise measures aimed at the poor. Mr Wen in his opening address said the government would “shift the focus” of state infrastructure development and the development of social programmes to the countryside, where income growth has been slower than in the cities (7.4% in real terms last year compared with 10.4% in urban areas). The aim is to develop what party leaders announced in late 2005 would be a “new socialist countryside” with subsidised health care and free schooling for all. From this year, said Mr Wen, schools would no longer charge tuition or other fees for children having their compulsory education (up to the end of junior high school). This will affect 150m families. A medical-insurance scheme, launched in 2003, is to cover 80% of rural areas by the end of this year, up from 50% at present. The aim is to have complete coverage by 2010.

But these measures, though welcome to many, hardly amount to spectacular shifts in the government's spending priorities nor are they a colossal burden. Central-government support for rural areas and agriculture is to increase by 15% to about 392 billion yuan ($51 billion) this year. This is almost the same rate as this year's predicted increase in central-government revenue (2.4 trillion yuan is the target). It is also about the same as last year's increase in the government's spending in the countryside.

The armed forces, however, get a bigger boost. The budget presented to the NPC calls for a nearly 18% increase in military spending this year to 347 billion yuan. Most analysts believe this is far less than China's true spending. The armed forces have enjoyed double-digit budget increases for most of the past 15 years. The leadership knows well whom it really needs to keep happy.

The central government has substantially increased its spending on health care, but from a very low base. This year it is forecast to rise by 87% to 31.3 billion yuan. Though it is encouraging that the central government is taking up a bigger share of health-care spending, this is still low: less than one-tenth of total government spending on the health sector last year. After four years in office Mr Wen has yet to announce any ideas for addressing one of the public's biggest concerns, namely the prohibitive cost of medical treatment for many urban and rural residents. Hospitals have been trying to generate revenues by pushing up medicine prices, over-prescribing drugs or recommending unnecessary procedures. Mr Wen was able to say only that the government had “begun formulating a plan”.

Even the health-insurance scheme in the countryside is not all it is cracked up to be. The programme requires contributions from peasants and provincial governments as well as the central government. The peasant has to pay only a dollar or two a year. But he still has to pay a considerable proportion of expenses for hospital treatment. Wealthier peasants may welcome the subsidy, but for poorer ones having to pay even a reduced share of hospital expenses still makes treatment unaffordable. The “new socialist countryside” campaign has its critics too. Mr Wen may not be to blame, but some village officials have used the campaign as an excuse to order the demolition of old houses and require villagers to borrow money to pay for new ones.

The central government is spending more on education: 54 billion yuan last year, an increase of more than 39%. This too will be welcome. Next to soaring housing costs (which Mr Wen pledged to keep at a “reasonable level” this year, without explaining his secret), education expenses are among the biggest complaints of urban residents. But the government remains way off the target set in the mid-1980s (when leftists enjoyed far more clout) of pushing education spending by central and local governments to 4% of GDP by the year 2000. Last year total spending increased by nearly 20% to 475 billion yuan, but this was less than 2.3% of GDP—“significantly lower” than the international average, according to a UN report in 2005.

Far from using its fast-rising revenues (let alone issuing more debt) to finance pro-poor programmes, the government has stressed its goal of further reducing the central budget deficit. Last year this amounted to 275 billion yuan, a fairly healthy-sounding 1.3% of GDP. The plan is to cut it by another 30 billion yuan this year. “We can never start spending money hand over fist just because revenue has been relatively good recently,” said a budget report submitted to the NPC.

A bit more equal than others

Mr Wen and Mr Hu may have swung to the left in their words, but they have kept the party's doors wide open to capitalists. In 2005 the party recruited 1,512 private-business owners, an increase of 170% over the previous year, according to a recent publication by the Chinese Academy of Social Sciences. The government's desire to keep all constituencies happy—but the middle class a bit more so than others—is reflected in the property- rights bill. Mr Gong says the drafters have added provisions on the protection of state property. But he dismisses these changes as superficial. “It would be a very shameful page in China's history” if the law is passed, he says. He is appealing for it to be delayed again. But Mr Hu and Mr Wen seem unenthused by their party's ideological baggage.

"History does not repeat itself" - is only partially true. If it does not diachronocally (over the time), it does synchronically (over the space). We remind you that in West Bengal, India, the so called Marxist Leninist Party is thinking and acting in line of their Chinese counter part. - IP