Hello, everyone. Welcome to Zooming In China Tea Time. I’m Simone Gao.
Two days before the publication of his much-anticipated memoir Red Roulette: An Insider s Story of Wealth, Power, Corruption, and Vengeance in Today s China, author Desmond Shum received a phone call from his former wife, Whitney Duan. Duan is the central figure in Red Roulette and had been missing since 2017, with no word from the Chinese government about her condition, whereabouts or alleged crimes.
Shum said in an interview with The Australian Financial Review, Whitney told me that she’s on temporary release and could be re-detained at any time. She asked me to cancel the book’s publication.
Shum later added that It was a ridiculous request which could only be dreamed up by some bureaucrat in Beijing, where they can disappear a book off all the shelves in China overnight. But this is the rest of the world. The book was already on the way to the bookstores, contracts have been signed. I can’t disappear the book even if I wish to.
It is clear that the Chinese government is deeply concerned about the revelations in Shum’s story at a time of growing crisis within its borders. With the recent string of crackdowns on Chinese entertainment and corporate celebrities, IPO debacles locally and internationally, and questions from George Soros about the security of Chinese markets, the CCP was already under a glaring spotlight.
Now comes word that China is teetering on the edge of a financial crash, due in part to the potential failure of the country’s second largest property developer, Evergrande Group. While Evergrande said in a public filing that they had resolved issues related to their yuan-denominated bonds due on September 23rd, It is not clear what the company would do with the $83.5 million interest payments on their dollar-denominated bonds due that same day. The Chinese government has ordered Evergrande to do anything they can to avoid defaulting on these bonds. The conventional wisdom is that Beijing normally would prioritize paying off foreign debt due to the need to maintain a good image on the international capital market.
So the company is left with three options: a rapid collapse with impacts that may be felt worldwide, a managed dismantling of the company, or a bailout by Beijing. We will see which one will turn out to be the Party’s choice in the coming days.
The way Xi Jinping deals with Evergrande’s crisis will, to certain extent, reveal his plan for the Chinese economy. Recently, some conflicting opinions have surfaced on China’s state-owned media. One article by Maoist activist Li Guangman claimed that China is experiencing a profound reform or revolution in all aspects: economic, financial, cultural and political. Analysts believe the article was alluding to the possibility that China would launch another great cultural revolution. Days later, Hu Xijin, chief editor of the Party’s mouthpiece Global Times, rebutted Li by saying that his article was a profound misunderstanding of the central government’s political direction.
Who is right? What is really on Xi Jinping’s mind? To understand Xi s plan, we must first understand the great shift in America s China policy since the Trump administration. It is no coincidence that Xi began to target and reform the domestic platform economy at the same time he began efforts to partially close the country. Xi believed both were necessary to redirect China to a different path, one that would differ dramatically from the one China has travelled smoothly for decades towards economic and political supremacy.
That path had been forged through state subsidies, state-supported intellectual property theft, and state-supported forced technology transfer carried out in a globalized market and largely ignored by Western powers who believed China would become a free country after it became a free economy.
Under those conditions, China’s economy and national power had grown rapidly. But Trump’s trade war and the coronavirus pandemic fundamentally changed Western thoughts on Communist China. Xi realized that their seat at the grand feast of globalization, the access that had empowered Communist China, had been removed.
For some leaders, that might have been a fatal blow to their regime. But for Xi Jinping, it was the excuse he needed to redirect China onto the path he had envisioned long ago, a path very different from his predecessors. In Red Roulette. Shum paints the eras of Jiang Zemin and Hu Jintao as a time of forward momentum, a time when capitalists like himself and his then-wife, Whitney Duan, could see the critical role they played in China’s modernization. They were creating the new jobs China needed to become a world leader. They were creating, and enjoying, the wealth that comes along with it. Things were improving. Today was better than yesterday, and this year better than last year.
It was not only the political or economic elite that felt that way. All of China seemed to be taken up with the same optimism. Citizens throughout the country felt that China was moving toward a more open and free society, a path most supported, even within the Communist Party. While Mao Zedong had once put capitalists at the bottom of Chinese society, his successor Deng Xiaoping improved their status. And on July 1, 2001, then-General Secretary of the Communist Party of China, Jiang Zemin, delivered a speech welcoming everyone, including capitalists, to join the Party, allowing them to enter the margins of political power.
But capitalists would not be willing to stay at the margins of that power for long. Shum points out that, at the top of the Party, elites had been preparing for this change. In private conversations, top-level officials like vice premier Wang Qishan shared their views that at a certain point, the Party would be forced to accept large-scale privatization and that Party elites and their inner circles should set aside capital so that they were prepared to invest when that time came.
Wang Qishan had been at the center of China’s reforms for decades. In 1993, China’s economy was in crisis due, in part, to $1.4 trillion yuan ($217 billion US) in non-performing loan debt between the four state-owned banks. China’s state-owned banks and state-owned enterprises were in urgent need of funds. Wang stepped in, working with Goldman Sachs on a deal that allowed China Telecom, a massive state-owned enterprise, to go public on the New York Stock Exchange in 1996, providing critical financial relief through international investments.
But what felt to Goldman Sachs and American investors like a mutually beneficial arrangement that could lead to the privatization of China’s economy was nothing more than an effort to save state-owned enterprises, allowing them to secure the Communist Party’s rule.
This was a realization that would only come many years later, during the Trump era. America had finally opened its eyes to the understanding that they had not changed China’s political system through their economic efforts.They realized that China remains a totalitarian Communist regime despite its booming economy.
Though Western leaders may have felt this as a victory for the Communist Party, even those inside of China, including reform-minded Party leaders, began to express concern. On March 14, 2012, at the last press conference of his State Council, Premier Wen Jiabao spoke from the heart for the final time in his tenure. In response to a reporter’s question, Wen said If China does not carry out political reforms, the achievements of China’s economic reforms so far will be in vain, and China is likely to repeat the mistakes of the great turmoil of the Cultural Revolution .
These are very heavy words, and they touched a nerve for the CCP. Political reform is a sensitive idea in China, one that carries connotations of moving toward freedom and democracy while demolishing the one-party dictatorship. Wen Jiabao did not specify the type of political reforms needed, but Chinese citizens had enough experience with global markets and capitalism to know what he likely meant. He added that if political reforms were not carried out, the achievements of China’s economic reforms would be in vain.
There is a fundamental contradiction between the market economy and the ideology of communism. A functioning market economy requires political systems that guarantee individual freedoms and rights. The right to hold, and be able to protect, private property. The assurance of fundamental human rights. The knowledge that an independent judiciary will protect those rights. The empowerment of knowing that truly democratic elections will ensure that the people will choose those who oversee the preservation of these rights. That system is vastly different from the rule of the Communist Party.
Without real reform, then, the contradiction between the political regime and the economy will fracture China and, because the CCP wants to protect its political system, it will destroy the market economy. Wen concluded by saying that, should that happen, China is likely to repeat the mistakes of the great turmoil of the “Cultural Revolution.” Wen recognized that China was moving toward more openness and more freedoms, and he realized that if the market economy continued to develop, the contradictions between communism and free market enterprise would restrain what China truly could become. Faced with that situation, he wanted to change the political system, not the economy.
The political reform Wen talked about was never carried out. That’s why, at the start of the Trump administration, the clock had finally run out for the Party. Trump demanded a change. I agree, for the most part, with the claim that the engagement policy has not made China a free country. However, that claim makes it seem like there has been no change in China’s political system at all, and that is not true. Yes, China remains an authoritarian state, but big changes have happened, including how the Chinese people view the legitimacy of the Party’s rule.
In the Mao era, the Party was believed to have heaven’s mandate. The legitimacy of the Party’s rule was unshakable and so was the Communist ideology. Though the Party’s policy had caused the deaths of tens of millions of people, the Party remained in power and unchallenged.
That natural legitimacy has gradually eroded since the reforms that opened China. During the Jiang Zemin and Hu Jintao eras, the Party’s legitimacy shifted. It is now based solely on its capability of bringing economic prosperity. The Communist Party knows that if the economy sharply declines, unemployment rates rise, and the bureaucracy stops working for the people due to the lack of corruption money, their ability to rule will be reduced or lost altogether. On top of that, Chinese people are losing their faith in the Communist ideology itself.
That reality is precisely what Xi Jinping refuses to accept. He has a new plan for China which we will explain in our future programs.
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