The Exit of China's Finance Minister Won't Leave Everyone Gloomy

The sudden transfer of Lou Jiwei from his position as China’s Finance Minister to overseer of the country’s pension system comes as a complete surprise to many commentators—or it should be. It might well have been a shock to Lou himself, given that he’s only just approaching the semi-official retirement age of 65 (and current Central Bank governor Zhou Xiaochuan is already past that point) and he’s currently part of Premier Li Keqiang’s high-level trade and finance delegation to Europe. In fact, the front page of Monday’s edition of People’s Daily has Lou sitting behind Li, and the paper spends a lot of space on the various economic agreements signed between Beijing and various East European countries during this trip. Lou wasn’t airbrushed but he was certainly given an abrupt brushoff.

There are those analysts who will no doubt insist that Lou’s removal is part of Xi consolidating his power—apparently a never-ending process because that’s what they tell us that Xi’s been doing whenever some high-level minister or provincial officials gets shunted aside. One can only wonder what Xi does, according to this school of thinking, when he’s not strengthening his political position or engaging in power struggles in the run-up to the 19^th Party Congress. Perhaps trying to run China’s Communist party? Perchance even endeavouring to govern the country?

Of course it’s possible that Lou asked to be replaced, and went on the previously scheduled high-level trip so as not to roil China’s markets, or its relations with its East European partners. Perhaps it’s simply a matter of health, overwork and strain for him. Maybe Lou jumped instead of being pushed.

Maybe. Maybe.

No one outside elite political circles can know for sure at this moment precisely what happened and why Lou was relieved of his portfolio—at the beginning of the week, not the end after markets are largely closed. What is known is that there has been more than a fair amount of tension between provincial and lower-level officials and Beijing about just how the former is supposed to generate local growth in a period of economic sluggishness. Property prices go up, land revenue increases--and Beijing reaches in to slap-down local governments for creating a real estate bubble. Provincial officials have been told for months to make the restructuring of local debt their policy priority—and suddenly the Ministry of Finance that Lou was then running announces that the central government would not be liable for debts incurred by special financing vehicles set up by local authorities to do just that.

None of that created a lot of goodwill between Beijing and its local brethren.

Nor was Lou helped by Premier Li’s agenda--streamlining administration, investing in innovation instead of infrastructure, and reforming China’s financial and fiscal sector. That strategy is popular among China’s technocrats and scholars (and consequently the international visitors who swing by the country to seek the odd insight by speaking only with them and the expat crowd) and probably makes good sense for China in the long-term. But that approach wins no plaudits from local politicians here, who deal with the daily, and dislike being told how to run their backyard—especially when what they say they see from Beijing are instructions to focus on the economy one week, and are then told to emphasize ideology the following one—and perhaps the one after that. Some local officials, especially in major cities, were already relieved that Xi was designated “core”, because they wanted some consistency and clarity from the capitol about what they’re supposed to be doing. 

Financial managers and stock traders may be shaken by Lou’s departure, but many China’s lower-level officials will sleep well this evening knowing that Lou Jiwei won’t be around to curtail them.

Xi At The Core At Least Means Clarity For Local Chinese Officials

The recent discussion of Xi Jinping’s appointment as the “core” of the Chinese Communist Party’s collective leadership is useful in at least one respect: that the collective understanding of the event illustrates yet again the deficiencies in analyzing China’s politics from afar, and that local pressures on Beijing need to be accounted for.

Perhaps the most important point to be made about the commentary thus far is how widely—even wildly—varying the significance of Xi’s elevation is seen to be. Some analysts are arguing that it’s equivalent to anointing Xi as a dictator, the equivalent of Mao and his authority. Others are insisting that this is simply a change in wording; that the naming of Xi as the core leader is merely a moniker, not carrying much meaning if only because many of his policy initiatives have yet to reach fruition. There’s also the vast and sometimes muddled middle ground, which assumes that Xi needs the title as he’s running into resistance, and that he was somehow granted the position in spite of opposition.

It’s difficult to know what to make of these conclusions. Mao may have been China’s preeminent leader but all sorts of sources make it clear that he ran into pronounced political opposition at various points. Indeed, it was precisely that resistance to aspects of his rule from Mao’s lieutenants that appears to have led to Mao launching the Cultural Revolution. So, if the claim is that Xi is becoming more like Mao because he’s been elevated to “core of the leadership” [在以习近平同志为核心的党中央周围], that’s not exactly a ringing endorsement of Xi’s authority. If one wants to wonder if this approval of Xi being so-named could signal Xi’s interest in a wider political purge and his comrades’ approval that something of the sort is needed—well, that’s a different (and more valid and intriguing) question.

It’s somewhat more puzzling to know how to react to those commentators and media reports who downplayed the news, insisting that the naming of Xi as “core” is really just words without real political import where Xi’s power is concerned. Words are actions in Chinese politics, especially where the leadership is concerned. That’s why party members are told to read speeches, documents, pronouncements, editorials and the like. (What’s troubling is how few analysts take the time to do so these days, and nonetheless feel free to prognosticate on what’s going on in Chinese political affairs.) Major announcements aren’t to be scoffed at, if only because party cadres don’t do that; they seek direction from such statements. Yet that’s what’s happening in some international commentaries where Xi’s elevation is concerned. Simply put, the Party wouldn't go to the trouble of making that decision at the recently concluded plenum unless it meant something major to those inside the organization at all levels. Dismissing the announcement is frankly dumb, and a disservice--at least if one wants to carry on a meaningful conversation of the current state and trajectory of politics in China.

The middle ground view—that this is Xi amassing more power because he needs it, and his colleagues recognize that—misses the larger point that the audience isn’t outsiders but the Party itself. Xi has made it clear on many occasions that he sees his mandate as cleaning up the Communist party, a departure from his predecessor’s focus on stabilizing Chinese society. This naming isn’t about Xi having more power (that old shibboleth about Chinese leaders in power struggles), but being able to proceed with his policy agenda because the “core” designation means that his reforms thus far (conservative though they are) are what the Party as a whole approved at the plenum.

Moreover, the title doesn't mean that Xi will get everything he wants at next year’s 19^th Party Congress (how anyone can possibly know that at this stage is baffling). This is a battle over policy agendas and party lines, not who’s seeking to screw-over whom.

What the designation does mean is that Xi needs lower-level cadres to recognize that it’s his programs—not anyone else’s, such as Premier Li Keqiang’s—that are to be studied and implemented, and the title of “core” gets him that. That was Central Party School senior researcher Deng Maosheng’s [邓茂生] clear message at the authoritative news conference yesterday: the title is really meant to help the current reforms because there’s too much lethargy or resistance locally [這對扭轉“上有政策、下有對策”的不良作風、對改革更加深化和順暢具有重要意義.]. A number of international media reports focused instead on the potential that Xi would stay beyond the usual two terms as Party secretary. 

Yet the real takeaway in Deng’s statements wasn’t the absence of dissension in the upper echelons (debatable, and he must know that ) but ongoing problems in the bureaucracy and at lower levels in accepting reforms. Local officials, for their part, have privately indicated their distress at not knowing which line in Beijing is the one they should be subscribing to: Xi’s “clean-up and discipline” campaign, or Li’s focus on investment and innovation. From their perspective, they’d like some clarity. Making Xi “core” gets them that.  

It’s worth mentioning that the coverage of the aforementioned news conference here in China was almost as interesting as the conference itself. While it was televised widely in-country, there’s been little official coverage in China’s domestic print and internet media thus far. So, it’s not entirely clear how “authoritative” Deng’s statements will turn out to be, and for whom precisely he was speaking.

For now, the issue isn’t that Xi’s at the “core”, but what the response will be in China’s provinces and localities. That’s unknown, but worth watching for.

Power For The Sake of Property in Local China

Property matters. In China, it matters massively—not just as an investment, but increasingly in some localities as an asset to be safeguarded.

Recently, a community in Jiangsu illustrated that the narrative of home purchases and upgrades in China shouldn’t only be about bubbles about to burst (even though they never seem to do so) or about nail-house owners who refuse to move unless the government meets their demands for compensation (which in many cases the local authority yields to).

The story of home buying in China is also about the inclination of some in the upper-class to employ violence to defend property.

Much is made of China’s growing middle class—a concept which is amorphous at best, another projection of Western stereotypes on a society that’s simply too diverse to tolerate such a template. Rarely do observers identify with any precision where the middle-class in China starts or stops financially, or investigate why Chinese themselves rarely if ever refer to themselves as “middle-class” [中产阶级] and why many prefer the moniker “mortgage slave” [房奴]. The appellation denotes economic status for residents of China, but outsiders tend to ascribe all sort of political dimensions to "middle class" here--a desire for government accountability, a quest for participation in the policy process, and the like. Chinese citizens often see matters otherwise--an issue of financial position, not of political leanings.

Moreover, the assumption in much of the international media is that property owners in China must be “middle class” in the same sort of Western sense, and that their growing numbers (whatever those are) are a direct challenge to the Communist Party, purportedly because their interests don’t align with the ruling leadership—though why that’s the case here remains entirely undemonstrated and is quite wrong. Hardly any mention is made of a housing market that was created by Beijing’s policies after all, and why a buying of a home here almost always demonstrates hope and joy, instead of illustrating smoldering social resentment that’s about to suddenly topple authority—reasoning that really has no connection to China’s local reality.

There’s also hardly any discussion of what Chinese residents do with the property that they’ve purchased. Many new owners renovate in ways that are at least somewhat outlandish (giddy, one might say) and off-putting to one’s neighbors. Some purchasers illegally restructure parts of their homes or grab adjoining land for their own private use, acting illegally and without permission, flaunting rules and regulations to their own ends.

It’s the latter that happened in the aforementioned instance and locality--a gated Jiangsu community that’s a mix of 4-5 story apartment buildings and separate villas, populated primarily by retired government officials, party cadres, and military families. There’s nothing especially exclusive about the community, save that it was one of the first large-scale projects inaugurated in the area by the local government, and many well-connected people were granted ownership of apartments in appreciation of their previous employment by and service to the State. (In the years that followed, apartments in many newly constructed buildings were often gifted to local officials by developers grateful for the green light that allowed them to build in the first place.) Some homeowners in this particular community do enjoy a level of local influence through previous relationships, to be sure. But many have now moved elsewhere and the compound is full of almost as many new owners as old.

The villas are another part of the story. They were built to entice foreign managers and company owners to bring business to the area, but they’ve long departed as well, replaced by affluent Chinese who aren’t looking to emigrate--or actually want to own a large home in China, as well as abroad. A number of the villas are currently being renovated, upgraded to more opulent standards.

It’s one of these villa owners who started the contretemps in question. He decided to extend his property line into another’s yard in the course of renovating his home. The adjoining neighbor protested and sought out assistance from the property management, which dithered about putting a stop to the expansion—something that occurs more often than not in local China, especially when, as in this case, the current management is supervising the community illegally, having lost its authority some months ago when residents chose not to renew the company’s charter when their 3 year term expired and the local court upheld that decision on appeal.

The offending homeowner though was not certain that the property management office wouldn’t step in (it’s likely that at least some in that office were interested in doing so for purely mercenary reasons, and wanted some consideration or compensation for their intervention).

And so the homeowner who wanted to skirt regulations called in reinforcements.

The first wave landed rather awkwardly: A handful of badly uniformed workers pretending to be police. The community’s security people had no idea who they were, as they appeared out of a renovation van they unknowingly let through the gates instead of announcing their presence to the property management company. It became clear quickly that their role was to deceive residents into thinking that they represented official authority in the matter. Their ill-fitting outfits and farmer footwear gave them away, and security guards compelled them to sit down and stay put.

Meanwhile the real action was taking place at the gates of the community residence, as a dozen or more tee-shirted, heavily-muscled, tattooed men sought to gain entrance, saying that they were “visiting a friend who invited them to a party”—and gave the address of the villa owner who wanted to secure the new property line. Evidently, they were there to threaten the angry next-door neighbor with retaliation if he refused to allow the change.

Remarkably, security guards refused to allow this group past the poorly built gates to the compound, despite threats by the assembled to breach the barrier. There was pacing, much finger-pointing, many cigarettes offered and not a few bottles of alcohol offered to those guarding the community. Finally, after over an hour of confrontation and the threat of combat, a single police car (official) rolled into the residence area, the contingent withdrew, and the rent-a-cops inside disappeared, having ditched their clothes in the van they arrived in. It’s not at all clear that the struggle is actually over, but at least that standoff ended.

Dramatic in its own way, this instance is all too typical of trends in many of China’s old and new localities. Many property owners in China don’t see ownership as another step towards inevitable democracy for the nation, but bestowing an inalienable right to deny Others (i.e., not members of the upper-classes) what they have and what those Others don’t. This isn’t a new middle class seeking mediation, nor a situation where property rights is creating a new class of citizens demanding more rights from a government reluctant to grant them. At China’s local level, this is property emboldening individuals, bestowing (at least in their eyes) a curious sense of entitlement to use power--which in local China incorporates violence if necessary. Consultation is supplanted by confrontation. These are homeowners not looking to overthrow the government, but simply ignoring it, and trying to settle local matters as if they are the authority. 

That’s hardly community-oriented or emblematic of a model middle class. Indeed, such attitudes and the actions of a privileged few have more in common with despotism than democracy. Property rights in China aren’t producing local political pluralism, but all too often serving to undermine what little is left of it. 

Beijing's Economic Logic About Real Estate in Nanjing Raises The Prospect Of Political Backlash

Nanjing authorities finally made a move on property prices this past weekend.

And it’s likely that Beijing forced them to take action.

Nanjing decided to introduce restrictions on home sales by calling a halt to the frenzy that began last year and had continued unabated until just yesterday—when pretty much everything came to a juddering halt. Local residents of Nanjing--that is, those holding a bona fide Nanjing residency card--are stuck with the 2 homes they already have (1 of which they are almost certainly renting to those who cannot afford to purchase one for themselves). Those without such residency can stay with what they have or purchase a single new or second-hand home if they haven’t yet, but under the just announced regulations they’re unable to buy another.

Interestingly enough, under the new rules, Nanjing residents aren’t allowed to purchase new apartments, but can buy as many second-hand homes as they want without restriction. The logic is that speculators are buying new homes in Nanjing, fueling new projects and new land sales, driving up prices to new levels, and—more importantly by far--making the real estate situation far less manageable for the local government.

At least that’s what the original announcement in the Nanjing party newspaper said—that “to continue to guide rational housing consumption, and further promote the stable and healthy development of the city's real estate market, in accordance with the current situation, the city government introduced [this change] in the main urban housing purchase policy.” Nanjing government officials aren’t that worried about inflation, because while some purchasers aren’t pleased with the rise in property prices, a robust market of any sort is welcome news in a province that’s not been immune from the nation’s economic doldrums.

What really began to concern Nanjing decision-makers was the volume and pace of purchases—the buying-and-selling fever—that threatened to take control of the property market out of the hands of the government and developers. It’s a matter of political reputation, as the property market started to become an independent force--and made Nanjing officials look like they didn’t have the power to manage it.

The good news is that the Nanjing government is full of very smart people, who are in touch with what transpires here daily, and that perception worries them. They couldn’t avoid knowing about the local fixation with property and prices even if they wanted to—and they didn’t; every bus stop, subway platform, street crossing, sidewalk, and meal in Nanjing contains conversations about apartments and their pricing. What Nanjing officials had been trying to do is to get back some leverage over the market, and convince both the central government and their citizens that they knew what they were doing, that they were in charge.

But trying to change course wasn’t easy. Many in Nanjing benefitted greatly from the rise in real estate values, and so the perceived need for local government intervention was low. At the same time, Beijing was starting to grow more anxious. So, in August, the local government reluctantly raised the level of down payment for current owners buying a second home to 50% of the purchase price—a cute move because it was already at 45%, so that was more of a signal to Beijing that local officials weren’t ignoring the situation but that at the same time they hardly considered it critical. Call it a balancing act, a tightrope walk—whatever the metaphor, Nanjing officials were caught, as cadres here always are, between local needs and central demands—the political dilemma that challenges them daily.

Somewhere in recent days (probably because Li is abroad and Xi had a more open field where economic decisions are concerned), the central leadership must have come to a consensus that Nanjing authorities had to act far more aggressively than they had been; that local rumors and rhetoric here were only making people look to buy more property, not less, and there was too much uncertainty. Plus, there’s a political cohort here in Nanjing that already agreed that the local property market was getting overheated; there were also developers tired of being shut out of an auction process slanted towards a select well-connected few. Complaints about the unpredictability of property prices and the difficulties for some of finding affordable housing were growing too. So Beijing was able to push Nanjing to be more regulatory now, instead of continuing to move in piecemeal fashion.

Local officials here were quick to signal to colleagues and citizens that they had been forced to do so on Beijing’s timetable—hence the mention in their announcement that the city was acting “in order to implement the central and provincial government’s supply-side structural reform.”

Which is, in fact, nonsense, because everyone here at least knows that Nanjing’s property problem isn’t national but local, specific to the city and its suburbs, and not something that the central government understands, much less fix. Nanjing has been a magnet for migrants in Jiangsu (the city population stands at 8.2 million, a 16% increase in about the last decade), and the government has looked to expand its administrative control to gather more land outside the metropolitan area to sell as property as other sources of revenue have declined. Nanjing was calling for nuance and a free hand—something that makes Beijing very nervous.

And after all, if Nanjing officials thought that Beijing’s diagnosis was accurate, Nanjing Daily would have run Monday’s editorial from People’s Daily, which argued that the run-up in real estate prices and the public fixation with property was “a deviation from the real economy.” That editorial didn't appear, and that’s probably because many officials here believe that it’s been Beijing’s blindness to local economic development issues that’s largely responsible for people running to property for financial protection. 

What Nanjing officials did this weekend—abruptly, unexpectedly and decisively—wasn’t aimed at carrying out reforms, but compelled to get control through controls, and to get Beijing off their back. They think that they’ve pretty much done so, even though some cadres here probably wanted to make their case at the upcoming Party plenum a month from now before being forced to move so sharply. The bifurcated regulations distinguishing residents and non-residents, new and second-hand homes was likely the compromise that Nanjing insisted on, to yield to Beijing's directives to do something, anything, that would calm what the latter saw as a gathering storm in real estate here. Nanjing authorities know that this isn't turmoil that Beijing is seeing but something of an actual market at work; that there are local stakeholders--including citizens--who see price rises as good things. Acceding to Beijing won't make local officials all that loved.

How these actions will play out economically is unknown at this point. But there’s a larger battle beyond Nanjing that’s about to start. Beijing finally got local officials here to move more forcefully, and it’s looking like they’ll try the same in other cities shortly. There might be good economic logic at work in trying to rein in the real estate frenzy, but property has become the main engine of economic propulsion in local China, in large part because the central leadership has yet to produce an alternative model for economic growth. 

Convincing officials in China’s provinces and localities that Beijing knows best won’t be easy. But then it rarely is. The new challenge will be preventing that ongoing tension from growing any uglier.