Summary
On March 11, China’s 3,000-strong rubber stamp legislature, the National People’s Congress, voted to remove constitutional term limits on the presidency, setting the table for Xi Jinping to stay in power indefinitely beyond 2022. Only two lawmakers voted against the move. On March 17, the congress approved the biggest overhaul of the government in decades, including the removal of eight ministries and seven agencies. Several other state entities, including some long seen as largely untouchable, saw their powers dramatically reduced.
These aren’t just cosmetic changes. Rather, they will have substantive implications for the ability of Xi and his lieutenants to transform the bureaucracy from something Chinese leaders have spent inordinate amounts of time fighting into something he can use to implement his grand plans for China’s future. More than anything, they dramatically tighten the Communist Party’s control over the state, further undoing the very system that helped facilitate China’s rise.
In other words, if China’s epochal 19th Party Congress in October was where Xi was crowned emperor, the National People’s Congress was where Xi made clear the extent of his rule over the realm. And just as Xi’s lifting of term limits signaled to his rivals that they cannot merely wait him out, it also signaled to China’s vast and unwieldy bureaucracy that it cannot stall the sweeping changes coming down the pike.
China is doing this because it has to. The magnitude of the economic and social challenges the country is facing leave little room for the bloat, inefficiency and pervasive corruption of the governing structure Xi inherited. So Xi is striking while the iron is hot – for the time being, Xi’s grip on power is unquestioned and the Chinese economy, thanks in large part to strong global growth, is relatively stable – to take on deeply entrenched pathologies he thinks are standing in the way of his plans to ensure that China doesn’t fall back into its historical swings between centralization and disintegration. But there’s no guarantee his grip on power will last, and economic conditions certainly won’t always be working in his favor, keeping open the question whether the sorts of changes introduced at the congress will be enough to stave off a reckoning.
The Problem Xi Inherited: Party vs. State
In 1987, China’s then-Paramount Leader Deng Xiaoping pushed through sweeping reforms intended to extricate the party from most matters of day-to-day governance. Over the previous five years, Deng had been gradually relaxing the Communist Party’s control over the economy, unlocking much of the market-driven dynamism that would fuel China’s breakneck growth over the coming quarter century – but he believed this effort needed to go further. Memories of Mao’s impulsive and chaotic reign were fresh, and in Deng’s view, China needed a technocratic and largely apolitical government to fully modernize. The party’s role would be confined to setting broad policy goals and intervening only selectively to make pivotal decisions. Critically, decentralization was also seen as a way to keep the peace among rival factions by ensuring each a slice of the growing pie.
The result was a peculiar structure of parallel hierarchies between the party, the military and the government (known as the State Council). Party institutions have always been preeminent. But their state and military counterparts were generally allowed to function in ways they would in any other modern country, with considerable autonomy over policymaking and implementation.
Over time, however, this structure bred a host of new problems. The era of newfound prosperity ushered in by Deng’s reforms also spawned pervasive corruption, crony capitalism, bureaucratic bloat, fuliginous power structures and conspicuous economic disparities, each of which threatened to undermine the party’s justification for single-party rule. It also allowed competing power centers to flourish, making the central government generally too weak to take on vested interests and implement much-needed reforms. This may have been fine had China continued on a course of seemingly permanent double-digit growth. But as has been made increasingly clear since the 2008 financial crisis, China is entering a prolonged period of, at minimum, slowing growth. With less pie to go around, the risk of paralyzing power struggles and the sort of socioeconomic unrest that could shake China to its core soars. This collective fear fueled Xi’s rise.
At the congress, Xi’s top economic adviser described the problem in terms that, by the paint-drying standards of party communiques, were akin to shouting from the rooftops: “The overlapping of functions and responsibilities of some Party and State organs remains a prominent issue.” During his first term, Xi dealt with it primarily by either putting the fear of God into established institutions or bypassing them altogether. For example, through his sweeping anti-graft campaign, Xi replaced rivals with loyalists in key positions throughout the party and government, and rooted out resistance to his agenda. To outflank bureaucratic fiefdoms and even senior-level bodies like the Central Committee, Xi also stripped formal institutions of much of their policymaking power, instead relying on loosely defined committees known as central leading groups (most of which he established and chaired) to lay out the rules of the road. This is how even senior-most figures like Premier Li Keqiang, officially the head of the State Council and the No. 2 member of the Politburo Standing Committee, have routinely found themselves with little real decision-making power.
This approach hardly seems sustainable. China is a massive place with a massive tangle of entrenched interests and enough moving parts to make micromanagement a fool’s errand. Xi and his inner circle have only so much bandwidth. Trying to control the Chinese government machinery too tightly raises the risk of losing control of it altogether. After all, Mao’s plans for the country went sideways when the cult of personality and culture of sycophancy he cultivated ultimately blinded him to the rot hollowing out the system from within. Eventually, Xi would need to wrangle the state into a shape that he could trust to operate in alignment with his agenda – and more easily detect when it strayed. Last week’s overhaul is a major part of that effort.
Managing Risks
Too many changes were introduced at the congress to cover comprehensively here. But combined, they can be viewed as intended to help address threats to five overarching (and largely overlapping) aspects of the administration: Xi’s power, his economic reform agenda, Chinese financial stability, public trust and Beijing’s ambitions abroad.
Threats to Xi’s Power
During his first term, Xi succeeded – beyond anyone’s wildest expectations – in sidelining rivals and potential successors and destroying competing centers of power. Perhaps most impressive, he received at least reluctant backing to do so from party elders who were all too familiar with the pathologies of the Chinese system. But this by no means ensures Xi will remain secure indefinitely. There will inevitably be winners and losers with every reform. With each, gobs of money and power will be at stake. The risks of a destabilizing power struggle will only grow during times of heightened political-economic upheaval. And since discarding the Deng-era succession model has meant skipping over an entire generation of leaders who expected a shot at reaching the upper echelons of power, there are any number of potential rivals waiting to seize on Xi’s missteps to get their due.
So one overriding goal of the recent overhauls is to weaken the ability of new rivals to gain traction as Xi takes China down the rocky road ahead. More than anything, this means making it harder for figures to use their positions in the government, bureaucracy or military – or perhaps even the private sector – to cultivate tight patronage relationships and develop independent bases of power. Making sure that folks who owe their careers to Xi more than anyone else are leading China’s most powerful institutions is one way to do this. So too is making sure the institutions headed by his people are imbued with clear authority over those that aren’t.
Another way is to weaken powerful institutions themselves – a method Xi employed to tighten his grip over the People’s Liberation Army. This is a major motivating factor behind one of the most ambitious overhauls: downsizing the National Development and Reform Commission – a sprawling agency that has dominated economic planning since the Mao era. The NDRC was intended to function as the preeminent conductor of state-led growth, channeling state funding into industries and regions deemed both economically and politically important and shrinking disparities between China’s coasts and the interior. In practice, this meant it had authority over everything from state-backed infrastructure projects to electricity pricing to corporate bond markets, making it a bastion of corruption and positioning its officials to build out lucrative patronage networks. At the congress, the NDRC was stripped of a wide range of its powers, including creating development zones, directing agricultural investments and controlling healthcare pricing. It’s a testament to Xi’s power that he could even take on the behemoth. The NDRC, known as the “mini State Council,” is the sort of deeply entrenched institution that couldn’t be overhauled by a weaker Chinese leader.
The biggest club in Xi’s bag will be the new National Supervisory Commission. During his first term, Xi relied most heavily on the Central Commission for Discipline Inspection to execute his sweeping anti-graft campaign and weaken all up-and-comers. To date, the CCDI has doled out a range of punishments to more than 1.5 million officials across all sectors of the party and the government and in state-owned firms, including low-level “flies” and senior-level “tigers.” (The probe has even netted nearly 8,000 anti-graft inspectors.) The CCDI, a party body, will now be combined with government anti-graft agencies to form the National Supervisory Commission, which is reportedly seeing its target set triple in size and staff increase by 10 percent. Investigations will no longer be limited to party cadres; anyone in the civil service or even the private sector will be fair game. Already, the CCDI had begun absorbing many of the government’s judicial functions; the NSC, headed by a Xi associate, will be formally placed above China’s judicial system in the hierarchy. It will be bigger, hold a broader mandate, and be more deeply embedded at all levels of the Chinese government. Effectively, the new watchdog will function as Xi’s eyes and ears – and in many ways his fist. And considering Xi’s ambitions to uproot even the most deeply entrenched problems in the Chinese system, it will surely be busy.
Threats to Xi’s Economic Reform Agenda
A core reason why Xi was able to amass so much power in the first place was that something of a consensus emerged among party elders that a strongman was needed at the helm to prepare China for a crisis and respond decisively when it comes. So Xi is backed by a mandate to push through painful reforms – as well as a shared sense of urgency to do so while the Chinese economy still has the wind at its back.
The problem for Xi is that the bureaucracy and local governments have proven exceedingly adept at looking after their own interests, particularly those that don’t align with those of Beijing. Resistance from further down in the ranks is inevitable. For example, Beijing wants to cool down overheating real estate markets and slim down unprofitable industrial sectors to deflate bubbles and debt risks that pose a systemic risk to the broader economy. But local governments rely overwhelmingly on development and real estate for their own funding, as well as on construction to maintain stable employment in their regions. For provincial and local leaders, stable employment and robust growth have long been keys to career advancement. For all parties involved, there are enormous incentives to skirt regulations and cook the books – a problem in China since the Mao era, including even for Xi.
The structural changes introduced at the congress are also intended to pave the way for reforms in two primary ways.
The first is by making it harder for state institutions – especially those seen as having become excessively cozy with local governments and industries – to act independently. The downsizing of the NDRC is illustrative here. The commission has often been accused of working at odds with Beijing’s broader economic and reform goals. For example, it’s been blamed for playing fast and loose with approvals for major infrastructure projects, as well as recklessly channeling excessive funding into unprofitable industrial sectors. This has contributed to the debt woes of local governments – which rely on infrastructure development for growth – as well as widespread industrial overcapacity. At times, the NDRC has directly undermined Beijing’s attempts to address systemic risks and introduce market mechanisms in these areas. These reforms remain priorities for Xi, so the NDRC had to be reined in. The NDRC’s focus will be narrowed primarily to macro-level industrial development, reducing its influence over individual projects and ability to work at cross purposes with Xi.
The second is by strengthening Beijing’s oversight capacity at the provincial and local levels, as well as the enforcement capacities of regulators. Part of the problem in the past was that environmental and financial regulators, in particular, were unable to come down hard on cheating, allowing a culture of impunity to fester. Xi’s use of the CCDI began to change this, especially as inspectors took on a wider range of responsibilities, such as environmental inspections. The National Supervisory Commission will dramatically expand its presence, embedding units across the national, provincial, city and county levels to try to ensure adherence with contentious reforms. Meanwhile, the National Audit Office is being beefed up with new powers (including some previously held by the NDRC) to try to ensure all parts of the system aren’t falsifying data to give the appearance of compliance.
Threats to Financial Stability
The most urgent overhaul is focused on China’s $42 trillion banking and insurance sectors. This reflects the priority being placed on addressing financial risk – an issue that Xi elevated to the level of a national security threat last year, supported by ample evidence that China is highly vulnerable to a financial crisis. At the congress, Beijing took its most dramatic steps in a generation toward modernizing China’s sclerotic and overmatched financial regulatory system, which has been plagued by rigid siloing, chronic gaps in supervision and incentives to protect the institutions regulators are tasked with keeping in line.
At the heart of the changes is the central bank, which is expanding beyond its traditional role as adviser on monetary policy to become China’s core policymaker on economic matters. Its new powers come at the expense of China’s top insurance and banking regulatory bodies, which are being merged and stripped of any major role in drafting new laws and rules for the finance sector. Alongside the consolidated banking and insurance regulator will be the China Securities Regulatory Commission, which appears to be surviving as a stand-alone entity, and the new Market Supervision Administration, which will have a range of oversight responsibilities, from food prices and safety to enforcement of competition laws.
For the past two decades, China’s financial system has been overseen by separate banking, insurance and securities watchdogs, the jurisdiction of each tightly confined to its own sector. More recently, however, the lines between the sectors have become blurred. For example, banks and nontraditional lenders such as insurance companies have increasingly been competing in the “shadow banking” space through activities that have not fit neatly under the purview of any single agency. This allowed financial institutions to essentially shop around for favorable loopholes in regulations (a practice known as regulatory arbitrage) or operate free of oversight altogether. As a result, regulators have been locked in a losing game of whack-a-mole that has dramatically undermined Beijing’s efforts to deflate any number of alarming debt bubbles.
The new system is designed to eliminate bureaucratic turf wars, gaps in oversight and conflicting regulations. The entire system, including the central bank, will be tightly overseen by the Financial Stability and Development Committee – a cabinet-level body established last year and headed by Xi’s top economic adviser, Vice Premier Liu He. Policymaking powers therefore will be controlled tightly at the top, with the FSDC setting broad guidelines, the central bank making them law, and the watchdogs focused solely on inspections and enforcement. Theoretically, at least, this new system will allow Xi’s writ to be felt more clearly down the line.
Threats to Public Trust
Economic risk isn’t the only threat to the Communist Party’s legitimacy. Consider environmental regulation. As with most major challenges facing Beijing, China’s leaders are trapped between conflicting pressures here. Pollution is becoming a major political issue. (A recent University of Chicago study estimates that air pollution in China’s northern rust belt will reduce regional lifespans by an average of three years.) Xi has staked his political standing with the public, in part, on cleaning up the environment, and it is an area where the masses can more easily assess for themselves whether the regime is making tangible progress. At the same time, shutting down high-polluting firms or forcing firms to invest in expensive smog mitigation measures could cause a spike in unemployment that Beijing may not be able to stomach. As Xi consolidates authority under the central government, pollution is becoming a litmus test for Beijing’s ability to enforce its writ and maintain the precarious balance between political and economic priorities.
Toward this end, the new Ecological Environment Ministry will be taking over functions currently divided among six other agencies, including the National Development and Reform Commission. Ostensibly, this will reduce regulatory arbitrage, as well as internal conflicts of interest in economy-focused agencies like the NDRC that often treated environmental issues as subordinate. As with all the overhauls introduced last week, it will also consolidate policymaking at the top and streamline enforcement. Moreover, as mentioned above, anti-graft investigators had already been playing bigger roles in cracking down on polluters. These efforts will be expanded through the National Supervisory Commission.
The establishment of a more centralized Emergency Management Ministry – tasked with addressing threats ranging from natural disasters to workplace accidents – is motivated by another set of concerns. In China, accidents and disasters tend to expose symptoms of institutional rot such as corruption and lax enforcement of safety regulations, as well as doubts about the state’s ability to respond effectively. Take, for example, a series of colossal chemical explosions at the Port of Tianjin in 2015 that left 173 people dead and sprinkled the city with toxic rain for days. The blasts were believed to have been triggered by illegal storage of vast amounts of hazardous materials. The ensuing political backlash compelled Beijing to heavily censor coverage of the event, and police were reportedly ordered to under-report the death toll. Ultimately, some 49 government officials were jailed, and the owner of the company responsible for the incident was sentenced to death. Similarly, following the 2011 collision of two high-speed trains in Zhejiang province that killed 40 and exposed pervasive corruption in the rail industry, officials were pilloried for their slow rescue response and ham-fisted attempts to suppress coverage of the accident.
For a government that claims that tight control over all aspects of Chinese society is in the public interest – and for a strongman who claims authoritarian leadership is needed to deliver on the Communist Party’s promises – failures to combat pollution or prevent or respond to disasters are not just an embarrassment, but also a threat to the party’s very legitimacy.
Threats to China’s Ambitions Abroad
The overhaul is also motivated by threats to Beijing’s ambitions abroad – ambitions driven by strategic and domestic concerns. For example, Xi brought his top lieutenant during his first term, former CCDI chief Wang Qishan, out of retirement to serve as vice president. The vice presidency has traditionally been a largely ceremonial post, but Xi is expected to lean on Wang to prevent U.S.-Chinese relations from devolving into a full-blown trade war that threatens Chinese economic stability.
Other changes reflect China’s efforts to tamp down fears among the international community about how it will use its growing power. For example, China is consolidating control over foreign aid under the new International Development Cooperation Agency. The main idea is to ensure that aid provisions serve Beijing’s comprehensive strategic goals – increasingly important as China seeks to make the case abroad that its rise will also be beneficial to those it considers friends. Previously, the Foreign Affairs Ministry and the Commerce Ministry dispensed aid separately, creating some potential for tactical dissonance. The main vehicle here will be China’s Belt and Road initiative, a project that underscores the links between Beijing’s domestic and foreign objectives.
Meanwhile, Beijing also merged the Culture Ministry with the National Tourism Administration, which deals with both tourists to China and Chinese tourists abroad, ostensibly in an effort to develop and promote Chinese culture. The geopolitical effects of this sort of soft power are difficult to gauge. Nonetheless, this effort reflects China’s anxieties about how it is perceived abroad, especially as the number of Chinese tourists heading overseas grows at more than 5 percent annually. As with all things related to China’s rise, this is inherently disruptive in destination countries, and Beijing is keen to avoid stirring up deep-rooted anti-Chinese sentiments in regional states. (Beijing regularly names and shames misbehaving tourists in state media, and has barred some from traveling again.)
Perhaps the most notable change related to China’s operations abroad is the establishment of the Veterans Affairs Ministry and accompanying moves to boost pay and pensions for the troops. To mold the People’s Liberation Army into a modern fighting force, clamp down on corruption in the ranks and tighten the party’s control over the senior brass, Xi has laid off some 300,000 troops since 2015 and replaced the PLA’s four former headquarters with 15 functional departments as a means of diffusing the powers held by each. Naturally, this generated significant friction among officers who’ve seen their career paths and (often lucrative) sources of patronage severed. It also sparked sporadic but alarming protests among veterans upset about issues such as unpaid pensions and lack of opportunities in recent years. The PLA is the ultimate guarantor of the party’s hold on power and, increasingly, the dominant tool at Beijing’s disposal for pursuing its strategic objectives abroad. There are 57 million retired military personnel in China, hundreds of thousands of whom may resent being included in that number. Xi isn’t taking any chances with allowing their grievances to fester.
All of these threats overlap, and all point to the underlying problem facing China: It’s trapped between contradictory economic and political imperatives, and trade-offs cannot be wished away, no matter how efficient the government becomes under Xi. The latest overhaul shows both Xi’s extraordinary strength and his fears of impotence in the face of deeper currents moving against him. So China is preparing for a crisis. Whipping the government into alignment with the party and tightening his grip over both may make Xi and his government better equipped to stall the crisis, or perhaps even substantially weaken it. But crisis is baked into China’s DNA and cannot be avoided forever. Ultimately, whether this recent overhaul will make any difference depends on whether Xi will remain strong enough, with tight enough control over the Chinese machinery, to keep China’s inherent fault lines from rupturing when the crisis comes.
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