President Xi Jinping’s tenure has been marked by growing state influence over all spheres of governance in China, including a marked tightening of control over the economy.

Curtis Milhaupt, the William F. Baxter-Visa International Professor of Law at Stanford Law School, addressed the hardening of Party controls over Chinese corporate governance. His lecture to the China Program on February 6 was based on research conducted by Milhaupt in collaboration with Yu-Hsin Lin of City University of Hong Kong, and examined the expanding role of the Chinese Communist Party (CCP) within both state-owned enterprises (SOEs) and privately-owned enterprises (POEs). The influence of the CCP within these enterprises, Milhaupt says, is not as straightforward as it might seem.

Milhaupt posits that the level of control exercised by the CCP on SOEs is lower than one might generally expect. At the same time, the CCP exercises a surprisingly higher level of control over POEs than we would typically assume. To draw these conclusions, Milhaupt uses a set of ten model provisions deemed to be dangjian, or “party-building,” measures that were developed and released by the Central Committee of the CCP. From data compiled between 2015 and 2018 from the charters of publicly-listed companies, Milhaupt shows that 10% of SOEs chose not to adopt any of the provisions distributed by the Central Committee. Meanwhile, 6% of POEs had at least a low level of adoption, despite the fact that the provisions were not directed at them. The reason for such variation, according to Milhaupt, can be explained by the characteristics of the provisions, the SOEs, and the POEs.

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Which enterprises adopted which provisions was highly correlated to those enterprises’ characteristics. SOEs were far more likely to amend their charters if they had direct state shareholding, but less likely to amend if they had large non-state shareholders, were further down in the state-ownership chain, or were cross-listed on international stock exchanges. POEs followed a similar structure, with enterprises being more likely to adopt provisions the more politically connected they were or the more direct state shareholding they had.

It remains unclear how the government can actually enforce the dangjian policy, and how these policies will affect the enterprises that adopt it. Despite the official rhetoric behind the dangjian policy, with claims that greater loyalty to the Party will lead to more economic success, Milhaupt expresses doubts:

“What’s [the danajian policy] going to mean for firm performance? Certainly, from a . . . straightforward economics or corporate governance perspective, one would not be optimistic that infiltrating corporations with political influence is going to do good things for firm performance.”

Milhaupt also has concerns about how the strategy will impact international investment, noting the already high levels of suspicion surrounding Chinese motivations: “This [emphasis on loyalty to the Party] would certainly seem to add fuel to the fire, and heighten concerns or suspicions with respect to Chinese outbound economic activity.” As SOEs and POEs continue to navigate both domestic and international markets with their amended charters, the future feasibility of the CCP’s reassertions over the economy is far from certain.

This is the second part of a series leading up to the publication of Fateful Decisions. You can read the first installment here.

In the last forty years, China has reemerged as a tremendous geopolitical, economic, and technological power on the world stage. But the easy phases of China’s quest for wealth and influence are over, argue Shorenstein APARC Fellow Thomas Fingar and China Program Director Jean Oi in a new article published by The Washington Quarterly.

In this piece, drawing on the findings and insights of contributors to their forthcoming edited volume Fateful Decisions: Choices That Will Shape China’s Future (Stanford University Press, available May 2020), Fingar and Oi outline the daunting array of difficult challenges China now faces and explain why its future depends on the policy choices its leaders make in what will be seen as a watershed moment.

An excerpt from their article is available below. For the full version, visit The Washington Quarterly and download the PDF.
 

From, “China’s Challenges: Now it Gets Much Harder”

Some years ago, one of us had a running partner who wanted a bigger challenge than the dozens of marathons he had completed. When asked to describe his first 50-mile race, he replied, “The first 30 miles weren’t bad, but after that it got really hard.” China is approaching the metaphorical 30-mile mark in its developmental marathon. The challenges it encountered and managed effectively during the past 40 years were not easy, but they pale in comparison to those looming on the horizon. The way ahead will be more difficult, less predictable, and highly contingent on the content and efficacy of complex policy choices. The easy phases of China’s quest for wealth and power are over.

We begin with this cautionary note because so much of the new narrative about China’s rise posits capabilities and evolutionary trajectories that we find implausible. That China has done well in the past does not assure that it will do equally well (or better) in the future. That the Leninist party-state system adopted in the 1950s has proven sufficiently agile to manage the easier phases of modernization does not assure that it will be equally adept at meeting the more difficult challenges of a country being transformed by past successes and demographic change. The number, magnitude, and complexity of these challenges do not foreordain that China will stagnate, fail, or fall apart, but they do raise serious questions about the putative inevitability of China’s continued rise and displacement of the United States. China’s future is neither inevitable nor immutable; its further evolution will be shaped by internal economic and social developments, the international system, and above all, the policy choices of party leaders facing a daunting array of difficult challenges.

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We refer to China’s current approach as “back to the future” because it seeks to resuscitate institutions, methods, and rationales adopted in the 1950s and shelved during the period of reform and rapid modernization. We do not know why party leaders decided that it is in their — and thus China’s — interest to curtail or reverse policies that facilitated sustained growth and rapid improvement of living standards and China’s international image, but speculate that they hope doing so will buy time before incurring the risks (and for the elite, the costs) of fundamental reform.

Beijing has announced a number of very ambitious goals such as moving into the ranks of highly-developed countries by the centenary of the PRC in 2049, achieving global preeminence in key technologies like robotics and artificial intelligence, providing urban social benefits to most citizens, and building a number of green megacities. The likelihood of achieving all of the proclaimed goals is nil, but China will make substantial progress on some of them. It is impossible to predict which will succeed, which will fail, and which will flounder, but we can anticipate a mix of all three outcomes. Whatever the precise mix, it is likely to produce a China that is less prosperous and less powerful than predicted by the predominant narrative about where China is headed. Whether China’s leaders will risk tackling the difficult reforms that remain or continue to embrace key and thus far counterproductive structures and methods from the past remains to be seen.  Whether the party-state system is able to maintain acceptable levels of growth and public satisfaction under the new conditions is also uncertain. The only certainty is that China can no longer ride the wave that helped along its economic growth and resultant capabilities for at least ten reasons.

Read the full text of this article via The Washington Quarterly.

The Great Wall of China is one of Asia’s most photographed and visited landmarks. Built over thousands of years and winding through a total of 13,170 miles, this wide-reaching network of defenses was constructed as a barrier against China’s northern neighbors. But within the digital landscape of China is a much less conspicuous yet far more pervasive set of fortifications: the Great Firewall. China’s state-operated internet is carefully controlled, heavily censored, and designed to keep its own citizens away from information that might damage the power and perception of the Communist Party.

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In Robert’s assessment, the Great Firewall is an example of censorship via what she terms “friction.” Rather than centering on fear, this type of censorship acts as a tax on information, creating small inconveniences that are easy to explain away and requiring those seeking information to spend more time and money if they want access to it. Censorship thus “works through distraction and diversion. It nudges — but does not force — most users away from unsavory material.”

This framing of censorship, Robert says, helps explain why, even though China’s Great Firewall is porous and can be circumvented, the number of people who “jump the wall” using a virtual private network (VPN) remains relatively low. People are not necessarily afraid of legal or political consequences of using a VPN, but rather the process of doing so is deemed too bothersome or offers too little value for the effort in most people’s day-to-day lives.

This friction-driven censorship is, therefore, effective on two levels: it keeps the majority of citizens away from sensitive material by making it too labor-intensive for them to access, and it naturally filters for outlier individuals the government has an interest in monitoring. According to Robert’s data, VPN users are overwhelmingly 35-year-old and younger, tend to be college degree holders, have fluency in English, have traveled or studied outside of China, and are interested in international politics — precisely the kinds of cohorts the Communist Party would benefit from managing more closely.

However, these digital demographics shift dramatically to include much broader groups of people during crises and following abrupt interruptions to citizen’s daily lives. Through analysis of Chinese social media data, online experiments, and nationally representative surveys, Roberts shows how the number of VPN  downloads spiked during the devastating Tianjin chemical explosion in 2015 as people scrambled to find information on the disaster. VPN downloads also increased after the shutdown of Instagram on September 29, 2014, following protests in Hong Kong. The Chinese government barred access to the platform to contain posts about the protests, but Roberts says that it was the sudden loss of access to the social media platform’s draw of entertainment that pulled many more “everyday” citizens over the firewall than would be typical. Once over, these new users quickly moved from accessing pictures of pop stars to exploring banned websites and censored information in more political spaces.

This is one of the important takeaways Roberts sees in her work. “This porous nature of censorship . . . means that there’s an Achilles heel of friction, which is that during crises, or sudden, more visible [moments of] censorship, people are willing to seek out that type of information and that can undermine some of these other strategies.”

With the Great Firewall only a few decades old, the full effects of its friction-based barricades remain to be seen, but Roberts is certain that in the coming years, the control of access to and accuracy of online information will have important effects not only on modern China but the future digital world as a whole.

You can learn more about Margaret Robert’s work in her book, Censored: Distraction and Diversion Inside China’s Great Firewall.

This is the first installment in a series leading up to the publication of Fateful Decisions.

China has tremendous resources, both human and financial, but it may now be facing a perfect storm of challenges. Its future is neither inevitable nor immutable, and its further evolution will be highly contingent on the content and efficacy of complex policy choices.

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One of these challenges — how China must soon achieve economic growth as it grapples with the realities of a rapidly aging population and a shrinking workforce — is the subject of a chapter authored by Karen Eggleston, the deputy director of APARC and director of the Center’s Asia Health Policy Program. In the following interview, Eggleston shares perspectives from her chapter, “Demographic Challenges.”

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Q: What are some of the fateful decisions China is facing regarding the responsibilities of caring for a large, aging population?

A: China has achieved impressive improvements in health and longevity. It has implemented universal health coverage and is experimenting with financial support for long-term care for older adults. Yet significant gaps between the most- and least-privileged Chinese citizens persist, and in some cases are growing. As I have written elsewhere, it is not surprising that there are wide disparities in health and healthcare between different population subgroups in a country as populous, expansive, and diverse as China. How effectively and efficiently China meets these and other health- and aging-related issues will have a major impact on its ability to manage other social and economic challenges.

In the chapter I contributed to the volume Fateful Decisions, I note that China’s current population and demographic trends — including relatively rapid aging — reflect the success of earlier investments in infectious disease control, public health measures, and other contributors to mortality reduction. The lingering effects of family planning policies, historic preferences for sons, and rapid economic development are also major considerations. Together, these factors have produced a shrinking working-age population, a growing number of elderly, a gender imbalance, and hurdles for inclusive urbanization. An urgent question for China’s future is to what extent policies will ameliorate disparities in health, healthcare use, and the burden of medical spending.

The unfolding COVID-2019 outbreak is a powerful illustration of just how fateful decisions about health systems can be. Compared to the SARS outbreak almost two decades ago, China has been better prepared for this situation. SARS raised health system reform to the top of the political agenda and, many argue, played a direct role in China’s achieving universal health coverage and vastly strengthening the public health system.

But as China has become a middle-income global economic powerhouse in the years since SARS and the ensuing wave of health policy reforms, the expectations of its citizens about their health system have also risen. Has the health system, including public health and medical care, been strengthened to the same degree as other parts of the economy and public services? The impact of and lasting response to COVID-2019 may prove a litmus test.

Q: Why do these decisions about health carry such importance for China’s future development?

Through the last four decades, China has benefitted from a demographic dividend caused by the large bulge in the working-age population. But to achieve future economic growth and productivity, investments in human capital — particularly in health and education —need to be made. This higher productivity will, in turn, be the means by which a smaller workforce can support China’s large and growing cohort of retirees.

As we’ve already seen, health expenditures have increased rapidly as China has developed its system of universal health coverage. Double-digit health spending growth surpassed the rate of economic growth, and as a result, health spending absorbs an increasingly larger share of the total economy. China needs to make sure additional spending on health and elderly care is efficient and effective, while also addressing the nonmedical determinants of health and promoting healthy aging. The health system needs to be reengineered to emphasize prevention, provide coordinated health care for people with multiple chronic diseases, assure equitable access to rapidly changing medical technologies, and ensure long-term care for frail elderly, all without unsustainable increases in opportunity costs for China’s future generations.

Q: What is the Chinese government doing to improve healthcare quality and delivery, and what more could it do to affect meaningful change in its systems?

China’s current policies seek to balance individual responsibility, community support, and taxpayer redistribution through safety-net coverage funded by central and local governments. Like many countries, China would benefit from improved coordination across multiple agencies and structure incentives to avoid or mitigate unintended consequences that undermine the goals of its health system. Recent governance reforms, such as the creation of the National Healthcare Security Administration, aim to address these challenges.

China’s achievements and remaining challenges can be illustrated with the Healthcare Access and Quality Index (HAQ), which measures premature mortality from causes that should not occur if the individual had access to high-quality healthcare: among 195 countries and territories, China achieved the highest absolute increase in the HAQ Index from 2000 to 2016. However, the 43-point regional disparity in HAQ within China is the equivalent of the difference between Iceland (the highest HAQ in the world) and North Korea.

Q: The subject of your chapter, China’s demographic challenges, is one of the issues you investigate in your upcoming book, Healthy Aging in Asia. As you show in this volume, challenges at the intersection of aging, economics, demographic transition, and healthcare policy are not unique to China. How are other countries in Asia responding to them and what lessons could benefit China?

 As I note in the introduction of Healthy Aging in Asia, the demographic transition from high to low fertility and mortality has been more rapid in much of Asia than in Europe and North America. That means social institutions, such as retirement, living arrangements, and intergenerational support, have to adapt quickly. For example, extending work-lives (as is happening in Japan) will be necessary but feasible only if the added years are healthy ones and equitable only if the least advantaged also benefit from healthy aging. The blessings of longevity dim when clouded by pain, disability, and loss of dignity.

 Investment strategies in insurance and managing chronic conditions are also important considerations. Japan and Korea have adopted insurance systems for financing long-term care for frail elderly, while places like Hong Kong have good empirical research on chronic condition management.

 No country or system has a “magic pill” to address these challenges, but the empirical evidence and rich policy experience documented in Healthy Aging from health systems as diverse as those in the cities of Singapore and Hong Kong to large economies such as Japan, India, and China can certainly be instructive.

While everyone was distracted with Justice Department controversies and the New Hampshire primary, a senior Huawei official has conceded that the company can clandestinely access users’ mobile networks. 

On Feb. 11, the Wall Street Journal ran a story citing U.S. officials who claimed that Huawei can “covertly access mobile-phone networks around the world through ‘back doors’ designed for use by law enforcement.” In other words, these officials claimed that Huawei can exploit backdoors intended for law enforcement in order to access user data without the permission of either users or the network operator. The Journal also quoted National Security Adviser Robert O’Brien as saying, “We have evidence that Huawei has the capability secretly to access sensitive and personal information in systems it maintains and sells around the world.”

Read the Rest at Lawfare

The signing of President Trump’s Phase One trade deal with China has rekindled speculations about the future of the world’s second-largest economy. Many analysts have cited trade frictions between the United States and China as a driving force behind the slowdown the Chinese economy has experienced in recent years. It is not a tariff crossfire, however, that explains the slowdown, argues Nicholas Lardy, a leading expert on the Chinese economy.

Lardy, the Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics, offered a different view on China’s slowing economy in a lecture presented at the China Program’s 2020 winter/spring colloquia series, which examines the past, present, and future of the PRC at 70. Using data and trends from the last forty years of China’s economic growth, Lardy presented the case that the slowing trend in the Chinese economy is directly related to changes in how the government lends credit and to what he terms “resource misallocation.”

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Coupled with this is the observation that Xi Jinping’s government has actively sought to increase the size and scope of state-owned enterprises. Lardy’s research indicates that the assets of state-owned, non-financial companies in China are growing twice as fast as the overall GDP, a situation he feels is only possible if state companies are being allocated a disproportional share of credit and loans. Lardy shows that pre-2012, funding to private companies was at $3.6 trillion USD, but by 2016 it dropped to a mere $600 billion.

Taking these factors together, Lardy argues that the economic slowdown will continue if the Chinese government continues to aggressively emphasize party control and the importance of the state sector over private companies. While reporting on trade deals may dominate the media, “We will increasingly see friction not on tariffs, but on technology transfer and issues of technology,” he says. “The key thing to watch is whether or not Xi Jinping gets serious about reforming state-owned enterprises and having a financial system that allocates credit more efficiently.”

Listen to highlights from Lardy’s presentation above, also available on our SoundCloud channel. A transcript is available