The Chinese stock market rebounded today, with the Shanghai Composite Index closing up 1.97 percent. But as we have pointed out previously, the crisis in China is not about the stock market. Nor is it simply a crisis of currency depreciation or capital flight, though certainly these are elements. The crisis is about whether the Communist Party can maintain its control over the country or will witness the country’s fracture into regionalism. The party and its leader, President Xi Jinping, have plans to avoid such an eventuality. These plans are embodied in an attempt to shift the economy’s focus from exports to consumption, in the anti-corruption drive purging disloyal elements of the bureaucracy, and in the military reforms initiated by Xi. But plans are abstract and theoretical, and have a tendency of breaking down when they encounter reality. Rumblings of a confrontation between Xi and the People’s Liberation Army (PLA) over planned military reforms are continuing to emanate. The results will determine China’s future.
Amidst the hubbub about Chinese economic challenges, the South China Morning Post (SCMP) published a report on Jan. 6 which identified the “new” commanders Xi has appointed to head up the recently reorganized structure of the PLA. That restructuring in part reduced the number of command zones from seven to five. But the list of commanders posted by the SCMP is telling because the heads of the five new commands were all previously heads of the seven old commands. Furthermore, all of these command chiefs are from the PLA. Part of the logic behind restructuring was to give the Chinese Navy and Air Force more of a role in the PLA’s command structure. Therefore, Xi, at least initially, has had to compromise on his military reforms as a result of PLA opposition.
Two other reports also indicate what appears to be strengthening PLA opposition to Xi’s policies. The first indication is the early retirement of PLA General Liu Yuan. Liu was an important source of support for Xi in the military, as he played a key public role in supporting Xi’s anti-corruption drive within the PLA. It was Liu who originally accused Gu Junshan, a lieutenant general and deputy director of the military’s General Logistics Department, of accepting bribes back in 2011. Observers had suspected that Liu was a natural choice to head up a new military disciplinary commission that Xi announced, via a statement on the website of the PLA daily newspaper on Nov. 26, would be formed in 2016.
It is abnormal for such a high-level figure to leave a post before reaching the mandatory retirement age, as Liu has done. It is unclear precisely why Liu retired. According to the SCMP, Liu wrote a farewell letter to staff in which he insisted he was completely loyal to Xi and would obey all of his directives. It may not be that Liu himself has a problem with Xi, but rather that Xi had to sacrifice a trusted general in order to come to a compromise with dissatisfied elements within the PLA. Whatever the case may be, Liu’s retirement is another signal that tension between the Communist Party and the PLA is increasing. Whether the new disciplinary commission to inspect corruption in the PLA is set up and given real authority, and who it will be led by, will together be an important gauge of Xi’s control over the PLA.
The second report that engenders suspicion about whether Xi’s strength relative to the military is weakening came on Jan. 7, when the state news agency Xinhua reported that Xi paid an inspection visit to the 13th Group Army in southwest China’s Chongqing municipality on Jan 5. There are two things to note here. The first is that Xi’s visit to Chongqing is the first a Chinese president has made since the fall of Bo Xilai, who was party chief of Chongqing before his removal in March 2012. Bo was perhaps Xi’s biggest competitor for power, so making this visit on his old turf seems a powerful symbolic gesture. Second, Xi may be meeting face to face with regional commanders both to gauge the level of their support and also to intimidate them. One such meeting by itself does not amount to much, though the political nature of choosing to visit Chongqing should not be lost on us. But combine this with the fact that Xi made a “precept speech” on Dec. 31, full of admonishing words demanding loyalty from the lower ranks for his reforms, and it becomes suspicious. Whether Xi continues to inspect various PLA bases will be an important indicator of how strong Xi is.
These new reports come in the context of sources in China reporting increased tension between the Communist Party and the PLA, and also reports that Beijing has ordered state-owned enterprises to hire PLA veterans who will be affected by the staff cuts Xi’s reforms aim to make. They also come after a year in which Xi turned his anti-corruption campaign on the PLA itself. At the beginning of the year, only three senior-level PLA officers were publicly known to had been investigated. By the end of 2015, the gloves had come off. In January 2015, a list of 16 PLA senior military officers that had been investigated for corruption was released publicly. In March, another list of 14 generals was released. In July, General Guo Boxiong, who had served as vice chairman of the powerful central military commission from 2002-2012, was stripped of his party membership and prosecuted for his lack of discipline. These are just a few examples highlighting what a combative year Xi had with the PLA, and why Xi may be facing opposition to his attempts to reform the PLA now.
These challenges to Xi also must be considered in the context of a particularly bad week for the Chinese economy, one that has been embarrassing not just for the Communist Party but for Xi personally. It has already become common knowledge that the high-growth miracle days are gone and that they will not be returning. But on Jan. 7, the People’s Bank of China announced that, in 2015, foreign reserves fell for the first time in 20 years. This is nothing less than a sea-change in Chinese economic history – a punctuation mark at the end of a 22-year astronomical rise in China’s foreign reserves.
This announcement came in the midst of a nosedive in China’s stock markets, which resulted in the largest devaluation of the yuan since last summer’s stock market rout, and suspicions that the yuan could drop even further. The stock market collapse has also completely undermined investor confidence in China’s ability to manage the economy, both because of Beijing’s inability to staunch the bleeding through market intervention and because of the poorly conceived design of a circuit breaker mechanism that only made the market’s decline worse.
The Caijing magazine, citing Sohu News, which cited social networking site Weibo, reported earlier today that Xiao Gang, the head of the China Securities Regulatory Commission, had submitted his resignation to Xi as a result of the mismanagement of the economy. But this resignation, if true, is little more than an attempt to deflect blame from Xi to a relatively low-level scapegoat. Xi has centralized decision-making powers in his Leading Group for Overall Reform. The role of premier in the past has been to run the Chinese economy, but current Premier Li Keqiang has little authority. Power is emanating from Xi. That means Xi gets credit for China’s successes, but it also means that Xi gets a bigger share of the blame when spasmodic events like this week’s stock market collapse happen.
Another dynamic to watch closely is Xi’s signature anti-corruption drive. Wang Qishan, one of Xi’s most important supporters and the man who leads the Central Commission of Discipline Inspection (CCDI), reportedly said on Jan. 7 that “punishment works better than words.” Qishan’s comments were striking in their stridency amidst so much economic and political chaos. The CCDI is scheduled to hold a meeting from Jan 12-14 to define its priorities for 2016. What the CCDI says will be a telling indicator of Xi’s status, as will any signs that challenges from the PLA and recent economic challenges have sapped his will or strength to continue his purges apace.
At the center of these swirling forces is Xi himself. There are many different paradigmatic opinions held about Xi. To some, he is the new Mao, a ruthless dictator centralizing power in a way no one since Mao has done in China. To others, he is, in his own words, the swatter of “flies” and slayer of “tigers,” crusading against corruption and reviving the ideological heart of the Communist Party with his fusion of Marxist Leninism and Confucian philosophy. Still others see Xi as a product of a system, chosen by the Communist Party, supported by China’s vast bureaucracy, and empowered in order to attempt to maintain the status quo at whatever cost necessary.
What such speculation fails to grasp is that leaders don’t make history. History makes leaders. Xi is president of China at a time when invisible and inevitable geopolitical circumstances have brought China to a fork in the road. Xi, the Communist Party, China’s vast bureaucracy and the PLA – they are all a part of a system that has governed China during one of the most unified chapters in its history. The period from 1949 to the present day – the era of the People’s Republic of China – has been remarkable by historical standards. The Communist Party has managed to hold China together in the face of the centrifugal forces that in the past have made the country vulnerable to regionalism, rebellion and invasion. The key question for China is not pegged to the yuan or economic performance indicators. It is whether China’s leadership, and the regime itself, have the strength necessary to weather the storm. The rumblings of discord between the party and the PLA are not a good sign, but more must develop before anything can be said with real certainty. What is clear is that the board has been prepared and the first moves have been made – a new game has begun.