Xi Jinping and China's New Era of Reform

CFR Senior Fellows Elizabeth C. Economy and Yanzhong Huang, and the Lowy Institute's Leon Berkelmans and Merriden Varrall, join the New York Times' Joseph Kahn to discuss China's future, with a focus on Chinese President Xi Jinping's leadership. The panel considers China's shifting economic paradigm, which has seen the country move from a growth model based on investments to one more reliant on burgeoning consumer demand. The panelists assess this economic shift in light of Xi's nationwide anti-corruption campaign. The discussion additionally explores China's legal and political reforms, and its evolving foreign policy.

This meeting is part of the U.S. Rebalance to Asia Symposium, presented by the Council on Foreign Relations and the Lowy Institute for International Policy.

This event was made possible by the generous support of longtime CFR Member Rita E. Hauser and the Hauser Foundation.

KAHN: That sounds good. Good morning. We're delighted to have you join us this morning for a panel that is going to tell you everything you need to know about the future of China. And, as a secondary topic, everything you need to know about Xi Jinping. So, we have our work cut out for us today. But we have a very good panel to try to take you there.  On my immediate left is Leon Berkelmans from the Lowy Center of International Policy in Australia; Liz Economy, most of you know very well from the council; as well as Yanzhong Huang, here from the Council for Foreign Relations; and Merriden Varrall, also of the Lowy Institute in Australia.

So we talked a little before we came in today and I probed our panel a bit on how many of them, like me, was surprised by something fundamental related to Xi Jinping after he took power in China. So we thought we'd start off just by polling the panel a bit to see who was surprised and by what, and we'll go from there. So Leon, do you want to start us off?

BERKELMANS: Sure. So, I'll focus on the economics. I wasn't really that surprised with anything economically he's done so far. I think I'm a little bit surprised with the sense of disappointment that some people have that the reform program hasn't been bolder. For a very long time the way the Chinese government has reformed the economy has been very, very small steps.

They liberalize something in very small geographic area and then expand it out or tinker with something at the edges and when that seems to work out they,, they expand that. And that seems to have worked pretty well for them so far. It surprised me that people thought they were going to start doing bold things. Doing bold things entails a lot of risks, especially when you think about the financial sector. When you do bold reform in the financial sector what you find out what happens is some unintended consequences.

In Australia, when we liberalized the financial sector in the 1990's there was some unintended consequences, the same sort of thing happened in the U.S. when there's been major reforms. I think the Chinese look at that and they're not that eager to go down that path. So, I was surprised that some people have been surprised that they hadn't go for bolder reforms.

ECONOMY: I think I was surprised like many people about the extent to which Xi Jinping could so rapidly assert his own control, to identify an agenda, moving forward on the political front and then begin to move forward on it. I think, you know, you could look at everything from sort of the anti-corruption campaign, which of course anti-corruption campaigns are nothing new in China.

They've been there since the 1950's but he has clearly racked it up in terms of the scope of the campaign, in terms of the intensity, and I think in terms of the level of the person he's identified, pursued, arrested and detained. But also just his ability to put himself at the top of the political system, to assume control of you know all of the major central committee leading commissions and committees; his ability to narrow the space for political voice. Right?

So, to roll back or become a very vibrant Internet and to sort of attack people who establish themselves in some respects as a sort of strong political reformers via the Internet, to chop them off at the knees, and then to go after NGO and to nail that type of focal space in civil society, to attack Western ideals and liberalism throughout the university structures. But he's really moved forward quite aggressively, I think, both to centralize his own political control and narrow the political space.

I'll say one other thing I think is more positive that of his identification of several issues that I think were very front and center for the vast majority of the Chinese people and to move forward and try to address their concerns, and here I'm thinking about the environment, the one child policy, the Huko system, the system of residency permits. I do think he's also set out a quite ambitious agenda the sociopolitical front that he's also begun to tackle. It's such to early to say that he's going to have success in any of these fronts, on any of these sociopolitical issues, but I do think that he has laid out a pretty impressive agenda for himself.

HUANG: I'm equally impressed by the rapididity. He's centralized his political power. But I'm also, it struck me that this similarly conflicting signals he's sent to the outside world that on the one hand has this some nasty (inaudible) but he's pursuing an agenda that includes a crackdown, crouching, deepening economic reform, reforming the unpopular institutions and policies such as a reeducation through labor, but in the meantime he, under his leadership, political reform, even civil liberties have suffered a serious setback and we have seen the recent arrests of the five feminists and also the sentencing of the rhetoring journalist now to seven years in jail, and this reminds me of what Charles Dickens wrote 150 years ago. This is the best of the time, this is the worst of the times. This is the season of light. This is the season of darkness. And this is the spring of hope and this is the winter of despair.

VARRALL: That was very poetic. (inaudible)

(LAUGHTER)

I agree very much with what the previous panelist has said and with the risk of sounding like a Lowy line of these things, I also wanted to say I was surprised that we're so surprised about Xi Jinping and how politically tight, at the tightening up, that he's done. And we felt the same way when Hu Jintao came into power a long time ago. We were all optimistic about it being a new era. And it seems like we have this external hope that anytime any Chinese leader comes in that he watches overseas television and like Sulka (ph) this will mean that he will naturally sort of be pro Western norms or Western political philosophies, and I think we misjudge that.

And, when we look at Xi Jinping's background and lot of people are spending a lot of time looking at that now, and we start to say oh we can see now with his background, with his father's background, and of course he was going to be like this. But that was all true before and we really hoped that he would be different, that he would be a real political reformer in the way that we think political reform should be. And we were so surprised that he, he put the party first, that he put the legitimacy of the party state first. It shouldn't had been such a surprise to us. I think now, looking back we should have been more, more compared to be the way it went.

KAHN: So Merriden, taking that for then, does that mean that you don't think that we should expect Xi Jinping as he enters a more mature phase of his leadership to shift direct in one way or the other? Another false conventional wisdom about Chinese leaders including Hu Jinpao was that they needed a phase of consolidation and then we'd see their real agenda come out.

VARRALL: Yeah.

KAHN: Are we seeing Shi's real agenda now?

VARRALL: I think, In was in China last month and a lot of the people I spoke to there were—so I was there in November and a lot of the people I spoke to in November were saying this is the beginning. We were tightening up. He's consolidating his power and then he's going to calm down and everything is going to be fine and we're all going to be back to normal. When I was there last month the same people were saying yeah, yeah, any minute now then next bit will happen.

And I think there's starting to be a sense that this is actually who Xi Jinping is. He really is committed to these ideals. He really is about this legitimacy and this longevity, and I don't think that it's—perhaps there will be a little bit of a roll back, but this is fundamentally what he believes. This is not sort of a showmanship exercise.

KAHN: Yanzhong...

HUANG: I have sort of a slightly different interpretation. I would rather view this as a rational logically response of Xi to the other strategic and political context after the 18th Party of Congress. We know that the Xi is very ambitious. He has a lot on his agenda. He wants to achieve the China dream, and regain China's greatness in the international arena, but he's in power—and that helps—but he's not in firm command. But he also mentioned and recently confessed it to a Chinese writer, he's not like other Chinese.

The more pressure you have and the more strong willed you will become. So, weighing a serious of scandals and political development revealed a system of authority in this anti-corruption campaign which was part of his agenda was suddenly elevated to the top of his political agenda was sort of overshadowed other agenda items.

And this process certainly needs to be very vigilant of any arrival attempts to sort of like counter attack. We have seen this rumor so of assassination attempts, also the potential coupe de ta, but in the meantime he doesn't want to lose the support of his main constituency that consists of the second red generation, certainly the principalings, the sons and daughters of the veteran communist leaders, the general public, the lower echelons of the military because he has to demonstrate he's the best.

He's better than other political competitors in terms of taking care of their needs, wants and interests. And so, you know, that probably explains why he wants to type in this political control ideological control as doing so is going to please his main constituency but also not to be the excuse of his political rivals. Not to make him vulnerable to the other side of his political analysts. So there's indeed rational logic.

KAHN: So you do see the anti-corruption campaign and the scope that it's taken on and the amount of time and energy it's taken up by the Chinese leadership . It's not necessarily a choice that Xi Jinping made but (inaudible) is forced on him.

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HUANG: It's not, I think it's more becoming a necessity in this case.

ECONOMY: I mean, look, it was the first thing when he took power. It was the last thing that Hu Jintao talked about when he left, and the first thing that Xi Jinping talked about when he entered, was the necessity of routing out corruption. He said, "If we don't route up corruption, it could mean the death of the Communist Party, and even the death of the Chinese state." So he entered with the anti-corruption campaign, I think, as his number one priority.

I have to say, Merriden, that I myself never thought Xi Jinping was going to be a reformer in the Western sense of the word. I got Hu Jintao way wrong. I wrote a whole piece on it in foreign affairs, where I said he could be a real political reformer. But with Xi Jinping, I never saw it, because you could look at back at any of his time as party secretary, any of his sort of political past, and you would see absolutely no evidence of political reform inclinations. And certainly it's been borne out of all the speeches and writings, and everything that we've seen since.

He's very consistent in what he says, very consistent in the way that he views Western ideals, and the sort of the attacks that he makes on officials that he thinks hold Western ideals. So, I don't see this as a moment in time, and then all of the sudden everything is going to be good, and he's going to break open and, you know, emerge as a political reformer. I think this is who he is, and the anti-corruption campaign—yes. I think there's an element of, you know, battening down the hatches and protecting himself, but he began with that even before he felt the personal political threat, I think.

HUANG: Yeah. It's something he shares a lot with second red generation in terms of maintaining the rule of the Communist regime. And in the meantime, this doesn't make any sense for him to open another battlefield, like pursuing political reform, that only invites attack from his political rivals, but also would undermine his own political support.

ECONOMY: True, but he's gone way past not pursuing more political reform to retrenching—right—and cutting back on gains that had been made, for example, via the Internet. Right? So it's not simply, we're not going to move forward, but we're going to, you know, take several steps backward.

KAHN: Leon, you—you're—go ahead.

BERKELMANS: So, on the Intel (ph) corruption campaign, I don't—I haven't seen too much discussion of the economic rationale behind it either, and I think there is economic rationale behind it. I've heard the argument made, and I think there's logic to it, that China's at a stage of its economic development, and it's staging—reforming economy that it needs to clean house. If they don't clean house then any further reforms are going to be ineffectual at best or counter-productive at worst.

So if you think—I'll go back to the financial sector again, if corruption is rampant in the financial sector and you liberalize that sector, then you could get wide scale fraud, or you could get finance just diverted to fairly the unproductive areas of the economy. So I think there's a clearly economic rationale behind the anti-corruption campaign as well.

KAHN: But the anti-corruption campaign has coincided with a tightening, a significant tightening, in the economy. You know, with the recent data showing a slowdown in the economy that we hadn't seen really since the direct aftermath of Tiananmen Square crackdown. Does that still—are you still optimistic that that's more a precursor to a new wave of more constructive, better balance growth, or are you wary about...

BERKELMANS: Definitely better balanced. So, China is at a stage, I think, where—well, for a long time they've been reliant on construction and manufacturing as a large source of their growth, and I think that those days are pretty much over. So, when I was at the Reserve Bank of Australia, I worked on the China desk, and we did some projections out --long-term projections for—after 2040 for China's urban residential construction. Now, long-term projections like that are very bold in the Sir Humphrey Appleby sense of being bold, but they—we just sort of did it to get a sense check of what was going on.

We came to the conclusion that China's residential construction was going to peak perhaps in about 2014, and that—we sort of see that coming through the data right now. So, as a source of growth, residential construction—and I think the same thing is happening in manufacturing—those days are pretty much over. Construction is going to remain at a very high level, but it's not going to grow anymore. What is going to have to take its place is consumption and services.

And one thing about services, is that productivity growth is not as strong in services for whatever reason, as it is in construction and manufacturing. So, naturally, as the economy becomes more focused on services, it's just not going to grow a quickly. So this slowdown is necessary. It's healthy. They may be overdoing it a little bit. The extent of the slowdown has surprised me. The economy is experiencing deflation at the moment, which is some indication that they are producing...

KAHN: Tightened too much.

BERKELMANS: They've tightened too much. But, it is part of, I think, the natural evolution of the economy.

KAHN: Liz, do you largely agree with that? Do you see the you see the slowdown as mostly a hopeful sign of sort of a better balanced future?

ECONOMY: I don't know. I mean, I think you can look at his glass half full or half empty. And, reading what Lee Kuan Yu (ph) has been saying, you know, quite publicly about the inability to push through a lot of the economic reforms that he wants to see take place, that makes me feel as though perhaps things are, you know, is the economic slowdown a function of the reforms making their way through the system? And it is a natural thing, and we should assume things are moving pretty much as expected, or is it really that there is an enormous blockage taking place and that Chinese economy is slowing because, you know, real estate.

You know, boom is coming to an end, and they don't have anything to replace it with right now, and are they going to get something to replace it at any time? We don't know. So, I don't think we can get out arms fully around the Chinese economy, but I would look at what Lee Kuchung (ph) and others are saying about the challenges that seem to be greater than they anticipated, and therefore I would put in slightly maybe a bit more cautionary word than, Leon, on how they are managing to strike the balance here.

BERKELMANS: The transition is going very slowly. So, it is happening slow and steady. It is going slowly. We can argue about whether it's going quick enough, but it is happening.

KAHN: Yanzhong, we talked a little bit about how, in some ways, Xi Jinping may be modeling himself politically after Mao, and at least in some of the propaganda and in some of his consolidation of power. Do you, first of all, agree with that? And secondly, if so has that kind of leftist tinge to many of his public statements, or those of his supporters, suggest something fundamental about the economic direction of the country?

HUANG: Well I certainly would that—he has adapted some of Mao's tactics, and like ratification campaign, the mess line, you know, that also in terms of centralizing political power. This is also like Mao, right, because, you know, have you have all these inflation political policy resources all concentrated in one person's hand. But I think that it is also interesting to notice that Shi, and his family, are victims of the Maos (ph), you know, the politics, you know, the cultural revolution, but—here lies the great irony is that the victims of the Maos, the politics now seems to be adopting the rules of game that Mao had adopted in the political process.

You know, if you look at the political games, you know, in the Mao era, especially in the cultural revolution, that essentially a one shot zero-sum game, losers of the elite politics power struggles lose everything, including their lives. But in the time, Xi Jinping, a chance on being Hu Jintao era, we've seen these changes, right? That this game has become more non-zero sum repeated game, because they put—officials no longer worry about this constant purges, attacks. You know, they also, even the losers of the political game, could still participate in the hopes become tomorrow's winners. But that game, I believe, changed in the Xi Jinpings anti-corruption campaign, because if you look at the tactics they used, there is no end point indicated of the campaign, or they're not going to spare any government officials.

There is not going to be any amnesty, no pardon, and in reality, of that campaign is pursued in that sort of like—Soviet (ph) checker style, by the departed disciplinary committees, no transparency, no balance of the checks and balances. So that created this very, sort of, field of politics, you know, the government officials once the investigating convicted, lose their political life, if not their physical life. And so, I think this recreated this Maoist, zero-sum washout game. That, I believe it has profound implications on the elite politics, and also on the policy process.

KAHN: Merriden, we are seeing, you know, often very contradictory responses to how popular Xi Jinping is domestically in China. If you can believe public opinion polls, or surveys at the lower level of society is often enormously popular for the anti-corruption campaign he's taken on. And yet, everybody in this room knows somebody who has from China who has removed most or all of their assets and resettled in New York, or London, or in the suburbs of San Francisco because, they're panicked and because the business climate has become somewhat frozen. Are we seeing two very different reactions of different strata to Chinese society to what's happening?

VARRALL: There's probably more than two different reactions from different, two different Chinese strata. There's a lot of different subgroups in Chinese society, and they're all being affected in different ways. So, for example, some government officials in central government feel a little bit disgruntled, a little bit concerned. They're not quite sure what they're supposed to do, what's OK. Last week is not OK. This week, and I was saying earlier, that when I was in China recently, when I would go to lunch with my—my former ministry friends, last time I went to lunch, I could take them out to lunch, this time they had to check the rule book that morning to see whether the rules last time were going apply to this time.

So, there's—I mean, that's sort of a specific example, but there's a paralysis about what is OK and what isn't OK. And officials are annoyed by that and unsure, and uncertain. Lower level officials, for example, in the provinces and in the localities, a lot of their incentives for taking risks, taking big bold in this area and in the Sir Humphrey Appleby sense and in other senses, big bold policy choices, that's—their pay is very low. So those risks, they're weighed up in a cost-benefit way that are they getting something else for making those big decisions, for making big bold changes?

And, if the case is, you know, the anti-corruption campaign is going to get them if they do anything bold and outside of the box, then they're not going—they lose that incentive. So there's a paralysis at that local level as well. I wouldn't want to imply that this is going to sort of—these sort of dissatisfactions are going to lead to an overthrow of the state, or in any way collapse of the system or the party, I think that's going too far. I think the party is much more solid than that. It's dissatisfaction with the way things are working, but it's not a dissatisfaction with the system as a whole.

KAHN: Liz, would you pick that up, because obviously many people read a recent essay by David Shambaugh, which he kind of stuck his neck out a little bit and said that he did actually see a threat to the party, because of the—because of the extreme tightening of Shi. Do you think that should be seen as a realistic possibility?

ECONOMY: I think that all of the sort of fault lines that David identified in his Wall Street Journal piece exist, and I think it appropriate to draw them together and to draw our attention to things like, you know, the fact that Xi Jinping's book isn't selling. Actually they are giving it away—or especially since the Chinese press comes out and says it's the number one seller, you know?

Or, it's appropriate to point out the fact that the Hurun Report for the fourth year in a row has talked about how X-percentage of Chinese are putting their assets abroad and sending their children abroad to study, because they are so concerned about what's taking place at home. So I think all of those things are correct.

Probably, I don't see the sort of conclusion that David arrived at in the same way. I don't think that all of this then leads one to say, and the death of the Chinese Communist Party has begun. So, I think, I think perhaps he stuck his neck out a little bit too far, but I think the piece provided a valuable sort of provided a valuable insight for all of us in sort of linking together a number of challenges that the party is facing. And so we can tend to see, you know, Xi Jinping moving forward on all of these fronts.

We can think of him as having really extraordinary level of success. Right? In initiating reforms and pushing forward—it can be on the economy, it can be on the political system, it can be on foreign policy, and maybe not fully appreciate the back reaction. Right? And sort of the other kinds of challenges, like Merriden said about sort of paralysis of local officials.

And so, I think again David's—David's point suggests, you know, that Xi Jinping at some point, is going to have to reform his reforms. Right? This is reforms set one that he's pushed out, but then he's going to have to deal with all of the reactions to those reforms, because otherwise those first set of reforms may not come to fruition.

KAHN: Yanzhong, what do you think? Is the party brittle or resilient?

HUANG: Well, it's a very tough question. I think I agree with Liz that all what David said is actually this phenomenon they pointed out exist. But the outcome may not be only one outcome, I mean. It could be the possibility of this potential, or short-term authoritarian resilience, that he strengthened the party control, you know, is actually make the party live longer, and so that possibility cannot be ruled out. It cannot also rule out that possibility that, especially after economic slowdown as a rational response, you might choose a less costly—to identify a less costly, more sustainable legitimacy base that is Democracy. I don't rule out the possibility that Xi could be another Jing Ching call (ph).

KAHN: OK. We're going to open it to questions in just a minute, but let me just briefly shift the discussion before we do the foreign side of Shi's agenda, maybe asking Leon and Merriden looking at China's foreign policy moves from the perspective of an Asia-Pacific nation. Can you give us a sense of how assertive or aggressive China's recent moves in the South China Sea field, as well as its apparent success in creating a rival of bank to the Bretton Woods institutions with the AIB?

BERKELMANS: You want me to go first? So, I'll talk about the AIB. I think the AIB is a good initiative. I think that it serves a need that multi-lateral banks really have stepped away considerably from funding infrastructure, and there is a bit of a hole there. By one estimate, there's—I think it is $8 trillion need to spend on infrastructure in the Asia-Pacific region between 2010 and 2020. There is a need there, and I think the AIB is going to fulfill it.

Not fulfill it, it will contribute to it. It's not going to get anywhere near that $8 trillion. But, just in terms of—I know there were concerns of the governance of this institution, my perspective is it that it's much easier to affect the governance of this institution from the inside, rather than lecturing them from the outside. So, I think that it's definitely a worthwhile initiative.

KAHN: How about the recent moves in the sputleys (ph) and the construction on various at holds on the South China Sea?

VARRALL: Sure. If I can get that to you in a slightly roundabout way, just following on from what Leon said, the AIB is a good example of how Australia sees China's role and behavior in the region. There's a sense on one hand, that it's a great opportunity, that the economic and commercial benefits and possibilities are very positive. But by the same token, at the same time, we're very concerned about the kind of politics, and what impact these kind of things like the AIB might have on the enormity of structures and values in the region.

And, we, the Lowy Institute has conducted polls on this kind of thing. And the last poll that we did on it there's a pretty even split in the Australian population about how they feel about China. There's on one hand, Australians feel like China, along with Japan, is Australia's best friend in Asia. On the other hand almost half the population feels like it's like it's going to be a military threat to Australia.

So there's a real bifurcation of views. In terms of their behavior, so for example on the sputlies (ph), I think it's viewed with considerable concern by the Australian population. And China hasn't done a particularly good job of communicating clearly what it's doing, why it's doing it, why it's there. It talks about its sovereignty, but those sorts of terminologies don't do much to alleviate the concerns, I think, in the region.

KAHN: Liz, are you seeing any particular prospects for significant improvement in U.S.-China relations, as Xi Jinping compares to come here in the fall?

ECONOMY:  I think there's some optimism in Washington coming out of the most recent meeting between President Xi and President Obama back in Beijing at APEC. And we did have some pretty concrete accomplishments that came out of that. And I think there's an effort to continue to push forward. But I don't think that anybody's talking, at least right now, in Washington about a breakthrough in the U.S.-China relationship, but no breakdown either.

I think the idea is, you know, hopefully to make some progress on the Bilateral Investment Treaty, but I think, that's moving pretty slowly at this point and time, not as quickly may in Washington would like; waiting to hear back from the Chinese on their negative list. I think, you know, there's an effort to sort of draw more countries into what was a successful bilateral pledging system on climate change, and to hopefully use this to you know, push forward with India, for example.

And so, I think there's some energy behind the U.S.-China relationship and a sense maybe in Washington that since President Xi wants a successful visit to Washington, that that might give us a little bit of greater leverage. But I haven't heard any whispers of any major breakthroughs.

KAHN: All right. Good. Well, let's turn to you all and please, you know, fire away on any of these subjects or some that we've missed. Yeah, please...

QUESTION: Thank you, Jamie Metsul (ph). Democracy was mentioned this morning. I wanted to get some or all of your sense of whether Democracy within the party is a sufficient proxy for societal Democracy, that if a push for Democracy within the party will help China, given the size of the party, address some of the misallocation challenges that it now faces?

KAHN: Who wants to take that one on?

ECONOMY: Well, I mean, I personally don't think that Democracy within the party is a proxy for broader societal Democracy, and I think China has under Hu Jintao—and when Hu Jintao did push forward on Democracy within the party, and there has been a greater sense that people are voted on, right, for the next level moving up and that's sort of widening the band of people who will be selected from. So, riding the number of candidates it might be considered within the party.

But what we're really looking for is, broader engagement within civil society. Right in the avenues for civil society participation, and here I think we haven't seen the kind of progress that we would have like to have seen. When China began village elections in 1989, I think, the first village elections, and there was always a sense in direct elections that these would move up the political system over time. All right? But they haven't, and so, I think that's one metric you could look at.

Another would be, you know, avenues, sort of reviews of policies in advance and public review of the local budget, or for environmental impact assessments, other kinds of public participatory mechanisms. Some of this has happened. Some of this is happening. But I don't think that there is—there are enough mechanisms for public participation, in society today when you're looking at a system that is facing 180,000 or more protests annually, that to me is a fairly good signal that, you know, public participation isn't being effectively channeled.

KAHN: Yanzhong, you actually mentioned Democracy. So what did you mean by that? Was it genuine Democracy in the party? Or...

HUANG: No. I don't mean the Democracy as a party, you know, as Liz just said—for a while I think that the leadership talked about this Democracy within the party. I think this is no longer on top of the agenda.

KAHN: Others? Yes, sir?

QUESTION: Hi, I am Lee Siegel. I want to pick up on Merriden's assessment of the degree to which the clampdown is affecting lower level initiative. I mean, one way you improve the economic circumstances under current condition in China, is people experiment down at the lower level. Are you saying that's exceeding the unlikely, given the pressures that are generated at the top?

VARRALL: I probably wouldn't go so far as to say exceedingly unlikely, but I think there's a much greater sense of caution in taking those kinds of risks, and taking on those kinds of initiatives with the anti-corruption campaign. I'd say it's increasingly unlikely—increasingly risky to do so.

HUANG: I think it's also interesting to talk about this like this paralysis. Actually there is a progressive increase of that paralysis with the bureaucratic rank, that is at the grassroots level that problem is even more serious. Officially, they would still bandwagon with Xi Jinping, you know, pay lip service to his policy, but they would refrain from taking any initiatives, or taking risks, because as they like to say, while they're doing things won't causing any—not doing anything would be cause you any trouble, right, but these things would cause you trouble.

So, this is a very rational response to Shi's anti-corruption campaign. The recent report from actually Shensi, the party's secretary, had admitted that in that providence we know that the corruption is very, very serious in Shensi, but they say there's 60 percent—there is an increase of 60 percent of these petitions, of the offense reports targeting this corrupted officials. But, you know, essentially, there was a drop of this filed cases against those government officials. In fact, over the past two years, the party's secretary admitted that there were no investigations at the township level of this—the corrupted government officials. 20 percent of the towns—townships in the province.

KAHN: Yes, question in front there.

QUESTION: Thanks, Rita Houser (ph). Henry Paulson in his new book issues a very cautionary note about the enormous rise of debt in China along with a slowing economy. In this morning's New York Times, reports a very major default of one of the largest builders. Do any of you see financial collapse or a major financial crisis coming along in China?

KAHN: Want to take that on?

BERKELMANS: So, the rising debt in China has indeed been very large. So, McKinsey came out with an estimate earlier this year, or last year, that suggests that the debt to GDP has increased by over 100 percentage points since 2007. This has been a very, very large increase from an economy that really didn't see much movement in that ratio beforehand. The IMF have talked about this and their Article Four Consultation last year, they talked about the increase in debt, and often when you see increases in debt of this magnitude, and the IMF said this, it is followed by a banking crisis.

So, the risk is there. However, there are things that mitigate that. So, first of all, even if the banking system were to get into trouble, it's largely state-controlled and the Chinese has form when it comes to dealing with financial problems in the banking sector. So, in the—like in the 1990s, non-performing lines in the Chinese sector are hit 40 percent. Four-zero. The banking sector was a basket case. What happened was the government came in, and they recapitalized it, and you really didn't see that much effect on the overall economy. JDP growth kept going reasonably well. So, they have form.

They have capacity. Government debt in China is fairly low at the moment; they have capacity to inject equity into the banks. Another thing to be—to make you a little bit more relaxed about it, is that China's potential growth, even though it is slowing, is very, very—is still quite high. They can grow their way out of a debt problem the way that Europe can't. And finally, the other things that might make you a little bit more relaxed about it, is that it's money. They owe to themselves so it's not external debt. It's money that they owe to themselves, and they owe it to themselves in their own currency.

(OFF-MIKE)

So there is some—so, I didn't read this report today. So, there is some debt that they raise externally, but it's not very much.

KAHN: Yes.

QUESTION: Chris Brody (ph), Vantage Partners. For many years, one looked at China in terms of the leadership, wanting to make sure there was not social unrest. Could you talk about economic growth, adequate employment, expectations of the masses, and whether this current leadership has reason to be comfortable that they're not going to run into issues of social unrest?

BERKELMANS: I'm sorry. I'll start off with that one. So, I mentioned the slowdown before with the economy going from construction, manufacturing and into services, a bit more focused on services. So, we're going to get lower GDP growth. That does not necessarily mean that we're going to get lower growth in urban employment. Services are much more labor intensive, and so as the economy moves into that area it's naturally going to—naturally going to create more jobs. I know that the authorities have done calculations along those lines.

I sat through, last year, a presentation by the People's Bank of China Chief Economist, where he sat—where he laid out the calculus that they said "Oh, the economy can grow by X percentage points less now and still create the same amount of jobs." I can't remember what exactly the said numbers are. N ow we did talk about the slowdown in the Chinese economy, particularly last quarter.

Last quarter was a pretty poor quarter for the Chinese economy, but the employment market is quite hot, so you're not seeing any sort of any—sort of ramifications there so far in the market, in the market for labor. And for me, and maybe the other panelists can comment on this, for me, it's not so much the GDP number they care about, it's the employment number. I think their attitude toward the GDP target has really changed a lot over the last few years.

The GDP target, which is seven percent now, they used to blow out the water. For years, and years, and years it was just—they beat it by three, four, five percentage points. Last year they sort of fudged it. They said around 7.5 percent, and it was 7.4 percent. And it wouldn't surprise me at all now, if they're going to be comfortable undershooting it. We see that even a city now, I think, it was Shanghai don't even have a GDP growth target. They just said "No, we're not going to bother with that this year." So, I think that their attitude toward GDP and GDP growth targets has changed a lot.

ECONOMY: You know, I don't know what the employment statistic is now. There was a point in time a few years back, when you know the official statistic was something like four percent unemployment, and the Chinese Academy of Social Sciences came out and said it's actually about 18 percent, you know, unemployment so I don't—I don't really know. I would say that if they move forward on some of the SOE reforms, if, you know, they really push forward very strongly in the coal mining sector, which they've started to do shutting down a lot of mining activity, I think you're going to get a lot of strikes over time.

I can't imagine that you wouldn't, because all of these people are not going to be immediately employable in the service sector. There's not going to be this sort of natural transition. And we've seen strikes among taxi cab drivers, for example. So, they're going to pop up. I think regionally they're going to sort of emerge by sector.

The real question is whether or not they can be linked? Right. And, pose an overall challenge to the regime. And I would have said, looking back three or four years ago, before Xi Jinping, you could have looked at the Internet and looked at the environment, for example, and seen that there was this process by which environmental protests were beginning to be linked up via the Internet.

So you had protesters in once city learning from others, and taking up the cause of people outside of their immediate locale. So you did you have that kind of protest linkage, and if you would mimic that on the labor front, I think you could, in the end, have quite a significant challenge to the regime. But, I think the extent to which Xi has been so successful, as I mentioned earlier, in sort of rolling back the Internet and containing it, constraining it, leads me to believe that they're unlikely to face that kind of challenge. But I do think that we're going to see protests and more labor-based unrest if, in fact, the reforms move ahead as they're supposed to.

BERKELMANS: And just one thing on that unemployment number as well Yeah, that unemployment number is rubbish. They aren't an actually very good employment indicators in China. There are some others that I look at. They've got a labor supply ratio, and also a gross number of jobs created. I'm sorry, the net number of jobs created nationally in urban areas, and they don't show any sign of slowdown as yet.

KAHN: Dan?

QUESTION: Thank you, Joe. Great panel. So, I want to circle back to the question of whether this is a reform era in China. On the one hand, there's sort of a cynicism that reform's taken place. On the other hand, really an acknowledgement that this is a radical amount of reform by Chinese standards, it's just not in a liberal direction. So we often use the term reform here on the West.

It implicitly means liberal reform. Reform, to change the way that the systems currently work doesn't necessarily inherently mean in a liberal direction. I mean, isn't it—wouldn't all four of you agree that Xi Jinping is absolutely a change agent? A very exceptional one by Chinese standards. And he's radically disrupting and reengineering almost every aspect of governance and the political economy of the Chinese system.

In the economic area, it's been sort of acknowledged that has to be somewhat liberal, otherwise potential growth will collapse. And so, it's kind of a pretty rich—richer conversation, I think, than just saying reform's kind of sputtering on the launch pad as David Shambaugh said, and which none of you really took that on head-on. I'm curious what you think.

ECONOMY: No, absolutely. I think that yes, reform is proceeding not along the lines of liberal Democratic reform, but he is an enormous change agent, and I think we'll have to see whether this kind of structural reforms that he's—again, set of set out in areas like the rule of law, or, you know, fiscal reform, or ideas that you're going to have everything. You know, power being increasingly concentrated up, the idea that Beijing is going to take more of a role in the provision of Social Welfare.

I think these things—I still think it's early days. Right? So, he's moving in that direction, but I don't—I don't—I wouldn't yet say that these have been achieved. ,Right? ,So, but yes. I think that if he succeeds in what he has set out to do, it will be revolutionary not even reform.

VARRALL: Can I add to that? Sorry.

KAHN: Go ahead.

VARRALL: I think I agree with Liz and with your question. Definitely a radical change agent and definitely radical reform, but it's reform for continuity. So you have to—it's a process of great reform, but the ultimate goal is not changed. The ultimate goal of party legitimacy and party control has not changed. That's not reformed, but the processes and the means to achieve that are what's being radically changed.

QUESTION: How do you know—how can you be so positive about what the ultimate objective is?

VARRALL: I think that it's historically clear, and I think that Xi Jinping's made it clear that that's what he's stands for, and I think that's just—when you study China for a reasonably long period of time, it's clear that that's what it's about.

KAHN: Yanzhong go ahead.

HUANG: I think even we agree that Xi Jinping wants to proceed—with this progressive policies, reform, we have to keep in mind that if there's—any politician policy makers is constrained by, in this case, first the anti-corruption campaign that sort of make it difficult for him to open another political battlefield, for example.

And secondly, we have to keep in mind the constraints of economic slowdown. You know, that leads to the drop of the public revenue, and we are already seeing this in February of this year, we have seen actually the—only a 0.2 percent increase, year-on-year increase of the public revenue, while demand of the public spending actually increased by 55 percent. I think this is also a serious constraint; he's—the choice pursuing desired policies.

ECONOMY: But—can I just say, also, in terms of his ultimate objective, I think he set it out, Dan, very early on in his China dream. Right? Which is what? It's a robust Chinese Communist Party at the forefront of the political system. It's a modern Chinese economy, an innovative, Chinese economy, a rebalanced one, and it's a far more expansive foreign policy with a military that is capable of fighting and winning wars. So, I think if you could look at those as sort of very broad strategic objectives, I think that's what he's driving toward.

BERKELMANS: On the economic front, I think—Dan I were talking earlier. I think we should talk after the panel as well. For me, as I said earlier, what I think is we're just seeing a continuation of reform. Maybe it's sped up a little bit, but it's not a huge game changer. It's pretty clear what need to be done. We need—there's intra-straight (ph) liberalization, exchange-rate liberalization, some price liberalization, (inaudible) reform, those things need to be done, and it just—it's happening very slowly, and I don't think there's too much difference of opinion about that.

KAHN: Yes, here on the front.

QUESTION: Thank you, Markel Folilove (ph) from the Lowy Institute.  Can I ask about the late reaction to the changes that Xi Jinping is introducing? It seems to me a few years ago, a lot of us in the West saw the senior leaders as a kind of technocratic cast that were making all these rational decisions about China's future in a way that, for many people contrasted favorably to the messy nature of Western politics, but it seems to me that Bojelai drama a few years ago showed up how wrong that was, and how brutal and viperish elite politics in China can be.

So, how do we think that senior leaders are reacting to these, these developments from Xi Jinping? Is there a limit to how far he can push them? And in that context, what does—what do the China politics watchers make of this weed story that flashed up on my Twitter feed last week, about—about speculation that Xi Jinping saw himself ruling beyond the normal period, and to that extent, to that end, not grooming successors?

KAHN: Yanzhong, do you want to take that on?

HUANG: I would rather leave that to Liz.

(LAUGHTER)

ECONOMY: No, no, no, no, no.

HUANG: It is a very tough question I would have to say, that certainly that the Communist—I wouldn't say Communist, the post-Mao, the politics, and especially the politics under Xi Jinping, I think we have seen a lot of changes. The political games, as I have pointed out, have changed, and the—those games that were—we believe, actually will characterizing the post-Mao politics. No longer they are like the discipline, the seemingly unity of the leadership that we have taken for granted is no longer there, especially after the—the Busholai (ph), Shodunkong (ph), scandal.

But we also, if you look at those policies they have pursued, especially on the policy front, we don't really know whether this is the policy that he pursued, or is the policy that others pursued by his top associates—Maoist associates like ideological control. But certainly, here there is some common ground I believe is still maintained by the top elites I would say.

ECONOMY: I think it's almost impossible to know. Right? The system remains so opaque. It's hard if you look, I think, at the very top leadership. Right? The top seven in the standing committee of the—you know, early days we could have said it seemed as though Lijachung entered with a somewhat more Western liberal reform oriented sense of where he might want to take the country had he become General Secretary of the Community party at present of the country. And, you know, what role he plays in trying to moderate some of what's going on, we don't know.

There are rumors out there that Lelanchao, was in the politbureau, who has actually spoken here a couple of times and is pretty much thought of as one of the more liberal, Western-leaning type of leaders ,also is under some duress now within the top leadership. So it's hard to know. You hear these rumors, and you try to figure out what's going on.

I would be surprised if Xi Jinping went beyond a 10-year term. He seems to me, again, having read through the 500 page book that he produced of all of his greatest ideas, that someone who is pretty consistent and pretty rules-based in his own way, and I think it would go against sort of his ideals of sort of establishing rules by which people should live, for him to do something like that. So, I would be surprised. I know that rumor was floated, but I would be surprised.

HUANG: Yeah, this—in a way—he's pursuing something that could potentially prove to be his undoing especially the entire corruption campaign we talked about here. You know, if you keep that in mind, corruption, this is a structural on China. Involves almost everybody, every government official. Even a conservative estimate by the Professor at Emory University said that two million officials that believed to be corrupt. And but even investigating those corrupt officials would take 40 to 50 years.

(LAUGHTER)

So, you imagine this ten-year tenure, right? You cannot get that job done. I think this is going to be—if he really cares about legacy, he should really think about this issues.

KAHN: Sorry. In the back there. Yeah.

QUESTION: Mike Moran (ph) from Control Risk. I want to go back to Dan Rosen's question for just a section, in part, because it made you look very uncomfortable. The Soviet collapse has been kind of looked at and studied and dissected in a fetish-like way in China. And so what, if it's still relevant at all, what does it tell us about what China will do should growth and unemployment really create pain?

VARRALL: Can I have a go at that...

KAHN: Yes, sure. Please.

VARRALL: I think there are two appealers (ph) to legitimacy for the party, for the Chinese Communist Party, and one is material well-being. This goes back to the Soviet's stability question. If GDP growth drops, and the other one is a sense of—at the risk of sounding a bit esoteric, a kind of spiritual sense of identity and that's national identity likely.

So, I think that, if it comes to pass that the material well-being, a sense of equity with others, if those things start to slow down and become truly cause of tension and truly problematic, what might happen in the Chinese situation? Is it the leadership might turn to looking at the national identity—China's strengthened that national identity. And I think this is something that they have, as you say, they've obsessed with Russia and Russia's collapse, and they don't want to do anything too rash, and I don't want to do anything too quickly.

They want to make sure these things are balanced and carefully so. I think if the social stability does become a problem, and there's no guarantee that it will, for the reasons that Liz and Leon I think have mentioned, what we might see is China starting to reconsider the way it discusses its role in the world, and the things that are happening around it in foreign policy. So, for example, the U.S., the victimization by the U.S., its relationship with Japan has a long enduring sense of persecution from Japan, I think those things we might start to see increasing in the narratives within China, if social instability starts to come up, because of that concern from the preoccupation with Russia about keeping stability and moving things slowly.

KAHN: Ambassador (inaudible) you had your...

QUESTION: This is a follow up really on Dan's question, but you know, the thrust of the economic reform has all been towards a more market-driven economy. And the question I have is a long-term one. We've seen in Asian history that you can have a market economy co-exist with an authoritarian political system, but not forever. Korea, Taiwan, Indonesia, so forth, show that over time if you really do have a market economy, that somehow impacts the political system. I wonder what your thoughts are on that?

KAHN: That's a big one.

BERKELMANS: I'll have a very quick go. So, in China, I don't know, Acemoglu—Daron Acemoglu and James Robinson in their book, "Failed States," I think talk a bit about China. And how they are reaching a point where things will need to change. There seems to be some logic in that. And I think that their framework for thinking about those things is generally a very, very good one. So, I think I'd defer to them on that one and say that yeah, something's going to happen at some point.

ECONOMY: I think, look—I think there are sort of two different ways at looking at it. One would be that, in order to achieve what they want to achieve on the economic front, for example, to become an innovative economy, right, they're going to have to remain open and that kind of openness will only bleed into the political system. Right? So, efforts, for example, recent efforts that we have seen to control Gmail. Right? That will limit not only the ability of scholars that deal with political ideals to communicate outside, but also limit the ability of scientists to communicate with their counterparts. Right? To access ideas from the outside world.

That is going to constrain Chinese economic growth in a way that the Chinese government is not interested in having. So, that's a kind of reform that they're going to push, and then probably take a step back. That's one way in which I think that sort of the Internet, in the end, wins in terms of keeping access back and forth between China and the outside world, and encouraging sort of continued political burbling within the country, even as Xi Jinping tries to contain it.

So I think achieving what they want on the economic front will drive them to keep a relatively more open political system. The other way is of course, the very traditional one, which is that as economic standards rise, as people get all of their needs met, they want to have a greater political voice.

Right? A greater political say in how the system is directed. And I think here the question is, will Xi Jinping somehow manage to develop those institutions of political participation that I started to elude to earlier that will be able to channel political participation effectively enough that people don't go out and protest; that there's not this, you know, gradually sort of—you know, that he's not simply putting the top on the top of the boiling pot. Right?

Which is kind of what you might think has happened today. And I think, you know, the jury is out on that. I mean, we do have a Singapore model as well, however small Singapore is, I continue to believe that is a little bit of what Xi Jinping driving toward. And so, whether or not they can, in fact, you know find ways for the public to participate in the process, get their views heard, but not have multiple party system and direct elections.

KAHN: Yanzhong, you want to have the last word on this?

HUANG: Yeah, sure, yeah. I think the reason that authoritarianism and market economy cannot sustain or co-exist for long, also because their legitimate space—authoritarianism is relied on. Basically authoritarianism sustained coercion, or on performance-based legitimacy. And both, if we compare that with is Democracy. Right? It's a more costly, less sustainable means of legitimacy base.

So, if you have, you know, the strong leader dies, right, or if you have economic slowdown, then that implicit social contract, right, between the leaders and the people will be broken, right? So, this is going to open the process for political change, because the leaders then will have to go for a new legitimacy base. That includes the less costly, more sustainable base of Democracy.

VARRALL: Could I have a tiny, tiny...

KAHN: Sure.

VARRALL: Sorry. I just don't think we should overstate the extent to which the middle class is going to be a push for political reform. I just think we need to remember to some degree the middle class is very much—it's got to where it has gotten because of the system, and it's quite well invested into the system. So, I don't think we should overstate how much that's going to be those driver for political change.

KAHN: Great. Thank you very much. That would—time is up. Thank you for our great panel.

(APPLAUSE)

END