By the time the Third Plenary closed on December 22, the leadership of the Chinese Communist Party (CCP) had formally committed to “conscientiously transforming the system and methods of economic management” by giving “local authorities and industrial and agricultural enterprises ... greater power of decision in management”—though of course all “under the guidance of unified state planning.”
The 1978 Third Plenary launched China on a forty-year trajectory of reform, opening and epic economic growth. The Chinese economy grew by a factor of thirty-five times between 1978 and 2018, according to official data. If you don’t trust the official numbers, scale that down to thirty times or twenty-five times. Lop a layer off the top to account for the simple remonetization of the economy in the first two decades of reform, as social services like food and housing that were once provided for free came to be bought on the market (and thus included in GDP). Make any adjustments you want; it doesn’t make any meaningful difference. The U.S. economy grew by a factor of 2.9 times over that period; large developing countries like Mexico (2.6) and Brazil (2.3) even less, according to data from the International Monetary Fund. China’s arch-rival India grew by a factor of twelve. By any measure, and despite many caveats, reform-era China has been the world champion of economic growth.
After four decades of unprecedented growth though, China’s economy is finally leveling off. Officially, the Chinese economy is still growing at a very respectable 6.5 percent, but no one who seriously studies it really believes that. Growth probably stalled at the end of 2015, when exports were falling, value-added tax receipts were flat and the purchasing managers’ index (PMI) was pointing toward a recession. Faced with a slew of bad statistics, the CCP took the easy way out: it fired the statistician. The director of the National Bureau of Statistics, Wang Bao’an, was charged with corruption and removed from office. The new director, Ning Jizhe, just happened to be the person in charge of setting China’s economic targets in the first place. The PMI immediately shot back up and China’s wobbly GDP statistics leveled off.
But falsifying statistics does not shift stock or sell cars. China’s smartphone sales were down 15.5 percent in 2018, according to official data from the China Academy of Information and Communications Technology. Sales of passenger vehicles were down 4.1 percent, according to the China Association of Automobile Manufacturers. China’s trade surplus fell by 16.8 percent. Bad loans are mounting, housing units are sitting empty, the university graduate job market is sluggish and Western entrepreneurs—professionals and charlatans alike—are leaving China in droves. None of this sounds like an economy growing at more than twice the rate of the United States.
In a desperate attempt to keep the economy growing, China is rapidly inflating the mother of all credit bubbles while hoping for a miracle to deliver it from the inevitable reckoning. China’s leaders refuse to face reality and accept that, after forty years of seemingly effortless economic growth, the party has finally come to an end. The CCP seems deathly afraid of facing up to even a mild recession. But why? It’s not like the end of the economic party means the end of the Communist Party.
The strange thing is that many people within China, and even within the CCP, believe that it just might. Hampered by ideological blinders and haunted by their own family histories, CCP leaders have bought into the mythology of their extraordinary skill as economic managers. They have relied on economic growth to justify Communist Party dictatorship for so long that they don’t think they can stay in power without it. They have enthusiastically embraced the doctrine of “performance legitimacy”: the idea that economic success legitimizes one-party rule in China, and that without it the country could break out in some kind of spontaneous combustion like the Cultural Revolution of Mao’s final years or the Tiananmen Square protests of 1976 and 1989. The performance legitimacy theory is accepted by figures as diverse as maverick Peking University law professor He Weifang, American China-hawk Gordon Chang, British China-booster Gideon Rachman and, according to China politics expert Bo Zhiyue, Chinese president Xi Jinping himself. But is it true?
PERFORMANCE LEGITIMACY is one of those ideas that finds its place in history and seizes it. No one in particular seems to have invented it or originally defined it, much less demonstrated that it really exists. It has always been used with the more or less common sense understanding that a government is legitimate if it delivers the goods. The term first began to bubble up in academic books and journals in the 1980s, but it really took off after Samuel Huntington made it a centerpiece of his 1991 book, The Third Wave: Democratization in the Late Twentieth Century. In a related article for the Journal of Democracy, Huntington applied the idea to the Asian Tiger economies and the often authoritarian parties that governed them:
Western democratic systems are less dependent on performance legitimacy than authoritarian systems because failure is blamed on the incumbents instead of the system, and the ouster and replacement of the incumbents help to renew the system. The East Asian societies ... had unequalled records of economic success from the 1960s to the 1980s. What happens, however, if and when their 8-percent growth rates plummet ... ? In a Western democracy the response would be to turn the incumbents out ... [but if] the structure of political competition does not allow that to happen, unhappiness with the government could well lead to demonstrations, protests, riots, and efforts to mobilize popular support to overthrow the government.
Though Huntington was writing about Singapore, South Korea and Taiwan, the implications for China were clear.
Huntington’s influence was at its greatest just as the first big wave of Chinese students swept into U.S. political science departments in the late 1990s and early 2000s. Those students would have read Huntington’s essays on democracy, as well as his 1996 book, The Clash of Civilizations, in which he explicitly linked the idea of performance legitimacy to post-Tiananmen China. Those very students are now the middle-aged academics, think tankers and Party strategists who form the intellectual vanguard of the Chinese regime. They have turned out dozens of academic papers, in English as well as Chinese, arguing that performance legitimacy is the glue that holds China together.
Huntington was a brilliant scholar, but not one well-known for his magnanimity in citing rivals. Like previous would-be discoverers of performance legitimacy in the 1980s, Huntington didn’t give any source for the idea. Nonetheless, every political science ph.d. student knows exactly where it came from: a classic 1959 article by Seymour Martin Lipset called “Some Social Requisites of Democracy.” In what has become the single most cited article ever published in the American Political Science Review, Lipset wrote, “Legitimacy involves the capacity of a political system to engender and maintain the belief that existing political institutions are the most appropriate or proper ones for the society.” He saw legitimacy as a substitute for effectiveness, since “the degree of legitimacy of a democratic system may affect its capacity to survive the crises of effectiveness, such as depressions or lost wars.”
In Lipset’s formulation, effectiveness didn’t confer legitimacy on a government. Effectiveness helped a government stay in power without it. The whole idea of “performance legitimacy” is nothing more than “effectiveness” with a little extra dignity. Writing in the shadow of the Holocaust, Lipset couldn’t very well have said that Nazi rule was legitimated by Germany’s strong economic performance in the 1930s—even if, for many admirers of Germany at the time, it was. But with the passage of time, legitimacy became a less loaded word. Cold Warriors thought Soviet rule illegitimate in occupied countries like Hungary and Czechoslovakia, but perhaps less so in Russia itself. In the era of decolonization, many developing countries established quite unsavory forms of government, but it may have seemed disrespectful (or even racist) to question their legitimacy. Performance legitimacy was a way to let non-Western dictatorships off the democratic hook, so long as they delivered the goods.
Reeling from the 1989 challenge in Tiananmen Square and desperate to restore its legitimacy in the eyes of the world, the CCP of the 1990s was ripe for the idea. It went after performance legitimacy with a vengeance. It even turned the idea on its own people. By the early 2000s, it was becoming increasingly difficult to inspire patriotism by trotting out ninety-year-old veterans of the Long March, and appeals to Marxism-Leninism were clearly farcical. The CCP needed something new, and it found it in the 2008 Beijing Olympics, the 2010 Shanghai Expo and endless economic growth. Perhaps egged on by Nobel Prize-winning economist Robert Fogel’s 2007 prediction that, by 2040, China would reach a GDP per capita of $85,000—and that was $85,000 in year 2000 dollars, equivalent to $127,000 today—China’s leader Hu Jintao wrote the goal of “building a moderately prosperous society” right into the CCP constitution. It remains there to this day.
to finish building a moderately prosperous society in all respects by the time the Party marks its centenary and to build China into a great modern socialist country in every dimension by the time the People’s Republic celebrates its centenary.
For the uninitiated, those are the two centenaries: 2021 to celebrate one hundred years of the CCP and 2049 for one hundred years of the People’s Republic. Xi may not be around for the second centenary, but he sure plans to be there for the first. It would be a grave embarrassment for Xi if China’s growth spurt were to end just as he holds a huge event to mark the Party’s success in making China prosperous. The loss of face would be unbearable. And so the order has gone out to every Chinese state organ at every level: keep the economy growing for at least another three years. Unfortunately for Xi, it seems unlikely that the Party will be able to keep up appearances for anything like that long.
THE NOBEL Prize comes with a diploma, a medal and some money, but no crystal ball. The Nobel Prize in economics doesn’t even come with a spoonful of common sense. The economist Paul Samuelson was notorious for predicting in 1960 that the Soviet economy would overtake the American one at some point between 1984 and 1997. Twenty years and one Nobel Prize later, he was still predicting a Soviet economic victory, though he had pushed back the date to the early 2000s. Maybe if the Soviet system had survived its economic and political meltdown, it would have proved Samuelson right. You never know.
Fogel’s China prediction seems likely to go the same way as Samuelson’s Soviet one. But China’s leadership is determined to make sure that China doesn’t go the same way as the Soviet Union. For Xi and his colleagues, the 2021 centenary of the CCP is important, but entirely symbolic. As it becomes increasingly obvious that China is no longer growing at 6 percent plus, the Party will likely get by on a combination of inflated statistics and reduced expectations. China is rich enough that the CCP can simply declare victory by claiming it has already finished building a moderately prosperous society and no longer needs to worry about it. In 2021, the Party constitution, which reads like a Western party platform, will be rewritten anyway. The embarrassing bit about prosperity can just be dropped.
Chinese leaders hate to lose face, but if the country’s economy stagnates in the 2020s, who will they lose face with? No one except themselves. Most Chinese people don’t have political science degrees from American universities, haven’t read Samuel Huntington and have never heard of performance legitimacy.
The myth of performance legitimacy rests on the incredible proposition that ordinary people will risk life and limb by pouring into the streets to protest nothing more than sluggish growth. That’s not what happened in Eastern Europe in the 1980s, Tiananmen Square in 1989, the color revolutions of the early 2000s and the Arab Spring in 2011. The Russian-American sociologist Pitirim Sorokin, who was jailed by both the Tsar’s government and the Bolsheviks for speaking truth to power, argued from personal experience that economics drive people to face down armed repression only when they don’t have enough to eat. Otherwise, a determined regime can always use military force to quash protests, as Bashar al-Assad has demonstrated in Syria.
Revolutions are poorly understood, and there are many reasons why a regime might fall. Were China’s economy to fail catastrophically, maybe that would lead to a revolution. But although China’s period of rapid growth is over, there seems little reason to believe that China’s economy will disintegrate overnight. Quite the contrary: China has all the levers it needs to ensure basic macroeconomic stability indefinitely. To begin with, the Chinese government borrows in its own currency and all of China’s banks are state-owned. Yes, there is a massive credit bubble, but deflating it need only lead to bankruptcies where the government considers these to be politically expedient. Instead of going through traumatic bankruptcies, moribund state-owned firms will simply be kept on financial life support, adding to the thousands of “zombie companies” that already litter China’s corporate landscape.
For a picture of what that could look like, just look at the steel industry, where zombie companies have been consuming policy brains for more than a decade. They continue to churn out oceans of unwanted steel despite repeated government pledges to address overproduction. For example, last January, China’s Ministry of Industry and Information Technology vowed to “unswervingly” cut steel capacity. This was reinforced in February, when Premier Li Keqiang said that capacity would be cut by thirty million tonnes in 2018. In fact, China’s steel production hit an all-time high of 923 million tonnes in 2018, up ninety-one million from the previous year. That compares with actual domestic steel consumption of 820 million tonnes in a world awash in steel. And the 2018 story is not a one-off: a 2010 report by the U.S. Congressional Research Service found that the overproduction of steel in China first “became acute in 2006.” China itself has been producing reports on overcapacity in the steel sector since at least 2009.
To put things in perspective, China’s 2018 steel surplus of 103 million tonnes was exactly equal to the total steel consumption of the United States. No wonder the Trump administration accuses China of dumping steel on the American market: it’s dumping steel anywhere it can. China has built a twenty-thousand-mile nationwide high-speed rail network in just ten years. It has built a national expressway system the scale of America’s Interstate highways, thirty metropolitan subway systems and dozens of commercial airports. Don’t even ask about skyscrapers. Unable to find enough domestic outlets for its steel, China is now using it to subsidize infrastructure construction throughout Afro-Eurasia as part of its Belt and Road Initiative. The one thing China won’t do is cut 103 million tonnes of steel production, even though that steel is literally sitting in heaps, rusting. The reason? In a word, stability.
Steel is not the only zombie industry in China. Most of the heavy industrial sector has long been plagued by overcapacity. The light industrial sector is now facing the same problems. One reason why China is heavily subsidizing rail links to Europe is to boost exports of light industrial goods like toasters, toys and Christmas tree ornaments. Of course, the government can’t keep the economy growing by subsidizing everything, but it can certainly stave off a collapse. Instead of a big shakeout that drives inefficient producers out of the market, dislocating supply chains and causing mass unemployment, China has opted for the old Latin American model of keeping inefficient businesses on perpetual life support. Lest anyone think that China is light years ahead of Latin America, it is worth remembering that China’s GDP per capita of around $9,800 puts it in the same league as Argentina ($11,700), Brazil ($8,900) and Mexico ($9,700).
Revolutions are driven by politics, not economics, and China doesn’t allow much in the way of politics. When Huntington transformed “effectiveness” into “performance legitimacy,” some of Lipset’s original nuance was lost. Lipset thought that the Weimar Republic fell under the double blow of hyperinflation and the Great Depression because it lacked legitimacy in the minds of Germany’s military, civil service and aristocratic elites. The American and British governments, by comparison, had enough legitimacy to make it through a temporary (though severe) failure of effectiveness in the 1930s. None of this was intended to apply to Communist Party dictatorships like those of China and the Soviet Union, even if they were illegitimate. In fact, what Lipset actually said was that “Ineffective and illegitimate regimes ... must, of course, by definition be unstable and break down, unless they are dictatorships maintaining themselves by force.” And as the CCP proved in 1989, it is absolutely prepared to maintain itself by force.
THE 2021 centenary of the CCP is all about celebrating the success of the Party in transforming China from a semi-feudal country dominated by foreign powers into a twenty-first-century superpower with a space program, two or three aircraft carriers, and some of the world’s most advanced infrastructure. The Party has made a lot of mistakes along the way, but it conveniently blames them on Mao, or better yet (as with the Tiananmen Square massacre) pretends they never happened. The CCP faces no immediate threats to its rule that could conceivably cause a “Chinese Spring” before the centenary on July 1, 2021. Much more important than saving face by avoiding a recession in 2021 is making sure that the CCP is still in charge when the centenary of the People’s Republic rolls around on October 1, 2049.
It is unlikely but possible that Xi might still be in charge. If he is still alive, he will be ninety-six years old—not much older than Zimbabwe’s Robert Mugabe was when he was forced out of office in 2017 at the age of ninety-three. Malaysia’s Mahathir Mohamad returned to politics last year at the age of ninety-two, and, of course, health and medical care are only improving with time. Xi might very well die before 2049, but will he retire? For decades, China experts insisted that China was different from other one-party dictatorships because China had institutionalized the practice of collective leadership and rotation in office. All that went out the window when the CCP changed its constitution in 2018 to remove presidential term limits.
A limit of two five-year terms for the president and vice president had been written into China’s constitution by Deng Xiaoping in 1982. The two-term limit was meant to establish a routine reshuffling at the top of China’s political hierarchy, though all the while Deng remained the unofficial power behind the scenes. China’s presidency under the 1982 constitution was at first a largely ceremonial post. The first two presidents, Li Xiannian (1983–1988) and Yang Shangkun (1988–1993), served one term each before being forced to retire by Deng. The next two presidents, Jiang Zemin (1993–2003) and Hu Jintao (2003–2013), each served two terms. After Deng died in 1997, Jiang started the practice of aligning the office of president with that of general secretary of the CCP, handing over both posts to his successor at the end of his presidential term. Hu went one better at his retirement, handing over the third key role of chairman of the Central Military Commission and commander-in-chief of the People’s Liberation Army (PLA). Thus when Xi took over in 2013, he wore all three hats right from the start: president of the prc, chairman of the CCP and head of the PLA. So much for collective leadership.
What really puzzled China experts in 2018 was why Xi was willing to waste political capital on removing presidential term limits when there are no term limits on the positions that really matter: chairman of the CCP and head of the PLA. Trapped in an outdated understanding of China that placed all power in the Party and the army, Western China experts have missed out on one of the biggest China stories of the twenty-first century: the growth of the state. The Party is still important, especially at the highest levels, but the days when Party commissars made day-to-day decisions in all realms of society are long since gone. Today, state bureaucracies and state-owned enterprises (SOEs) have become power bases of their own, as amply illustrated by China’s difficulty in shutting down steel production. The CEOs of big SOEs like Sinopec (oil), State Grid (electricity) and ICBC (banking) may report to Xi Jinping, but their junior vice presidents certainly don’t answer to their local Party branches. And what goes for SOEs applies even more to big private-sector companies like Huawei, Alibaba and Tencent.
Mao’s China may have once fit the political commissar model to a T, but the period of international opening and economic reform that Deng put in motion made that model obsolete. Interestingly, it was Xi Jinping’s father, Xi Zhongxun, who in 1979 as governor of Guangdong Province set up China’s first special economic zones (SEZs). Xi the son graduated from Tsinghua University that year, and one can only wonder what career advice his father may have offered at the dinner table. Xi junior would later serve as vice mayor of Xiamen (1985–1988), which, although in Fujian Province, was one of four initial SEZs that his father had been instrumental in setting up. During the Cultural Revolution of Xi’s early years, when he and his father were both sent for “reeducation” in the countryside, the Party was clearly in charge. But in 2018, at a time when government expenditures exceeded $3 trillion and China’s SOEs turned a collective profit of $180 billion on revenues of $4.3 trillion, the state is king.
THE HEADLINE news from China’s 2018 constitutional reforms was the removal of term limits and the associated implication that Xi might rule as president for life. Less noted were several other constitutional and administrative changes that help explain that move. The constitution was amended to create a new anti-corruption agency, the State Supervision Commission (SSC). The SSC will absorb the former anti-corruption agency, the Central Commission for Discipline Inspection, which is an organ of the Party, not the state. Like every other element of the Chinese government, the SSC is still ultimately beholden to CCP authority at the highest levels, but the 2018 reforms will reduce the ability of lower-level Party officials to settle scores by prosecuting rivals for corruption. The new structure of anti-corruption investigations is likely to reinforce the concentration of power at the top of the party-state hierarchy.
Administrative reforms undertaken at the same time will also increase Xi’s ability to govern from the top. China’s cabinet, the State Council, has been restructured and reduced from thirty-five members to a more manageable twenty-seven. The avowed aim of this reform is to increase “the capacity for governance of the State,” and there seems to be no reason to doubt this straightforward and forthright explanation. Taken together, the removal of presidential term limits, the centralization of anti-corruption prosecutions and the streamlining of reporting channels all point toward one conclusion: Xi intends to complete the historical transition from governing China through the CCP to governing China through the state.
This is not to say that the Party is going anywhere, anytime soon. The CCP remains firmly in charge. But the structure of its rule is changing. In the not-so-distant Maoist past, the CCP dominated society in every functional domain (farms, businesses, schools, social services, etc.) and at every level, from the village to the nation. In the rapidly-emerging Xi-ist future, the CCP will dominate the central government, which will dominate everything else. The power of the CCP will remain the same, perhaps even strengthen, but the power of petty local Party secretaries will decline. It already has. The route to the top in China no longer starts in some remote local Party branch—it starts at Harvard.
Viewed through this lens, one otherwise meaningless 2018 change to the prc constitution becomes strangely telling. A seemingly gratuitous statement was added to Article 1: “The defining feature of socialism with Chinese characteristics is the leadership of the Communist Party of China.” Taken at face value, this is utterly superfluous pap. But if so, why bother, and why now? One possible interpretation is that this statement was inserted to reassert the ultimate authority of the CCP in the face of the many other changes (constitutional, administrative and economic) that have reduced the importance of the Party at all levels of Chinese life except at the very top. The amendment is a concession to the wider Party membership to reassure them that they still matter.
It also comes at a time when the Party’s core mission, social control, is increasingly being taken over by the state. China’s latest tool for repression, the infamous social credit system, almost entirely bypasses the Party bureaucracy. The CCP just doesn’t have the expertise to run a sophisticated twenty-first-century technology operation. Although some ham-fisted attempts by local authorities to encourage neighbors to spy on each other have attracted a lot of international media attention, the real organizational muscle behind the social credit system comes from internet giants like Alibaba and Tencent. They have the big data analytics capacity to integrate myriad local systems and mine them to detect behavioral patterns. And they don’t report to local Party branches—they report to Beijing.
China’s new monitoring tools, which include social scoring, algorithmic profiling of people’s online behavior, automated facial recognition at potentially millions of invisible checkpoints, and even gait recognition for those who may cover their faces and ditch their phones, are giving the Chinese government unprecedented power to control its citizens. As China moves rapidly toward a cashless (though thoroughly monetized) economy, it will soon be possible for the government to control people’s every action simply by controlling their wallets. At the first sign of trouble, protesters could lose their ability to communicate, travel or even buy food. This new and strangely impersonal form of totalitarianism won’t rely on the Party’s human informants and thugs. Artificial intelligence will be more effective at keeping people in line than human muscle ever was.
China continues to use the heavy hand of military force in the restive Xinjiang region of western China, where a million or more Uyghur Muslims and other minorities have been interred in “re-education camps.” But Xinjiang is very remote from China’s power centers, and unrest there could never threaten the CCP’s rule over China as a whole. China’s leaders are much more concerned about the possibility of urban street protests of the kind that overthrew governments in Egypt (2011) and Ukraine (2014), and it is these that the social credit system and associated big data tools are designed to prevent.
AS THE CCP passes its own centenary and starts to look forward to the 2049 centenary of the People’s Republic, it will realize that the only meaningful threat to its continued rule comes from inside. The breakup of China is sheer fantasy, but the breakup of its ruling party is a real possibility. The rapid economic growth of the reform era may not have conferred legitimacy on the CCP, but it did give the Party leadership plenty of resources with which to buy off potential opponents. When the economy was growing at 8 percent per year, every project succeeded, and everyone got rich. Now that the economy is growing slowly (if at all), party discipline is becoming much more problematic. Facing much stricter fiscal constraints than his predecessors, Xi has shifted from placating internal rivals with corrupt payoffs to prosecuting them for corruption.
In the Deng era, that would have been dangerous. A disgruntled Party faction could form around a functional or regional nucleus in the army, the heavy industrial complex or certain large provinces. Since the CCP was organized as an alliance of many such local fiefdoms, the Deng model of collective leadership—sharing the newfound wealth of the reform era—was an ingenious solution. Most of the factional leaders of Deng’s China rose from relative poverty to become multimillionaires, if not billionaires. No wonder they acquiesced in Deng’s decentralizing reforms. Inheriting a rich but stagnant economy, with looming aging and pensions crises to boot, Xi has opted to recentralize power. That strategy is likely to work as long as Xi stays healthy and keeps two strong hands on the reins. But what happens when he doesn’t?
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