China’s Decision Making System

It may sound strange to begin a book about the Chinese financial system with a description of the decision making system, but in China, everything is “political”. Politics and economics are one and the same thing. There is no Chinese wall between the State and the market, as is customary in a market economy. The decision making system is not transparent, which makes it difficult for the markets to work properly. According to the Constitution, China is a centralized one-party system. The Chinese Communist Party (CCP) controls directly or indirectly everyone and everything. But if the Party is powerful, it is not limitless: it generates counter-balances from within the Party and the State apparatus. Central government action is limited by the sheer size of the country and the population: 1.3 billion people scattered over 6 million square miles. The Party-State has to cope with a multi-layered bureaucracy: provinces, county, districts, towns, villages. Some towns are so large that they form a single autonomous unit (Beijing, Shanghaî, Chongking). The Party secretary of a province is much more influential than a minister based in Beijing. In theory, the flow of instructions goes down while the flow of information goes up, but the Centre must come to terms with the passive resistance of local levels and inaccuracy of the information. The deadly famine of the Great Leap Forward in the 1960s was caused not only by Mao’s megalomania, but also by the flow of reports channelled from local officials to the top, each one outbidding the lower one throughout the upper level. Although 95% of the Chinese population belongs to the Han ethnic group, the Chinese do not understand each other and have to rely upon a common language, Mandarin. Local idiosyncrasies are very strong. Local dialects, regional patrons, family links are alternative sources of power. A Party official appointed in a remote area has to cope with local powers and local leaders whom he does not understand. In any case he expects to be moved to a new appointment within two or three years. The central government is also limited by the bureaucracy at both the central and local level. Any company manager must come to terms with the overwhelming network of 80 million civil servants and as many party members (even though some are both). Any private entrepreneur has to rely upon a wide network of “friends” (nanxin) to set up daily bureaucratic problems. Government offices are overlapping and often compete with each other. Party-State control is indeed much “cleverer”, much more flexible than it used to be. Market mechanisms are more widely understood. Officially the Planning Administration has been over since 1992, but the powerful NDRC (National Development and Reform Commission), which took its place, interferes in any economic decision. Last but not least, in a totalitarian government, the rule of law is by definition meaningless. The corpus of law and regulations is not designed to rule everyone including the State and the Party, but to protect the Party leadership. Legal interpretation is unpredictable and differs from one place to next.