Nov. 6 (Bloomberg) -- Days after Xi Jinping became chief in 2002 of Zhejiang, China’s hotbed of private enterprise, he set out on a tour of the province. His message: more capitalism.
Promoted five years later to the party’s top policy making body in Beijing, and heir-apparent to President Hu Jintao, Xi lectured students at the Communist Party’s main school, by the Imperial Summer Palace. His plea this time: more Marxism.
His ascent to the country’s most powerful position, including becoming party general secretary later this month, will put the 59-year-old in a position where he has to reconcile those opposing faces of China’s transformation. On one side are businesses and politicians calling for a revival of the market-opening policies pioneered by Xi’s father in the 1970s. On the other are powerful state-owned monopolies and local governments that prospered under Hu and resist change.
“The next administration doesn’t have a lot of time to dilly-dally,” said James McGregor, author of the book “No Ancient Wisdom, No Followers: The Challenges of Authoritarian Capitalism,” published this month. “To keep this economy going and keep this restive population happy, reform is the only answer. The party’s entire legitimacy is based on growth and making people’s lives better.”
Xi, scheduled to take over the presidency in March, may face economic growth of 7 percent in 2013, the slowest in 23 years, according to Pacific Investment Management Co., which runs the world’s largest bond fund. Standard Chartered Plc sees a risk of annual growth slumping to between 3 percent and 4 percent within 10 to 15 years without market-driven change to introduce more competition for state enterprises.
The slowdown is fueling unrest in an industrial workforce reliant on migrant labor, with a wealth gap exceeding a level analysts use to gauge potential social unrest. Add to that a rapidly aging population, a legacy of industrial pollution, widespread corruption and an escalation in territorial disputes with neighbors, and Xi is facing one of the toughest leadership transitions since Deng Xiaoping rose to power in the late 1970s.
His challenge is to build a consensus among political and industrial leaders to back policies that promote consumption and boost access to credit for small and medium-size enterprises -- goals enshrined in the government’s five-year plan -- as well as break up the state monopolies, McGregor said.
Those advocating change point to Xi’s pedigree. His father, Xi Zhongxun, gained prominence for implementing Deng’s reforms in Guangdong, turning rice paddies into industrial cities like Shenzhen and Zhuhai that underpinned three decades of export-driven growth. Xi himself helmed Fujian and Zhejiang, coastal provinces that now have economies bigger than Hong Kong’s and Taiwan’s, respectively.
“It won’t be easy, but I think he has reform in his DNA,” said Jon Huntsman, U.S. ambassador to China in 2009-2011. “I’ve been impressed with his work in the regional areas, in Fujian and Zhejiang, and he understands the marketplace and what the needs are in order to keep moving in a direction of reform.”
Xi’s father was a hero of the revolution, who helped Mao Zedong win control of China in 1949 before falling into disfavor in 1962. He regained prominence after Mao’s death in 1976, spearheading Deng’s opening of the economy as governor of Guangdong province, next to Hong Kong.
“His father was the most democratic person in the whole Chinese leadership,” said Sidney Rittenberg Sr., who was a translator for Mao and knew the elder Xi well. “I just hope some of his father rubbed off on him.”
The son spent 22 years working in provinces dominated by the private sector on the industrial east coast, where he became known for curbing bureaucracy, encouraging private enterprise and cracking down on corruption.
“We didn’t have to seek approval for every action we took, such as selecting a site for a factory,” said Zong Qinghou, who became China’s richest man by building Zhejiang-based Hangzhou Wahaha Group Co., China’s biggest seller of bottled water.
“It’s likely that Xi will change the current situation that state-owned companies are taking ground from private ones,” said Zong, whose $19.2 billion fortune puts him 34th in the world on the Bloomberg Billionaires Index. “He understands that monopolies actually weaken state-owned companies’ competitiveness.”
Even as Xi allowed private companies to prosper during his time as party secretary of Zhejiang from 2002 to 2007, state enterprises there and elsewhere in China still hold most of the advantages, such as access to cheaper capital and land. When Premier Wen Jiabao visited the city of Wenzhou a year ago, after company failures sparked a series of suicides, some entrepreneurs were paying interest of as much as 7 percent a month to illegal lenders to try to keep their businesses afloat.
By contrast, state-owned developer Wenzhou Anjufang City Development Co., set up by the local government, sold bonds to raise 1.2 billion yuan ($192 million) earlier this year at 7.65 percent annual interest. Private companies are almost completely absent from the bond market. Of the top 50 bond sellers in China this year, 49 are government units or state owned.
To rejuvenate private-sector expansion, Xi would have to implement measures to boost competition and end monopolies that would jeopardize close to 10 million “official sinecures” in state enterprises, regulatory agencies and government, said Minxin Pei, a professor specializing in China at Claremont McKenna College in California, in a March paper.
With the economy slowing and demand from China’s traditional export markets hit by Europe’s debt crisis, the cost of failing to rebalance the economy toward private enterprise and domestic consumers may be higher.
The public’s “very widespread alienation from the leadership” means “a real danger of chaos” if Xi fails to move ahead with market-driven change, said Ezra Vogel, author of “Deng Xiaoping and the Transformation of China.”
“The new leaders are very aware that their back is to the wall,” said Vogel, a professor emeritus at Harvard University in Cambridge, Massachusetts. “There’s such a strong feeling in the country that they need bold reforms and big changes and to attack corruption. A lot of high officials will have to suffer.”
That won’t be easy in a system where Xi’s power will be limited by consensus-based decision making among the party elite, designed to prevent the nation “galloping off too rapidly in one direction,” said U.S.-based Robert Kuhn, author of “How China’s Leaders Think” and an adviser to the Chinese government.
Xi’s task is complicated by rivalry within the Communist Party between the factions of Hu Jintao and former president Jiang Zemin, who will continue to wield influence even after Xi takes office, said New York-based Gao Wenqian, author of “Zhou Enlai: The Last Perfect Revolutionary.”
“You have to compromise with every group,” Gao said. “Hu Jintao hasn’t been able to achieve anything over 10 years because above him he has a supervisor, who is Jiang Zemin. But Xi Jinping will have not one but two supervisors watching over him: Jiang Zemin and Hu Jintao.”
As well as Xi and probable Premier Li Keqiang, the seven or nine members of the Politburo Standing Committee that will rule the party, and hence the country, won’t be known until the end of the 18th Communist Party Congress, which opens in Beijing on Nov. 8. Among the people on the committee, and the 25-member Politburo, are likely to be many who prospered from the current system and are resistant to change.
“When everybody had nothing back in the late 1970s, there may have been ideological resistance to reform but there wasn’t personal-property, personal-wealth resistance to reform,” McGregor said. “Now you’ve got a lot of people with millions, tens of millions and even billions of dollars riding on their position. That is an order of magnitude different.”
Xi’s own extended family has seen its fortunes skyrocket in the decade since patriarch Xi Zhongxun died. The families of two of his sisters held investments in companies with total assets of $376 million; Hong Kong real estate worth $55.6 million, including a Repulse Bay villa worth $31.5 million owned by Xi’s niece; an 18 percent indirect stake in a rare-earths company with $1.73 billion in assets; and a $20.2 million holding in a publicly traded technology company, Bloomberg News reported on June 29.
No assets were traced to Xi, or his wife or daughter, and there was no indication Xi intervened to advance his relatives’ business transactions.
China’s Gini coefficient, a measure of inequality, will stay “dangerously” high over the coming decade, said Li Shi, executive dean of Beijing Normal University’s China Institute of Income Distribution. The gauge may hover around 0.5, he said in September, exceeding the 0.4 risk level for social unrest.
In Xi’s favor is a political career that has been highlighted by his ability to gain the support of different and often opposing factions.
“We talked to a number of people in Hangzhou and other towns when he was in charge” of Zhejiang, Rittenberg said. “They really seemed to love this guy. He was approachable and had a democratic style. He listens to people. He keeps his ear to the ground and never made life hard for political opponents.”
During Xi’s time in charge of Zhejiang, the township of Zeguo in Wenling city carried out an experiment in deliberative democracy -- allowing citizens to debate how the local budget was spent, said He Baogang, a professor at Deakin University in Melbourne, who advised Zeguo’s government on the project.
At the same time, Xi’s time as vice president shows that he adheres to core Communist Party rhetoric, such as the lectures at the central party school in Beijing, which he heads, discussing the theories of Karl Marx and Vladimir Lenin.
“From Xi’s speeches it’s quite clear he takes Marxist theory very seriously,” Rittenberg said. “Not just slogans and lip service -- he tries to analyze things.”
That may help him bridge political factions within the party as well as powerful groups such as the People’s Liberation Army, said Kerry Brown, a professor at the University of Sydney.
“There’s no other leader quite like him,” said Brown, who served as a British diplomat in Beijing from 2000 to 2003. “A president able to unify a leadership facing all these problems isn’t a bad place to start.”
The duality of Xi’s political evolution can be traced back to his upbringing, which included a spell as a teenager during the Cultural Revolution.
With his father out of favor, Xi, like millions of other city residents, was sent to the countryside to learn from the peasants. Xi spent seven years in a village in Shaanxi near the Gobi desert, where even today, village homes are often caves hollowed out of the hillside to reduce the extremes of freezing winters and baking summer heat.
“The experiences from my time in the countryside have left a deep impression,” Xi said in a 2000 interview with magazine Zhonghua Ernu that was translated into English this year by the Nordic Institute of Asian Studies. “When later I have come across problems, I have never experienced them as big as then.”
His father’s democratic and reformist legacy also endured.
“Cooperation was something I learned at home as a child,” Xi said in the interview. “My father often talked about it. When you live with other people and only follow your own opinion, things will go badly.”
As China’s Cultural Revolution wound down, Xi returned to the capital, enrolled as an engineering student at Tsinghua University and graduated in 1979. By then, his father was the top official in Guangdong, and Xi entered the State Council’s Office of General Affairs and worked as a secretary to Geng Biao, General Secretary of the Central Military Commission, according to his official biography. He married Ke Lingling, daughter of China’s ambassador to the U.K., a union that ended in divorce.
Xi left Beijing once again in 1982, to gain experience in local government, taking a post in Zhengding County in the northern province of Hebei, where he became party secretary.
During this period, he made his now-famous trip to the U.S., spending time in 1985 with a family in Muscatine, Iowa, to learn how U.S. farmers grew crops and raised livestock. He returned to the Mississippi River town earlier this year, recalling how residents then were surprised he watched American movies such as “The Godfather.”
“It’s my second visit to Muscatine after a hiatus of 27 years, and all the memories of my being here are now coming back,” he said. “Coming here is really like coming back home.”
For the next 17 years, Xi rose through the party ranks in Fujian, ending up as governor from 1999 through November 2002, when he moved to Zhejiang as party secretary.
“He didn’t roll out any major specific measures,” said Zong, at Hangzhou Wahaha Group. “His rule was to just let them do business freely.”
In 2007, he spent a few months as party secretary in Shanghai before his elevation to the Politburo Standing Committee and the vice presidency.
Xi married his current wife, People’s Liberation Army folk singer Peng Liyuan, in 1987. Peng, who is now a major general, was more famous than her husband in the 1980s, when she starred in the popular Chinese Spring Festival gala on China Central Television. She’s active in anti-smoking and anti-AIDS work and is a World Health Organization goodwill ambassador for HIV/AIDS and tuberculosis. The couple has one child, daughter Xi Mingze, who is an undergraduate at Harvard.
Xi oversaw preparations for the $70 billion 2008 Olympic Games in Beijing, the showpiece sporting event designed to highlight China’s development to the world. The success of the games “further established Xi as a national leader,” Professor Zheng Yongnian and research fellow Chen Gang of the National University of Singapore’s East Asian Institute wrote in 2008.
Xi comes to power as China’s authoritarian model -- and its ability to make and swiftly implement decisions -- is running out of steam, said Tony Saich, a professor of public policy at Harvard’s Kennedy School of Government.
“The defenders of authoritarianism in the developmental phase are really beginning to reach the ends of their arguments,” said Saich, whose program to train senior and mid-level Chinese officials counts Communist Party Organization Department head Li Yuanchao as a graduate. “A lot of these policies that would be good for the country do not necessarily get through.”
An example is the property tax, which would provide a predictable revenue stream for local governments, allowing them to end reliance on land sales and expand the social safety net, Saich said. Party cadres with ties to developers are resisting moves to implement such a tax, he said.
“The men near the top in China don’t want an innovator, a reformer, a boat-rocker like Bo Xilai because their collective interest is to keep the power-elite’s boat afloat,” said Perry Link, a professor at the University of California, Riverside, who helped to translate the “Tiananmen Papers,” Communist Party accounts of the events surrounding the 1989 crackdown on protests in Beijing.
Bo, former head of Chongqing in Central China, was expelled from the party in September, on charges of abusing power.
In contrast to this week’s presidential election in the U.S., ordinary Chinese have little to do with the rise of Xi.
“All I hear is that he’s been chosen,” said Karen Shen, 36, who works in technical support for a company in her native Shanghai. “I don’t think he’ll change much. I hope they’ll allow more discussions, more freedom, more openness -- let people participate in things like voting.”
Failure to implement change could also increase protests against the government, making it more difficult to maintain order, Vogel said. “There’s even a danger that the uncertainty and turmoil could lead China to be more aggressively patriotic,” causing problems in places like the South China Sea and with China’s international relations, he said.
To follow in his father’s footsteps and revive the restructuring of China’s economy, Xi may have to spend years building his own power base at the top of the party. Should he achieve that, Xi will then show whether his years of encouraging change can be squared with his conservative Marxist rhetoric.
“There are two Xi Jinpings,” said Gao, now a senior policy adviser to Human Rights in China. “One of them is the son of Xi Zhongxun. The second Xi Jinping is a son of the party, the red empire. There will be conflicts between the two Xis.”
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