Why China's Nervous Leaders Are Cracking The Whip

In the interior Chinese city of Xian, it is now routine for squads of soldiers to show up at local elementary schools. They assemble the students and drill them in marching and other military skills, while leading them in praise of the Communist Party and the 3.2-million-strong People's Liberation Army. Such indoctrination sessions, which were rare until recently, sometimes last as long as 10 consecutive days.

The raised profile of the PLA in China's provinces is just one sign of a tougher line by Beijing on everything from domestic dissent to religion to foreign trade. The latest indication of this trend was the Jan. 16 announcement that within the next three months, such providers of electronic financial information as Dow Jones, Reuters, and Bloomberg would have to have their products distributed and screened by the official Chinese news agency, Xinhua. In announcing this big shift, Xinhua said the government will punish companies that release reports that contain information "forbidden by Chinese laws or [that] slanders or jeopardizes the national interests of China."

TOP DOGS. While this move is undoubtedly partly motivated by Xinhua's complaints that its business was threatened by foreign competitors, the step is a sign of the insecurity of China's leaders as 91-year-old Deng Xiaoping fades from the scene. When healthy, Deng was strong enough to do just about anything he wanted. But hand-picked successor President Jiang Zemin feels he has to pay court to the increasingly influential hard-liners. China's top dogs are growing worried that the last four years of freewheeling growth have taken too much power away from the central government. They are scrambling to regain control through pandering to the military, cracking down on dissent, and strengthening macroeconomic restrictions.

Not just foreign news agencies but Western investors that have plunked down billions in China in recent years could start feeling the chill winds of China's new conservatism. Fearful that multinationals are grabbing too much market share in key industries, the resurgent State Planning Commission is preparing tough industrial policies that would restrict foreign equity and require greater technology transfer and exports in sectors ranging from consumer electronics and telecommunications equipment to automated machine tools.

China's ambitions to join the fledgling World Trade Organization could also be sacrificed. Even though Beijing is slashing import tariffs and insists it wants to join the WTO immediately, China is making other moves that suggest it's willing to push back that goal indefinitely. One reason may be that Washington is setting very tough conditions for China's membership. "China's leaders have decided the price of joining the WTO is just too high," says Nicholas Lardy, a specialist on China's economy at the Brookings Institution in Washington. "Opening up sectors as rapidly as the West has demanded would hurt the state-owned industries too much."

It is not yet clear how tight the controls on financial information will be. So far, Xinhua hasn't released many details. A lobbying campaign by international media and domestic financial institutions could persuade Beijing to water them down. The Xinhua power play has local companies complaining as well as foreign ones. "We're very concerned about whether we will still be able to get information freely and in a timely fashion," says a Beijing securities official.

But Beijing officials now seem willing to take the risk of stunting their financial markets' development. China's tone is very different from what it was a few years ago, when Deng gave his blessing to a huge shift to freer markets. Recently a Chinese-backed Hong Kong paper went so far as to run a story blasting the policy of high-speed growth in the coastal provinces during the early 1990s as "crazy."

The shift toward conservatism doesn't seem likely to stop anytime soon. It is being accompanied by a marked growth in military influence. The generals are getting a bigger slice of the budget than before and have certainly contributed to Beijing's tougher approach--especially on the Taiwan issue. The military also seems increasingly suspicious of Washington. It believes the U.S. is pursuing a policy of containing China. PLA leaders frequently use the cold-war phrase "hegemonism" when criticizing American actions. The military doesn't mind Jiang's slowing down reforms or harping on "social stability." After all, a government that emphasizes military virtues such as patriotism and order is bound to give the PLA much of what it wants.

But the big question is what sort of toll this conservatism is going to take on the economy. At the moment, the hard-liners have the reformers on the defensive, but one wonders what will happen if China's markets start tanking or investment flows drop. Should influential Chinese start to suffer, the winds could shift again.

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