How Zhu's Foes Could Undermine His Reforms

It was proof of Zhu Rongji's key role in China's reform--but also a reminder of how shaky his future may be. When rumors spread that the tough-talking Premier had offered his resignation on June 30, markets in Hong Kong, Shanghai, and Shenzhen tumbled.

The bourses recovered after Beijing denied the rumor. But the fear remains that China's cadres are waging an internal power struggle over Zhu's handling of the economy. As the pain of Zhu's reforms deepens, his enemies are multiplying. Even President Jiang Zemin, usually Zhu's backer, is sending hostile signals. One day after the Zhu resignation rumors, Jiang gave a speech lauding the Communist Party and attacking the idea of privatizing state enterprises. "That's part of the repositioning of Jiang," says one Western diplomat in Beijing. "It's a message of support to the right that Zhu can't like."

SANDBAGGING. For now, it's unlikely Zhu's opponents could oust him from office. For the last decade, the Chinese have avoided purging high officials. And dumping Zhu would trigger very bad press as China approaches Oct. 1, the 50th anniversary of the founding of the People's Republic. The bigger risk is that Zhu's enemies could marginalize him by sandbagging further efforts at reform.

The anti-reformists have already found a forum: a resurgent National People's Congress headed by ex-Premier Li Peng, who favors a go-slow approach on restructuring the economy. Many provincial representatives in the NPC, who resent Zhu's efforts to centralize power and taxing authority, back Li. Political observers say conservative NPC members are calling for Zhu to testify about the bombing of the Chinese embassy in Belgrade by U.S. fighters. In another salvo, the NPC has accused the State Council, headed by Zhu, of corruption within its many ministries.

Anti-reformists want to prevent a repeat of Zhu's personal diplomacy in April, when he offered the U.S. sweeping trade reforms to qualify for entry into the World Trade Organization. The NPC is now calling for future WTO terms to be first debated within its chambers. That could force Zhu to backtrack even more on his offer and kill any chance of China's entering the body soon.

Zhu is still intent on reforming state companies and opening the economy more to foreign investment. But the opposition is making things tougher. Afraid of appearing conciliatory, Zhu had to join the rest of the leadership in rejecting U.S. explanations of the Belgrade bombing incident. Emboldened, the conservatives are taking a harder line on U.S. plans for a missile defense system for Asia, the U.S.-Japan security arrangement, and policy toward Taiwan. The atmosphere makes it "difficult to advocate policies that require compromise with the U.S," admits one senior American official in Washington.

The struggle between Zhu and his rivals will intensify. In late July, the annual party retreat at the seaside resort of Beidaihe takes place. There, Zhu will try to rally support, while Li and others will work to undermine him and his policies. Later in the fall, grassroots opposition to reform is likely to spread. Already, rumors are sweeping Beijing that more than 10 million people will be laid off from ailing state enterprises in the months following the Oct. 1 celebrations. True or not, such rumors could stir up ire against Zhu.

Zhu isn't likely to give up easily: He recently spoke out against corruption and mismanagement surrounding the construction of the Three Gorges Dam, Li Peng's pet project. The feisty Zhu can still take the offensive. Trouble is, his opponents can, too.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE