China's New Team

President Hu and Premier Wen vow to help those the boom left behind

It wasn't much of a holiday for Wen Jiabao. As millions of his compatriots gathered with friends and family for a week of feasting and fireworks over the Lunar New Year in February, Wen climbed into a grimy elevator and descended 720 meters down a narrow mine shaft to spend two hours sharing a simple meal of steamed dumplings with coal miners. Such a visit during China's biggest holiday would be unusual for a Chinese official at any level. But for a man of Wen's stature -- he's China's new Premier -- it's unprecedented.

The SARS epidemic has cast a shadow over most news from China. Yet another momentous event is occurring there -- the first assertions of power by Wen and his boss, President Hu Jintao. And a hallmark of their leadership is an effort to portray the pair as in touch with the working man. After two decades of reforms that have launched hundreds of millions of Chinese into the middle class, the new leaders say it's time to focus on the problems of the billion others who barely scrape by. Hu has met with shepherds in a yurt and visited the homes of poor peasants on the outskirts of Beijing. Wen has chatted with miners, factory workers, and earthquake victims. "Poverty relief for the poor and the needy should be a high priority," Hu said in January.

The outbreak of SARS and foreign policy challenges such as the simmering crisis on the Korean peninsula could yet prove to be costly distractions for Wen and Hu. But barring a public health catastrophe, their real challenge will be to turn reformist rhetoric into action. Hu has vowed to trim unemployment, plug a yawning pension gap, and reduce the ever-widening rural-urban income divide. Just as important for the long term, he and Wen have promised to revitalize state-owned industries through privatization and to make it easier for new businesses to get started so laid-off workers or jobless farmers can find jobs in viable companies.

The challenges Hu and Wen face have dogged China's leaders for years. And whether the new team will be successful in dealing with those issues is anybody's guess. Some 150 million farmers are without work, and a third of the 27 million workers laid off from state-owned companies in the last five years haven't been able to find new jobs. The country's pension system is at least $800 billion short of what it needs to support the swelling ranks of retirees. And last year, average incomes in cities were more than three times those in the countryside, according to the World Bank. "The gap is widening," says Gao Hongbin, a top official in the agency charged with fighting poverty. "The situation is serious."

While Wen and Hu have been short on policy specifics so far, their style shows a marked change from that of their predecessors. When SARS first appeared last November, Beijing's initial response -- under the old leadership -- was to hide the problem. But since Wen personally took charge of the SARS fight in April, Chinese officials have grown a bit more forthright in their handling of the issue. As the SARS crisis develops, it may become clear whether Wen is truly committed to greater openness.

Wen and Hu spent many years in the remote, impoverished province of Gansu, which may have given them greater sympathy for those left behind by China's boom. Former Premier Zhu Rongji and former President Jiang Zemin, in contrast, were products of Shanghai and focused squarely on the reforms that boosted the fortunes of China's coastal cities. And even though Zhu wowed Westerners with his commitment to economic reform, lower-level officials in China feared his temperamental outbursts and brusque manner. Many technocrats say Zhu never really trusted the market, so he consistently pursued top-down, interventionist policies.

Wen appears far more open to dissenting voices. At the first meeting of the powerful State Council -- China's Cabinet -- that he presided over, Wen ordered government agencies to consult businesspeople and academic experts before new policies are drawn up. This policy could mean a drastic change for Chinese bureaucrats, who typically have handed down decrees after secret deliberations. Wen's order is "a big step toward democratization of decision-making," says a policymaker who oversees the securities industry -- and who is relieved at Zhu's departure. "This is a big step away from Zhu's very authoritarian decision-making style."

Hu and Wen also seem willing to base decision-making on practical results. They say they will accelerate privatization by putting many of the country's 30,000 state-owned enterprises into a new asset-management commission that will be responsible for operating them, selling them, or shutting them down. Currently, those enterprises are owned and overseen by various ministries and local authorities. With one agency in charge, it will be easier for Beijing to overcome entrenched local resistance to privatization. This is all happening under the rallying cry "Government Out, Entrepreneurs In!" A few years back, the slogan was "Seize the Big [companies], Free the Small!" Slowly, China is embracing the idea that virtually every state company must go the way of Mao's Little Red Book.

A proposed pension overhaul could be an equally radical departure from the status quo. Under the old system, factory officials typically used new pension money to pay for current retirees, but the funding gap just kept growing. So Hu and Wen are modeling their plan on a successful experiment in the northeastern province of Liaoning. There, assets were taken away from enterprises and placed in a province-wide fund that has collected almost $600 million for new pension accounts since it was launched in 2001. Now, all future pension money nationwide will be placed in regional funds or a national fund. Those will include contributions from employees and company matches, similar to U.S. corporate pension plans.

The privatization and pension reforms, in turn, are expected to help strengthen China's capital markets. Today, the country's bourses are among the world's most volatile as short-term speculators rapidly move their money among relatively illiquid stocks based on insider information. With more shares in the hands of pension funds and other institutional shareholders, money is more likely to flow to companies that will honestly seek to increase shareholder value. That, along with regulations that boost foreign share ownership, should help make the Shanghai and Shenzhen exchanges less like casinos and more like proper capital markets.

Growing income inequality. Hundreds of millions of underemployed or unemployed. A failing pension system. Hu and Wen have begun to search for innovative reforms for China's huge challenges. The question is whether they are bold and innovative enough to push through real solutions before those problems become insurmountable.

By Mark L. Clifford and Dexter Roberts in Beijing

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