China's Next Boss Has Some Capitalist Cred

Xi Jinping ran a province that’s a showcase for private enterprise in China

Zhejiang province is home to some of China’s most successful entrepreneurs, such as Zong Qinghou, a soft-drink merchant, and Li Shufu, founder of automaker Geely International. Many of the province’s business owners pride themselves on succeeding without much help from the government.

For five years the coastal province, with its population of 54.4 million, was also the place Xi Jinping called home. Xi, 58, served as top official of Zhejiang from 2002 to 2007 and is set to become the Communist Party’s general secretary later this year. In March 2013 he’ll likely assume the Presidency.

The province’s capitalist spirit rubbed off on Xi, says local billionaire Lu Guanqiu, whose Wanxiang Group makes auto parts. “When Xi becomes general secretary, he’ll be even more open and will pay even more attention to private enterprise and the people’s livelihood,” says Lu. “It’s because he was in Zhejiang for five years.”

President Barack Obama will get to probe Xi’s character and philosophy firsthand when the Chinese Vice-President visits the White House on Feb. 14. Xi will also travel to California and to Iowa, a state that made “a very deep impression” on him when he visited in 1985, Chinese Vice Foreign Minister Cui Tiankai told reporters in Beijing on Jan. 9. Xi stayed with a family in Muscatine, a town on the Mississippi River.

Xi’s rise to power comes amid questions about China’s commitment to capitalism. “We continue to be concerned both in terms of what’s happening in China, where the movement toward a market economy seems to be pretty much stalled, and in terms of what state-owned enterprises will be able to do in markets like the U.S. or Europe or Africa,” says Christian Murck, president of the Beijing-based American Chamber of Commerce in China. The creeping power of state companies, called guojinmintui, meaning “the state advances and the private sector retreats,” even touches Zhejiang. In 2010 privately held Gonow Auto, which manufactures in Zhejiang, merged with state-owned Guangzhou Automobile Group in a government push to consolidate the industry.

U.S. diplomats have kept an eye on Xi, son of a Vice-Premier and husband of Peng Liyuan, a famous folk singer who also holds the rank of major general in the army (you read that right). In a 2007 cable disclosed by Wikileaks, then-Ambassador Clark T. Randt Jr. described a dinner he hosted for Xi, who told Randt that Zhejiang had achieved prosperity with more equality because “it is an economy of the grass roots—the common people choose their own development paths.” He also revealed his taste for U.S. movies, singling out Saving Private Ryan as a favorite.

Zhejiang has the smallest gap between rural and urban consumption of any of China’s 31 provinces, municipalities, and autonomous regions, according to the National Bureau of Statistics. Farmers in Zhejiang have, on average, the biggest homes anywhere in China, and the province ranks fifth in per capita gross domestic product. In Zhejiang, Xi met merchants who would fit well in the U.S. Republican Party. “Rich people are investing their money, creating more jobs,” soft-drink baron Zong Qinghou told reporters last March. “If rich people all get killed, nobody is going to invest or build factories. There will be no jobs.”

As provincial boss, Xi simplified registration for new companies, made it easier for private corporations to get bank loans, overhauled how companies identified prospective workers, and strengthened the protection of private property, says Wanxiang’s Lu, who plans to accompany Xi on his American visit.

Some, like the American Chamber’s Murck, say running China is not like being boss of capitalist Zhejiang. Xi now heads the Communist Party’s main school and regularly makes speeches steeped in Marxist rhetoric. As President he will have to accommodate not only Zhejiang capitalists but also the state-owned companies—many, such as China Mobile and China Petroleum & Chemical, based in Beijing. “Of course Zhejiang is more progressive,” says Lien Chan, former Vice-President of Taiwan, who met Xi in Zhejiang and in Shanghai. “But you also have relatively less advanced provinces and areas. It’s hard to strike a balance.”

One of the biggest challenges Xi will face is overhauling the financial system. The top four banks, all state-controlled, extend billions in credit to the giant government-backed corporations as well as provinces, counties, and cities. Many private entrepreneurs, meanwhile, must borrow at exorbitant rates or go without any credit at all. Even in Zhejiang, famous for its nonbank financing system, business has been starved for cash, resulting in a credit crunch last year that led to government intervention.

Economists who study the province’s relatively equitable income distribution say the “Zhejiang model,” which stresses small and medium enterprise, offers a possible solution to rising social unrest caused by a widening wealth gap. “Zhejiang is my source of hope for China,’’ says Fred Hu, who was China chairman for Goldman Sachs before founding Primavera Capital Group. “It is the most freewheeling province in China, and Xi’s firsthand knowledge will help him make economic policy.”


    The bottom line: Xi Jinping, China’s probable next President, has spent years working with self-made entrepreneurs in Zhejiang.

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