Monday, April 16, 2012


UPDATED around 12:45 on Monday.

Do you like movies or books about political intrigue?

It’s going on right now, live, big time, in China.

This is going almost uncovered in the American legacy media. Remember the point from my Why Is Macroeconomics So Hard? lecture that journalists are availability entrepreneurs? They want to make the most about developing the stories that are available. And hard news out of China is just not that available. So, this has been in the front section of the big national newspapers the last week or so, but it was spotty before then. A lot of information is leaking from microbloggers* inside China.

Is this relevant to our macroeconomics class? Who knows. So this is mostly optional: expect for 1 softball question on the exam on this topic to keep you honest.

But, might it be relevant to macro in the future, and this class next year? I’ll have to post this now, and wait and see.

The reason to watch this is that the desire for political liberalization doesn’t strike most populations until the per capita income gets high enough: in the $5-10K range. It is no mistake that the Arab Spring started in Tunisia last year: the non-oil-producing Arab country with the highest per capita income: economists had actually been watching places like Tunisia and Morocco, rather than places like Egypt or Syria — the revolution might end in Syria but it wouldn’t start there.

And, China is just below that threshold where economic well-being starts to translate into political unrest. Economists have been watching China too: this is why I posted about the World Bank’s China 2030 report in February.

So, what’s going on? Well, there’s a lot of background, so here goes.

Formal Political Background

China is not run by a dictator, it’s more of a junta: a small collection of men who collude politically. Microeconomics teaches us that collusive arrangements are not stable.

Junta’s usually break down around the time that power has to be transferred from one person or sub-group, to another. This is why it is important for successors to be clearly designated, and given a big enough power base to defend themselves.

In China, the Communist Party still runs everything, but the party is run by a group of 9 men called the Central Politburo Standing Committee of the Communist Party of China (aka, Standing Committee). A handsome group, eh:

Green Indifference_thumb Brown Indifference_thumb[2]Orange Indifference_thumb Pink Indifference_thumb Yellow Indifference_thumb Red Indifference_thumb[1] Purple Indifference_thumb[1] White Indifference_thumb Blue Indifference_thumb

The Politburo is the traditional Soviet name for the guys at the top, and this is 25 men in China. The top 9 are on the standing committee. These are selected by vote, but the only people that get to vote are those at the top of the party — the 371 people on the Central Committee (and most of the voting is by bloc, and is a done deal). Based on that vote, the members are ranked. Most of the people who move up to the top group of 9 were in the second group of 25 beforehand.

The two most powerful of those are Hu Jintao (the President and # 1) and Wen Jiabao (the Premier and # 3).

Green IndifferenceOrange Indifference

The former is the big picture guy, and the latter is the day-to-day operations guy. Basically, a Chairman of the Board, and a CEO. Chinese names are expressed with last name first, so hereafter I’ll refer to these guys as Hu and Wen.

The Standing Committee has a mandatory retirement age of 67. Positions are renewed periodically after deaths, purges, and voluntary early retirement.

The term of a particular Standing Committee is 10 years. So, every tenth year they get together and push the old guys out the door, and get some new blood in.

There’s been exactly one peaceful transfer of power this way; the last one in 2002.

And there’s one coming up this fall. So, 7 guys, including the two at the top, are going away soon.

Green SadBrown SadOrange SadPink SadYellow SadWhite SadBlue Sad

The successors are already nominally in place: current Vice-President Xi (ranked 6th) who will become President and one of the four Vice-Premiers, named Li (ranked 7th) who will become Premier. Maybe.

Red HappyPurple Happy

But, these two guys need to make sure that they get 7 new guys that will support them.

Informal Political Background

There are no independent political parties in China. But, there are factions, and figuring out the factions can give some insight. The problem is that there are two definitions of factions out there.

The first factional definition focuses on power base. The two factions are the “Crown Prince Faction” and the “Communist Youth League Faction”.

The Crown Prince Faction (aka The Princelings) is composed of the children of the old guys who were in power in the 1980s. In turn, those old guys were often generals or top party officials under Mao going back to the 1920s. They fought in the Civil War, World War II, the Revolution, and the Korean War. This faction has used their power base to get filthy rich.

The Communist Youth League Faction is composed of people who joined the party as teenagers, and worked their way up.

The old guys, Hu and Wen, are both from the Communist Youth League Faction. Li is also from the Communist Youth League Faction.

Green IndifferenceOrange IndifferencePurple Indifference

But, Xi is from the Crown Prince Faction.

Red Indifference

The Crown Prince Faction is composed of about 250 people, many of whom are on the Central Committee (of 371)

The other way to break down the politics is to focus on the political choices they make: populist or elitist. Again, there are two breakdowns, but they line themselves up a bit differently.

The “Populist Coalition” looks to make overall life better across China, and wants to reduce social unrest. It dominates the interior provinces. This coalition is about 25% of the Central Committee.

The “Elitist Coalition” is based in the richer provinces on the coast. It is focused on exports and making money.

The old guys, Hu and Wen are both populists. So is Li.

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But, Xi is an elitist.

Red Indifference

Because of these decade long regimes in power, each group is called a generation. The outgoing guys are 4th generation and are populist. The 3rd generation guys were all elitist. The new guys, Xi and Li, are 5th generation. They have split: Xi is part of the Elitist Coalition and the Crown Prince Faction, while Li is part of the Populist Coalition and the Communist Youth League Faction. They may not get along, and Li doesn’t have Hu and Wen to back him up anymore:

Red Indifference Purple Indifference

The guys in this generation have been jockeying for position for decades and the finish line is in sight. If they screw up now, it may have all been a waste.

On top of all this, there are also regional cliques based around major cities, like Shanghai, or amongst alumni of the same school, as in the Tsinghua University clique.

Regional Background

So, what’s happened?

More details …

Chongqing is one of the largest and poorest cities in China. It was part of Sichuan province: big, poor, and interior. Chongqing is big enough that it was made independent of Sichuan.

Think: Houston and Texas, but Houston got made into its own state.

Chongqing has a lot of corruption. This is where work for the Three Gorges Dam (one of the largest construction projects in world history, and a huge environmental disaster) was based.

A couple of years ago, one of the group of 25, Bo, was put in charge of Chongqing and told to clean it up.

Black Indifference Bo is part of the Crown Prince Faction but is a fencesitter between the Elitist and Populist Coalitions. If you’re cynical, you’d probably think he is populist because it is politically helpful to him, rather than out of any personal affinity to that position.

His methods were brutal even by Chinese standards: mass arrests, torture, and execution.

Clear(blk) MoustacheThe dirty work was done by Wang Lijun, Bo’s police chief. But, it’s worked, so Bo was popular. Bo was expected to move up to the top group of 9 this fall.

Black Wink He is too old to eventually be at the top of the heap, but closer to the top of the pyramid is always better, right?

Bo’s successes have been a big plus for the Crown Prince Faction.

Bo is married to Gu, a lawyer and minor celebrity in China.

Black Kiss She is also from the Crown Prince Faction. Both families are fabulously wealthy … from connections.

And they had a British expatriate named Heywood in their entourage who has been helping them out for about 20 years. He was married to a Chinese woman and had lived in China for most of the last 25 years.

Rainbow Happy Heywood helped Bo and Gu get their kid into a prestigious English boarding school, and eventually graduate school at Harvard.

Black IndifferenceBlack KissBlack CoolRainbow HappyClear(blk) Moustache

Gu also apparently holds a residency card for the UK (a real no-no if you’re part of corrupt operation, because it “gives you an out” that others don’t have). The son, Bo Guagua has not lived permanently in China in 10-15 years (but dated John Huntsman’s daughter when he was in Beijing).

The Blow-Up

Now the gory details.

Two months ago, Bo’s police chief Wang, fled to Chengdu — the capital of Sichuan.

Black AngryHe showed up at the American Consulate and asked for asylum to get away.Clear(blk) Moustache

This is like fleeing from Houston to Austin, and asking the Canadian Consulate to save your butt.

Wang was chased by 70 police cars, and there was a Mexican standoff outside the American Consulate between the Chongqing police loyal to Bo, the local Sichuan/Chengdu police, and national authorities loyal to the Standing Committee.

Wang spilled all the beans, but was denied asylum because he’s a thug — and how would they get him out of there anyway?

So, the Americans pushed Wang out the door, where he was picked up by the national authorities. He’s disappeared —

Clear(blk) Embarrassed out of sight for two months now. He’s undergoing “vacation-style† medical treatment”.

Wang alleged that Gu was nuts, she may have had an affair with Heywood, she put too much pressure on Heywood, he screwed up, and Bo had him poisoned.

Rainbow Sad Heywood had been found dead in a hotel room in Chongqing last fall, and was cremated without an autopsy. He had warned friends that he was in big trouble, and may have secreted sensitive documents outside China. This did not become news until Wang fled to Chengdu.

No one knows why Wang cracked and fled. But, you’ve got to think that if you’re a nationally known police officer getting chased by guys who are supposed to report to you that he must have feared for his life.

The handwriting was on the wall in February: Bo was in big trouble.

Black Sad Then last month there were rumors that a coup was suppressed in Beijing. It now appears this may have been true, and put on by supporters of Bo (Princelings?). Other reports suggest that Bo called in his Army friends for his own protection, but was not staging a coup.

Bo has now been removed from power. Bo and Gu have been arrested and charged with murder.

Black EmbarrassedBlack EmbarrassedThey have not been seen for days.

It looks like the Standing Committee has united and decided that these folks have to be pushed overboard. But, how does that work when Bo has connections?

Oh … and there have been nationwide internet outages sporadically. You don’t think this has to do with information control, do you? Certainly those coup rumors were squashed. Either way, the telecom companies have stated publicly that the outages are not with their equipment.

The bottom line of all of this is that it’s a bit like an auto race when parts start to fly off cars: you know something bigger might happen soon. This may turn out to be nothing. Or maybe not. Stay tuned. Here’s The Financial Times view from just this morning. And don’t forget about what I said: as an economist, you need to watch China as prosperity pushes liberalization.

P.S. The son, Bo Guagua, holed himself up in his $3K/month condo in Boston.

Black CoolLast Thursday, after reporting that he was under surveillance by unknown Chinese nationals, he was removed by uniformed security to a helicopter. It is believed he may have defected.

* I learned something interesting about China this past month. Microblogging (like Twitter) is a much bigger deal there because the 140 character limit allows for much greater information content when you are choosing from 5K Chinese idiograms than from our 26 letters.

† The comedian George Carlin frequently picked on the usage of euphemisms to cover true meanings. One of the points he made that when you hear the word “style” appended to something, it usually means that the something is actually absent. I’m channeling Carlin here a bit, and he used to swear a lot, so what he would have said is that “vacation-style” means no f***ing vacation.

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