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WALL STREET JOURNAL
The Whiplash of Xi Jinping’s Top-Down Style
Impulsive decision-making jars China, investors as ‘Chairman of Everything’ does away with consensus
By Andrew Browne SHANGHAI—For financially distressed local governments across China, Beijing’s recent Circular No. 62 landed as a bolt from the blue. It instructed them to unwind tax and other incentives that made it worthwhile for foreign businesses to locate to their areas. Some investors, including China’s largest foreign employer, Foxconn, the Taiwan-based assembler of iPhones and iPads, froze their expansion plans. Others threatened to pull out. Already strapped for cash as the economy slows, local governments panicked. Amid an uproar, Beijing backed down. The State Council yanked the edict and replaced it with one that scraps future investment incentives while leaving existing giveaways mostly intact. The debacle dramatically underscores a new change of direction in the governance of China under President Xi Jinping. Decision-making has become top-down, more rushed and far less predictable. Many outsiders have always believed that China operates a Stalinist-style command system that doesn’t wait around. But that’s far from the case. The system in place since the Mao era has been marked by extensive deliberation across the bureaucracy, step-by-step experimentation and a high degree of give-and-take between Beijing and the provinces. The benefit of that approach was that once policy was formulated, it tended to stick. Policy reversals, such as the one over the tax inducements, were extremely rare. That episode “begs the question of how thoroughly the original circular was vetted in the first place,” says Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai. For Scott Kennedy, an expert on Chinese industrial policy at the Center for Strategic and International Studies in Washington, the tax about-face illustrates the “radical centralization” under way in Mr. Xi’s China. Mr. Xi is in a hurry to overhaul the economy. His predecessor, Hu Jintao, was a ditherer who put off economic reforms needed to get the economy on a sustainable track, one driven by consumption rather than investment. Under Mr. Hu’s watch, local governments spun out of control, amassing mountains of debt with lavish spending on infrastructure while inflating a real-estate bubble. To break the gridlock, Mr. Xi is concentrating power at the top, especially in his own hands. The scholar Geremie Barmé, the director of the Australian Centre on China in the World at the Australian National University, dubs Mr. Xi “the Chairman of Everything.” That’s not too much of an exaggeration. Mr. Xi has amassed extraordinary personal control by installing himself as head of the most important “Leading Small Groups” in the Communist Party that set policy. Among them are committees in charge of economic and military reform, internal and external security, cyberspace and finance. Where committees didn’t exist for Mr. Xi to exercise his authority, he’s invented new ones. And he’s clamped down on groups and individuals that might question his decisions—bloggers, nonprofits, rights lawyers and others. All this has led to a series of jarring policy decisions, followed in several cases by messy retractions. Foreign investors have felt the whiplash effect. For instance, recently proposed rules on banking technology would force foreign suppliers to turn over proprietary software source code and encryption keys—requirements so onerous that, if implemented, they likely would drive some foreign players out of the market. After an outcry from U.S. and other trade officials, those requirements appear to have been put on ice. Western chambers of commerce are up in arms over a restrictive draft law on foreign nonprofits so sweeping it could limit the ability of multinationals to tap NGO expertise, and even to conduct community activities. Western lawyers who’ve studied the legislation say that what surprises them isn’t just its harshness (henceforth, all NGOs will be under police control) but its technical clumsiness. It looks to them like a rushed job. Mr. Xi’s impulsive style is also evident in foreign affairs, including the South China Sea where tensions are rising as China dredges tiny coral reefs to create military fortresses in waters it disputes with a handful of neighbors. For years, say diplomats, China’s behavior in that area fit a pattern: Vietnam or the Philippines would take provocative actions and China would respond. It generally didn’t pick fights, although when it waded in it did so with disproportionate force. Then, in May last year, China sent a massive oil drilling rig into waters disputed with Vietnam. Hanoi was shocked. It had done nothing, apparently, to trigger the move that sparked deadly riots against Chinese-owned businesses, and although China has tried to repair the diplomatic damage, Vietnamese foreign-policy analysts say Hanoi now regards Beijing with new wariness. So do other actors, both foreign and domestic, that deal with a more confident but less reflective Chinese leadership. Mr. Kennedy warns that Mr. Xi’s approach will eventually lead to “a wobbly road of problems.” More than two years into Mr. Xi’s administration, we’re a long way down that trail. In provincial governments, it seems, some officials are already nostalgic for the days of consensus.
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