The_Broken_China_Dream_How_Reform_Revived_Totalitarianism_-_Minxin_Pei

-- 1 of 345 -- t h e brok e n ch i na dr e a m -- 2 of 345 -- -- 3 of 345 -- The Broken China Dream how r e for m r e v i v e d tota l i ta r i a n ism m i n x i n pe i pr i nce ton u n i v er sit y pr e ss pr i nce ton & ox for d -- 4 of 345 -- Copyright © 2026 by Princeton University Press Princeton University Press is committed to the protection of copyright and the intellectual property our authors entrust to us. Copyright promotes the progress and integrity of knowledge created by humans. Thank you for supporting free speech and the global exchange of ideas by purchasing an authorized edition of this book. If you wish to reproduce or distribute any part of it in any form, please obtain permission. Requests for permission to reproduce material from this work should be sent to permissions@press. princeton.edu Published by Princeton University Press 41 William Street, Princeton, New Jersey 08540 99 Banbury Road, Oxford OX2 6JX press. princeton.edu GPSR Authorized Representative: Easy Access System Europe - Mustamäe tee 50, 10621 Tallinn, Estonia, gpsr.requests@easproject .com All Rights Reserved ISBN 9780691223339 ISBN (e-book) 9780691223346 British Library Cataloging-in-Publication Data is available Editorial: Bridget Flannery-McCoy, Dave McBride, and Alena Chekanov Production Editorial: Ali Parrington Jacket Design: Ben Higgins Production: Erin Suydam Publicity: James Schneider and Kathryn Stevens Copyeditor: Anita O’Brien This book has been composed in Arno Printed in the United States of Ameri ca 10 9 8 7 6 5 4 3 2 1 -- 5 of 345 -- To Larry Diamond -- 6 of 345 -- -- 7 of 345 -- con t e n t s List of Abbreviations ix Introduction 1 1 The Decisive Decade 15 2 Reform and Growth in the 1980s 45 3 Building Neo-Authoritarianism, 1992–2002 74 4 Stagnation in the Hu Jintao Era 101 5 China’s Economic Miracle 132 6 Revival of Totalitarianism Under Xi Jinping 164 7 End of the Chinese Economic Miracle 192 8 From Engagement to a New Cold War 222 Conclusion 253 Acknowl edgments 261 Notes 263 Index 309 -- 8 of 345 -- -- 9 of 345 -- ix a bbr e v i at ions A2/AD anti- access/area denial ADIZ Air Defense Identification Zone AIG American International Group BOT build-operate- transfer (model) BRI Belt and Road Initiative BRICS Brazil, Russia, India, China, and South Africa CCP Chinese Communist Party CCTV China Central Television CDIC Central Discipline Inspection Commission CMC Central Military Commission CNKI China National Knowledge Infrastructure CYL Communist Youth League DPP Democratic Progressive Party EPZ export processing zone EU European Union FAO Food and Agriculture Organization FDI foreign direct investment FTO foreign trade organization GATT General Agreement on Tariffs and Trade GFC global financial crisis HDI Human Development Index ICF China Integrated Circuit Industry Investment Fund ICOR incremental capital output ratio ILO International Labour Organization IMF International Monetary Fund IPO initial public offering KMT Nationalists (Kuomintang) LGFV local government financing vehicle MFN most-favored nation -- 10 of 345 -- x L i s t of A b b r e v i a t ion s MOFERT Ministry of Foreign Economic Relations and Trade MPS Ministry of Public Security MSS Ministry of State Security NCW new cold war NPC National People’s Congress ODA Official Development Assistance PAP People’s Armed Police PAP People’s Action Party (Singapore) PBOC People’s Bank of China PLA People’s Liberation Army PPP purchasing power parity PRC People’s Republic of China PRI Institutional Revolutionary Party (Mexico) PSC Politburo Standing Committee ROC Republic of China SAIC State Administration for Industry and Commerce SARS Severe Acute Respiratory Syndrome SASAC State Asset Supervision and Administration Commission SCO Shanghai Cooperation Organisation SED Strategic Economic Dialogue SEZ special economic zone SOE state-owned enterprise SPP Supreme People’s Procuratorate TFP total factor productivity TPP Trans-Pacific Partnership TVE township and village enterprises UNDP United Nations Development Programme UNHCR United Nations High Commissioner for Refugees UNICEF United Nations Children’s Fund WEP World Education Program WTO World Trade Organization ZGTJNJ China Statistical Yearbook -- 11 of 345 -- t h e brok e n ch i na dr e a m -- 12 of 345 -- -- 13 of 345 -- 1 Introduction the closing ceremony of the 20th National Congress of the Chinese Com- munist Party (CCP) on October 22, 2022, was supposed to be a festive occa- sion celebrating Xi Jinping’s unprecedented third term as the party’s general secretary. But something evidently went awry. Xi’s predecessor, former party chief Hu Jintao, then 80 years old, was escorted off the podium, apparently against his will. The more than 2,300 delegates to the congress stared in stunned disbelief while Xi and the other top party leaders seated with Hu sat expressionless, pretending not to notice what was widely seen as an act of public humiliation of a former party chief. What exactly happened remains a subject of fevered speculation. The most plausible explanation is that Hu noticed in the file given to him that his protégé and two-term member of the Politburo, Hu Chunhua (no relation), was not on the list of members to be appointed to the new Politburo, even though he was only 59 years old and had more experience than most other members of the Politburo. As Hu Jintao likely had not been notified of this last-minute change, he probably wanted to ask those seated around him (Xi Jinping sat to his right) why Hu Chunhua had been dropped from the Politburo. Apparently, this was too much for one of Xi’s closest loyalists, Li Zhanshu, a retiring mem- ber of the Politburo Standing Committee. Li seized the file from Hu Jintao while Xi summoned an aide and appeared to instruct him to remove Hu from the podium.1 This incident, unanticipated by Xi as it may have been, nevertheless serves as a fitting marker of the total political dominance he had attained since be- coming CCP chief in November 2012. During his decade in power, he had dismantled the political order constructed by his predecessors and had revived the central elements of totalitarianism: personalistic rule, a cult of personality, permanent purges, stifling social control, ideological indoctrination, and an -- 14 of 345 -- 2 I n t r oduc t ion aggressive foreign policy. The reinstitution of fear as a vital instrument of rule can be seen in a long list of acts previously thought to be inconceivable in the post-Mao era: the mass incarceration of millions of members of ethnic minori- ties (mostly Uighurs) in Xinjiang in the second half of the 2010s; the unilateral imposition of a national security law on Hong Kong in July 2020 that all but ended the “one country, two systems” governance model in the former British colony; the ferocious crackdown on civil society, the press, and social media that has raised repression to its worst level in the post-Mao era. Within the regime, Xi made himself the most powerful—and most feared— Chinese ruler since the death of Mao Zedong in 1976, largely by deploying the tactics of the permanent purge and monopolization of decision-making power favored by totalitarian leaders. By the time he ordered that Hu Jintao be es- corted off the podium, Xi had broken nearly all the norms and rules estab- lished by the party in the post-Mao era, including collective leadership, term limits, mandatory retirements, and security of political elites. (By late 2022, Xi’s decade-long war on corruption had led to the investigation of 4.6 million party members, including more than 500 “centrally supervised” officials and more than 200,000 mid-level and local officials. About one in eight full and candidate members of the Central Committee had been investigated, prose- cuted, and imprisoned.)2 The day after his display of raw political power in front of the officials who ran the country, the Central Committee duly elected Xi as general secretary for another five-year term, breaking the unwritten two-term limit and effec- tively making him the first lifelong ruler since Mao Zedong. The return of a neo-totalitarian ruler and practices reminiscent of Stalinism was scarcely imaginable four decades earlier when survivors of Mao’s Cultural Revolution had regrouped in Beijing to salvage a regime traumatized by its self-destructive policies. Prominent among them were Deng Xiaoping, who had the distinction of being purged thrice by the party (twice by Mao), and Chen Yun, another veteran revolutionary and the party’s most respected eco- nomic planner. Although Deng and Chen would later clash over economic reform, they shared the same goal of restoring collective leadership and pre- venting the rise of a Mao-like figure who could again terrorize the party. They pushed through a series of reforms enshrining the principle of collective lead- ership, prohibiting the building of a personality cult, and introducing the prac- tice of mandatory retirement and term limits. In addition to such efforts to steer the party away from its totalitarian past, the party in the early 1980s also boasted liberal-leaning incumbent leaders -- 15 of 345 -- I n t r oduc t ion 3 running its day-to-day affairs (even though Deng and Chen would still call the ultimate shots). Hu Yaobang became party chief in June 1981 after Deng and Chen forced out Hua Guofeng, a transitional leader credited with the coup that led to the arrest of Mao’s widow and three other radicals in early October 1976. Hu Yaobang oversaw the party’s routine administration for the next five and half years and played a pivotal role in drafting some of the party’s historic documents in the 1980s. On the economic side, Zhao Ziyang, the premier, worked tirelessly to turn Deng’s vision of “reform and opening” into a reality. The reformist duo was instrumental in nudging the party in a kinder, gentler direction. Indeed, before Deng ordered the Chinese military to crush the peaceful prodemocracy protests in Beijing on June 4, 1989, China had ex- perienced the most open and free decade in the post-1949 era. Hopes that China would continue to evolve into a more prosperous and open society did not die even after the brutal suppression of the protesters in Beijing in June 1989. The collapse of the Soviet Union in December 1991 led Deng to launch his final attempt to revive the country’s economic revolution in early 1992, as he knew that the CCP, like the former Soviet Union, would also lose legitimacy if it failed to deliver a better standard of living for the Chinese people. During the following two decades, modernization on an unprecedented scale in human history completely transformed China, even though the party retained its power and continued to resist political liberalization. For those believing that growing economic prosperity and integration with the West through trade and investment would increase the odds of bringing democracy to the country, democratization through economic modernization seemed a feasible route for China in the post-Tiananmen era. In the twenty years be- tween Deng’s tour of South China in 1992 that reignited the economic reforms and the installation of Xi Jinping as the new party chief in late 2012, the Chi- nese economy grew at an average of 10 percent each year.3 Per capita income measured in purchasing power rose nearly tenfold, from 1,262 purchasing power parity (PPP) to 11,169 PPP, during the same period.4 In 1992, only 27.5 percent (or 322 million) of the population lived in urban areas. By 2012, 52.6 percent (or 712 million) of the population were urban residents.5 The Chi- nese population had also become better educated. In 1992, 604,000 people graduated from college. In 2012, 6.24 million people graduated from college, representing a tenfold increase.6 The globalization in the post–Cold War era helped make China an integral part of the global economy and also the world’s largest manufacturing power. Between 1992 and 2012, more than $1.2 trillion -- 16 of 345 -- 4 I n t r oduc t ion in foreign direct investment (FDI) flowed into China, and foreign merchan- dise trade increased from $136 billion to $3.867 trillion.7 Before the rise of Xi, few could have imagined that a country that had made such tremendous progress through economic development and globalization could restore totalitarian rule at home and precipitate a new cold war with the West. Tragically, that is exactly what has happened. By the time that Xi effec- tively became China’s new lifetime ruler, he not only had revived totalitarian rule at home but also had implemented an aggressive foreign policy that even- tually contributed to the collapse of Sino-American relations and the rise of a new cold war. What Happened? No single theory in the existing social science literature can fully explain the revival of totalitarian rule in China despite decades of transformative socio- economic modernization, the immense improvements in economic well- being, and integration with the global economy. To understand how China underwent a great political leap backward under Xi’s rule, we must first ap- preciate the odds against a potential opposite outcome—political liberaliza- tion or even democratization in parallel with rapid economic development. One of the greatest puzzles about China since the end of the Maoist era is the apparent disconnect between economic development and democracy. Contrary to the strong correlation between the level of economic develop- ment and the existence of democratic regimes that has long been observed, rising prosperity and social change in China since the 1980s have created many favorable preconditions for democracy but have not actually led to meaningful democratization of its political system.8 Explanation of this puzzle may not be difficult to find. For starters, despite the observed correlation between wealth and democracy, the exact mechanisms by which economic development leads to democracy remain unclear.9 Research on democratization since the mid- 1970s shows that the choices made by authoritarian ruling elites play a far more important and direct role in the transition from authoritarian rule.10 One of the most influential studies of the relationship between economic develop- ment and democracy finds no linear relationship between economic develop- ment and the transition to democracy. The single most important variable in a country’s transition to democracy is not the attainment of a particu lar level of wealth but the demise of dictatorship.11 -- 17 of 345 -- I n t r oduc t ion 5 If the strategic choices made by China’s leaders in the post-Mao era matter more than the structural changes of the country’s society and economy in determining the evolution of its political system, then there may be a simpler and more straightforward explanation of the Chinese puzzle. One-party rule has persisted in China in spite of modernization mainly because the CCP not only has chosen to resist pressures for political liberalization but also has adopted effective measures to neutralize the political effects of economic de- velopment. Indeed, we do not need to look far to find evidence that Deng Xiaoping, the leader who almost single-handedly steered the party away from Maoism in the direction of modernization, had no intention of allowing his project of “reform and opening” to endanger the party’s political monopoly. In March 1979, three months after he effectively became the paramount leader, Deng laid down the “Four Cardinal Principles”—upholding the socialist path, the people’s democratic dictatorship, the CCP leadership, and Mao Zedong Thought and Marxism-Leninism—as the political limits not subject to chal- lenge.12 However hard he pushed for market reforms, integration with the West, and measures favorable to development during his rule, Deng made it abundantly clear that economic modernization was the means by which to perpetuate one-party rule, and nothing else. Although he fought the hard- liners in the party who resisted his economic reforms, he consistently took their side, often wittingly, in lashing out against what he called “bourgeois liberalization”—his shorthand for societal pressures to advance political lib- eralism and democracy. To be sure, there was perhaps a narrow and brief window for democ- ratization in the 1980s, the most open period since 1949. During the decade, liberal reformers such as Hu Yaobang (party chief from 1981 to January 1987) and Zhao Ziyang (premier from 1980 to 1987 and party chief from 1987 to May 1989) did what they could to open up the political system. Taking advan- tage of Deng’s support for administrative reforms to improve the efficiency of the state, in 1986–1987 Zhao even drafted a blueprint that had the potential of introducing a limited form of political pluralism into the Chinese party-state.13 Despite their positions as the top leaders, these two reformers did not have ultimate decision-making authority. Deng Xiaoping and the other aging revo- lutionary veterans wielded such power and made sure that Hu and Zhao, whose limited mandate was to implement Deng’s economic reforms, would not condone liberalizing trends that could endanger one-party rule. Indeed, Deng purged these two reformers when they supported prodemocracy forces -- 18 of 345 -- 6 I n t r oduc t ion in defiance of Deng’s expressed hard-line views. As the balance of power in the 1980s consistently favored political hard-liners such as Deng and Chen Yun, the odds for genuine and sustained liberalization were never great. After the thorough purge of the liberal reformers following the crackdown in June 1989, such odds evaporated. In the post-Tiananmen era, the regime adopted a sophisticated survival strategy that relied on a diverse set of tools to ensure that economic development and globalization would not endanger the party’s hold on power.14 The party maintained broad-based popular support mainly by delivering rising prosperity. Regime legitimacy was also reinforced with appeals to nationalism.15 To expand its base, the party carried out a con- certed program to recruit capitalists, professionals, and intellectuals—new social elites whose support would help it rule a more diverse and complex society and economy.16 The post-Tiananmen period also saw the rise of a se- curity state equipped with a vast network of informants and advanced tech- nology, underwritten by a massive increase in fiscal resources generated by the economic boom.17 As a result of the party’s response, rapid economic development in the post-Tiananmen era strengthened party power instead of weakening it. Furthermore, the critical choices made by top CCP leaders in the 1980s, the party’s effective adaptation in the post-Tiananmen era, and the unique institutional features of the CCP increased the difficulties of transition to a more open political system. Unlike average authoritarian regimes, such as per- sonal dictatorships, military juntas, or non-Leninist one-party regimes, for instance Singapore’s People’s Action Party (PAP) and Mexico’s Institutional Revolutionary Party (PRI) before 2000, Communist totalitarian regimes have a programmatic ideology, better-organized ruling parties, a more systematic use of terror as a means of rule, greater influence over the economy through planning and state-owned enterprises, more effective control of military and security forces, and an unrivaled capacity to dominate society and restrict the flow of information.18 These institutional features make it much more difficult to democratize a totalitarian regime than an authoritarian one. The transition to democracy in a garden-variety dictatorship usually involves the ruling elites’ exit from power and the establishment of civilian control over the military. But in the case of totalitarianism, such a transition requires changes in practically every facet of the political system, economy, and society because totalitarian rule itself is deeply embedded in them. Piecemeal reform in a totalitarian regime is un- likely to have much of an impact in terms of changing the nature of the system -- 19 of 345 -- I n t r oduc t ion 7 because the old system will retain its totalitarian essence unless the most impor tant institutional features of totalitarianism—above all the Leninist party-state—are removed. A quick review of democratization in the former Communist regimes be- ginning in the late 1980s and culminating in the fall of the Soviet Union in December 1991 shows that this process was accomplished almost exclusively through revolution—the rapid overthrow of the Communist regimes. To be sure, the Communist regimes in Eastern Europe and the former Soviet Union in the late 1980s were post-totalitarian regimes that had abandoned some of the essential practices of classic totalitarianism, in particular the permanent purge and mass terror, but they still retained other defining features of totali- tarianism, especially the Leninist party-state, a command economy, and near- total control of the flow of information. However, once it became clear that the Soviet Union would no longer intervene militarily to keep the Communist regimes in its satellite states in power, spontaneous revolutionary movements overthrew these regimes and replaced them with democracy.19 If the rapid downfall of the Soviet-backed Communist regimes in Eastern Europe is easier to explain, the collapse of the Soviet Union itself perhaps shows that even an indigenous Communist regime becomes vulnerable to revolution if it attempts to reform and weaken the foundational institutions of totalitarianism as part of a gradual process of political reform. In the Soviet case, reformist leader Mikhail Gorbachev introduced glasnost and perestroika in an attempt to revitalize the moribund system. But Gorbachev’s gamble on openness, pluralism, and competition to create a more humane system quickly unleashed revolutionary forces, in particular nationalism in the republics of the empire. As reform turned into revolution, Gorbachev ultimately lost con- trol and became the gravedigger of Soviet communism.20 Although the fall of the Soviet Union is the only case of the overthrow of a Communist regime founded by an indigenous revolution, it raises the ques- tion whether totalitarian regimes can be transformed into a democracy through reform, not revolution. Admittedly, the Soviet Union under Gor- bachev was the only indigenous Communist regime that attempted to save the crisis-ridden system with political reform, not economic reform. Yet, because Gorbachev’s glasnost and perestroika succeeded in dismantling the foundations of post-totalitarian rule (most critically the Communist party’s political monopoly), the Soviet case remains the only instance in which a post- totalitarian regime was replaced by another political regime (a weak democ- racy in the Russian case). Instructively, indigenous Communist regimes such -- 20 of 345 -- 8 I n t r oduc t ion as China and Vietnam that embraced capitalism but resisted political liberal- ization have gained unprecedented economic prosperity but have also retained the key political institutions of totalitarianism.21 The absence of democ- ratization in such regimes implies that economic modernization alone is un- likely to result in the transition to a diff erent political regime. Political reform that fatally weakens the foundational institutions of totalitarianism, as in the case of the Soviet Union in the late 1980s, may be the only path to democracy for a totalitarian or a post-totalitarian regime. The preservation of the foundational institutions of totalitarianism—the Leninist party-state, near-total control of information, direct control of the military and the security apparatus, and decisive influence over the economy— also suggests that the revival of totalitarian rule in such regimes is not only possible but also likely if a strongman holds political dominance and decides to return the regime to its totalitarian roots. As totalitarianism in such regimes has never really been uprooted and its principal institutions remain essentially intact, restoring totalitarian rule faces far fewer obstacles than it does in re- gimes where totalitarianism has been largely dismantled. How the China Dream Was Broken When Deng Xiaoping launched his “reform and opening” in 1979, China fi- nally had a chance to realize its dream of becoming a rich and strong country after enduring a “century of humiliation,” the period between the start of the First Opium War in 1839 and the founding of the People’s Republic of China in October 1949. Econom ically, the country enjoyed favorable structural con- ditions to embark on a fast-paced modernization drive. Unlike the Soviet Union, the state-socialist economic system had shallower roots and a more tenuous hold on China. Most of the population lived in the countryside— outside the inefficient state sector. The potential of tapping into the productive capacity suppressed by communism was enormous if the CCP could relax its restrictions on economic freedoms.22 Diverse local conditions forced the state to allow a more decentralized system with greater potential for experimenta- tion, innovation, and private entrepreneurship.23 Demographically, China could reap the immense benefits of a vast young and healthy labor force if it were to adopt policies to make it more productive.24 Geograph i cally, China is located in the world’s most economically dynamic region—East Asia—and could not only benefit from trade and investment with Japan, then Asia’s eco- nomic powerhouse, but also gain from the development experience of the four -- 21 of 345 -- I n t r oduc t ion 9 little dragons, Taiwan, South Korea, Singapore, and Hong Kong, all of which were success stories of globalization.25 Geopoliti cally, by the end of the 1970s, China had become a strategic partner of the West in the Cold War. Supporting China’s modernization drive served the West’s security interests. While the preconditions for China’s economic take-off at the end of the Maoist period were overwhelmingly positive, the preconditions for political liberalization or democratization were mostly negative. It is true that, ideo- logically, the calamity of the Cultural Revolution had thoroughly discred- ited Maoism, weakened the party’s hold on Chinese society, and motivated Deng Xiaoping to adopt pro-market economic policies.26 But most precondi- tions for genuine political liberalization or democratization were either nonexistent or downright unfavorable. Crucially, the strategic choice made by the dominant Chinese leaders, mainly Deng Xiaoping and his conservative rival Chen Yun, was to repair and preserve the rule of the CCP, albeit with more pragmatic economic policies. They not only viewed political liberalization, let alone democratization, with intense hostility, but also they had launched periodic crackdowns in the 1980s to rein in any trends threatening the party’s hold on power. Although liberal reformers were represented in the top echelons of the regime, they lacked the power to push the party toward greater political openness. If the unfavorable balance of power at the top precluded the possibility of an elite-led transition toward a more open society, the likelihood of a transi- tion driven by societal forces was vanishingly small due to the legacies of three decades of totalitarian rule. As the most repressive form of dictatorship in human history, totalitarianism concentrates power and resources in the party- state and seeks to eliminate all potential threats to its rule. In totalitarian re- gimes established through revolution, the process of consolidating power typically entails the brutal destruction of social forces deemed to be threats to regime survival.27 Consequently, societal groups, such as independent civic organizations, religious groups, and business associations, are not permitted in totalitarian regimes. The private sector is either strictly controlled by or beholden to the state (as in the case of Nazi Germany), or almost completely banned (as under Communist rule).28 In the Chinese case, societal forces that might have pressured the CCP to liberalize the political system were too weak to become politically significant. Even though these groups grew as the result of economic development, the restrictions imposed by the Chinese regime prevented them from becoming truly autonomous and effective political actors.29 -- 22 of 345 -- 10 I n t r oduc t ion Thus the party’s monopoly of power faced no real threats from within or without. The most important consequence of the post-Mao rulers’ decision to rely on economic reform to save the party was the preservation of the key institutions of totalitarianism. Indeed, except for the decline of the orthodox Communist ideology and erosion of the party’s control of the economy, prac- tically all other components of totalitarianism remained intact throughout the post-Mao period. To be sure, Deng and other Chinese leaders sought to set up guardrails to prevent the return of a Mao-like figure who could restore person- alistic rule and again terrorize the party. Unfortunately, the specific measures on term limits and protection of the rights of party members that had been introduced in the 1980s were too narrow and vague (for example, they set no explicit age or term limits for Politburo members or for the general secretary). As rules and norms are unenforceable in a dictatorship and Chinese leaders’ resistance to democratization and the rule of law made it impossible for enforcement by independent third parties (such as the courts, the press, or voters), the limited reforms adopted by Deng in the 1980s were inherently incapable of preventing the return of totalitarian rule. Fortunately for the party, and for China, the fragile balance of power among rival leaders and their factions between 1979 and 2012 sustained collective leadership and ensured the continuation of Deng’s pragmatic policies. During the pre-Xi period, however, totalitarianism was merely lying dor- mant. The party had suspended or curtailed policies and practices associated with classic totalitarianism, most importantly the mass terror and the near- total control of the economy. But as long as the party kept intact the founda- tional institutions of totalitarianism, the possibility of its revival was both real and substantial. All it would take was the return of a leader who, driven both by his ideological beliefs and his personal ambitions, found that the restora- tion of totalitarian rule would best serve his goals and interests. Because the limited reforms introduced by Deng were too weak or too flawed to preclude this scenario, the return of totalitarian rule, however unthinkable to many, remained a real possibility. Once a strongman were to gain power in the party, he would face no real opposition from within to make himself into a Mao-like figure, while the preservation of the essential institutions of totalitarianism would enable him to revive such a regime with relative ease. In addition to the dormant totalitarian institutions, the flaws of Deng’s neo- authoritarian developmentalism—economic modernization under one-party rule—were also responsible for the return of totalitarianism. Neo-authoritarian developmentalism rests on two pillars: repression of organized opposition and -- 23 of 345 -- I n t r oduc t ion 11 civil liberties, and a single-minded focus on economic development. However appealing in theory, neo-authoritarian developmentalism not only is unsus- tainable in practice but also creates political conditions favorable for the return of a totalitarian leader. Economic development under autocratic rule faces two insurmountable obstacles. The first is the lack of rule of law—the foundation of property rights and a market economy. As dictatorships are unwilling to be constrained by the rule of law and have short time horizons due to their inse- curity, state predation is a structural feature of dictatorship. Property rights will therefore remain permanently insecure in countries ruled by dictator- ships, thus undermining investor confidence and inherently limiting the eco- nomic potential of these countries.30 The second hurdle is the trap of partial economic reform. A dictatorship desperate to gain political legitimacy by im- proving economic performance may initially be willing to adopt radical re- forms, but it will have decreasing incentives to pursue further radical reforms because the early success of its reform strengthens its legitimacy and reduces the pressures for further change. Critically, economic reforms under dictato- rial rule tend to become more difficult politi cally as they progress because the most radical or thorough reforms require a full empowerment of market forces, decentralization of resources, and a concomitant curtailment of the power of the state. As complete market reforms threaten to limit the ability of the ruling elites to use their power to extract economic benefits, such reforms become less attractive to the ruling elites, who become more reluctant to un- dertake them. Economic stagnation, not sustained dynamism, will likely follow.31 A combination of autocracy and a partial reform trap inevitably produces crony capitalism characterized by collusion between political elites and capi- talists who use their connections with political elites to gain access to privi- leges and opportunities unavailable to those outside such networks. This union allows political elites in an autocracy to convert their power into wealth. As crony capitalism exacerbates inequality and corruption by privileging only the well-connected, it stokes social tensions and accelerates regime decay, thus creating opportunities for a strongman to seize power by weaponizing anticor- ruption investigations to destroy his political rivals and their networks.32 This is precisely what happened after Xi became party chief in late 2012. In retrospect, the relative ease with which Xi could turn back the clock and restore a form of totalitarian rule few had thought would be possible was not a random outcome of Chinese history in the post-Mao era. To be sure, the leader responsible for this great leap backward—Xi Jinping—might have been -- 24 of 345 -- 12 I n t r oduc t ion an accident, as his rise to the top echelons of the CCP was by no means pre- ordained or inevitable. But in the larger political context of the post-Mao era, in particular the deliberate choices made by Deng and other hard-liners to maintain and defend the party’s political monopoly at all costs, the preserva- tion of the foundational institutions of totalitarianism, and the inherent flaws of Deng’s neo-authoritarian developmentalism, the conditions for the revival of totalitarian rule were both ever-present and highly favorable. In other words, that the post-Mao reforms ended with a new form of totalitarian rule reminis- cent of Stalinism was an accident waiting to happen. Argument in Brief Post-Mao China has experienced three distinct eras: the reform era of the 1980s, the neo-authoritarian era (1992–2012), and neo-Stalinist era under Xi Jinping since 2013.33 Despite the identifiable ruptures between these eras, they are all connected by the logic of path dependence. Chinese leadership’s stra- tegic choices in one era narrow the range of options and potential paths for- ward in the subsequent eras as these choices produce outcomes that increase the probability of certain developments and decrease the probability of other developments in later periods. Specifically, path dependence means that China had the widest range of options in the 1980s. During that decade, unsurprisingly, the intense struggle at the highest level of the Chinese leadership centered on the three potential paths forward. Hard-liners advocated returning to a communist system with- out Maoist radicalism. Pragmatic Leninists wanted to embrace capitalism to save a crisis-ridden regime. Liberal reformers tried to institute both political and economic reforms to steer the party away from its totalitarian roots. The decisive defeat of the liberals in 1989 eliminated the third option. In the post- Tiananmen period, pragmatic Leninists led by Deng seized the fall of the So- viet Union in December 1991 to rally a demoralized party to a neo-authoritarian path of capi talist development under one-party rule. This strategy in the sub- sequent two decades initially produced unprecedented economic dynamism but gradually succumbed to rapacious autocratic cronyism. The legacy of the post-Tiananmen order—pervasive official corruption, moribund market re- forms, and sophisticated and effective repressive capacity—opened a potential path for a strongman to gain dominance and revert to totalitarian rule. Al- though the party could conceivably continue to plod along its post-Tiananmen path under a different leader, it was just as likely that it could embark on an -- 25 of 345 -- I n t r oduc t ion 13 entirely different path—one toward a new form of totalitarian rule under a strongman. If anything, the odds of revival of totalitarianism were even greater because a potential strongman could easily purge corruption-tainted rivals to seek supremacy within the regime. The same strongman could deploy totali- tarian repressive practices to reimpose strict control over society because the coercive institutions of totalitarianism, such as a party-controlled military, the secret police, mass surveillance, and networks of informants, not only had been preserved, but also had been significantly upgraded with technology and investments in the post-Tiananmen era. The logic of path dependence similarly illuminates the trajectory of Chi- nese economic development in the post-Mao era. Thanks to its favorable de- mographic structure, pent-up entrepreneurial energy in society, and coopera- tive relations with the West, the economy was poised for a massive and rapid take-off if the party dismantled the old Communist economic institutions and adopted pro-market policies. Even though China indeed experienced an eco- nomic “miracle” that was marked by three decades of high economic growth, Deng’s strategic choice of using economic reform and globalization to sustain one-party rule inevitably resulted in the loss of momentum of reform. Dictated by the political imperative of preserving one-party rule, Deng and his succes- sors simply could not risk ceding the “commanding heights” to the private sector and foreign investors. The principle of preventing market reform from undermining one-party rule would severely limit the growth of the private sector and shield the state-owned enterprises from competition, resulting in a hybrid economy that would eventually stagnate. Even worse, the same princi- ple could also lead to the rollback of the private sector if the regime wants to contain the threats of capitalism. Seen from this perspective, the reversal of post-Mao economic reform under Xi is no accident. China’s relationship with the West in the post-Mao era cannot escape the confines of path dependence, either. National weakness, the Soviet threat, and the party’s desperate need for Western support necessitated a pragmatist for- eign policy prioritizing economic development over ideological conflict with the West. The United States and its allies opened their arms to reintegrate China into the West-led economic order in the 1980s, motivated by shared security interests and the tantalizing prospects that Chinese reforms could promote both economic prosperity and political freedom in the country. When the Tiananmen crackdown in 1989 abruptly ended China’s strategic partnership with the West and revealed their unbridgeable ideological divide, the path to full integration was nearly closed. The success of the post-Deng -- 26 of 345 -- 14 I n t r oduc t ion regime in pursuing a grand strategy of “hiding strength and biding time” in the post–Cold War era only increased the odds of a new cold war later as a far more powerful China began to assert its newly acquired power and challenge the US-led order. With the arrival of Xi in late 2012, the combination of his ideological hostility, geopolitical ambitions, and strategic miscalculations—all of them direct or indirect consequences of the revival of totalitarian rule— would lead to a series of confrontations with the United States and its allies that eventually escalated to a new cold war. Organization of the Book To understand how political and economic developments since 1979 gradually narrowed the range of alternatives and increased the probability of the revival of totalitarian rule, this book uses a chronological approach to describe and analyze the most critical events, decisions, and factors that shaped the political and economic trajectories during three distinct periods in post-Mao China: the 1980s, the post-Tiananmen era, and the era of Xi Jinping. Chapter 1 focuses on elite politics and factional struggles over the direction of reform in the 1980s, the most politi cally open decade that ended with the tragic crackdown on the prodemocracy movement in June 1989. Chapter 2 reexamines the in- troduction of market-oriented reforms in the 1980s, with a special focus on how the rapid decollectivization of agriculture unleashed pent-up entrepre- neurship and created a fast-growing private sector. In chapter 3 we dissect the neo-authoritarian political order, which the CCP constructed during the first decade of the post-Tiananmen era under Jiang Zemin’s leadership. We explore how the CCP’s adaptation of this neo-authoritarian political order enabled the regime to survive the shocks of the fall of communism in the former Soviet bloc and to confront the threats of economic modernization. Chapter 4 exam- ines the policies adopted by the party during the Hu Jintao era to address the social deficits produced by neo-authoritarian rule, and it probes the factors that contributed to the unraveling of the post-Tiananmen order. In chapter 5 we analyze the drivers of China’s rapid economic growth in the post-Mao era. Chapter 6 traces the rise of Xi Jinping and the return of totalitarian rule. The story of the end of China’s economic miracle is told in chapter 7. In chapter 8 we review and analyze how China’s engagement with the West in the post-Mao era eventually ended in a new cold war. -- 27 of 345 -- 15 1 The Decisive Decade after deng Xiaoping and his coalition partners ousted the transitional leader Hua Guofeng at the end of 1978, they faced the momentous strategic choice of deciding on a path forward for the party and the country. Ideological differences within Deng’s coali tion over the direction of economic reform re- sulted in constant clashes over economic policy and political liberalization. As a result, politics in the 1980s was marked by persistent tensions and power struggle at the highest level of the leadership of the Chinese Communist Party, culminating in the Tiananmen crisis in June 1989. On the surface, fluidity of elite politics in this period may imply a wide range of outcomes, including simultaneous pro-market reforms and political liberalization. In hindsight, however, the forces arrayed against such an outcome were simply too powerful to overcome. Nevertheless, the decade of the 1980s presented a narrow win- dow of opportunity for China to embark on a diff erent political path. Indeed, during that decade, the party attempted a series of institutional reforms, some aimed to make the regime less totalitarian and others designed to open up the political process in a more pluralistic and accountable direction. Tragically, the Tiananmen crackdown foreclosed this narrow path toward an alternative— and arguably better—future. The purge of the liberals from the CCP leader- ship and Deng’s success in forging an elite consensus on capi talist economic development under one-party rule put China on an entirely diff erent path in the post-Tiananmen era. Broadly speaking, this period can be divided into three phases, each marked with its distinct characteristics of struggle over power and policy among the party’s top leaders. In the first phase (1979–1986), China’s era of reform and opening was launched, and rapid progress in economic reform was made. It was also a period of relative political openness, in spite of one short-lived con- servative backlash at the end of 1983. Assisted by two liberal reformers, Hu -- 28 of 345 -- 16 c h a p t e r 1 Yaobang as CCP chief and Zhao Ziyang as premier, Deng was able to decol- lectivize agriculture, reintegrate China into the global economy, and imple- ment the reforms to enable a private sector to emerge and grow. Politi cally, he also enacted modest changes to institute collective leadership, mandatory retirement, and measures to introduce fresh blood into the party. But the informal coalition that toppled Hua Guofeng, the transitional leader who had seized power in October 1976 and effectively ended the Cul- tural Revolution, fractured during this phase because of incompatible visions about China’s future. As he shared the conservative political values of the hard- liners led by Chen Yun but clashed with them on economic policy, Deng played a pivotal balancing role in this phase. As reform unleashed growing societal pressure for political liberalization, the rift between Deng and the lib- eral wing of the party widened, ultimately resulting in Deng’s dismissal of Hu in January 1987. In the second phase, 1987–1988, momentum of reform slowed down despite an abortive attempt to introduce comprehensive political reform in 1987. Hu’s ouster not only weakened the liberals in the party but also undermined Deng’s own ability to overcome resistance to further economic reform by the newly emboldened hard-liners. After Deng filled Hu’s vacancy with Zhao, he effec- tively ceded the control of economic policy to the conservatives who took over the State Council. Even before the Tiananmen crisis in 1989, the third and final phase, Deng’s reform and opening had stalled. Siding again with hard-liners during the most critical moments of the crisis, Deng stained his historical legacy by ordering the military to suppress the peaceful prodemocracy move- ment. Even worse, the wholesale purge of the liberals within the party and the worst rupture with the West in the wake of the crackdown threatened a pre- mature demise of Deng’s cherished project of reform and opening. As a result, the decade of the 1980s began with hope and optimism for a new future but ended with one of the darkest and bloodiest incidents in modern Chinese history. Ideological Divisions in the Party On October 6, 1976, a military-backed coup led to the arrest of the infamous “Gang of Four,” a radical clique that included, among three others, the widow of Mao Zedong, the brutal dictator who had died less than a month earlier. The news of the fall of Mao’s closest and most reviled followers quickly set off spontaneous celebrations throughout China. The victor in this succession -- 29 of 345 -- T h e De c i s i v e De c a de 17 struggle, Hua Guofeng, was immediately installed as China’s new leader. He assumed positions as chairman of the Chinese Communist Party and of the Central Military Commission (CMC), as well as premier of the State Council (China’s cabinet).1 When the 55-year-old Hua took over the party, his position seemed unas- sailable. Among the twelve voting members of the Politburo, none presented a potential threat. The group that could possibly dethrone Hua was nowhere near the center of power at the end of 1976. Many had already been purged, sidelined, incarcerated, or murdered by Mao during the Cultural Revolution (1966–1976). Among those who had survived physically, Deng Xiaoping, age 72, had been dismissed from all his positions in the party- state by Mao six months earlier. Chen Yun, age 71, a capable economic planner who had ranked number 5 in the party hierarchy in 1956, at the time of Mao’s death was simply a member of the Central Committee after falling out of favor with Mao before the Cultural Revolution. However, rule by the “wise leader,” as Hua was then called, was brief. The writing was on the wall when revolutionary veterans forced him to bring back to office the victims of the Cultural Revolution. In July 1977 Deng regained all the leadership positions he had lost after the Tiananmen protests of April 1976, including membership on the Politburo Standing Committee (PSC), vice pre- mier, and chief of the General Staff Department of the People’s Liberation Army (PLA).2 At a Central Committee plenum in December 1978, Hua lost a decisive power struggle to a coalition of revolutionary veterans and reform- ers.3 Although he did not officially resign his position as chairman of the CCP until June 1981, the coup that brought him to the pinnacle of power had merely paved the way for the return of victims of the Cultural Revolution, who shared little else beyond a desire to depose Hua and to end Mao’s self-destructive radicalism that had brought the country to the brink of ruin and endangered the party’s hold on power. The informal grand coalition that ousted Hua in December 1978 was led by Deng and Chen, both titans in the Communist revolution. Deng became the head of the Secretariat of the Central Committee in 1927 when he was only 23 years old. During the civil war (1945–1949), Deng co-commanded the Sec- ond Field Army that performed brilliantly in defeating the Nationalists. Be- tween the establishment of the People’s Republic in 1949 and the outbreak of the Cultural Revolution in 1966, he had served in a series of top-level party and government positions. In fact, as the seventh-ranked party leader on the eve of the Cultural Revolution, Deng had the dubious honor of being lumped -- 30 of 345 -- 18 c h a p t e r 1 together with Liu Shaoqi, Mao’s designated successor, as one of China’s top two “capi talist roaders” when Mao unleashed the Red Guards on his enemies in the party in the summer of 1966. Chen Yun’s revolutionary credentials were no less illustrious. He was made a member of the Politburo when he was 29. In fact, even though he was one year younger, he had greater seniority than Deng. After the party emerged victorious in the civil war in 1949, Chen became a vice premier, playing an instrumental role in crafting the First Five-Year Plan and constructing the basic framework for a command economy. However, he fell out of favor with Mao in 1958 because he cautioned against Mao’s unrealistically ambitious economic targets. But being sidelined by Mao later turned out to be a blessing in disguise. While most of Mao’s enemies were politi cally hounded or even physically liq- uidated during the Cultural Revolution, Chen escaped persecution and even managed to retain his seat on the Central Committee. Although Deng and Chen played the most important roles in the decisive defeat of Hua and his supporters in December 1978, they were assisted by more liberal-leaning but lower-ranked leaders in the party. The two most prominent representatives of this wing were Hu Yaobang and Zhao Ziyang. Prior to the Cultural Revolution, Hu was the head of the Communist Youth League (CYL), an auxiliary organization of the party that had no real administrative responsibility. A victim of Mao’s purge during the decade of chaos, Hu became a supporter of Deng when the latter briefly returned to power in 1973–1975. In the campaign to unseat Hua Guofeng as party leader, Hu made two crucial contributions. Wielding his administrative authority as the head of the party’s organization department, he helped rehabilitate a large number of victims of Mao’s purges and facilitated their return to positions of power within the party-state.4 In addition, as Hua continued to rely on Maoism as his source of political legitimacy, Hu Yaobang organized a series of articles in 1978 debating the “criterion of truth.” Behind this seemingly esoteric philosophical project was the intent to discredit Maoism as the guiding political doctrine of the party and weaken Hua’s claim to rule.5 Zhao Ziyang, who had served as provincial party chief in Guangdong, Inner Mongolia, and Sichuan before and during the Cultural Revolution, did not play a direct role in the power struggle in 1978 that made Deng the para- mount leader. Zhao had had little prior contact with Deng, but because he implemented bold and successful agricultural reforms in Sichuan in the late 1970s when he was the provincial party chief, Deng picked him to succeed Hua as premier in September 1980.6 -- 31 of 345 -- T h e De c i s i v e De c a de 19 In an illuminating history of elite conflict in the 1980s, Yang Jisheng persua- sively argues that the grand coalition later collapsed into three forces, each with its own distinct ideological values and political agenda. The conflict among these three groups, in Yang’s view, defines the politics and shapes the Chinese political and economic trajectories during the decade.7 The forces represented by Chen Yun were hardcore conservatives seeking to maintain the orthodox Communist ideology and the Leninist one-party regime and to re- turn to the pragmatic but essentially state-socialist economic policy and de- velopment strategy of the 1950s. The second group, led by Deng, shared the same political objective of preserving the Leninist party-state, but it differed from the conservatives in terms of the economic means by which to reach this goal. As Zhao Ziyang observed, although the elders, such as Deng and Chen, disagreed on economic reform, they had indistinguishable views on maintain- ing the existing political system. They feared “any real reform would challenge the Communist Party, undermine its power, and weaken its rule.”8 Unlike Chen Yun, who was enamored of the Soviet planned economy and took enor- mous pride in his own role in establishing China’s command economy in the early 1950s, Deng was convinced that only an efficient market economy inte- grated with the capi talist West could save the party. The third group, represented by a slightly younger cohort of more open- minded leaders, such as Hu Yaobang and Zhao Ziyang, sought both pro- market economic reforms and political liberalization because they believed that economic and political reforms were both needed to change a China that had been impoverished and brutalized by Maoism.9 Of these three groups, the most powerful were the first two factions: the conservatives led by Chen who wanted to return to the 1950s and the neo- authoritarians represented by Deng who believed that Chinese economic modernization, the sole means of regime survival, could succeed only with a combination of capitalism and autocracy. The political strength of the conser- vatives and the neo-authoritarians was derived mainly from the personal pres- tige of their most senior leaders, such as Deng, Chen, and other elderly revo- lutionaries. They wielded ultimate power on major policy and personnel decisions. Another source of the political strength of the conservatives and neo- authoritarians was their extensive network of supporters in the bureaucracy of the party-state and the military. Because the conservatives had been in charge of the economy, propaganda, and organization before the Cultural Revolution, they had groomed a group of younger hard-liners whom they -- 32 of 345 -- 20 c h a p t e r 1 appointed to key positions in the party and government. Although Deng had fewer followers in the state and party bureaucracies, he had unrivaled control of the military because he had elevated many of his former subordinates in the Second Field Army to senior PLA positions, such as the General Staff Depart- ment and the Secretariat of the CMC, which oversaw the PLA’s day-to-day affairs. The sources of political support for the liberals were diverse. Within the party, they could count on a small number of (less influential) revolutionary veterans at the center of power, such as Xi Zhongxun (father of Xi Jinping and a member of the party’s Central Secretariat), Wan Li (a vice premier credited with launching the agricultural reforms when he was party chief of Anhui province at the end of the 1970s), and provincial party chiefs in Guangdong and Fujian. The most vocal group of supporters of the liberals was made up of the intelligentsia. This group was extremely valuable to the liberals because they could provide ideas for reform and expose the ideological bankruptcy of the conservatives. However, the intelligentsia had no real political power and could, from time to time, create problems for the liberals in the party when they pushed too hard for political change. The greatest weakness of the liberals is that they relied almost exclusively on Deng’s support for their effectiveness and survival. If Deng sided with the liberals on economic reform, they could overcome the opposition from the conservatives. But when Deng threw his weight behind the conservatives in cracking down on “bourgeois liberalization” in 1987, the liberals were sure to lose (as in the downfall of Hu Yaobang in 1987 and the Tiananmen crisis in 1989). The liberals also likely underappreciated Deng’s ruthlessness and unreli- ability at the most crucial junctures. To Deng, the liberal reformers were useful but ultimately dispensable. He needed them to fight the conservative opposi- tion to pro-market reforms and an opening to the West. But Deng’s support for them had a bottom line: When they defied him on the most important issue of preserving monopoly rule by the party, he would not hesitate to cast them aside. The unfavorable balance of power among the conservatives, centrists, and liberals shaped the outcomes of the key battles over economic and political reform in the 1980s. Out of necessity, Deng had to rely on the liberal wing of the party to overcome conservative opposition to his economic reform agenda. As a result, he could form a winning coalition with the liberals in most battles over economic policy. At the same time, however, to defend against any threats to party rule, Deng consistently banded together with the hard-liners -- 33 of 345 -- T h e De c i s i v e De c a de 21 in lashing out against liberalizing trends and prodemocracy forces. Put another way, the differences between Deng and Chen were tactical, not fundamental. Both were determined to preserve one-party rule, but Deng believed that pro- market reform and opening to the West could better serve this ultimate objec- tive than the closed command economy that Chen advocated. Obviously, post-Mao history vindicated Deng. Nevertheless, the differences between Deng and the liberals were fundamental and irreconcilable. The objective of the liberals was to build both a market economy and a political system in which party power would be curtailed by rule of law and would be withdrawn from the state. (Even though the liberal intelligentsia advocated a multiparty democracy, few liberal leaders, least of all Hu Yaobang and Zhao Ziyang, en- visioned any replacement of CCP rule with a competitive democracy.) In ret- rospect, the fundamental agreement between the hard-liners and Deng made it inconceivable that the liberals, the weakest of the political forces in the party, could have prevailed in the most crucial battles over the direction of reform in the 1980s, such as the handling of the prodemocracy movements at the end of 1986 and during the Tiananmen protest movement in April and May of 1989. Institutionalizing Elite Politics High on the agenda of the grand coalition in the early 1980s was the imple- mentation of institutional reforms to protect the party from the rise of another Mao-like figure and to reinvigorate party leadership. Deng initially summa- rized the overall framework for these reforms in a landmark speech at an en- larged Politburo meeting in August 1980.10 Considered the most open-minded and searing diagnosis of the pathologies in China’s political system, this speech laid out a set of measures to mitigate these flaws. From Deng’s perspective, the most serious institutional flaws in the Chinese party-state and their manifesta- tions included the “overconcentration of power, patriarchal methods, life tenure in leading posts, and privileges of various kinds.”11 Deng also decried “feudal- ism” (which really meant an autocratic mindset) and the phenomenon of “pa- ternalism,” which he defined as a form of despotism that led to the dominance of the individual over the party organization. Most likely Deng had Mao in mind because he blamed “paternalism” for the egregious harm that had been inflicted on the party. Reforms to address these flaws, according to Deng, should include collec- tive leadership, which meant the party chief would have to share decision- making authority with his colleagues. Another solution was to abolish lifetime -- 34 of 345 -- 22 c h a p t e r 1 tenure of cadres and to make improvements in the selection, appointment, evaluation, transfer, and dismissal of cadres. Intriguingly, although Deng said that reform of the political system could provide institutional safeguards for “democratization” of the political life of the party and the state, he stopped well short of calling for democratic reforms. Instead, he merely said that research and investigation were needed to learn from other countries’ experiences and to produce practical plans. To underscore his belief in the centrality of the party-state, Deng said that “the reform of the system of party and state leader- ship is precisely to maintain and further strengthen party leadership and dis- cipline, and not to weaken or relax them,” because “without such a party, our country will split up and accomplish nothing.”12 If anything, this speech revealed the limitations of Deng’s vision of political reform. To be sure, he correctly identified the most serious symptoms of the pathologies of the Chinese political system. But the immediate solutions he proposed—abolishing lifetime tenure and improving the cadre management system—were purely technical or organizational. He focused almost exclu- sively on how to address the problems within the party but did not show much interest in dealing with the problems between the party-state and Chinese society caused by the lack of rule of law and democracy. Neither did he have a clear idea about how to establish enforceable mechanisms within the party to mitigate the overconcentration of power, feudalism, and paternalism. Most critically, by cautioning against reforms that would undermine the party’s political monopoly, Deng effectively ruled out the empowerment of Chinese society or the establishment of rule of law as potential autonomous forces that could safeguard the new institutional rules and norms. Such inherent limitations and contradictions notwithstanding, Deng’s call for establishing the principle of collective leadership, norms of political con- duct within the party, and formal rules on retirement age and term limits reso- nated with conservatives and liberals alike. As victims of Mao’s tyrannical rule, they had no disagreement on the need to implement reforms to bring more stability and predictability into the inner workings of the party as an organization. Thanks to the consensus within the party on collective leadership, security of elites, and rules on age and term limits, the post-Mao leadership quickly passed several historic documents that constituted the CCP’s most serious effort to institutionalize. As we will see, however, these institutional reforms had severe limitations because Deng and the veteran revolutionaries did not observe them. Most key provisions were deliberately vague so as to grant top -- 35 of 345 -- T h e De c i s i v e De c a de 23 leaders sufficient discretion. Institutional reforms to separate the party from the state, which Deng sanctioned in late 1986, were doomed from the start because he was adamantly opposed to any reform that could weaken the par- ty’s power and result in some form of checks and balances. Taken together, the institutional reforms of the party-state in the 1980s were administrative in na- ture and largely superficial. They did not touch on the defining feature of a totalitarian regime: dominance and control of the state apparatus by the party. Consequently, instead of a transition from totalitarian to authoritarian rule, the institutional reforms of the party-state in the 1980s succeeded in preserv- ing the core of a totalitarian regime. The party laid out its most important principles and norms in a key docu- ment, “Guiding Principles for Inner-Party Political Life,” in February 1980.13 Besides reiterating the sacrosanct principle of loyalty to the party, this Central Committee document emphasized collective leadership and decried “per- sonal arbitrary decision-making,” obviously a veiled reference to Mao’s per- sonalistic rule. Thus it specified that all key decisions were to be discussed and approved by the party committee or standing committee at each level, and not by an individual—a provision Deng himself honored only in the breach. The resolution explicitly banned activities or rituals that could pro- mote a “personality cult.” The document encouraged “democracy in the party” and called on the party to “correctly treat diff erent views.” It expressly prohibited the practice of exaggerating party members’ mistakes or persecuting them under false pre- tenses. Party members had the right to participate in discussions of party poli- cies (but only at meetings organized by the party or in party publications). They could make appeals and presentations to superior party organizations on disciplinary decisions related to themselves or other people. In practical terms, perhaps the most important reform the party adopted in the early 1980s was the mandatory age limit for most party and government officials and term limits for top government positions. The party had urgent reason to persuade a large group of aging revolutionary veterans (roughly 2.5 million) to vacate their leadership positions to make way for younger and better-educated people. More important, the institution of mandatory retire- ment and term limits would also improve predictability of promotion and elite circulation, retain the loyalty of ambitious younger elites, and ensure vigor among the ruling elites.14 In the party’s February 1982 decision on establishing a retirement system for “veteran cadres,” the retirement age limit of ministers, provincial party chiefs and governors, and heads of provincial high courts and -- 36 of 345 -- 24 c h a p t e r 1 procuratorates was set at 65. Their deputies were required to retire at age 60. Officials at the rank of director general (bureau-level) were not to serve be- yond 60 under normal circumstances.15 When the Chinese constitution was overhauled in 1982, it also instituted a two-term limit for the presidency (a largely symbolic position) and for the premier. Although the institutional reforms in the early 1980s constituted a real and positive step toward making political life within the party-state less brutal and less arbitrary, they had serious limitations. In terms of age and term limits, it is notable that Deng and his colleagues deliberately exempted the most senior leaders. For instance, such limits were not imposed on members of the Central Committee, the Politburo, the PSC, or the chair of the CMC. This omission, as we will see later, was to have profound—and negative—consequences dur- ing the remainder of the post-Mao period. Another noteworthy loophole in the mandatory retirement system was that the age limit could be waived if continuing service by the official was “needed.” The most critical flaw of all the institutional reforms, whether in terms of the political norms within the party or the age and term limits, is the lack of credible enforcement mechanisms. For any rules or norms to be binding, the most ef- fective institutional arrangement is the designation of a third party, in this case an organization independent of the CCP, to enforce them. However, none of the reforms implemented in the early 1980s contained provisions on third-party enforcement. Instructively, when the National People’s Congress (NPC) was discussing a major overhaul of the constitution between September 1980 and October 1982, a key issue was whether to establish an institution to ensure compliance with the constitution. One proposal was to form a specialized con- stitutional committee within the NPC. However, Deng vetoed the idea. As a result, the Chinese constitution has no provisions for ensuring compliance.16 Two factors lay behind the limitations of the institutional reforms under- taken by the CCP in the early 1980s. Politically, Deng and the other aging leaders did not want to be bound by any rules in their own exercise of power. They not only wielded power behind the scenes but also openly violated the key provisions laid out in the “Guiding Principles for Inner-Party Political Life.” For example, instead of convening meetings of the PSC, Deng spoke directly to key leaders to issue instructions, thus bypassing his archrival, Chen Yun. Impor tant personnel decisions were made by party elders, not by the general secretary. Zhao Ziyang revealed that “leaders at my level could not make important personnel decisions. That was true when Yaobang was the general secretary. Sometimes we did not even have the opportunity to -- 37 of 345 -- T h e De c i s i v e De c a de 25 participate in discussing such decisions. Only a small number of elders were consulted. Such decisions could be made only when Xiaoping and Chen Yun reached an agreement between them.”17 Even though the guiding principles ostensibly permitted party members to voice different opinions and prohib- ited their persecution, after the start of the anti–bourgeois liberalization cam- paign in January 1987, Deng himself named several liberal party members who would be slated for punishment. It was only stalling by Zhao that allowed most of the people on Deng’s list to be saved.18 An even more critical factor is the impossibility of enforcing any rules and norms in an autocracy. As many theorists have noted, institutions function only when the rulers’ commitments to uphold them are enforceable.19 Nor- mally, the most effective mechanisms of enforcement are those that rely on third parties, such as independent courts, a free press, and civil society. Such third-party enforcers do not exist in autocratic regimes. Counting on autocrats to self-enforce their commitments is unreliable because the temptations to gain political advantage and power by violating the rules and norms are often too great to resist. Rules and norms may be enforceable in an autocracy only when the balance of power is equally distributed among dueling factions, mak- ing it costly for any one faction to violate them. In the Chinese case, due to Deng’s determination to suppress prodemoc- racy forces that could undermine the party’s monopoly of power, it was impos- sible for third parties to emerge and help enforce the very rules and norms that Deng thought would help make political life inside the CCP more stable and predictable. The contradictions between Deng’s goals of institutionalizing the CCP and his aversion to any reforms that might weaken CCP power ultimately would render his reforms partial, ineffec tive, and short-lived. Clashing Visions of Economic Reform Two fundamentally different visions of the future of the Chinese economy divided the conservatives, led by Chen Yun, and the Deng-liberal coalition. The reform agenda of the latter emphasized opening to the outside world and implementing market reforms, while the conservatives tried to preserve the command economy that had been established in the 1950s and maintained a skeptical attitude toward market reforms and integration with the West- dominated global economy.20 In terms of policy, the two groups differed on the pace and scope of rural reform, domestic economic liberalization (such as development of a private sector), and economic growth rates.21 Chen and -- 38 of 345 -- 26 c h a p t e r 1 Deng also disagreed on foreign policy (Chen liked the Soviet Union and did not trust the United States, whereas Deng favored good ties with the United States and took a hard line toward the Soviet Union).22 Ideologically, Chen consistently advocated that central planning must de- termine economic activities, with the market playing only a secondary role. To use his famous analogy, the planned economy was the cage and the market was the bird living inside the cage. The market could operate freely—but only within the confines of the planned economy.23 In contrast, Deng and the liber- als saw a market-oriented economy as China’s future.24 At the beginning of the 1980s, Chen’s opposition to the economic reforms was more measured, even nuanced. As a fiscal hawk who preferred lower growth to deficit-spending, he repeatedly gave speeches affirming the domi- nant role of the planned economy, urging fiscal conservatism, and cautioning against hasty reforms.25 But on occasion, he would show support for Zhao’s reformist policies. Nevertheless, despite the early achievements of the eco- nomic reforms, Chen continued to insist on maintaining the dominant role of planning. Consequently, his opposition to the economic reforms—and his policy differences with the reformers—intensified.26 The area where Deng and Chen diverged and clashed the most was opening China to the capitalist West. As opening was key to the success of the domestic reforms, Deng strongly advocated policies welcoming foreign investment. He enthusiastically supported the proposal to establish special economic zones (SEZs) in Guangdong and Fujian in April 1979, and within a year he fast- tracked a package of policies granting Shenzhen, Xiamen, Shantou, and Zhu- hai autonomy to attract foreign investment and trade.27 In 1984 he visited some of the SEZs to show his support. As Deng said to Zhao and Hu in Febru- ary 1982, “The SEZs are a window through which [we can] bring in technology, management, and knowledge.”28 In October 1984 Deng countered the conser- vatives’ criticisms of his policy of opening, declaring, “Some of our comrades are always worried that if we open up, undesirable things may be brought into China. Above all, they worry that the country might go capitalist. . . . Of course, some negative elements will come in, and we must be aware of that. But it will not be difficult for us to overcome them. . . . If we isolate ourselves and close our doors again, it will be absolutely impossible for us to approach the level of the developed countries in fifty years.”29 Although Deng did not name Chen, he most likely was referring to him. On the issue of opening, as Zhao observed, Chen Yun “was completely at odds with [Deng] Xiaoping. . . . Chen Yun was very cautious about foreign investments. The case file for the Shanghai-Volkswagen joint venture remained -- 39 of 345 -- T h e De c i s i v e De c a de 27 in his office for a long time before he finally gave his consent.”30 As reflected in his speeches on foreign trade and investment, Chen was consistently skepti- cal about, if not hostile to, the idea of economic engagement with the capitalist West. In December 1980 he opposed borrowing from the West or from the World Bank to finance imports of capital goods, and he called for “vigilance in welcoming foreign capitalists.” On foreign trade, Chen had a zero-sum mindset, continuing to worry that competition among Chinese exporters would allow foreign trade partners to benefit. He therefore advocated retreat- ing to a centralized foreign trade system to avoid “losses.” Chen was especially skeptical about the SEZs. In 1982 he warned that if more SEZs were allowed, “foreign capitalists and domestic speculators will come out in droves, and speculation will be rampant. That must not be allowed.”31 Instead of promot- ing the SEZs, Chen urged a pause and, to show his opposition, never set foot in any of the SEZs. In all likelihood, Chen’s opposition to opening arose from his fears of the ideological influence of the West, not just its economic clout. He called on the party to “pay attention to the negative things brought in by opening to the outside.” In particular he worried that exposure to the devel- oped capi talist West could lead people to believe that socialism is inferior to capitalism.32 Yet, despite Chen’s consistent opposition to market reforms, he was con- stantly outmaneuvered by Deng and the liberals in the early 1980s because Zhao Ziyang was in direct charge of economic policy at the State Council and generally implemented Deng’s policies, even though he would also consult with Chen out of deference.33 Because of their sharp differences over the eco- nomic reforms, Deng developed a strategy to undercut Chen’s role in eco- nomic policy making. He rarely held PSC meetings (which would have given Chen an opportunity to present his opposing views and potentially to force Deng to water down his reformist policies). Instead, Deng would approach Zhao and Hu Yaobang directly and give them instructions. At one point, a frustrated Chen asked Zhao why no PSC meetings were being held. Zhao, then serving as CCP acting general secretary, replied “I am only a big secretary. If you want to have meetings, you should first reach an agreement with Com- rade Xiaoping.”34 Partial Political Reforms In addition to the institutional reforms focusing on party leadership, Deng also promoted two important reforms to modernize the legal system and restore the function of the NPC. He supported these reforms not because he intended -- 40 of 345 -- 28 c h a p t e r 1 to promote the rule of law and multiparty democracy but because he saw in- strumental value in them. Specifically, restoring the legislative function of the NPC could give party policies a veneer of popular and procedural legitimacy. After all, CCP Central Committee resolutions were, strictly speaking, docu- ments issued by a political party that lacked the same legal force as the national legislature. Much dearer to Deng’s heart was the use of law to create a friendlier legal environment to attract foreign investment. Therefore, from the very beginning, party efforts to introduce legal reforms were focused on passage of the essential commercial laws that underpinned a market economy, such as a contract law, foreign investment law, and company law.35 Additionally, the legal profession, abolished during the Maoist era, was rebuilt. Law schools were reopened to train legal professionals. Courts and procuratorates, previously heavily staffed by discharged military officers with little legal training, were gradually filled with more qualified personnel. Citi- zens enjoyed better legal protections as the state was forced to observe some form of legal procedures.36 Despite progress toward establishing a modern legal system, the party-sanctioned legal reforms in the 1980s were inherently limited. The supremacy of the CCP meant that the party continued to remain above the law and maintained tight control over the courts and procuratorates. Protection of human rights and property rights was spotty. Fragmented au- thoritarianism, a unique feature of the Chinese regime, meant that the imple- mentation of law and the enforceability of judgments could not be ensured at local levels or across different jurisdictions.37 To be sure, the reforms that took place in the legal arena during the 1980s marked a significant improvement over the lawlessness of the Mao era, but they made only modest progress toward establishing rule of law.38 In addition to these legal reforms, the party also gave the NPC a more prominent procedural role in policymaking. Institutionally, the NPC was strengthened by the formation of specialized committees, the establishment of formal legislative procedures, and the recruitment of a more professional staff. Politically, the NPC gained status with the appointment of heavyweight political figures as chairs of its Standing Committee. On occasion, delegates to the annual NPC sessions could voice their views on public policy and even register symbolic disapproval of government performance with “no” votes or abstentions to the work reports of the premier and the presidents of the People’s Supreme Court and the People’s Supreme Procuratorate. Similar in- stitutional developments, albeit to a lesser degree, also occurred at the local levels.39 Although these modest reforms made the NPC a more impor tant -- 41 of 345 -- T h e De c i s i v e De c a de 29 actor in Chinese politics, they fell far short of establishing functional con- straints on the power of the party, which controlled all key appointments to the NPC, set its legislative agenda, and used it mainly as an instrument to le- gitimatize its policies. Attempt at Comprehensive Political Reform, 1986–1987 If there were one brief window of opportunity for the party to implement genuine political reforms to dismantle its totalitarian institutional founda- tions, it was an attempt undertaken by Zhao Ziyang in 1986–1987 with Deng’s support. The paramount leader unexpectedly put political reform on the agenda in the summer of 1986 mainly because he was frustrated by the slow pace of reform in urban areas, which he attributed to obstruction by an inef- ficient party-dominated administrative apparatus, an assessment shared by Zhao as well.40 In June 1986 Deng told leading members of the Central Com- mittee: “Early in 1980 it was suggested that we reform the political structure, but no concrete measures to do so were worked out. Now it is time for us to place political reform on the agenda . . . to create the necessary conditions for sustained economic growth,” warning that “other wise economic restructuring and economic growth will be retarded.”41 However, Deng’s definition and objective of “political system reform” dif- fered fundamentally from Zhao’s. As Zhao pointed out, Deng’s “political sys- tem reform was no more than a form of administrative reform.” His idea of such a reform was not “real political modernization or democratization.” As his goal of undertaking such reform was “to solidify further the CCP’s one- party dictatorship,” Deng resolutely rejected “any reform that could affect or weaken the CCP’s one-party dictatorship.”42 By contrast, Zhao believed that the ultimate objective of political system reform was to “change the party’s complete monopoly of power . . . so as to establish gradually a democratic and accountable system with the CCP as the ruling party.” (Zhao also believed that Hu Yaobang shared the same vision even though Hu had not said much about political reform publicly.)43 Even though Zhao’s concept of political system reform fell short of full democratization, it was much more comprehensive and radical than anything Deng entertained. In Zhao’s judgment, Deng’s fram- ing of political system reform represented a retreat from his famous speech of 1980 on the same subject because it narrowly confined reform to “separating the party from the government, decentralizing power, streamlining bureau- cracy, and improving efficiency.”44 -- 42 of 345 -- 30 c h a p t e r 1 Because Deng had lost trust in Hu Yaobang by the summer of 1986, he as- signed Zhao the task of drawing up a comprehensive political system reform plan. In September Zhao formed a small group, innocuously called the “Cen- tral Research Small Group on Political System Reform,” and chaired it himself. To carry out research and to draft the reform program, Zhao appointed his top aide, Bao Tong, to direct the special office supporting the “Small Group.” Bao recruited a team of liberal intellectuals to staff this office.45 For the next twelve months, Bao’s team labored in secrecy to produce a blue- print of a comprehensive reform that would be acceptable to Deng but would also accomplish Zhao’s goal of introducing modest reforms that, in totality, could help the party-state make the transition from totalitarianism to authori- tarianism. Despite Deng’s restrictive remit, Zhao supported Bao’s team in its exploration of a broad range of sensitive topics beyond the priorities laid out by Deng, in particular the “separation of the party from the government.” Ironically, Zhao’s group had more freedom than it appeared mainly because Deng did not define what he meant by “separating the party from the govern- ment.” For example, the group determined that “the party’s supervision of cadres” did not mean that the party should make specific appointments. In- stead, a civil service system needed to be established as soon as possible, a first step toward extricating the party from the state.46 Besides defining the scope of “separating the party from the government” more broadly, Zhao’s task force also veered off in more sensitive directions. It discussed how to institute “inner-party democracy,” a topic not on Deng’s list of reforms. In addition, the group explored the most sensitive issue of democratization by convening seminars on establishing channels through which various interest groups could engage in dialogue and consult with one another, and on the holding of competitive local elections to select delegates to local people’s congresses.47 After Zhao delivered to Deng the blueprint of the reform, titled “Overall Design for Political System Reform,” in late May 1987, Deng immediately spot- ted the potential in the plan to establish mechanisms of checks and balances that could undermine the party’s monopoly of power. Reiterating his opposi- tion to a “separation of powers,” Deng chided Zhao for “introducing some separation of powers,” even though the plan did not explicitly state this con- cept. Deng again emphasized that the Chinese system was superior because it did not have to face interference from interest groups and because decisions made by the leaders could be implemented immediately. Deng warned that this superiority must not be abandoned just to appease “sentiments for democracy.”48 -- 43 of 345 -- T h e De c i s i v e De c a de 31 Deng’s veiled but unmistakable criticism forced Zhao’s group to scramble to revise the blueprint so that it could win his support. Two months later, Deng approved the revised draft of the “Overall Design”—but only after in- structing Zhao to insert the following sentence: “[We] will never institute the Western practice of a tripartite separation of powers and rotation of powers among multiple parties.”49 In September 1987 the Politburo approved the final draft of the Overall Design “in principle.” But even Deng’s support failed to produce a resounding endorsement by the party (most likely because Deng did not actively promote the plan). When Zhao tabled the Overall Design for discussion at a Central Committee meeting in mid-October 1987, many mem- bers expressed reservations or different views. As a result, he decided not to have the plenum vote on the document because he feared a potential setback. Instead of “approving” it, the plenum’s communiqué stated that the Central Committee “discussed and agreed in principle with the ‘Overall Design.’ ”50 The text of the Overall Design was never made public. Based on the recol- lections of one of the drafters, this document likely stated the guiding princi- ples for political reform and established its objectives in general terms.51 After the Central Committee “agreed in principle” with the Overall Design in late October 1987, Zhao implemented several modest but substantive reforms. To promote inner-party democracy, he made the selection of members of the Central Committee at the Thirteenth Party Congress slightly more competi- tive. As a result, 185 candidates competed for the 175 slots on the committee. The archconservative Deng Liqun suffered a humiliating defeat when he was among the ten candidates who failed to get enough votes to serve. Competi- tive elections for provincial governors and the presidents of the provincial high courts and procuratorates were also introduced in some provinces, resulting in the defeat of a small number of CCP-nominated candidates.52 In an attempt to institutionalize the decision-making process, the Politburo supported Zhao’s proposal to regularize meetings of the party’s Central Com- mittee, Politburo, and the PSC (two plenums of the Central Committee per year; a monthly Politburo meeting; and a weekly PSC meeting). Additionally, again at Zhao’s suggestion, the Politburo formalized the procedural rules for voting in the Politburo, the PSC, and the Central Secretariat, and it mandated that the decisions of each Central Committee plenum and every meeting of the Politburo be made public via the media. (Remarkably, the party still fol- lows some of these rules established by Zhao.)53 Unsurprisingly, the reform to “separate the party from the government” encountered strong opposition because it threatened both the power and the -- 44 of 345 -- 32 c h a p t e r 1 job security of a large number of apparatchiks. Nevertheless, local authorities began to carry out the leadership’s guidelines on restructuring the party’s role in government, such as reducing the number of party secretaries and full-time cadres and abolishing local party departments that were functionally redun- dant to their government counterparts. Zhao made only marginal progress in the central government. The party’s “small groups” in finance, propaganda, foreign affairs, and political-legal work were kept intact, but they could no longer directly intervene or supervise the administrative tasks of the govern- ment. About half of the party groups in the State Council had been abolished by early 1989. Of all the measures to “separate the party from the government,” the most impor tant implemented by Zhao was abolition of the Central Political-Legal Committee, which oversaw law enforcement and the courts. To prevent this powerful body from interfering in the legal system, in 1988 Zhao downgraded it to a “small group.” He also instituted an administrative leadership responsibility system by giving managers, presidents, and directors of state-owned enterprises (SOEs), universities, and public institutions sole administrative responsibilities, thus downsizing the role of the party chiefs.54 Liberalization and Backlash Between 1978 and the Tiananmen crackdown in June 1989, Chinese writers, artists, and intellectuals experienced freedom unprecedented in the post-1949 period, like their counterparts in the former Soviet bloc after the beginning of the “thaw” that followed Nikita Khrushchev’s denunciation of Joseph Stalin in 1956. This wave of liberalization in the literary, artistic, and ideological spheres occurred mainly because of the spontaneous efforts of China’s long- repressed writers, artists, and intellectuals to seek freedom of expression, expose unspeakable suffering and trauma of the Chinese people under the Maoist regime, and challenge orthodox Communist ideology. Importantly, liberal leaders, in particular Hu Yaobang, provided political protection and helped sustain liberalization despite constant conservative backlash. The awakening of Chinese society in the post-Mao period began with the emergence and popularity of the so-called scar literature—short stories, no- vellas, plays, and films based on fictional characters who were victimized dur- ing the Maoist period. This genre gets its name because one of its classics is a short story titled “Scar” (Shanghen), published in 1978 in a major Shanghai newspaper. Its heroine was a young woman who, brainwashed by party pro- paganda, broke off relations with her mother, who was wrongfully persecuted -- 45 of 345 -- T h e De c i s i v e De c a de 33 by the party as a “traitor” and “spy.” But doubt, guilt, and pain tormented the heroine, who was sent to the countryside like many of her contemporaries during the Cultural Revolution. She finally sought reconciliation with her mother, who was exonerated after the Cultural Revolution. But before she could get home, her mother suddenly died. “Scar” became an overnight best- seller and inspired an entirely new genre of works exploring the collective trauma of Chinese society.55 The ostensibly philosophical debate over humanism and alienation under socialism in the early 1980s was another manifestation of the relative freedom of the period. Unlike the scar literature that sought to help a traumatized na- tion confront its darkest days, the discussion of humanism and alienation in socialist societies undermined the ideological legitimacy of Chinese commu- nism. By emphasizing the humanism in Karl Marx’s writings, participants in this debate—exclusively writers, journalists, and social scientists—attacked the brutal rule under Mao as an egregious deviation from Marxism. Even more impor tant, the article launching this debate argued that alienation existed under socialism because the lack of democracy, economic mismanagement, and personality cult resulted in “alienation of power”—the abuse of the power by “the servants of the people.”56 Even after the fall of Hu Yaobang in January 1987, the space for Chinese writers and social scientists did not disappear. Between early 1985 and the Tiananmen crackdown in June 1989, a “culture fever” swept over China. Dur- ing this period, Chinese intellectuals explored a diverse set of topics, such as existentialism, the modernization theory, and contrasts between Chinese and Western cultures. On the whole, the culture fever consisted of a self-critical exploration of the reasons behind China’s economic backwardness and dis- played an eagerness to learn from the West even though one topic that emerged during this period was “neo-authoritarianism,” the theory of successful eco- nomic development under autocratic rule.57 The culture fever reached its peak with the airing of a six-part documentary, River Elegy (Heshang), in June 1988. Written by a leading liberal writer, this series critically examined the factors of China’s failure to modernize and blamed its traditional inward-looking mind- set. China Central Television (CCTV), the country’s primary official media outlet, broadcast River Elegy, which became an instant success but also infuri- ated hard-liners because of its liberal tone and themes.58 These literary, ideological, and artistic efforts in the 1980s had the most profound impact on Chinese intellectuals and university students. Some even called this movement “enlightenment” because, collectively, the ideas and -- 46 of 345 -- 34 c h a p t e r 1 values promoted by these works were generally humanistic, cosmopolitan, and liberal.59 In all likelihood, relative intellectual freedom in the 1980s allowed prodemocracy values to influence a generation of students to press for political openness and democracy, a struggle that would end in the tragic confrontation with the party in June 1989.60 Most accounts of the conservative backlash against liberalization in the 1980s focus on the role of two hard-liners in charge of the party’s ideology and propaganda. One was Hu Qiaomu, a Politburo member (1982–1987) and Mao’s former speech writer. The other was Deng Liqun (no relation to Deng Xiaoping), director of the CCP propaganda department between 1982 and 1987. On the surface, the backing by Chen Yun, their political patron, embold- ened Hu Qiaomu and Deng Liqun to take the lead in attacking liberals, in particular Hu Yaobang.61 In reality, they shared nearly identical views with Deng Xiaoping on the party’s imperative to contain the trends of liberalization in the 1980s. A review of the key episodes of conservative backlash against liberalization in this decade shows that Deng Xiaoping, in fact, played a more prominent and direct role in launching the counterattacks on liberalization. Hu Qiaomu and Deng Liqun often acted with Deng Xiaoping’s instructions and endorsement. Deng Xiaoping demonstrated his staunch opposition to liberalization as soon as he gained political dominance at the end of 1978. When the Democ- racy Wall, the first major mass prodemocracy movement in the post-Mao era, emerged in Beijing in late 1978, he expressed some support, apparently because this movement could weaken Hua Guofeng, then the party leader. But Deng revealed his true stance on democracy after he dethroned Hua in Decem- ber 1978. In March 1979 he not only shut down the Democracy Wall and sen- tenced its most prominent leader, Wei Jingsheng, to fifteen years in jail, but also announced his “four cardinal principles” reaffirming that the party’s monopoly and its official ideology must not be challenged.62 As the trends of liberalization gathered pace in the 1980s, Deng either took the lead or backed the hard-liners in trying to suppressing them. Apparently alarmed by signs of liberalization at the end of 1980, he delivered a tough talk at a conference attended by all senior leaders. He lamented that the party had not put up a vigorous effort to “struggle against erroneous ideas that opposed the four cardinal principles.” After warning against these trends, Deng empha- sized the need to reaffirm the accomplishments and positive aspects of the Maoist era.63 A month after Deng’s speech, the party issued a document -- 47 of 345 -- T h e De c i s i v e De c a de 35 demanding stricter control of the media. Some of the words of the document were verbatim quotations from Deng’s speech.64 In some instances, Deng would personally intervene to fight “bourgeois liberalization.” The censorship of the movie The Sun and the Man [Taiyang yuren] in 1981 was one such example. This movie was based on a script, Unre- quited Love [Kulian], published in September 1979. Its hero is an accomplished artist who returned to China from the West in 1950, only to suffer incessant political persecution during the Maoist period. He later froze to death in the wilderness while on the run. When Unrequited Love was turned into a movie in 1980, it enraged the hard-liners, including Deng Xiaoping. After watching the movie during its prescreening, Deng declared that “the movie smeared the socialist system. . . . Someone said its artistic achievement was high. But pre- cisely because of this, its poisonous harm is all the greater. . . . Could you imag- ine the consequences if ‘The Sun and the Man’ were to be shown in public?”65 Fortunately, resistance from the liberals prevented a full-scale crackdown on the intelligentsia in the wake of this incident.66 Deng Xiaoping’s intervention during the debate on alienation would even- tually result in the party’s “anti–spiritual pollution” campaign in 1983, the first nationwide crackdown on liberalization in the post-Mao era. After liberal in- tellectuals launched the debate on alienation under socialism, the hard-liners, led by Hu Qiaomu and Deng Liqun, tried to suppress the debate and punish the proponents of “alienation under socialism.” After Hu Yaobang thwarted their attempts, the two hard-liners went directly to Deng Xiaoping and appar- ently obtained his support to punish the liberals who started this debate in September 1983.67 The most important fallout from the controversy over “alienation under socialism” was the anti–spiritual pollution campaign. Backing the stance of the hard-liners on the debate in September 1983, Deng Xiaoping said “we must not do (bugao) spiritual pollution.” At a Central Committee plenum on October 12, 1983, he reiterated his resolve, declaring that “spiritual pollution must not be allowed on the ideological front.”68 Deng’s public stance instantly changed the political dynamics. The party’s propaganda machine went into overdrive and launched a nationwide campaign against spiritual pollution. Although the conservatives initially targeted the liberal intelligentsia, they quickly expanded the scope of the campaign to crack down on pop culture, entertainment, and people’s lifestyles, thus fanning fears of another Cultural Revolution.69 Aware of the consequences of the conservative counterattack, -- 48 of 345 -- 36 c h a p t e r 1 Hu Yaobang and Zhao Ziyang formed a united front to put the brakes on the campaign. After realizing the harmful effects of the campaign on his economic reform drive, Deng reversed course. As a result, the campaign died a quiet death within a month.70 The Road to Tiananmen For the first half of the 1980s, Deng appeared to be successful in playing a role as the pivotal player. Economically, his alliance with the liberals achieved criti- cal breakthroughs in the decollectivization of agriculture, liberalization of the economy, and opening to the West. Although he also aligned with the hard- liners during this period in suppressing liberalizing trends, he would quickly reverse course once he realized that political retrogression would threaten economic reform, as shown in the short-lived campaign against spiritual pol- lution in 1983. Politically, he succeeded in containing the liberals with periodic crackdowns on prominent members of the intelligentsia and the causes they advocated without fatally undermining his alliance with them. But starting in 1986 Deng began to find it increasingly difficult to perform this balancing act. As economic reforms in the urban areas turned out to be much tougher than those in the rural areas, Deng began to toy with the idea of endorsing limited political reforms to increase efficiency, but without intro- ducing democracy or undermining the party’s monopoly. His dalliance with political reforms occurred at a time when the intelligentsia and university stu- dents were growing more vocal in agitating for political liberalization. The result was that Deng’s rhetoric on political reform unintentionally encouraged university students to take to the streets in several Chinese cities in late 1986 to demand democratic changes, thus triggering the first of the two major political crises facing Deng in the post-Mao era. But the greatest mistake Deng made, and the one that fatally weakened his effectiveness as the pivotal player, was his decision to sack Hu Yaobang, who consistently resisted pressure from him to crack down on “bourgeois liberal- ization” in the early 1980s. When Deng removed Hu as party chief following the outbreak of the prodemocracy demonstrations in late 1986, he lost a ca- pable ally. Even though Deng managed to appoint Zhao Ziyang, who was at that time a liberal economic reformer, the fall of Hu Yaobang shifted the bal- ance of power decisively in favor of the conservatives. The resultant unfavorable balance of power was likely the cause of the grow- ing resistance Deng faced between 1987 and 1988 to his efforts to accelerate -- 49 of 345 -- T h e De c i s i v e De c a de 37 reforms in the urban areas and to open China’s doors even wider to the West. Even though agricultural decollectivization and liberalization unleashed private entrepreneurs and gave birth to the “township and village enterprises” (TVEs), private firms disguised as collective firms, Deng could claim no progress in restructuring the unprofitable state-owned enterprises.71 An ambitious but ill- timed effort to ram through price reforms in the summer of 1988 led to panic buying and run-away inflation, forcing Deng to retreat and leading to a weaken- ing of Zhao’s position.72 Starting in the second half of the 1980s, the pace of opening up to the West also slowed down. Establishment of the Hainan Ad- ministrative District, with its expanded foreign trade authority, resulted in a smuggling scandal that the conservatives exploited to block Deng from creating a much larger SEZ.73 In terms of economic reforms, Deng had little to show between 1987 and the outbreak of the Tiananmen protests in April 1989. The Fall of Hu Yaobang and the Anti–Bourgeois Liberalization Campaign The surprise dismissal of Hu Yaobang as CCP general secretary in January 1987 marked a political turning point in Chinese politics in the post-Mao era.74 This event not only signaled Deng’s resolve to defend the party’s monopoly on power even at the cost of sacrificing a longtime ally but also foreshadowed his purge of Zhao Ziyang, another trusted supporter, nearly two and half years later. The fall of Hu Yaobang decisively strengthened the hard-liners and weak- ened both Deng and the liberals. The immediate political consequences of Hu’s downfall consisted of a short-lived crackdown on “bourgeois liberaliza- tion” and the stalling of the economic reforms. Given Hu’s liberal political views, it may be difficult to understand why Deng, a staunch Leninist despite his pragmatist streaks, picked him for the position of CCP general secretary. One obvious explanation is their close per- sonal relationship. After Deng returned to power in 1973, he appointed Hu to lead the Chinese Academy of Sciences. During Mao’s campaign against Deng in late 1975, Hu refused to denounce Deng, thus proving his loyalty. Hu’s con- tributions were also considerable during Deng’s power play against Hua Guofeng in 1978, in particular his instrumental role in leading the debate on the criterion of truth and in rehabilitating many senior leaders whom Mao had persecuted during the Cultural Revolution.75 Despite their personal friendship and Hu’s proven leadership abilities, the relationship between Deng and Hu began to fray over the issue of “bourgeois -- 50 of 345 -- 38 c h a p t e r 1 liberalization.” Unlike Deng, who sought to restore CCP legitimacy through economic reforms, Hu envisioned reform as a more comprehensive process that entailed a high degree of democracy.76 During his tenure, he was credited with a dramatic relaxation of the party’s harsh policy toward ethnic minorities, and, in the case of Tibet, he almost single-handedly pushed through a policy that resulted in the withdrawal of many Han Chinese officials and improve- ments in the living conditions of Tibetans.77 On foreign policy, Hu advocated improving ties with Japan. But as a politician in the CCP’s Hobbesian world, Hu’s integrity, tolerance, and openness that endeared him to the liberal intelligentsia turned out to be fatal political liabilities. After he was forced to resign, Hu painfully admitted his naiveté. “[I did] not know how duplicitous people could be,” he told another senior liberal official. “I realized my folly only when I was dismissed at the beginning of 1987.”78 According to Zhao Ziyang, Deng’s erosion of trust in Hu grew gradually in the 1980s because Deng thought Hu was too weak to deal with the emerging liberalizing trends. Zhao believed that Deng and Hu held “genuinely diff erent views” on “bourgeois liberalization,” and the breakdown of their relationship was “unavoidable.”79 As early as July 1981, Deng revealed his dissatisfaction with Hu’s resistance to cracking down on the liberal intelligentsia with his criticism that party work on the “theoretical front,” an area for which Hu was responsible, was “lax and weak.” Their rift widened further even before Deng launched the anti–spiritual pollution campaign in October 1983. Deng blamed Hu for tolerating the growing liberalizing trends among the intelligentsia.80 Although Deng reluctantly called off the anti–spiritual pollution campaign at the end of 1983, Zhao believed that Hu’s apparent resistance to the campaign “aggravated the conflict between them a great deal.”81 Based on Zhao’s obser- vation, Deng had made up his mind to remove Hu in 1986, if not earlier. In the summer of 1986, he privately told a group of veteran revolutionaries that he had made a big mistake in selecting Hu Yaobang and that Hu would not con- tinue to serve as party chief when the Thirteenth Party Congress was convened in 1987. In other words, Hu’s political fate had already been sealed several months before his formal ouster.82 Although Deng made his own decision to dismiss Hu without manipula- tion or pressure by the conservatives, his action could only have delighted the hard-liners who had been seeking Hu Yaobang’s removal.83 Deng launched a nationwide “anti–bourgeois liberalization” campaign after Hu’s dismissal in January 1987, creating another golden opportunity for the conservatives to roll back economic reforms. Even though Deng wanted to limit the backlash -- 51 of 345 -- T h e De c i s i v e De c a de 39 against liberalism to the ideological sphere, the conservatives tried to expand the crackdown to culture, education, science, and the lifestyles of ordinary people. The crackdown had an immediate chilling effect on economic reform. The experiment to empower managers of SOEs ground to a halt, and foreign direct investment plummeted in the first half of 1987.84 To counter the conservative backlash and salvage economic reform, Zhao not only declared to senior officials in January 1987 that the party would not change its policy on comprehensive reform and opening but also warned against “leftist” excesses and another witch hunt.85 Privately, he lobbied Deng in late April, warning him that “some people are trying to use the anti– bourgeois liberalization campaign to undermine reform and opening.” An alarmed Deng immediately gave his personal support to Zhao’s proposal to deliver a major speech that would constitute a counterattack against the con- servatives. Shortly thereafter Zhao delivered his famous “May 13 speech” at a conference for high-level officials that effectively ended the anti–bourgeois liberalization campaign.86 The fall of Hu Yaobang in January 1987 dealt the liberals a near-fatal blow. They lost a powerful advocate for liberalization, and, more impor tant, Hu’s departure greatly strengthened the hard-liners. Because there were no suitable candidates to take over the position of party chief, Deng appointed Zhao to replace Hu, a move that entailed the promotion of Li Peng to the position of premier of the State Council and Yao Yilin to executive vice premier. Now wielding enormous influence over the economy, the two hard-liners were also elevated to the PSC at the party’s Thirteenth Party Congress in fall of that year. The emboldened conservatives soon set their sights on Zhao because he had used Deng’s support to thwart the conservative counterattack against re- form. Zhao further enraged the hard-liners by abolishing the Central Secre- tariat’s Research Office, controlled by the hard-liner Deng Liqun, depriving him of the institutional base that had served as his platform for organizing ideological campaigns against reform. The relationship between the dwindling liberal forces represented by Zhao and the conservatives became so tense that, when Zhao was delivering his keynote speech at the Thirteenth Party Con- gress in October 1987, Chen Yun, the arch conservative and patron of Deng Liqun, stood up and left the stage, in a very public and calculated display of disapproval.87 But the fall of Hu Yaobang also weakened Deng politically because he could be a pivotal player only if the liberal wing in the party on which he had to rely to push through his economic agenda remained strong. Now Deng had a -- 52 of 345 -- 40 c h a p t e r 1 weaker ally to help him counter the conservatives. Between January 1987 and the outbreak of the Tiananmen prodemocracy movement in April 1989, Deng was unable to advance any ambitious economic reforms. The strategy of focus- ing on developing an export-oriented economy on China’s coast, which Zhao proposed, did not become actual policy despite Deng’s backing. The price reform Deng tried to rush through in the late summer of 1988 only succeeded in triggering an inflation crisis, which undercut Zhao’s authority and enabled the conservatives to mount a retrenchment campaign to roll back the eco- nomic reforms. The Tiananmen Crisis and the Fall of Zhao Ziyang Before the fall of Hu Yaobang in January 1987, Zhao was not the primary target of the conservatives, who saw Hu, party general secretary responsible for day- to-day party affairs, as a much greater threat than Zhao. Zhao avoided direct attacks by the conservatives also because he seldom spoke out on sensitive ideological issues, and his effective implementation of reformist policies had earned Deng’s strong support. However, after Deng replaced Hu with Zhao as party chief in January 1987, it did not take long for the conservatives to start trying to topple him. The campaign against Zhao gathered momentum in the summer of 1988 when a poorly timed proposal by Deng to implement price reform triggered a spike in inflation. Although Zhao had not proposed the idea, he took responsibility to avoid placing the blame on Deng.88 The conser- vatives in charge of the State Council, Li Peng and Yao Yilin, seized this op- portunity to sideline Zhao in economic policymaking. A group of retired lead- ers reportedly wrote a joint letter to Deng calling for Zhao’s dismissal. However, Deng stood by Zhao, telling him that he wanted him to serve a sec- ond term as the party chief and even offering him the position of chairman of the CMC at one point.89 Although Deng’s support helped Zhao retain his job, his position had become increasingly untenable by early 1989. After college students in Beijing went to Tiananmen Square to mourn the death of Hu Yaobang on April 15, 1989, the conservatives finally got their op- portunity. By pure coincidence, Zhao Ziyang was scheduled to leave Beijing for an official visit to North Korea on April 24. Before Zhao left Beijing, how- ever, he went to see Deng and obtained support for his proposal to take mod- erate measures to deal with the demonstrations. But immediately after Zhao left Beijing, the conservatives called a PSC meeting to discuss the situation in Beijing, even though the student-led demonstrations had all but died down -- 53 of 345 -- T h e De c i s i v e De c a de 41 by then. In Zhao’s absence, the conservatives could turn Deng, a hard-line authoritarian, into an ally. Indeed, on April 25 Li Peng went to Deng’s house to report on the discussions during the PSC meeting the previous night. Deng’s reaction was predictable: He immediately declared that the events in the square were “not an ordinary student movement but a turmoil,” and he called for a speedy and tough reaction, which completely contradicted his prior support for Zhao’s proposed moderate approach. Even though Deng’s speech was not supposed to be publicized, Li Peng circulated it among senior party officials and then turned it into the infamous People’s Daily editorial published on April 26, apparently without consulting Deng. Publication of this editorial, which was known to reflect Deng’s hard- line stance, instantly fueled anger among the students and turned them against Deng. The next day, hundreds of thousands of students again took to the streets of Beijing, calling on the party to retract the editorial, an impossible demand because that would be a public humiliation for Deng. After Zhao’s return from North Korea on April 30, he tried in vain to de-escalate the con- frontation. By that time, however, Deng was no longer open to suggestions for a moderate solution. He refused to grant Zhao an audience, an indication of his loss of confidence in Zhao. The final break between Deng and Zhao occurred on May 16, when Zhao disclosed at a meeting with visiting Soviet leader Mikhail Gorbachev that Deng remained the party’s ultimate decision-maker. According to Zhao, he had made similar statements earlier to other Communist leaders, and, in this particular case, his intent was to affirm Deng’s authority and prestige, not to undermine him. However, Deng apparently thought Zhao was trying to shift the blame to him, thus further enraging him, as Zhao later wrote. Deng must have viewed Zhao’s action as treachery. The next day, May 17, Deng decided to impose martial law and fired Zhao.90 On June 4, more than two weeks later, PLA tanks rolled into Beijing and crushed the Tiananmen prodemocracy movement, killing at least hundreds of students and ordinary citizens in both the capital and the provinces.91 In retrospect, the Tiananmen massacre and the fall of Zhao, a turning point in post-Mao history, appear to have been entirely avoidable. Obviously, had Zhao postponed or canceled his scheduled visit to North Korea, the conserva- tives could not have outmaneuvered him and turned Deng into their ally. Gor- bachev’s untimely visit to Beijing was another factor. The student movement had lost momentum by early May, but Gorbachev’s scheduled visit on May 15–16 gave the sagging movement a second wind, as students took -- 54 of 345 -- 42 c h a p t e r 1 advantage of the international media spotlight to stage a mass hunger strike on Tiananmen Square to pressure Deng. Historical contingencies, in this case, may not have played as critical a role as one might have wished. Today, one can make the case that by early 1989 Deng’s reform and opening was in deep trouble, largely due to Deng’s own mistakes. His hostility to democracy and liberalism led him to sack Hu Yao- bang, fatally weakening the liberal wing that he had to rely on to prevail against the hard-liners. Although he managed to replace Hu with another reformer, Zhao Ziyang, the emboldened and strengthened conservatives took over the State Council and wasted no time in waging a campaign to topple Zhao. They succeeded all too soon, again thanks to help from Deng Xiaoping. Reflections The reforms undertaken by the party in the 1980s constituted a comprehensive political institutionalization effort aimed mainly at stabilizing a regime ravaged by the radicalism and brutality of the Cultural Revolution. On the whole, the party’s reforms to reinstitute collective leadership, improve elite security, and establish rules on term and age limits marked an important step in the transi- tion away from totalitarianism. Additional reforms, such as building a legal system and relaxing social control, helped create a more friendly business en- vironment and greater space for personal freedom. However, these restorative reforms had serious limitations. The self-interests of the top leaders, especially Deng himself, diluted the application and effectiveness of the reforms. In prac- tice, as these top leaders were exempt from the rules, the reforms failed to constrain them from violating the very rules and norms they were trying to enshrine. Most critically, the reforms were not backed by effective mechanisms of enforcement. This might not have been a problem when there was a rough balance of power among competing factions, as was the case in the 1980s and in the post-Tiananmen period (1992–2012). But when this balance of power broke down and a strongman re-emerged, the institutional reforms Deng had put in place crumbled quickly. A feasible solution is to establish genuine institutional constraints within the regime, such as by introducing inner-party democracy, reducing the power of the Leninist party-state, and creating more political space for other autono- mous social forces. Indeed, the political reform blueprint Zhao and his advis- ers conceived in 1986–1987 was intended to accomplish these objectives. In this sense, Zhao’s attempted institutional reforms were transformative, not -- 55 of 345 -- T h e De c i s i v e De c a de 43 restorative. They were far more radical than the relatively modest steps Deng had taken earlier in the decade to repair the damage inflicted on the party by Mao. If Deng’s reforms were designed to preserve the core features of Lenin- ism and make party rule more stable and durable, Zhao’s reforms sought to turn a post-totalitarian regime into a looser and more pluralistic authoritarian regime dominated by one party. Sadly, Zhao’s efforts did not succeed. After making some real, although modest, initial progress, Zhao’s reforms stalled. As he later admitted, “in reality, after the Thirteenth Party Congress, it became very difficult to implement or sustain political system reform.”92 When the PLA tanks rolled into Tiananmen Square on June 4, 1989, the party not only crushed the prodemocracy movement but also extinguished any hopes of a regime-initiated gradual transition. In retrospect, however, the pathway to democracy via a party-sanctioned program of reform was too narrow to be viable. Regime-initiated reform, or “transformation,” according to Samuel Huntington, requires that the reform- ers in the regime maintain political dominance.93 But with Deng firmly aligned with the hard-liners in opposing any change that could undermine party power, the balance of power decisively favored the hard-liners. This balance grew even more lopsided after the dismissal of Hu Yaobang in January 1987. The greatest negative legacy of the 1980s is the preservation of the core institutions of a totalitarian regime. The tenacious opposition to political lib- eralization by Deng and his hard-line allies shielded these institutions from even the moderate reforms envisioned by Zhao’s task force in 1987. Through- out the 1980s, as would be the case in the post-Tiananmen period as well as in the Xi Jinping era, the CCP maintained a monopoly on violence through its direct control of the military and other coercive forces. It was the military that saved the party from the nationwide popular prodemocracy movement in the spring of 1989. The modest steps Zhao took to “separate the party from the government,” most of which were reversed after his purge, hardly made a dent in the party’s tight grip on the Chinese state. Throughout the post-Mao period, the party remained as deeply entrenched in the state as ever. The party’s control of information in the 1980s was weakened moderately, due partly to protection of the liberals by reformers such as Hu and Zhao, and partly to the impact of an increasingly commercially oriented media market.94 But the mechanisms that enabled the party to limit access to information, such as state-owned television networks, newspapers, and publishing companies, the prohibitions against private ownership of media outlets, and the party’s nationwide propaganda networks that censor news, were kept, allowing the -- 56 of 345 -- 44 c h a p t e r 1 party to tighten the control whenever needed. The use of terror, a hallmark of totalitarianism, declined significantly throughout the 1980s. However, the party retained its capacity to deploy terror against certain segments of the population (as during Deng’s draconian anticrime drive in 1983) or to crush prodemocracy forces (as in the Tiananmen crackdown in 1989). The only area in which the reforms of the 1980s substantially undermined party control was the economy. The rapid growth of the private sector broke the party-state’s monopolistic control of the economy and fueled hopes that the growth and consolidation of a market economy would not only spur mod- ernization but also deconcentrate vital resources away from the state. Yet, the experience of the post-Tiananmen decades reveals the limits of capi talist eco- nomic modernization in promoting political change. Despite sustained double-digit growth over a period of twenty years (1992–2012) and the emer- gence of the private sector as the largest contributor to economic output, the party’s hold on power showed no signs of weakening. If anything, the party not only gained legitimacy from the ever-rising living standards but also ac- quired greater capabilities of control and coercion to defend its political mono poly. -- 57 of 345 -- 45 2 Reform and Growth in the 1980s most accounts of China’s post-Mao economic history characterize gradu- alism as a deliberate decision made by its leaders to avoid initial costly mistakes.1 As with most conventional wisdom, this observation is partly true. This narra- tive, however, obviously downplays the fact that the party decided to pursue a cautious and incremental course of reform because opposition by hard-liners made it impossible to undertake more radical reforms. More critically, once Deng Xiaoping decided to rely on capitalist tools to save the CCP, the actual range of choices for economic reform strategy was limited. Stated simply, a full and unconditional embrace of a market economy was out of the question po- litically because this would entail the demolition of the economic foundations of one-party rule. This danger did not deter Deng from courting capitalism in the 1980s because he was willing to try anything to salvage a regime devastated by three decades of Maoist misrule, but the threat of a decentralized market economy to one-party rule would mushroom decades later as the private sector overtook the state sector as the most dynamic economic force. In the 1980s, fortunately, the prospect of a capitalist subversion of the CCP’s political monopoly seemed so unreal that, despite staunch conservative op- position, the party went along with Deng and opened the door for domestic private entrepreneurs and foreign investors. What the party did not foresee was how fast capitalism would grow and thrive in a semihostile environment. Unfortunately, the logic of path dependence also means that the party’s half- hearted embrace of capitalism would set firm boundaries for the reach of the market and preserve the regime’s control of what Vladimir Lenin called the “commanding heights” of the economy. The resultant hybrid economy would eventually exhaust its initial dynamism and begin to ossify and stagnate. The emergence of China’s hybrid economic system in the 1980s can be di- vided into two phases. The most impor tant achievement in first phase, -- 58 of 345 -- 46 c h a p t e r 2 1979–1983, was the rapid decollectivization of agriculture. This breakthrough not only raised rural productivity and output dramatically but also paved the way for the rise of a dynamic private sector and established the foundations of China’s dual-track economy: a highly efficient private sector alongside an inef- ficient state-owned sector. Reform of the urban sector, where the economy was dominated by the state-owned enterprises, began tentatively in this period and made no meaningful progress. In this phase, reformers led by Deng Xiaop- ing also launched “opening”—integration with the global economy through attracting foreign direct investment and promoting foreign trade. Compared with the successes of rural reform and the opening to the outside world achieved in the first phase, the second phase, 1984–1989, delivered far less impressive reform outcomes mainly because of the complex challenges of reforming SOEs, growing conservative resistance, and Deng Xiaoping’s dismissal of the party’s general secretary Hu Yaobang in January 1987, a move that seriously weakened the reformist camp at the top. In spite of China’s failure to reform its large and inefficient state-owned sector in the second phase, it built the foundations of sustained rapid growth in the 1980s, thanks to the rapid growth of the private sector and foreign- invested firms. Ironically, this development, especially the rise of a vibrant domestic private sector, was not the planned outcome of Deng’s reform. Due to political opposition and the technical difficulties in reforming SOEs, re- formers wisely opted for the path of least resistance: liberalizing the economy to bring into the marketplace far more efficient nonstate firms as the new en- gines of growth. Political expediency aside, this pragmatic approach to reform was also made possible by, paradoxically, the absence of a clear and compre- hensive strategy to transform a state-socialist economy into a market-oriented one. Instead of following a rigid approach, Chinese reformers relied on learning-by-doing and avoided making costly mistakes in the early phase of the transition that could doom the entire enterprise. Origins of Chinese Experimentalism When China began to reform its economic system in the early 1980s, its lead- ers were in unchartered territory as they could not draw much guidance from economic theory or real-world examples.2 The neoclassical economic litera- ture was irrelevant for a country embarked on a transition from a nonmarket economy to another system. The experience of limited economic reform in Eastern Europe (mainly Hungary and Yugoslavia) in the 1960s and 1970s was -- 59 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 47 only marginally useful because these efforts focused on SOEs and ultimately failed to produce meaningful economic improvements. However, what Chinese policymakers lacked in theory was more than com- pensated for by their overriding political imperatives and pragmatic instincts. Politically, the top leaders knew they must produce higher growth to bolster CCP legitimacy after decades of economic mismanagement under Mao. Deng Xiaoping put it bluntly in October 1979: “Economic work is the greatest politics today. The economic issue is the overwhelming political issue.”3 As for how to achieve this objective, Deng’s answer was straightforward, though it lacked spe- cifics: “The goal of our revolution is to liberate and develop productivity.”4 To “liberate productivity,” China’s initial efforts were focused on making the existing system more efficient mainly through decentralization, instead of replacing it altogether. Starting in 1979, decentralization consisted of granting local governments more autonomy in economic management and incentiv- izing them with “fiscal contracting.” This allowed provincial governments to retain surplus revenues after they met the quota of tax revenues to be paid to the central government.5 The pragmatic instincts of the Chinese leaders led them to prefer experimental measures to decisive but risky steps. This cautious approach was necessitated by both opposition from conservatives resisting full liberalization and a lack of the requisite knowledge or theoretical guidance. Consequently, reform measures were rolled out gradually, typically first in a small number of localities to gain valuable knowledge and avoid pitfalls.6 One such example was the economic opening to the West, which occurred through a series of cautious reforms, such as the establishment of four SEZs in Guang- dong and Fujian in the early 1980s, the gradual extension of policies to key coastal cities, and piecemeal reforms of the foreign trade regime. Another ex- ample is the price reform of the 1980s, which started with a unique “dual-track” pricing system featuring both government-mandated prices and market- determined prices.7 The only big-bang reform breakthrough—in agriculture— occurred not because of a deliberate strategy by the top leadership but because of a combination of bottom-up peasant initiatives and support by reformers in a few key provinces in 1979.8 Although it is common to credit China’s “learn-by-doing” strategy of the 1980s for the initial success of its economic reform, it would be unfair to dis- miss the influence of ideas and lessons from Eastern Europe and the West in helping Chinese policymakers and economists gain a deeper and more sophis- ticated understanding of the nature, scope, and challenges of their tasks. If anything, one of China’s initial moves was to dispatch a number of senior -- 60 of 345 -- 48 c h a p t e r 2 officials and economists to visit countries in Eastern Europe, Western Europe, and East Asia to gain useful lessons, insights, and knowledge about economic reform.9 The World Bank, eager to help chart China’s course, provided invalu- able technical assistance. The head of the bank’s office in Beijing organized seminars for technocrats and rising economists in the Chinese government. The most influential event was a seven-day seminar on a cruise along the Yang- tze in September 1985 attended by prominent economists from Eastern Europe and the West. Many of the Chinese participants in the seminar later became influential players in the Chinese reform, such as Wu Jinglian, Gao Shangquan, Guo Shuqing, and Lou Jiwei. Impressed by the value of the World Bank’s tech- nical assistance, in 1983 Deng invited the bank to conduct a comprehensive study of the Chinese economy and identify the policy choices it faced. This led to a milestone study by the World Bank, published in 1985 and titled “Issues and Choices for Long-Term Development,” which drew heavily on the bank’s knowledge of developing economies.10 Gradually and cumulatively, these intellectual interactions, especially those with Eastern European economists (the most influential were Janos Kornai from Hungary, W łodzimierz Brus from Poland, and Ota Šik from Czechoslovakia), led some Chinese reformers to conclude that economic re- form was “not a collection of random policies” but a “systemic transition.” Decentralization and liberalization, hallmarks of the gradualist reform in the 1980s, were too limited to achieve a transition to a different economic system. Consequently, Chinese reformers began to look elsewhere for insights and inspirations. Two models—the Western liberal model and the East Asian developmental state model—began to gain influence. For Deng, the East Asian model held stronger appeal because of the leading role played by an authoritarian state.11 This brief account of the evolution of China’s economic reform strategy shows that in the 1980s China mainly followed an experimental and improvi- sational approach, appropriately captured by the idiom, “crossing the river by feeling for the stones.” But Chinese leaders adopted this largely successful strategy out of necessity. The top leaders were divided about the goal and pace of reform, and even those committed to reform lacked the necessary intel- lectual tools or real-world models. Fortunately, interactions with their counter- parts in the West and Eastern Europe helped Chinese economists realize the limits of piecemeal experiments and administrative decentralization and led them to gravitate toward a far more comprehensive and coherent strategy of transition. Because of the post-Tiananmen political turmoil and the brief -- 61 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 49 conservative backlash against reform during 1990–1991, China would have to wait until after Deng’s historic southern tour in 1992 to implement a full pack- age of institutional reforms that marked the beginning of a qualitatively differ- ent phase of its transition. Rural Breakthroughs When CCP leaders pivoted away from Maoist class struggle to economic modernization in 1979, one of the strategic choices they faced was where economic reform should begin. At that time, the Chinese economic structure was severely distorted in terms of population and output. The countryside contained 82 percent of the population in 1978, but the rural sector accounted for only 28 percent of economic output. In other words, China was both under- urbanized and highly industrialized (with industry producing 48 percent of output in 1978).12 Economically, it might appear that reforming the industrial sector, the largest contributor to economic output, could de- liver faster and better results. However, reform in China started not in the urban industrial sector but in the impoverished countryside. Reforming the industrial sector based in urban areas might have appeared to be a promising way to improve performance and produce a bigger bang, but political resistance to reform in the SOE-dominated industrial sector was strong. Technically, industrial reform was also far more complex, entailing not only changes in firm management and ownership but also a whole set of complementary institutional reforms involving prices, fi- nancial markets, and social safety nets. If political opposition and technical challenges made rural reform more attractive than industrial reform, one might have expected the top party lead- ers to proactively pursue this route in 1979 or the early 1980s. But they did not. Rural reform began mainly as a bottom-up revolution waged by long-suffering peasants who received, in its early days, the support of only a small number of provincial party leaders, most notably Wan Li in Anhui and Zhao Ziyang in Sichuan. In fact, the CCP Central Committee issued a rural policy directive in September 1979 that explicitly discouraged decollectivization.13 Opponents to rural reform included Hua Guofeng, who was still nominal party chairman, Li Xiannian and Hu Qiaomu, two hard-liners who consistently opposed eco- nomic reform in the 1980s, and a large number of provincial party chiefs. Chen Yun, the conservative standard bearer, was neutral, however. From the very beginning, Hu Yaobang was the most enthusiastic supporter of rural reform -- 62 of 345 -- 50 c h a p t e r 2 among the top leaders. Deng supported the “household responsibility sys- tem,” the rural reform that effectively decollectivized agriculture, but he did not publicly endorse the reform until May 1980.14 According to Zhao Ziyang, Deng’s tacit support was critical to the success of the rural reform because it prevented the emergence of unified opposition among the party’s top eche- lon.15 The party did not formally approve the household responsibility system until the beginning of 1982.16 Judging by the speed and scope of agricultural decollectivization, which began in 1978 and was completed throughout the country by 1982, rural reform should be considered a radical big bang in one of the most important economic sectors.17 Although China’s post-Mao economic reform is often characterized as a case of “gradualism,” in reality the country experienced both a “big bang” and a gradualist course of reform. China’s big-bang approach to agricultural reform was feasible and successful mostly because the state-socialist system was less deeply entrenched in the countryside, and collectivized agriculture had victimized almost the entire rural population. By comparison, strong political opposition at the top, groups benefiting from a command economy (planners, managers, and workers in SOEs), and genuine technical difficulties of industrial reform compelled China to adopt a more cautious step-by-step approach in this area. The end of collectivized agriculture produced an instant increase in pro- ductivity. Agricultural output, measured in constant prices, rose an average of 8.7 percent annually between 1979 and 1984.18 Academic studies show that a radical institutional change—replacing the Maoist people’s communes with private household farming—contributed at least half of output growth in the agricultural sector during this period.19 The rural breakthrough in the early 1980s had vast—and positive—implications for Deng’s reform. The rapid gains in productivity and standard of living due to agricultural decollectiviza- tion generated valuable political capital for the reformers as rural per capita income grew threefold from 1978 to 1985 in real terms.20 Few appreciated the political benefits of the early success of reform in the rural sector as acutely as Deng, who said in 1985, “To make our domestic economy dynamic, we must start with the countryside. Eighty percent of the Chinese population is in the countryside. Whether Chinese society can be stable and the Chinese economy can develop depends on whether the countryside can develop and the life of peasants can improve.”21 More important, liberation of the peasantry from the yokes of the people’s communes was the first step in creating a private sector, which later became -- 63 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 51 the most dynamic engine of growth. The connection between decollectiviza- tion and the private sector became obvious only in hindsight. In reality, the emergence of the private sector in the countryside during the post-Mao era was an inevitable outcome of the successful rural reform. Increased productivity and output freed up a huge amount of labor and allowed peasants to accumu- late savings to finance nonagricultural activities, thus creating two necessary conditions for a nascent private sector: entrepreneurs and capital. The dismantling of the communes opened up an unanticipated opportunity for rural entrepreneurs because the communes had accumulated considerable industrial assets during the Great Leap Forward (1958–1959) and the agricul- tural mechanization campaign in the Cultural Revolution. After the com- munes disappeared, some of these assets were effectively privatized (usually in the form of leasing), while others were transferred to newly formed collec- tive firms that were nominally owned by township and village governments. This development laid the early foundations for China’s township and village enterprises.22 Several other factors also contributed to the rapid growth of the TVEs. Due to fiscal decentralization in the early 1980s, local authorities had strong incentives to support industrial growth in their respective areas because nonagricultural activities generated more tax revenues.23 The neglect of light industry and the service sector in favor of defense-related heavy industry during the Maoist period also meant that there was a severe shortage of consumer goods and services, which presented a huge opportunity to be exploited by rural entrepreneurs. Consequently, the market-oriented TVEs quickly gained a competitive edge over the SOEs in supplying consumer goods and services. They also began to contribute a rising share of Chinese exports.24 Policy support from Beijing mainly consisted of allowing rural entrepre- neurs access to rural credit co-ops and informal financing.25 The dual-track price reform, however imperfect, allowed TVEs to purchase vital inputs legally because this reform encouraged SOEs, which monopolized the production of steel, aluminum, chemicals, and other upstream materials used for the manufacturing of consumer goods, to sell their products to TVEs at higher, market-based prices.26 The explosive growth of TVEs in the 1980s (table 2.1) was a positive devel- opment totally unanticipated by even the most ardent reformers. Deng admit- ted in 1987 that “our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by -- 64 of 345 -- 52 c h a p t e r 2 villages and townships. They were like a new force that just came into being spontaneously. . . . The Central Committee takes no credit.”27 Because the TVEs were officially designated as “collective” firms owned not by the state or private individuals but by a local collective entity, such as a village or township, one may have the impression that they were not genu- ine private firms. In fact, however, many were bona fide private firms despite the designation of “collective firms” because the latter provided more political protection in an era when private ownership of property was not officially endorsed by the party or legally protected by the Chinese constitution (the constitution was not amended until 2004 to protect private property). Re- search by Yasheng Huang shows that by 1987, private TVEs accounted for half of the output of all TVEs in eight provinces and 30–50 percent of the output of TVEs in fifteen provinces. In 1989 private TVEs contributed 58 percent of after-tax profits of all TVEs and accounted for 45 percent of the wage bill of all TVEs.28 Another far-reaching consequence of the TVEs is that they gave rise to a new generation of private entrepreneurs.29 Those who leased the assets of TVEs or later assumed managerial responsibilities in them built thriving pri- vate businesses. The most successful became tycoons who led globally com- petitive firms, such as Fuyao Industrial Glass Group (a global leader of auto glass founded by Cao Dewang) and Wang Xiang Group (an auto parts maker founded by Lu Guanqiu). Entrepreneurs who did not lease or manage TVEs but were able to scrape together enough capital also started businesses that grew into thriving private companies, such as New Hope Group, which began as a small Sichuan company producing animal feed. A government-sponsored study of rural entrepreneurs in 1991 found that 19 percent were the heads of TVEs and 13 percent had at one time worked in TVEs. In other words, roughly one-third of all rural entrepreneurs were connected with the TVEs. Other studies show that between 17 percent and 47 percent of private entrepreneurs had been senior executives or workers in TVEs.30 table 2.1. Growth of the TVEs in the 1980s Year Number of TVEs Employment Gross Output (billion yuan) 1980 1,420,000 29,997,000 65.69 1984 6,065,000 52,081,000 170.99 1989 18,686,000 93,668,000 742.84 Source: ZGTJNJ 1995, 363–65. -- 65 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 53 Opening to the World China’s economic engagement with the world was miniscule relative to its size due to Mao’s policy of “self-reliance.” In 1978 total foreign trade was only $20.6 billion, or 10 percent of China’s GDP.31 But economic reintegration into the global trading system was crucial to the success of the country’s moderniza- tion. Deng, who likely acquired a cosmopolitan outlook during his five-year sojourn in France (December 1920 to January 1926), viewed opening as a top priority and subsequently invested enormous political capital to push for re- forms to attract foreign capital.32 More than any other Chinese leader at the end of the 1970s, Deng recognized that a favorable external environment, in particular warming ties between China and the West, would provide a window of opportunity. In May 1979, shortly after he reached political supremacy, Deng told a French delegation that “now we enjoy relatively favorable inter- national conditions and can introduce advanced technology, research prod- ucts, and considerable international capital from the U.S., Europe and Japan. In the first twenty years of the [PRC] we did not have such international con- ditions. . . . We must adopt a policy of opening.”33 In the early years of reform, Deng effectively made himself China’s chief salesman to the West. His visits to the United States (in early 1979) and Japan (in October 1978 and February 1979) cemented diplomatic foundations with the two countries that were most critical to Chinese modernization. Deng also carried out a tireless campaign with visiting foreign dignitaries and business- men to promote his policy of opening. The official chronology of Deng’s ac- tivities in 1978 shows that during that single year he spoke to thirty-one visiting del egations of foreign businessmen and politicians about his policy of open- ing. In 1979 he delivered the same message to thirty- five visiting del egations.34 At the same time, Deng made it clear to the party that opening to the West was integral to his reform agenda, and he repeatedly emphasized that China had to seize this window of opportunity. Speaking to provincial party chiefs in October 1979, Deng devoted an entire section of his talk to foreign invest- ment and trade. “We must utilize foreign capital in whatever form,” he stressed. “This is such a rare opportunity and it would be a shame to pass it up. Utilizing foreign capital is a major policy. . . . I believe we should persist. . . . We must encourage exports.”35 He was even more explicit a month later: “Achieving the four modernizations requires a correct policy of opening to the outside. Al- though we will rely mainly on our own efforts, resources, and foundations, -- 66 of 345 -- 54 c h a p t e r 2 [the four modernizations] would not be possible without international coop- eration.”36 An important reason why China had remained backward econom- ically, according to Deng, was “its policy of closing the country to outside contact. Our experience shows that China cannot rebuild itself behind closed doors.”37 Politically, it is not difficult to see why Deng prioritized opening. He was more directly involved personally in promoting policies to attract foreign in- vestment and increase exports than he was in pushing for domestic reform. Also, domestic economic reform faced greater political resistance because it threatened entrenched interest groups, such as those in the state-owned sector. Outside the agricultural sector, which was quickly privatized, radical reform in urban areas would also encounter more practical difficulties and entail greater political risks. For example, restructuring the money-losing SOEs through bankruptcy or privatization would need new legal tools and a func- tioning capital market, which China still lacked in the early 1980s.38 In the meantime, price reform, which could unleash temporary inflation, was politi- cally risky. As an astute practitioner of geopolitics, Deng took full advantage of China’s crucial role as a counterweight to the Soviet Union during the Cold War to reap substantive economic benefits from the West, in particular capital, technology, and access to markets. Given the overwhelming political logic for opening, Deng lent his support to a series of reforms to attract foreign invest- ment and increase Chinese exports. Legislation to Attract Foreign Direct Investment Topping Deng’s agenda to attract foreign capital was establishment of a legal framework. In May 1979 he told a delegation of Japanese legislators that China was considering setting up joint ventures with foreign investors and passing a law on foreign investment to underscore its policy of opening. He listed a set of laws on patents and international trade that would also need to be enacted.39 In July 1979 the NPC passed the historic “Chinese-Foreign Equity Joint Ven- tures Law” to create a legal framework for allowing foreign investors to operate in China. Among other things, the law stipulated that a foreign partner had to put up at least 25 percent of the equity in a joint venture. Although the law did not limit the total amount of equity the foreign partners could invest, the prac- tice was that their total contribution was not to exceed 50 percent of the equity. (The draft of the law sought to explicitly limit the amount of equity of foreign investors to 49 percent, thus making the foreign investors minority owners, -- 67 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 55 but Deng quashed the idea after learning that such a provision was not an in- ternational norm.)40 Foreign joint ventures were encouraged to source local materials, bring in advanced technology, and export their products in ex- change for tax benefits. The Chinese partners could contribute land as part of their equity (the law would later be revised on three occasions before it was annulled in 2020).41 Although it did not offer substantial benefits to foreign investors, who often found the law’s provisions restrictive and vague, it never- theless signaled China’s desire to welcome foreign capital and opened the door slightly for foreign investors to enter a potentially huge market that had long been closed to the outside world. (Deng said that, despite its flaws, the law was a statement of “our political desires and goals.”)42 The second law, promulgated by the NPC in 1986, most likely to make for- eign investment even more attractive than joint ventures, was the “Foreign- Capital Enterprises Law,” which allowed foreign investors to set up wholly owned firms in China. The law included only a small number of general provi- sions, but, like the law on joint ventures, it encouraged wholly owned foreign firms to introduce advanced technology, source locally, and export their prod- ucts in exchange for tax benefits.43 The State Council issued a far more detailed regulation on wholly owned foreign firms in 1990, with more specific, but also restrictive, provisions. Most important, foreign investors were allowed to set up wholly owned firms only if (1) they brought in advanced technology and equipment; (2) they could manufacture products to substitute imports; or (3) they could earn enough hard currency to cover their foreign exchange expenses. China also kept many sectors—media, broadcasting, films, domestic retail, foreign trade, insurance, and telecommunications—off-limits to wholly owned foreign firms. Other sectors, such as public utilities, transportation, and real estate, were open to foreign investment but only with severe restrictions. Furthermore, all wholly owned foreign investment was subject to a national security review.44 In the late 1980s the Chinese government passed another law, the “Chinese- Foreign Contractual Joint Ventures Law,” making it attractive for foreign com- panies to bring intellectual property rights and management know-how to China in lieu of capital.45 These three laws, which were later revised several times to make them more liberal, laid a legal foundation to attract foreign capital and technology. But based on their still relatively restrictive provisions, which likely reflected both conservative opposition and lingering distrust of foreign capital, it is doubtful that these three laws on their own played a pivotal -- 68 of 345 -- 56 c h a p t e r 2 role in persuading foreign investors to bring their capital to a country that had yet to establish a record as a safe and welcoming place for outsiders. Despite Deng’s heroic efforts to welcome foreign investment, only a modest amount of foreign capital actually flowed into China in the 1980s. Special Economic Zones A tentative but politically bold step taken by Deng and fellow reformers in the late 1970s was the establishment of SEZs. To be sure, the idea of attracting for- eign investors by providing tax benefits and other privileges to set up shop in a designated jurisdiction for export-processing was not a Chinese invention. Tai- wan, South Korea, Malaysia, and other countries in Asia had pioneered export- processing zones (EPZs) in the 1960s to promote labor-intensive exports.46 However, for a country with fresh memories of Western “concessions” (areas within China where Westerners had exercised quasi-sovereign control) during the pre-1949 era, the creation of zones that would grant foreign investors privi- leges that were denied to Chinese people was fraught with political risks. But the potential ideological and nationalist backlash did not deter Deng. In April 1979 he responded enthusiastically to a proposal made by Xi Zhongxun (then the party chief of Guangdong) and Yang Shangkun (a close ally of Deng) to set up EPZs in Shenzhen, Zhuhai, and Shantou, three underdevel- oped areas close to Hong Kong. The only twist was Deng’s suggestion that they be called “special zones” (tequ). According to him, the central govern- ment would give policy preferences instead of money to attract foreign businesses to these zones. Due to his intervention, in July 1979 the central leadership approved requests from Guangdong and Fujian for special policy treatment and flexibility, and by May 1980 the central government formally approved the establishment of four SEZs—in Shenzhen, Zhuhai, Shantou, and Xiamen.47 Shenzhen was by far the largest: Even though at the time it was only a small fishing village with a population of thirty thousand, the entire territory of over 327 square kilometers was allocated for the SEZ. China made Shenzhen the largest SEZ because it bordered Hong Kong and could attract investment from the then-British colony. The other three SEZs were much smaller: Zhuhai, which bordered Macao, consisted of only 14 square kilo- meters, and Shantou was only 6 square kilometers. Initially, only one district in Xiamen was designated as an SEZ, but in 1985 the central government ex- panded the Xiamen SEZ to include the entire city, with 131 square kilometers of land.48 -- 69 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 57 The primary objective in establishing the SEZs was to attract FDI and to set up export-processing factories to earn foreign exchange.49 The NPC passed special legislation in August 1980 on Guangdong’s SEZs that offered foreign investors favorable tax treatment and operational autonomy. For example, such investors could form wholly owned firms in the SEZs so as to retain full management control, a privilege denied to foreign investors elsewhere in the country. Those firms operating in the SEZs could import their equipment and materials duty- free. Furthermore, their profits would be taxed at only 15 percent, and additional tax subsidies would be made available for firms that invested more than $5 million or reinvested their profits in the SEZs. In return, firms in the SEZs were required to export their products.50 Despite the enormous attention given to the SEZs, their direct contribu- tion to China’s economic development in the 1980s was modest because they were established in underdeveloped jurisdictions (except for Xiamen). In 1980 the four SEZs accounted for only 0.2 percent of China’s industrial output. In 1989, although their contribution had grown sixfold, it was still only 1.3 percent of the country’s total industrial output. But in many ways the SEZs were stun- ning economic successes. Their growth was much higher than the national average at the time (Shenzhen’s industrial output grew, on average, 20 percent per year between 1981 and 1992, compared with 14 percent for the national average). The SEZs also attracted $4.1 billion in utilized FDI between 1980 and 1989, roughly 26 percent of China’s total utilized FDI during the same period.51 Exports from the four SEZs recorded explosive growth in the 1980s. Between 1983 and 1989, exports from these areas rose seventeenfold. Their share of China’s total exports grew from 1 percent in 1983 to 6.4 percent in 1989.52 Of all the SEZs, Shenzhen is undoubtedly the greatest success story. Within three decades, it was transformed into a mega-city (with a population of over twelve million in 2020), a manufacturing center of electronics, and a high- tech cluster.53 Several factors, such as the preferential treatment of foreign capital, local autonomy, and proximity and historical ties to Hong Kong (in the case of Shenzhen) and Taiwan (in the case of Xiamen), lay behind the success of the SEZs. But perhaps the single most important favorable factor was the invisible institutional factor. Specifically, the institutions of the Leninist party-state, in particular the command economy, were the least embedded in the most successful SEZ. (In Shenzhen, the private sector accounted for more than three-quarters of economic output in 1992.) The private sector could flourish without the stifling control of the state, as illustrated by the contrast between -- 70 of 345 -- 58 c h a p t e r 2 two successful SEZs, Shenzhen and Xiamen. In 1980 Shenzhen’s industrial output was only 84 million yuan, less than 10 percent of Xiamen’s 943 million yuan. But by 1989 Shenzhen’s industrial output had risen to 11.6 billion yuan, twice that of Xiamen’s industrial output.54 In addition to FDI and exports, the SEZs generated substantial intangible and indirect benefits for China. This experiment in opening to the outside world yielded valuable lessons about how to integrate with the global econ- omy via investment and trade. The knowledge gained from this learn-by-doing process gave the reformers, led by Zhao Ziyang, the confidence to turn the entire coastal area into de facto SEZs in the late 1980s (the plan was fully imple- mented in the 1990s, even after the ouster of Zhao in 1989).55 Foreign Trade Reform Integration with the international economy—Deng’s “opening”—meant a dramatic rise in China’s foreign trade. The country’s economic growth could be increased substantially if it took advantage of its comparative advan- tage in cheap labor and export labor-intensive manufactures.56 During the Maoist era, however, China had pursued a development strategy that favored heavy industry and sought import substitution, contrary to its comparative advantage. More important, China’s self-imposed isolation and hostility to both the capi talist West and the Soviet bloc isolated its economy from inter- national trade. In 1978, on the eve of reform, China’s foreign trade was only 10 percent of its GDP.57 Even this figure exaggerated China’s trade openness because of the significant overvaluation of the Chinese currency. In addition, China’s GDP itself was undervalued. If both the GDP and the exchange rates were adjusted using market-based measures, China’s trade openness at the start of the reform would have been 5–6 percent of GDP, nearly half of the nominal figure.58 Ironically, the closed nature of the Chinese economy and its inefficient de- velopment strategy that favored capital-intensive heavy industry implied that the country could boost its foreign trade and reap dramatic productivity gains if it reformed its foreign trade system. Parallel to the efforts to attract FDI, Chinese leaders also launched a series of reforms to promote exports and make the foreign trade system more efficient. Because the state monopolized foreign trade through specialized central foreign trade organizations (FTOs), firms could conduct trade only through these monopolies. The first step was to dismantle these monopolies through -- 71 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 59 administrative decentralization. Provincial governments and their FTOs were thus allowed to directly engage in foreign trade. Once the central monopoly was broken, the impact of decentralization was instant and dramatic, as shown by the rapid increase in Chinese foreign trade (table 2.2).59 However, foreign trade reform was no smooth sailing. During the eco- nomic retrenchment campaign launched by Chen Yun in 1981–1983, foreign trade was recentralized with a permit system, ostensibly to regulate it and avoid excessive competition among provincial foreign trade firms that de- pressed the prices of Chinese exports.60 But the conservative backlash fizzled out quickly, and a far more market-oriented round of foreign trade reforms took place in 1984–1986. New measures allowed large firms to directly engage in foreign trade by bypassing the state foreign trade organizations. Addition- ally, the Ministry of Foreign Economic Relations and Trade (MOFERT) was stripped of its authority to supervise the business activities of local FTOs, which could then become the real middlemen in foreign trade. The number of FTOs therefore rose rapidly to about eight hundred in the country. Incentives for exports were enhanced by allowing firms to retain a larger share of their hard currency earnings and to swap their retained hard currency at designated foreign exchange swap centers at market rates instead of at the overvalued official rate, thus converting their hard currency at more favorable rates. In the second half of the 1980s, China restricted state planning of foreign trade to major commodities (such as crude oil, rice, minerals, poul- try, and steel), allowing all other goods (mostly manufactures) to be traded without administrative controls. Even though the government set general ex- port targets, MOFERT stopped making and issuing specific export plans.61 Complementary market-oriented reforms were implemented as well. The (overvalued) Chinese currency was devalued repeatedly. Subsidies for foreign trade were reduced. A system of tax rebates was introduced to encourage pro- cessing trade (which involved the import of components without tariffs for assembly and re-export).62 These initial reforms led to an instant and rapid increase in foreign trade (see table 2.2). Total foreign trade rose fivefold, from table 2.2. Foreign Trade and Exports, 1978–1988 (in billion USD) Year 1978 1980 1982 1984 1986 1988 Total foreign trade 20.6 38.1 41.6 53.5 73.8 102.7 Exports 9.7 18.1 22.3 26.1 30.9 47.5 Source: ZGTJNJ 1990, 641. -- 72 of 345 -- 60 c h a p t e r 2 $20 billion to $102 billion between 1978 and 1988. Exports registered an in- crease of similar magnitude. As manufactured goods began to account for a growing share of exports, China’s foreign trade structure improved signifi- cantly. In 1980 manufactured goods accounted for about one-half of total ex- ports; by 1989 manufactured goods constituted 71 percent of total exports.63 As a whole, after one decade of reform, the Chinese economy had become much more open. In 1978 foreign trade accounted for only about 10 percent of the economy based on the exchange rate; by 1988 it had risen to 27 percent.64 Greater openness allowed the economy to grow faster. One study estimates that exports increased China’s economic growth by one percentage point per year between 1981 and 1988.65 Research on the benefits of China’s opening to the world has also yielded evidence that the growth of foreign trade after 1979 led to the emergence of dynamic regional manufacturing clusters, technologi- cal upgrading, and improvements in productivity.66 However, China’s reform of its foreign trade regime was far from complete. It maintained a dual-exchange-rate system that distorted prices (unification of exchange rates did not occur until 1994). Most firms still could not engage directly in foreign trade, hampering competition and efficiency. Nominal tariff rates remained high, although the effective tariff rate was lower because many imports—machinery and inputs for export processing—were tax exempt. Licenses and nontariff barriers were widely used to protect domestic indus- tries (mainly SOEs).67 Rise of the Private Sector The rapid emergence and expansion of the private sector in the 1980s was not the result of a planned or concerted effort by the party. In fact, the party did not anticipate the rise of the private sector, nor did it actively promote the sector, due to conservative opposition. Instead, reformers took tentative steps to enable the private sector gradually to gain legal status and economic free- dom. Unlike in the former Soviet bloc, where the private sector emerged mostly as the result of the privatization of SOEs after the fall of communism, the emergence of the private sector in China was marked by the entry of a huge number of small firms and “creeping privatization” of state-owned assets.68 Throughout the 1980s the dynamism of the private sector, which was practi- cally nonexistent on the eve of reform, created a new engine of economic growth that fundamentally reshaped the Chinese economy and contributed to its long-term success, arguably more than any other policy or reform. As a -- 73 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 61 result, it is reasonable to claim that China’s economic success was more one of “growing out of the plan” than of reforming inefficient SOEs.69 The best summary of this process of growing out of the plan was provided by Zhao Ziyang, the premier in charge of the economy during most of the 1980s. According to Zhao, one of the most impor tant aspects of China’s economic reform in the decade was the gradual growth and strengthening of a new mar- ket economy that consisted of TVEs, private firms, and foreign-invested firms. The new market economy existed outside the planned economy and operated according to market rules. Due to their efficiency and dynamism, such firms grew much faster than the state-owned firms. Consequently, even as the planned economy remained fundamentally unreformed, the share of the mar- ket economy continued to rise, and over time this development changed the nature of the Chinese economy.70 In hindsight, the benefits of growing out of the plan are self-evident. The dynamics are simple but powerful. Because private firms are more efficient, they grow faster and can, over time, take market share away from state firms and account for a higher proportion of economic output.71 The growth of the private sector and the commensurate decline of the state sector—the defining characteristic of growing out of the plan—can be seen in the economic statis- tics of the 1980s (and subsequent decades). In absolute terms, the state sector grew in the 1980s, but because the nonstate sector (mostly private firms) grew much faster, the latter gained a greater share of economic output. Official data show that the industrial output of SOEs rose from 367 billion to 1.234 trillion yuan from 1979 to 1989, while the nonstate sector grew from 100 billion yuan to 967 billion yuan.72 As a result, the share of industrial output attributed to SOEs declined from nearly 78 percent to 56 percent between 1979 and 1989 (table 2.3). table 2.3. Contribution of the Nonstate Sector to Industrial Output, 1978–1989 (%) Year SOEs Nonstate Sector 1978 77.63 22.37 1980 75.97 23.54 1983 73.36 25.74 1986 62.27 33.51 1989 56.06 35.69 Source: ZGTJNJ 1990, 416. -- 74 of 345 -- 62 c h a p t e r 2 Economically, growing out of the plan helped sustain growth and avoid the decline in economic output that had characterized the transition experience in the former Soviet bloc. The superior economic efficiency of the private sec- tor also created competitive pressures on the state sector and accelerated its relative decline in the post-Mao era. Politically, growing out of the plan al- lowed Chinese reformers in the 1980s to build up political capital quickly while shelving the more difficult task of reforming the SOEs, a step almost certain to precipitate a confrontation with conservatives opposed to dismantling the economic foundation of the party-state. At the same time, it created winners and avoided making powerful groups losers, at least at the crucial initial stage of reform.73 However, growing out of the plan had serious limitations. Because the party continued to favor inefficient SOEs and failed to provide secure property rights and a level playing field for the private sector, China’s private entrepre- neurs operated in an unfavorable regulatory and institutional environment that severely constrained their potential. The economic benefits generated by the rapid growth of the private sector reduced pressures to reform the ineffi- cient SOEs until the end of the 1990s, resulting in ever-increasing subsidies to SOEs that ultimately contributed to an accumulation of bad loans in the state- owned banking system. China’s hybrid economy also generated abundant op- portunities for rent-seeking because the resources under the control of the state sector, such as the regulatory approvals, land, and bank credits, could be allocated through administrative means to well-connected private entrepre- neurs and families of officials.74 As Zhao Ziyang observed after his downfall, the coexistence of two fundamentally different economic systems—a favored state sector and a dynamic private sector—produced significant negative ef- fects on the economy. Although it was wise to adopt growing out of the plan as a transitional strategy, it would stop working in the long term.75 Emergence of the Private Sector The party’s primary focus of economic reform in urban areas in the 1980s was on the SOEs. Ironically, the private sector thrived during the decade, even though the party did not provide meaningful economic incentives to promote it. The most the party did was to create the minimal legal or policy space needed for the private sector to emerge and exist, even though this process was slow, gradual, and tentative. The party opened the door slightly for the private sector in July 1981 when the State Council issued a document -- 75 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 63 permitting the establishment of individually operated businesses (geti jingji) in the urban areas. The document, “Several Policy Provisions on Nonagricul- tural Individually Operated Economic Activities in Urban Areas,” allowed private entrepreneurs to hire up to seven employees and operate mainly micro service businesses, such as retail, restaurants, handicrafts, and residential reno- vation.76 Shortly thereafter, with its major overhaul of the Chinese constitu- tion in 1982, the party officially recognized the legal existence of the geti jingji. Article 11 of the amended constitution states that “economic activities of indi- vidual laborers conducted within legally permitted scopes are an auxiliary of the socialist state-owned economy. The state protects the legal rights and in- terests of individually operated economic activities. The state, through admin- istrative means, guides, assists, and supervises such economic activities.”77 (The constitution was amended again in 1988, 1993, 1999, and 2004 to provide greater protections for the private sector.) At the beginning of 1983, the party took another small step by allowing rural residents to engage in nonagricul- tural activities and, more important, to purchase tractors, motor vehicles, and boats to operate in transportation businesses.78 As the private sector began to grow and prosper, the conservatives pushed back. Chen Yun, Deng’s ideological rival who was adamantly opposed to the rise of a private sector, launched a campaign against “economic crimes” in 1982.79 In 1985 he and his followers manufactured a national scandal, the so- called Case of Fake Medicines in Jinjiang. Private entrepreneurs producing food supplements in Jinjiang, Fujian province, were falsely accused of turning out counterfeit medicines on a massive scale. Shortly thereafter, Chen engi- neered the ouster of the reformist provincial party chief, Xiang Nan, blaming him for the scandal.80 The most potent tactic deployed by the conservatives was attacking the widespread practice of private firms employing more than seven workers (the legal limit was up to and including seven workers). As they thrived, private entrepreneurs had to expand by employing more workers, thus running up against the legal limit imposed by the State Council’s 1981 document on geti jingji. It was Deng’s personal intervention in 1984 that apparently prevented the conservatives from cracking down on the private sector. At a meeting with revolutionary veterans on the Central Advisory Com- mittee in 1984, the conservatives clamored for punishment of successful pri- vate entrepreneurs (in particu lar, a flamboyant private entrepreneur who had hired over a hundred workers and had made a fortune by selling snacks). But Deng pushed back hard. “Based on my view,” he declared, “we should not deal -- 76 of 345 -- 64 c h a p t e r 2 with the issue of hiring labor [above the limit of seven] for two years. Can [al- lowing the private entrepreneur to do business] upset our overall situation? But if you touch him [the entrepreneur], the people will say that [our] policy has changed. Confidence would be shaken. Let ‘Idiot Seeds’ [the brand of snacks sold by the entrepreneur] do its business for a period. What is there to be afraid of?”81 It was not until April 1988 that the party formally endorsed private busi- nesses (siying qiye), when the NPC amended the constitution to permit the private sector to exist and develop. Compared with the constitutional amend- ment passed in 1982, which allowed only individually run private businesses (geti jingji), the constitutional recognition and protection of the private sector in 1988 represented a major ideological breakthrough, even though by that time the private sector had already been thriving in a vast legal gray area for the better part of the decade.82 In June 1988 the State Council issued a land- mark document granting private businesses most of the rights they needed to operate and grow. The key provisions of the document, known as “The PRC Interim Regulations on Private Businesses,” include permission to hire more than eight workers, limited liability, an expanded scope of business, the right to hire and fire workers and to set their compensation, and the right to enter into joint ventures, to engage in transactions with foreign companies, to con- duct foreign trade, and to have access to bank credit.83 Due to political support from the reformers, the private sector grew at an as- tonishing rate in the 1980s. At the end of 1978, the private sector, which employed only 150,000 individuals in household-run, or geti, micro businesses, was a negli- gible economic force. But by 1988 such micro businesses had mushroomed into 14.5 million firms, employing 23 million people.84 TVEs, most of which were private firms despite their official “collective” label, saw their employment grow from 28.3 million to 93.7 million between 1978 and 1989.85 As table 2.4 indicates, growth of the private sector in the 1980s was truly phenomenal. Both individually owned businesses and foreign-invested businesses grew rapidly in the 1978–1989 decade (the contribution of firms in these two catego- ries to industrial output grew from zero to more than 8 percent in just one decade). But the star performers in the private sector in the 1980s were un- doubtedly the TVEs. Their output rose from 49 billion yuan to 742 billion yuan from 1978 to 1989, accounting for 21 percent of “total social output” in China in 1989.86 Aside from the necessary political protection and regulatory framework that allowed the nascent private sector to exist and expand, several other -- 77 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 65 factors also facilitated the rapid growth of the private sector. Some scholars attribute this phenomenon to the self-interests of the key actors, in particular the entrepreneurs themselves and the local officials. While the growing pri- vate businesses enabled entrepreneurs to build and accumulate wealth, the same development also helped local officials expand the sources of revenue, burnish their performance in employment and growth, and acquire private wealth from previously nonexistent opportunities for rent- seeking and self-enrichment.87 However, other economic and political factors likely played a far more important and direct role in turbo-charging growth of the private sector. The most critical factor is the success of the decollectivization of agriculture. The virtuous cycle created by the rural reforms produced the essential conditions for the private sector to take root and thrive. On the supply side, higher pro- ductivity in the rural areas increased overall income, which boosted private savings for investment and in turn then allowed a small number of entrepre- neurs to raise capital, either by borrowing from family, relatives, and friends or by tapping into their savings. Greater efficiency in rural production also freed up the surplus or the underutilized vast labor pool in the countryside, chan- neling them into the more productive manufacturing and service sectors. On the demand side, higher rural productivity raised farmers’ income and boosted their demand for consumer goods. At the same time, the economic distortions of the Maoist era had led to serious shortages of consumer goods and services, thus creating a huge backlog of demand that the private sector could meet. The demand for employment in the modern sector, which (the already bloated) SOEs could not meet, also forced the party to liberalize the economy so that the new private firms could absorb new entrants into the labor market (between 1980 and 1985 alone, more than thirty-seven million people in the urban areas needed employment).88 table 2.4. Share of Industrial Output, 1978–1989 (%) Year State- Owned Nonstate Sector TVEs Geti (Individually Owned) Cooperative Other (Foreign- Invested) 1978 77.63 22.37 1985 64.86 14.65 1.85 1.56 1.21 1989 56.06 19.58 4.80 2.25 3.44 Source: ZGTJNJ 1990, 413, 416. -- 78 of 345 -- 66 c h a p t e r 2 Yet, despite such favorable conditions, private entrepreneurs nevertheless hedged their bets by disguising the ownership of their businesses. A popular method was to register as “collective enterprises” rather than as “private,” or siying, firms (legally, the state did not formally endorse siying firms until 1988). In addition to the political protection, private businesses registered as “collective enterprises,” in a practice known as “wearing red hats,” so they could navigate the many regulatory obstacles to obtain business licenses and secure access to banking services and credit as well as to government contracts. To be sure, donning a “red hat” had its disadvantages as well because such private firms were effectively paying for political protection, and they had to bear extra fi- nancial burdens (such as forced contributions to local budgets and employ- ment). Private entrepreneurs resorting to this survival strategy also exposed themselves to legal risks, such as disputes over the ownership of their assets and even criminal prosecution.89 Although wearing a “red hat” was widespread, the exact share of private firms among the TVEs is a matter of dispute.90 According to a 1995 survey conducted by the State Administration for Industry and Commerce (SAIC), of 178,000 “collective firms,” roughly one in five of them had private majority ownership.91 This number almost certainly underestimates the share of private firms among collective firms. Yasheng Huang’s research uncovers more con- vincing evidence that, based on data collected by the Ministry of Agriculture, nearly 90 percent of TVEs in 1985 were actually private firms.92 Entrepreneurs blazing the trail in the 1980s came from a wide range of social backgrounds, but a majority hailed from the countryside, again affirming the critical contribution of the rural reform to the transformation of the Chinese economy. According to a national survey of 1,187 owners of private firms in the countryside in 1991, 42 percent had served as village cadres, 19 percent had been principal officials of TVEs, 13 percent had been workers in TVEs, and 9 percent were former PLA soldiers. Another survey of 1,853 owners of private businesses (apparently based in urban areas), also conducted in 1991, shows that 30 percent had resigned from SOEs, 31 percent had been peasants, 16 percent had been self-employed, and 12 percent had been unemployed.93 In other words, most pioneers in the private sector came from outside the state sector. Reform of the SOEs On the eve of Deng’s reform, SOEs dominated the modern sectors of the Chinese economy, accounting for 87 percent of the fiscal revenue of the state, 77.6 percent of industrial output, and 78 percent of urban employment.94 -- 79 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 67 However, like their counterparts in the former Soviet bloc, Chinese SOEs were plagued by systemic inefficiencies.95 As economic organizations, these firms were more like government bureaucracies than profit-seeking economic actors because they were administered by the government through directives governing nearly all operational matters. As part of a planned economy, they did not have the basic freedoms for business operations, such as determining what or how much to produce. Nor did the SOEs have control in matters such as the amount of labor to employ, the appointment of management, and compensation of workers and management, because it was the supervising government bureaucracies that made these decisions. Like the SOEs in the Communist regimes of the former Soviet bloc, Chinese SOEs had two critical institutional flaws: an absence of real owners and soft budget constraints. Nominally, the “state” owned these firms. In reality, there were no real owners but instead multiple bureaucracies (such as government agencies in charge of production planning, fiscal revenue, and labor-related issues) exercising con- trol over them. This situation not only created conflicts of interest among stakeholders but also made it impossible for the SOEs to pursue economically efficient goals. The “soft budget constraints” meant that these firms were not responsible for their failure because they could always count on the state to bail them out.96 The last systemic flaw of Chinese SOEs was their so-called policy burden. As an essential component of the party-state, SOEs had to perform many non- economic roles that served the needs of the party, such as maintaining employ- ment regardless of costs and providing social services, including healthcare, housing, childcare, and retirement income.97 Given the centrality of the SOEs in the Chinese economy and the daunting technical difficulties of restructuring these firms (practically all attempts to reform SOEs in the former Soviet bloc and Yugoslavia had ended in failure), reformers were forced to adopt a far more cautious and incremental ap- proach.98 Their first step was to expand the autonomy of the SOEs and to grant more financial incentives to SOE management in the belief that greater opera- tional freedoms and material rewards could improve their efficiency. After localized experiments in Sichuan and Beijing in early 1979 produced promising results, the State Council formally endorsed measures to expand the auton- omy of SOEs in July 1979.99 According to “Several Provisions on Expanding Management Autonomy of State-owned Industrial Enterprises,” the manage- ment of the SOEs could retain a portion of the profits, hire workers, appoint executives, and exercise a wide range of executive authority provided they fulfilled the targets set by the state.100 -- 80 of 345 -- 68 c h a p t e r 2 However, the expanded autonomy quickly created its own problems, espe- cially as the managers of the SOEs gamed the new policy to retain more prof- its, which led to less income for the state and an increase in budget deficits.101 To liberal economists, expansion of SOE management autonomy alone was unlikely to produce sustained improvements in SOE performance. Real SOE autonomy was impossible to achieve because the state kept most of the power that directly affected the performance and operations of the enterprises. Ex- panding SOE autonomy also worsened the “principal-agent” problem in the state-socialist system because it allowed managers to behave more opportu- nistically.102 Most important, because SOEs were part of the market, giving the enterprises autonomy when the market itself had systemic flaws was un- likely to work. Specifically, when prices were distorted, even enterprises with full autonomy could not respond to distorted markets or be responsible for profits and losses.103 Once it became clear that expanding the autonomy of the SOEs was an unpromising proposition, Chinese leaders began to look for alternatives. Lib- eral economists argued that a successful reform of SOEs would be possible only when it was part of a package of reforms of other institutions, such as prices, taxation, wages, social security, and the financial system, that directly affected the SOEs. But the party did not adopt their proposal for comprehen- sive reform.104 The alternative, which the party eventually settled on in 1986, was the “con- tract responsibility system” (chengbao zerenzhi). In essence, the contract re- sponsibility system was an updated version of a 1981 government attempt to attach conditions to the autonomy of the SOEs.105 What made the reform proposed in 1986 different was its granting of full operational autonomy in return for commitments to fulfill fixed financial targets. A document issued by the State Council in February 1988 formalized this system (implementation had begun in 1987).106 In terms of specifics, the “contract responsibility” of the SOEs consisted of meeting financial targets, such as profitability, growth, reduction of losses, capital investments, technological innovations, and tax payments. SOEs that reached these goals could retain more profits to provide higher compensation to workers.107 However, the contract responsibility system quickly proved to be a disappointment. Because of the heterogeneity of firms and their vastly different structural conditions (such as competition, supply, and demand) among industrial sectors, it was nearly impossible for the government to stipu- late standard contracting terms or to set performance standards.108 -- 81 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 69 Even worse, the contract responsibility system rewarded short-term SOE behavior because the length of a typical contract was three years, which en- couraged SOE managers to cut spending on capital investments and techno- logical upgrading in order to reach their profit targets. SOEs also had powerful incentives to raise prices to increase their profit margins—an easy thing to do in sectors where incumbent SOEs faced little competition. Despite the formal contracts signed between SOE management and supervising government agencies, SOEs continued to enjoy soft budget constraints and, as a result, were not responsible for failing to fulfill the terms of their contracts. As the contract responsibility system did not touch the core issue of “state owner- ship,” it was obviously incapable of addressing all the pathologies of such ownership.109 Despite the flaws in China’s approaches to reforming the SOEs in the 1980s, some economists endorsed these limited measures but with qualifications, arguing that they helped improve the SOEs’ financial performance, output, and innovative capacity.110 But evidence supports the consensus opinion among Chinese policymakers and economists that the SOE reforms in the 1980s essentially were failures.111 The early experiment to expand SOE au- tonomy was short-lived; it was replaced by the contract responsibility system, which itself was abandoned in the early 1990s when the post-Tiananmen lead- ership introduced a new round of reforms that sought to “establish a modern corporate system.” By then, most SOEs were mired in crisis because they sim- ply could not compete with private firms or imports. By the end of the 1990s, the government, no longer able to keep loss-making SOEs afloat without en- dangering the banking system, was forced to adopt a new strategy of “grasp the big and let go of the small,” by which it retained only the large SOEs in critical sectors (banking, telecommunications, transportation, and energy) and al- lowed small and medium-sized SOEs to go bankrupt en masse.112 Zhao Zi- yang, the reformist premier in charge of the economy in the 1980s, was perhaps the most authoritative person to render a verdict on this issue. Reflecting on China’s reform when he was under house arrest in the 1990s, Zhao said: “Re- form of the mechanisms of SOEs did not touch the fundamentals.” By “fun- damentals,” he likely meant the most critical institutional factors affecting the performance of the SOEs, such as state ownership, the pricing system, capital markets, and the social safety net. However, Zhao believed that, ironically, the failure to reform the SOEs had a positive impact during China’s transition to a market economy.113 Although he did not elaborate on this point, he was likely thinking of the potential political risks and costs of more aggressive -- 82 of 345 -- 70 c h a p t e r 2 reforms that might have made SOEs far more efficient but would have also triggered strong opposition from both the ideological conservatives and the affected interest groups. Dual-Track Price Reform As in Soviet-type economies, prices in China during the prereform era were set by the state, not by the market (although as a more decentralized economy, some prices in China were set by local, not central, authorities).114 Theoreti- cally, price reform should be a top priority during a country’s transition from state-socialism to a market economy. But as the experience of the former Soviet bloc in the early 1990s shows, price reform could only be completed with a “big bang” that freed all prices at once—at the cost of hyperinflation that would be economically disruptive and politically destructive for the reformers.115 By comparison, China adopted a far more gradual and cautious approach to price reform in the 1980s, for two reasons. Econom ically, unlike the Soviet bloc after the fall of communism, China did not face high inflation in the early 1980s and therefore had no need for the stabilization program that all Soviet bloc countries had to adopt. Politi cally, Chinese reformers in the early 1980s had to share power with conservatives, so they did not have the ability to push through radical reforms, such as the freeing up of prices. Even more important, Chinese reformers likely realized that a failed price reform could spell calamity for the entire reform program (such fears were realized when mere talk of price reform triggered panic buying and high inflation in the summer of 1988). As a result, China did not start to reform the pricing system until 1984, when the government implemented an experimental program of “dual-track pricing.” Instead of ending mandatory pricing set by the state, dual-track pric- ing retained mandatory pricing but also introduced a second set of parallel prices determined by the market. The initial concept was proposed by a graduate student at an academic conference in 1984. Economists advocating dual-track pricing argued that since the prices of most products cannot be liberalized without eviscerating the command economy, the only way to reform a planned economy without abandoning it right away is to introduce pricing that allows both plan-mandated and liberalized prices to operate alongside each other to bring supply and demand into balance.116 The government quickly embraced this alluring concept. In May 1984 the State Council formally permitted SOEs to adopt dual-track pricing. Specifi- cally, SOEs could sell excess output at prices they set by themselves (but only -- 83 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 71 20 percent above or below the state-mandated prices).117 Leading economists have since hailed dual-track pricing reform as an innovative measure that pro- duced winners but no losers.118 It likely also gave the SOEs a greater incentive to increase production because they could charge higher prices for products exceeding the planned target. Such marked-up products also provided a vital source of inputs for the nonstate sector, in particu lar the TVEs that other wise could not purchase products made by SOEs outside the plan.119 But the dual-track pricing system also facilitated rent-seeking behavior and corruption because the SOEs and well-connected individuals could easily make a quick profit by obtaining products at lower state-mandated prices within the plan and then selling them at higher prices. Many SOEs also gamed the new system by trying to get more “fixed-price” (below-market price) in- puts from the plan and to underreport their production so they could sell more at above-plan prices.120 For all the attention the dual-track pricing in the 1980s received, it is impos- sible to evaluate its contribution to China’s price reform. Although the share of products subject to state-mandated prices continued to fall, it was most likely the result of increased production that can be credited to other factors, especially the rapid increase in industrial output by nonstate firms.121 Instruc- tively, when nearly all prices were fully liberalized in the 1990s, this achieve- ment was not due to any price reform. By that time, China was no longer a shortage economy. The liberalization of prices was almost certainly the result of sufficient supply made possible by the explosive growth of the private sector and foreign trade. Summary Measured by key indicators of economic performance, China achieved un- qualified success in the 1980s. Through domestic reform and integration with the global economy, the country scored its best growth rates since 1949. Per capita income, which was 315 yuan in 1978, rose to 1,189 yuan in 1989. Adjusted for inflation, real per capita income nearly tripled during the period. The gross social product (a proximate measure of the gross national product) rose from 677.6 billion yuan in 1978 to 3.46 trillion yuan in 1989, representing a 3,600 percent increase after adjusting for inflation. Despite high inflation in 1988–1989, China maintained overall macroeconomic stability, with inflation averaging 6.8 percent per year between 1979 and 1989. The economic structure improved as well. Household consumption averaged 65 percent of national -- 84 of 345 -- 72 c h a p t e r 2 income during the period, reflecting a relatively balanced economy. The rapid growth of the nonstate sector reduced the role of the state in the economy, as indicated by the fall of its share in industrial output from 78 percent in 1978 to 56 percent in 1989.122 China’s integration with the world economy proceeded at a rapid pace as well. Foreign trade rose from $20.6 billion in 1978 to $111.6 billion in 1989, av- eraging an annual growth rate of 49 percent. Exports increased from $9.75 billion to $52.5 billion during the same period. The inflow of FDI totaled $15.4 billion during the decade.123 Even though China would attract far more FDI in the 1990s, this amount still represents foreign investors’ vote of confidence in Deng’s economic revolution. Aside from these measurable achievements, reform in the 1980s also scored major political and institutional breakthroughs. Obviously, by delivering a proverbial “early harvest” of the fruits of reform, Deng and his supporters reaped immense political capital to bolster their case for more reform. Thus the most important success of the reform in the 1980s was the laying of the foundations for China’s economic take-off in the subsequent two decades. As this chapter shows, Deng’s reform and opening in the decade substan- tially weakened the command economy by growing out of the plan. Rural decollectivization not only dismantled a key pillar of the Maoist economic system but also unleashed pent-up entrepreneurial energy and created a virtu- ous cycle that powered the emergence and growth of a new and dynamic pri- vate sector. At the same time, integrating China into the global economy through trade and investment enabled a previously self-isolated economy to capitalize on its comparative advantage of cheap labor. The combination of an efficient domestic private sector and integration with the global economy quickly became the engine of Chinese growth. To be sure, growing out of the plan avoided tackling the thorny issue of SOE reform. Indeed, China’s attempts to reform these dinosaurs of totalitari- anism in the 1980s were largely unsuccessful. It would take another decade and a pending banking crisis for the party to muster the courage to push through major SOE reforms. But this par ticular failure must be understood in the political context of the times. With powerful conservative forces led by Chen Yun entrenched at the top of the party’s leadership, it was inconceivable that Deng and his fellow reformers would risk a confrontation in order to enact far more radical SOE reforms (such as mass bankruptcy and privatization—the approach the party eventually adopted at the end of the 1990s). Given the complete lack of knowledge in the 1980s about how to reform the SOEs and -- 85 of 345 -- R e f or m a n d G r o w t h i n t h e 19 8 0 s 73 the far superior alternative of cultivating new and more efficient economic forces, such as domestic private firms and foreign-invested firms, it made per- fect political and economic sense to prioritize growing out of the plan over reforming the plan itself. Nevertheless, the success of growing out of the plan during the decade was achieved at the expense of not dismantling, once and for all, the economic foundations of totalitarianism—the SOEs through which the party-state con- trolled the “commanding heights” of the economy. Even though the output of the private sector eventually exceeded that of these firms, they continued to dominate some of the most important sectors of the economy, in particular finance, energy, telecommunications, and transportation. The party-state’s control of these firms not only allowed the regime access to bountiful eco- nomic resources but also necessitated costly protection of these firms that distorted markets and undercut economic efficiency. Zhao Ziyang, the re- former in charge of economic policy in the 1980s, foresaw the long-term dan- ger of a “dual-track” transition characterized by rapid growth of the private sector and continuing state dominance in a large segment of the economy. “The long- term coexistence of two systems and two tracks,” he warned in the 1990s, “ultimately will produce enormous negative effects. It was right to resort to gradual transition initially, but this approach must not continue in the long run.”124 If anything, the deposed former premier and CCP general secretary likely underestimated the economic and political costs of the dual-track transi- tion. The dual-track transition would ultimately lose momentum, and the party-state would be forced to use its power to support a hugely inefficient state sector at the expense of the private sector.125 -- 86 of 345 -- 74 3 Building Neo-Authoritarianism, 1992–2002 the bloody end of the Tiananmen crisis closed off, at least for the foresee- able future, China’s path to a more open and free society. But the neo- authoritarian order—capitalist economic development under one-party rule—did not emerge in the immediate aftermath of the crackdown. Indeed, the party still had two plausible pathways to choose. One was to reverse the economic reforms of the 1980s, reassert the party’s control over the economy and society, and reconstitute a system embodying most of the institutional characteristics of the early 1950s. The other was to fully embrace neo- authoritarian developmentalism. Initially, between mid-1989 to the end of 1991, hard-liners who had gained power after the crackdown attempted to re- suscitate the old communist system. Even though their efforts largely failed, a prolonged political stasis during which the regime would be stuck in a transi- tional no-man’s land was a distinct possibility. The event galvanizing the party into unreservedly endorsing neo- authoritarian developmentalism was the fall of the Soviet Union in Decem- ber 1991. Less than a month later, Deng Xiaoping started his tour of southern China that, in substance though not in name, launched the post-Tiananmen era of neo-authoritarian rule. Due to the purge of the liberal wing from the party in 1989 and the demoralization of the hard-liners by the dissolution of the Soviet Union, party leadership became ideologically more homogenous. However reluctantly, hard-liners bought into Deng’s vision of capitalist eco- nomic modernization under one-party rule because this was the only feasible survival strategy despite their past resistance to this path. After he rallied the party to his neo-authoritarian vision and installed a new leadership team in the fall of 1992, Deng gradually faded away from the political -- 87 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 75 scene. Jiang Zemin, the compromise choice for the CCP general secretary the elders picked during the Tiananmen crisis, became an effective implementer of Dengist neo-authoritarian strategy. Under Jiang’s leadership, the party was laser-focused on economic development while adopting novel tactics to keep its grip on a fast-changing society. The individual components of the party’s survival strategy, such as performance-based legitimacy, an implicit security pact among elites, nationalism, social co-optation, and selective repression, evolved into the key pillars of the post-1989 neo-authoritarian order. Judging by the economic boom and political tranquility at both the elite and mass levels in the post-Tiananmen era (1992–2012), Deng’s neo- authoritarian vision had to be credited with bringing about the party’s golden period and enabling the regime to weather the shocks of the Tiananmen de- bacle and the collapse of the Soviet Union. Behind the façade of stability and prosperity, however, new dangers began to emerge. The party’s success in de- livering rising standards of living, albeit on an investment-led growth model that would soon produce diminishing returns, reduced incentives for deeper and more difficult economic reforms. At the same time, the party’s control of immense and fast-growing economic resources fueled corruption, exposing the fundamental flaws of Dengist neo-authoritarianism. A Family “Vacation” That Changed History The brutal crushing of the Tiananmen protests on June 4, 1989, severely dam- aged Deng politically. The purge of Zhao Ziyang and other liberal reformers meant Deng could no longer rely on members of this group to implement his agenda of reform and opening. The octogenarian was said to be very de- pressed, and, after having given up smoking for several years, he began to smoke again.1 The only consolation for Deng was that he managed to install a compromise choice, Jiang Zemin, former party chief of Shanghai, as Zhao’s replacement, thus preventing an ideological hard-liner from taking over the party’s top leadership position. But Deng’s power play failed to prevent the hard-liners from implementing policies to roll back the reforms of the 1980s as Jiang, a risk-averse opportunist with no power base of his own, lacked both the inclination and the ability to put up any resistance. Li Peng and Yao Yilin, the two arch conservatives in charge of economic policy, doubled down on an austerity program adopted in late 1988 to contain inflation. Although initially it prioritized reducing investment, in the wake of the Tiananmen crackdown they aggressively pushed for a recentralization of -- 88 of 345 -- 76 c h a p t e r 3 power and a reinvigoration of economic planning. These measures favored the SOEs at the expense of the nascent private sector.2 Consequently, the econ- omy registered its weakest growth in a decade. GDP rose only 4.1 percent in 1989 and 3.9 percent in 1990, even though it rebounded to 9.5 percent in 1991.3 The TVEs, the largest component of the private sector, averaged an annual growth rate of 40 percent from 1985 to 1988, but in 1989 and 1990 they grew only 15 percent and 14 percent, respectively.4 Hard-liners had less success in recentralizing the economy, however, as such efforts encountered strong resistance from the large and economically impor tant provinces, such as Shanghai and Shandong.5 The political crackdown launched by the hard-liners targeting the partici- pants in the prodemocracy movement produced mixed results at best. The regime successfully restored political control on university campuses.6 But its witch hunt for prodemocracy activists at the grassroots level largely failed due to resistance by sympathetic local officials.7 The hard-liners’ thinly veiled ideological attacks on Deng’s policy of reform and opening instantly encoun- tered pushback from Deng himself.8 The overall political situation in the year and a half following the Tiananmen crackdown can be best described as a political stalemate.9 Although ascendant hard-liners had momentum to re- verse Deng’s reform and regain the party’s eroded control over society, they were not fully successful. At the same time, the reformist camp led by Deng, now structurally weakened as the result of his purge of the liberals at the top, lacked strength to breathe new life into reform and opening. To outside ob- servers, the Chinese regime in 1990 “showed many of the classic signs of a moribund system.”10 Deng, whose legacy was hanging in the balance, was reluctant to see his project of modernizing China wither in midcourse. In 1991 he began to take actions to revive his reform and opening.11 He first visited Shanghai in Janu- ary 1991 and gave a series of speeches calling for “emancipating the mind” and taking bolder steps in reform and opening.12 Shortly after he returned from his visit, Deng elevated Zhu Rongji, the no-nonsense party chief and mayor of Shanghai, to the position of vice premier, even though Zhu was only an alternate member of the Central Committee (traditionally vice premiers were also Politburo members). The promotion of Zhu in April 1991 marked the beginning of the erosion of control of economic policy by the hard-liners in the State Council. However useful these political maneuvers might have been for Deng, they were insufficient to change the political dynamics decisively in his favor. What -- 89 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 77 really made the difference was the shock of the fall of the Soviet Union in late 1991. Judging by the rebound of the Chinese economy that year, the primary motivation behind Deng’s last-ditch effort to salvage his legacy at the begin- ning of 1992 was not China’s economic difficulties but the geopolitical and ideological environments that had been altered beyond recognition by the events in the Soviet Union.13 On August 19, 1991, diehard conservatives in Moscow, in a desperate at- tempt to save the imploding Soviet Union, launched a coup. Initially, their counterparts in Beijing were thrilled. Some of them even proposed that they should publicly support the coup, but Deng quashed the idea and urged cau- tion.14 If anything, the crisis in the Soviet Union reinforced Deng’s conviction that only economic success could keep the CCP in power. The day after the coup, Deng stressed that the party’s survival would largely depend on reform and opening. Instead of seeing the pending Soviet collapse as a crisis, he warned leading members of the Central Committee that “great changes are taking place in the world, and this gives us an opportunity. . . . If we don’t seize this opportunity to raise the economy to a higher level, other countries will leap ahead of us, leaving us far behind.”15 How Deng personally reacted to the dissolution of the USSR at the end of 1991 is unknown. However, three weeks after Gorbachev signed away the USSR, Deng embarked on his historic southern tour that would usher in the post- Tiananmen era of neo-authoritarianism. Ostensibly, the thirty-six-day trip that took Deng, then 87 years old, to several cities in the South was a family vacation. Before his train rolled out of Beijing on January 17, 1992, there was no indication that the political stalemate after the Tiananmen crackdown would end anytime soon. But by the time Deng returned to Beijing on February 21, he was on the verge of relaunching an economic revolution that would establish a new order: capitalist economic development under one-party rule and the route to mod- ernization that Deng had consistently advocated since the late 1970s.16 Within a week of Deng’s return, as a gesture of endorsing his views, the party distrib- uted summaries of the speeches he had given during his tour. On March 9 and 10 the Politburo convened a rare two-day meeting (Politburo meetings usually last one day) and decided to implement the “spirit” of Deng’s speeches.17 The political atmosphere in the country changed instantly afterward. After it be- came clear that Deng had regained dominance, provincial leaders vied with one another in calling for more rapid economic reform. Growth immediately ex- ploded (GDP would rise 14 percent in 1992).18 By October 1992 Deng had in- stalled a Politburo Standing Committee dominated by a new group of leaders -- 90 of 345 -- 78 c h a p t e r 3 who shared his neo-authoritarian vision (Li Peng, the premier, was the only surviving hard-liner in the top leadership). There is no single answer to the question of how a monthlong “family trip” by a retired 87-year-old leader, whose only title at that time was “honorary chairman of the China Bridge Association,” could change the course of Chi- nese history. At the level of elite politics, the most important impact of Deng’s tour was to force Jiang Zemin, who had toed a more conservative line since his appoint- ment as party chief in June 1989, to fully embrace Deng’s policy. Based on one unofficial, but apparently authentic, version of the summaries of the talks by Deng during his tour, Deng could barely conceal his deep dissatisfaction with the post-Tiananmen leadership, and he implicitly threatened to sack Jiang.19 In addition, Deng talked at length about the fall of the Soviet Union. “What I have been thinking about the most these days,” Deng allegedly told his audi- ence in Shenzhen, “is the Soviet Union. This is a country with such bountiful natural resources, a deep cultural tradition, a powerful state, and a huge Com- munist Party. But it collapsed overnight.” (Ironically, Xi Jinping would be re- flecting on the Soviet collapse in nearly identical language two decades later after he assumed the position of party chief in November 2012.) Deng’s diag- nosis of the Soviet collapse was its economic failure (“it could not even fill up the bellies of its people,” to use his colorful language). If China failed econom- ically, Deng warned, “today’s Soviet Union will be tomorrow’s China.”20 Deng’s threat to dismiss Jiang in early 1992 seems credible. A well-connected Chinese journalist, Yang Jisheng, writes that Deng was disappointed with Jiang, and he implied that Jiang should step aside if he would not support re- form more aggressively. Later, Deng did not sack Jiang, but this was only because he was dissuaded by a close associate, veteran revolutionary Bo Yibo. Ezra Vogel also claims that Jiang, in February 1992, was aware that Deng was “determined” to fire him if he did not support reform.21 With his job on the line, Jiang decided to back Deng’s agenda wholeheartedly. Even though in 1992 Jiang had not yet consolidated power, the shift in his posi- tion from a fence-sitting opportunist to a supporter of Deng’s renewed call for economic reform decisively tipped the balance at the top of the leadership in favor of Deng’s policy. In addition, by early 1992 the major aging hard-liners were either in poor health or dying. The eighty-six-year-old Chen Yun, the leader of the conservative camp who might have been able to resist Deng’s offensive, was apparently in poor health and politically inactive. (Chen died in April 1995.)22 -- 91 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 79 In terms of policy, the conservative forces could not put up any resistance because by 1992 they had no credibility left. Their retrograde economic poli- cies had produced the worst two-year growth record since 1979. The implosion of the Soviet Union, the party’s model, fully revealed the ideological bank- ruptcy of orthodox communism. While Deng had laid out a strategy to keep the CCP in power in the changed world that was becoming implacably hostile to communism, the hard-liners simply had no alternatives to offer. Deng’s call for accelerated economic development also resonated with the public. One alternative to this path—reversion to a planned economy and totalitarian so- cial control—hardly sounded attractive to people who still remembered the dark era of Maoism. The other alternative—economic modernization concur- rent with political liberalization—was impractical. The Tiananmen crackdown had dealt a fatal blow to the (already weak) prodemocracy forces at all levels. Their patron in the top leadership, Zhao Ziyang, had been purged. Leading liberal intellectuals and activists had been either exiled or imprisoned. The political control imposed after the Tiananmen crackdown eliminated any pub- lic space for advocating political change.23 Under these circumstances, a neo-authoritarian path appeared to offer something for everybody. For those determined to perpetuate one-party rule, this survival strategy was the most pragmatic and promising. For those seeking to reform the one-party regime, economic modernization could be a round- about way to liberalize or even democ ratize the dictatorship. For the vast ma- jority of Chinese people, with a per capita income of only 1,262 in purchasing power parity in 1992, a ruling regime bent on economic development appeared to be much better than one that was not.24 Lastly, the Soviet factor likely had a major, albeit difficult to measure, im- pact on the attitudes of ordinary Chinese people toward their government. The chaos in the wake of the Soviet collapse, which the Chinese government portrayed in apocalyptic terms through official propaganda, probably made ordinary Chinese, for whom the turmoil of the Cultural Revolution was recent memory, prefer order and stability to change that might bring about a calamity on the order of the Soviet collapse. Indeed, opinion surveys conducted in the early 1990s show a surprisingly high level of support for the CCP. In addition to the party’s satisfactory economic performance, an important source of sup- port was fear of social instability.25 After turning the tide with his southern tour, Deng immediately set about to rearrange the party’s top leadership to ensure that his neo-authoritarian survival strategy would be faithfully implemented. Because Chen Yun had -- 92 of 345 -- 80 c h a p t e r 3 largely abandoned his opposition to Deng’s policy, partially due to his poor health, Deng had near-complete freedom to pick the top leaders at the Fourteenth Party Congress in October 1992.26 Judging by the line-up of the top leadership chosen at the congress, Deng scored a total political triumph. The Central Committee featured a number of technocrats who could be trusted with the mission of supercharging economic development.27 Of the seven members of the PSC, Deng could count on six to carry out his policy, including Jiang Zemin (general secretary), Zhu Rongji (executive vice pre- mier), and Hu Jintao (a rising star whom Deng anointed as Jiang’s successor). The only conservative on the PSC was Premier Li Peng. Deng’s anointment of Hu Jintao, then 50 years old, as Jiang’s successor likely reflected his fear that there might be a succession struggle after Jiang com- pleted his second full term as party chief in 2002. Such a fight not only would be destabilizing but would probably result in elevating a leader to the top who could threaten Deng’s legacies. Deng’s choice of Hu, a party apparatchik with a thin record of accomplishments, remains a puzzle. Since Deng hardly knew Hu personally because Hu was nearly forty years younger and had not worked under him directly, it is very likely that Deng had relied on the recommenda- tion of close associate and Hu’s lifelong patron Song Ping, a conservative and member of the PSC (1989–1992). Deng might have also been reassured by Hu’s loyalty to the party because, as party chief in Tibet beginning in 1988, he had ordered martial law and had crushed the protests by Tibetans in March 1989, several months before the Tiananmen massacre. At the same time, Hu had not demonstrated any opposition to market-oriented reforms. Under these cir- cumstances, Hu Jintao apparently was the safest choice as a future leader.28 Intellectual Foundations of the Post-Tiananmen Order Intellectually, the CCP’s survival strategy in the post-Tiananmen era was de- rived, in most part, from the developmental successes of the East Asian coun- tries (in particu lar South Korea, Taiwan, and Singapore) under authoritarian rule from the 1960s to the 1980s and, after the Soviet collapse, from their own interpretation of the causes of the failure of the Soviet regime. “Neo- authoritarian developmentalism”—a combination of pro-market reforms, integration with the West-dominated global economy, and authoritarian rule— probably best summarizes the essence of Deng’s strategy of economic modernization. As indicated by his speeches emphasizing both economic -- 93 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 81 development and preservation of the CCP’s political monopoly (the most important of his “four cardinal principles”), from the outset neo-authoritarian developmentalism was the ideological inspiration of Deng’s reform and open- ing, even though he never invoked the term in his public speeches. The only credible piece of evidence that Deng embraced the concept is provided by Zhao Ziyang, who said that Deng commented to him in a meeting in 1988 that “neo-authoritarianism”—economic development in a stable environment under the rule of a strongman—“is my position, but there is no need to frame it in such a way.”29 Indeed, the concept of “neo-authoritarianism” had become a hot topic in 1988 in China’s intellectual circles due to advocacy by a group of young and middle-aged scholars with conservative leanings participating in a larger de- bate on China’s optimal path forward. Although there is no evidence that hard- liners were behind the proponents of neo-authoritarianism at the time, the idea of an authoritarian regime committed to economic development held tremendous appeal and was seen among its advocates as an alternative to the model of development under a liberal political regime.30 In terms of real-world examples, champions of neo-authoritarianism could find persuasive cases sup- porting their argument. South Korea, Taiwan, Singapore, and to a less extent Thailand, Indonesia, and Malaysia had achieved spectacular developmental successes since the 1960s under authoritarian rule. Even though no academic research explicitly argues that authoritarian rule made such economic success pos sible, the connection between authoritarianism and rapid economic de- velopment appears intuitively obvious.31 Although neo-authoritarianism was the guiding principle of Deng’s reform and opening prior to its ascendance in scholarly circles in 1987–1988, Deng had encountered great difficulty com- pletely translating this vision into policy because of opposition, primarily from the hard-liners and secondarily from the liberals. The hard-liners, led by Chen Yun, steadfastly resisted Deng’s efforts to liberalize the Chinese economy, while the liberals advocated political reform even though they supported Deng on economic policy. The decimation of the liberals as a political force after the Tiananmen crackdown in 1989 eliminated one set of obstacles to Deng’s neo-authoritarian vision. After the Soviet collapse in 1991, hard-liner opposition to a survival strategy that would rely on capi talist economic devel- opment to perpetuate one-party rule also melted away. Besides bolstering Deng’s neo-authoritarian strategy, the Soviet collapse also informed the CCP’s survival strategy in many important ways.32 In the -- 94 of 345 -- 82 c h a p t e r 3 1990s the Chinese leadership tasked the country’s social scientists with carry- ing out a number of studies probing the factors responsible for the Soviet collapse. Not surprisingly, these studies reached very diff erent and contradic- tory conclusions. In general, the liberal scholars pinned the blame on the inef- ficient economic system, imperial overreach, corruption, and the rigidity of the Soviet regime, but the conservative academics attributed the Soviet col- lapse mainly to Mikhail Gorbachev’s policies of glasnost and perestroika and to the “peaceful evolution” advocated by the West.33 The conservative interpreta- tion of the Soviet collapse would become the dominant official narrative and would influence the CCP’s strategy of suppressing domestic dissent and guarding against Western influence in the post-Tiananmen era. But two con- clusions drawn by liberal scholars—the Soviet regime’s failure to reform its economy and its imperial overreach—had a profound impact on the party’s survival strategy during this period. To be sure, credit for these two observa- tions should go first to Deng himself because he not only had pointed out that economic failure would doom the party but also had insisted that China “must never take the lead” in confronting the West.34 The lessons the Chinese leadership derived from the Soviet collapse, albeit eclectically, complemented Deng’s neo-authoritarian vision almost perfectly and guided the party’s domestic and foreign policies until the rise of Xi Jinping at the end of 2012. Domestically, the Soviet collapse underscored the centrality of economic development for the party’s performance-based legitimacy, thus justifying bold market-oriented reforms and integration with the global econ- omy. In foreign relations, the post-Tiananmen leadership faithfully followed Deng’s dictum of taoguan yanghui (hiding your brightness and building up strength) and took great pains to avoid conflict with the United States. At the same time, however, the party also methodically strengthened social control to guard against “peaceful evolution,” systematically cultivated nationalism to augment regime legitimacy, carried out a campaign of co-opting the social elites to expand its base of support, and consistently maintained control of the key sectors of the economy to prevent the market reforms from undermining the economic foundations of one-party rule. To be sure, the party’s post-Deng leadership arrived at this comprehensive survival strategy mainly through learning and adaptation.35 Yet, judging by the party’s success in economic growth and regime survival in the two decades following Deng’s southern tour, the core ideas of neo-authoritarianism and the lessons from the Soviet collapse can claim a great deal of credit for the golden age of one-party rule in China from 1992 to 2012. -- 95 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 83 Key Pillars of the Post-Tiananmen Order The neo-authoritarian order, beginning with Deng’s historic southern tour in 1992 and ending with Xi Jinping’s takeover as party chief in November 2012, lasted about two decades. In addition to producing the Chinese economic “miracle” during this period, the post-Tiananmen order was characterized by ideological consensus among the elite on policy, collective leadership and power-sharing at the top, an implicit security pact among the rulers, and re- cruitment and promotion of elites apparently based on established rules and norms. These observed features of elite politics deviated substantially from those that had characterized all other periods in post-1949 China. During the Maoist period (1949–1976), personalist strongman rule and constant purges dominated elite politics, as has been the case in Xi’s “new era” since 2013. Dur- ing the 1980s, ideological differences led to bitter conflicts over policy and triggered the fall of two general secretaries. What made post-Tiananmen elite politics relatively stable has fueled a vigorous debate about the role of institu- tions and power in the post-Deng era. One obvious factor behind this development was the smooth exit of the revolutionary veterans, which began in the early 1990s and ended with Deng’s death in February 1997. The transition from revolutionary veterans to a new and younger generation of well-educated technocrats ( Jiang Zemin was the first party chief with a college education) took place without incident, mainly due to Deng’s political maneuvering in 1992. The meltdown of opposition to his neo-authoritarian vision allowed him to appoint a leadership team that could implement his agenda of keeping the party in power through super- charged economic development. By pure coincidence, but crucially, nearly all the heavyweight hard-liners died before Deng. Their departure removed a potential threat to the new leadership to which Deng had entrusted his unfin- ished agenda. To be sure, a small number of slightly younger hard-liners were still alive. But shorn of powerful patrons and official positions, they could do little more than occasionally rail against a “capi talist restoration.”36 The mar- ginalization of the hard-liners after 1992 and the purge of the liberals in 1989 allowed the new leadership to pursue Deng’s agenda without distraction or debilitating infighting. After Deng selected the new leadership team at the Fourteenth Party Con- gress in October 1992, he receded from the scene. According to his official chronology, his last public appearance was in February 1994, about three years before his death on February 19, 1997. It was during this period that the -- 96 of 345 -- 84 c h a p t e r 3 foundations of the post-Tiananmen political order were laid. Despite his repu- tation as an opportunist, Jiang Zemin had by then become fully committed to Deng’s vision and started to implement Deng’s neo-authoritarian agenda with few reservations. In November 1993 Jiang shepherded approval of a landmark document at the Third Plenum of the Fourteenth Central Committee. “The CCP Center’s Resolution on Several Questions on Establishing Institutions of a Socialist Market Economy” legitimized, for the first time, the status of the market econ- omy, representing the ideological breakthrough that had eluded Deng throughout the 1980s. The resolution also laid out a blueprint for the radical economic reforms that the hard-liners had bitterly opposed in the prior decade. The fifty provisions of the resolution include plans to reform the SOEs, develop the underlying institutions of a market economy, encourage the growth of the private sector, establish mechanisms of macroeconomic management, expand the opening to the world economy, and build a modern legal system.37 Institutionalization of the Party and the Balance of Power Compared with the preceding Maoist and Dengist periods as well as the sub- sequent Xi era, the post-Tiananmen era stands out for its normality and stabil- ity. No earth-shaking political events on the order of the Cultural Revolution, the Tiananmen crackdown, or Xi’s unrelenting purge took place during this period. Although Jiang Zemin and Hu Jintao each sent a rival Politburo mem- ber to prison, these incidents are notable mainly because they were so rare. Throughout this period, China’s rulers conducted their business seemingly according to a set of written rules and unwritten norms, of which the most important and effective appear to have been those governing the recruitment and promotion of officials on the basis of their age, educational qualifications, and administrative record and the disciplining and punishment of party mem- bers suspected of corruption. To be sure, the idea of making elite politics more rule-based originated in the early 1980s, as exemplified by “Guidelines on Political Life in the Party” passed by the Central Committee in 1980.38 However, few specific rules on governance within the party were formulated in the 1980s. One of Jiang’s top priorities in the early to mid-1990s was to promulgate specific rules and regula- tions governing key procedures for appointment, promotion, discipline, and administration of local party committees. Some of the party’s most important -- 97 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 85 regulations, such as the Trial Regulations on the Selection and Appointment of Party and Government Leading Cadres (1995) and the Regulations on Chi- nese Communist Party Discipline and Sanctions (1997), were promulgated under Jiang’s leadership. (The project of subjecting politics within the party to more rules continued under Hu Jintao, who updated the interim rules passed by Jiang and rolled out new ones.)39 The stipulations in these rules and norms provided the party with signifi- cant benefits. Making certain measurable qualifications—such as age, educa- tion attainment, and record of administrative competence (mainly in terms of economic management)—some of the considerations for recruiting and pro- moting officials helped add youthful vigor and technocratic capabilities to the party’s local apparatus. The value placed on administrative experience in dif- ferent capacities and diff erent sectors enabled the party to train and promote well-rounded officials. The concomitant de-emphasis on ideology allowed the party to confine disagreements to policy and personality, not to polarizing debate over ideological values. Nonetheless, rules on “meritocracy” and administrative accomplishments could be gamed by clever local officials. For instance, officials without a genu- ine four-year college education could burnish their credentials with degrees obtained through less rigorous college or graduate programs. Xi Jinping, for example, received a doctorate from the prestigious Tsinghua University via a correspondence program in the late 1990s while he served as the governor of Fujian province. The practice of faking economic data to embellish one’s rec- ord was widespread. Cultivating ties with superiors, often through illicit means such as bribes, could advance an official’s career.40 Such meritocracy appeared to apply to the promotion of local officials more strictly than to national-level officials as patronage— personal ties to senior leaders in the party—played a decisive role in the selection of members of the Central Committee who typi- cally staff the most impor tant political and administrative positions in the party-state.41 Yet, despite these flaws, codified rules and implicit norms on elite politics helped the party recruit more talented individuals and keep them committed to the party out of self-interest. At a minimum, these rules and norms provided them with a career road map for upward mobility inside the party-state. En- forced limits on term (usually two terms in the same position) and age (the mandatory retirement age was 60 for officials with the rank of vice minister or deputy provincial governor, while ministers and governors were required to retire at 65) accelerated elite circulation as officials reaching these limits were -- 98 of 345 -- 86 c h a p t e r 3 forced to retire and give way to a younger cohort. This allowed the party to avoid the Maoist-era problem when the absence of age and term limits enabled the revolutionary veterans to stay in office indefi nitely, blocking the careers of younger officials. These frustrated followers of the party played an outsized role in toppling the old guard at the beginning of the Cultural Revolution.42 To avoid alienating a large group of officials forced into mandatory retire- ment, the party appointed them as deputies to local people’s congresses or people’s political consultative conferences (an advisory body). Those officials who retired from frontline responsibilities also retained their perks, such as generous retirement benefits, government-provided housing, and access to high-quality healthcare. They could count on support and services provided by a special bureaucracy, the “Veteran Cadres Bureau,” which originally had been set up in the central government in the 1980s to cater to the needs of the octogenarian revolutionaries but had been expanded to all levels of the party- state in the 1990s. Although maintaining an ever-growing number of officials in their early sixties consumed enormous resources, the party had no trouble covering the expenses because the coffers of the state were flush with tax rev- enues generated from the rapidly expanding economy. Unlike during the Maoist and the Dengist eras, elite politics during the period when Jiang was effectively in charge (1993–2002) was marked by a de- gree of stability and collective leadership that was unmatched in all other pe- riods of PRC history, except for the Hu era (2003–2012). When Mao ruled the party, he conducted ceaseless purges to get rid of his enemies, including his two designated successors (Liu Shaoqi and Lin Biao). In the 1980s Deng’s disenchantment with his own protégés, Hu Yaobang and Zhao Ziyang, ulti- mately led to their ouster from power. By contrast, the end of bitter ideological feuding after 1992 dramatically bolstered elite unity in the post-Tiananmen era. Jiang did not carry out any mass purges during his time as general secretary, even though he occasionally did conduct half-hearted anticorruption campaigns, mainly targeting mid- level officials.43 Only a personal rival, Politburo member Chen Xitong, was imprisoned on corruption charges in 1995 (an act of poetic justice in the eyes of many because Chen had played a dark role in the Tiananmen crackdown). To be sure, in the post-Tiananmen era personal vendettas and naked power struggles likely replaced ideological conflicts as the main cause of conflict among elites. This change may not seem to be much of an improvement. How- ever, the presence of explicit rules for approval of the penalties to officials ac- cused of corruption most likely constrained discretion among most party -- 99 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 87 officials who would have liked to see their rivals sent to prison. It is worth not- ing that anticorruption investigations were not weaponized on a meaningful scale until after the rise of Xi Jinping. The party established procedures for approving penalties for senior officials found guilty of corruption in 1983. Nor- mally, expulsion from the party had to be blessed by the standing committee of a party organization. So a member of the Central Committee could not be punished without the approval of the PSC.44 At the highest level of the party, however, what most likely helped curb the weaponization of corruption investigations against political rivals was not merely the presence of such rules but the delicate balance of power in the PSC.45 During the Jiang era, Jiang had to share power with formidable rivals. Li Peng, the hard-line premier (and later chairman of the Standing Committee of the NPC) who occupied the second most senior position in the party, had a strong base of support among conservatives. Qiao Shi, the third-ranked leader until 1997, had enjoyed a more illustrious career than Jiang, having over- seen the party’s Organization Department and security apparatus. Zhu Rongji, who joined the PSC in 1992 and became premier in 1998, was no pushover, either. In 1993, after poor health and high inflation forced Li Peng, then the premier, to cede much of the executive authority of the State Council to Zhu, the former hard-charging mayor of Shanghai quickly established his creden- tials as the country’s economic czar and served as the most influential eco- nomic policymaker in the post-Tiananmen era until his retirement in 2003. In addition to these three political heavyweights, Jiang also had to contend with Li Ruihuan, the fourth-ranked member of the PSC, whom Deng had promoted after the Tiananmen crackdown to counter the hard-liners. Even though they allegedly did not get along, Jiang could do little more than ma- neuver Li into retirement at the Fifteenth Party Congress in 1997.46 The pres- ence of Hu Jintao, Jiang’s successor designated by Deng in 1992, further tied Jiang’s hands. The leader-in-waiting could not be counted as a Jiang ally. If anything, Hu had a stake in preserving the balance of power to prevent Jiang from becoming a strongman and threatening his ascension to the top party position after Jiang served out his full second term in 2002. This analysis suggests that, perhaps more critical than any formal rules, the finely tuned balance of power during the Jiang era (and later in the Hu era) preserved elite stability and collective leadership. Rules are effective only when they can be enforced with coercive power. In the post-Tiananmen era, the ap- pearance of institutionalization and relative stability in elite politics led some to conclude that the party had successfully established binding rules and -- 100 of 345 -- 88 c h a p t e r 3 norms, and politics in the erstwhile Hobbesian world had become “normal.”47 But skeptics questioned whether, in the absence of a third-party enforcer, elites in an autocracy can be counted on to exercise self-restraint and abide by any rules and norms.48 What stands out in the post-Tiananmen era is the total absence of a third party—such as an empowered electorate, an independent judiciary, or a free press—that could enforce party rules and norms. The ab- sence of third-party enforcers was by design rather than by accident. It was Deng’s firm opposition to the political liberalization and to the checks and balances proposed by Zhao in 1987 that blocked the establishment of potential third- party enforcers. The fragile balance of power in the post-Tiananmen era enabled the party to adhere to its rules of succession. But a closer look at the two successions, in 2002 and 2012, shows that these two cases were close calls, and they reveal that the institutionalization of elite politics in the post-Tiananmen era was mostly an optical illusion. In the case of Hu’s succession in 2002, Jiang most likely resented Deng’s appointment of Hu as his successor, but he lacked the power to remove him. Yet Jiang still tried to hang on to power by keeping his position as chairman of the party’s Central Military Commission, ostensibly following the precedent set by Deng (who retained the same position after giving up his seat on the PSC in 1987). In Chinese vernacular, Jiang did not retire “naked” (luotui) by giving up all his official titles, as Hu would later do in 2012. The shallowness of the party’s institutionalization was again on display at its Seventeenth Party Congress in 2007, when Hu’s successor was to be se- lected. Deng’s far-sighted, if not preemptive, move to designate Jiang’s succes- sor in 1992 may have spared the party a brutal power struggle in 2002, but in 2007 the party was forced to reach agreement on who should succeed Hu. As will be discussed later in this chapter, there were no rules for the party to fol- low. Xi Jinping—the eventual victor emerging from a contest between Jiang and Hu—was unaffiliated with either faction. But it was this relatively un- known princeling who, after his rise to power in November 2012, wasted little time in purging his political rivals and destroying the fragile balance of power at the top. Xi’s success in expanding and perpetuating his personal power re- confirmed that the many rules and norms the party had instituted in the post- Mao era were no match to the political ruthlessness and machinations of a strongman. If anything, the relative tranquility in elite politics during the post- Tiananmen era was the exception that proves the rule of the impossibility of institutionalizing politics in a dictatorship. -- 101 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 89 The Patriotic Education Campaign and the Resurgence of Nationalism On June 9, 1989, five days after the PLA crushed the Tiananmen prodemocracy movement, Deng Xiaoping met with senior military officers responsible for the crackdown. As he thanked them for their “hard work,” Deng also admitted that “the biggest mistake [we] have made in the last decade was . . . [neglect- ing] ideological and political education.”49 To remedy this mistake, his succes- sors in the 1990s launched a comprehensive campaign to revive nationalism as a means of cultivating mass support for the party. The core component of this campaign was patriotic education—a program utilizing party control of the education system, media, and cultural facilities to instill in the Chinese public, especially the younger generations, national pride, resentment against Western imperialism, and loyalty to the party. The patriotic education campaign slightly predated Deng’s historic south- ern tour. In late August 1991, prodded by newly installed party general secre- tary Jiang Zemin, the State Education Commission issued two important documents. One required a strengthening of the history curriculum in primary and middle schools so that pupils would learn more about China’s modern and contemporary history. The document explicitly stated that this undertak- ing aimed to “smash the plot of ‘peaceful evolution’ by domestic and foreign hostile forces.” To ensure that students would have an incentive to study the party’s version of history, the document also mandated that starting in 1992, the college entrance examinations, or gaokao, would test knowledge of party history. The second document directed schools and universities to organize visits to museums and revolutionary monuments as part of a program to foster “patriotism and a revolutionary spirit.”50 The most important policy document on patriotic education, “Outline on the Implementation of Patriotic Education,” was issued by the CCP Central Propaganda Department in August 1994.51 It laid out the specific provisions for this campaign. Among other things, patriotic education was to focus on Chinese history, China’s contributions to civilization, Chinese resistance to foreign aggression and oppression, and CCP policy and accomplishments in economic development. The younger generations were to be the target audi- ence of the patriotic education campaign, and schools were to be the primary venue for this endeavor. Textbooks in primary and middle schools were re- quired to include content on patriotic education. Additionally, films, television, -- 102 of 345 -- 90 c h a p t e r 3 publications, and music would be utilized to disseminate patriotic education. The government would also fund the establishment of “patriotic education bases”—museums, historical monuments, sites of major battles during the civil war, and well-known cultural heritage sites. Patriotic rituals, such as sing- ing the national anthem and flag-raising, would be required at graduation com- mencement ceremonies and at large sports events. Patriotic education also included promotion of patriotic models—party leaders, artists, poets, and revolutionary martyrs—who had made outstanding contributions to China. The motivation behind Jiang’s push for patriotic education is easy to identify. Politically, he wanted to establish his bona fides as an ideological conservative faithfully implementing Deng’s edicts. In the aftermath of the Tiananmen debacle of 1989 and the disintegration of the Soviet Union, culti- vating Chinese nationalism also served party interests because it could rally the public behind the party after orthodox Communist ideology had lost its popular appeal.52 Following promulgation of the “Outline” in 1994, the party mobilized its propaganda apparatus and the entire education system to implement patriotic education. Judging from official publications, universities and schools carried out the specific instructions laid out in the “Outline.” Curricula were revised to include the required patriotic education content, such as the history of Western imperial aggression and Chinese culture, tradition, and patriotism. Schools began to hold regular flag-raising ceremonies, sing the national an- them at major events, and hang national flags in classrooms, lecture halls, and offices.53 “Patriotic education bases”—newly designated revolutionary monu- ments, sites of major battles during the second Sino-Japanese war (1937–1945), history museums, and birthplaces of major revolutionary and cultural figures— were established throughout the country. The narratives in the ma- jority of these bases explicitly glorified the role of the CCP in regaining the country’s sovereignty, independence, and dignity after a century of national weakness and humiliation.54 University students were the chief target of patriotic education because the party viewed them as more deeply corrupted by Western ideas and potentially more threatening to CCP rule than any other social groups. Students were required to take two courses: “Theories of Marxism and Leninism” and the “Current Situation and Policy” (xingshi zhengce jiaoyu). Although the cam- paign was labeled “patriotic education,” its primary objective, according to a senior official in the State Education Commission, was to ensure loyalty to Deng’s “four cardinal principles” and to the party mission of constructing -- 103 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 91 “socialism with Chinese characteristics under the leadership of the Commu- nist Party.”55 Some university officials explicitly stated that the “basic compo- nent” of patriotic education was “love for the party and socialism.”56 In a major departure from the party’s triumphalist tone in promoting Chi- nese nationalism during the Mao era, the post-Tiananmen leadership opted for a victimhood narrative emphasizing imperial bullying of China and portraying the party as the greatest defender of China’s honor.57 The party deliberately picked this theme because, after the Tiananmen crackdown and the Soviet collapse, China was isolated from the West, and it was easy to por- tray the West as again attempting to subjugate China. By coincidence, a series of incidents in the 1990s helped lend credibility to the party’s victimhood narrative and reinforce its message that the United States, then the world’s sole superpower, was intent on containing China. In 1993 the so-called Yinhe incident enraged the Chinese public. US intelligence agencies accused the Yinhe, a Chinese container ship, of carrying materials to be used in Iran’s chemical weapons, and, likely due to American diplomatic intervention, the United Arab Emirates prevented it from docking in its ports. Even after an inspection revealed that the Yinhe was not carrying any contra- band, the United States refused to apologize. In 1995, under pressure from Congress, the Clinton administration was forced to grant a visa to Lee Teng- hui to visit the United States. Lee was at the time the president of Taiwan, who was reviled in Beijing for his pro-independence aspirations. In response to the pro-independence remarks Lee had made in the United States, China staged a series of military exercises as a warning to Taiwan. But Washington re- sponded in March 1996 by dispatching two carrier battle groups to the waters surrounding Taiwan as China was conducting its largest military exercises thus far, which included the firing of missiles into the waters near Taiwan. Although no military conflict broke out, America’s show of support for Taiwan once again angered the Chinese public.58 The event that perhaps did more than anything else to help reinforce the party’s narrative of Chinese victimhood is the accidental bombing of the Chi- nese Embassy in Belgrade by an American stealth fighter during a NATO bombing campaign against Serbia in May 1999. Despite Washington’s explana- tions and apologies, Chinese leaders insisted that this was a deliberate act, and ordinary Chinese took part in nationwide anti-American demonstrations. Angry protestors in Beijing, many of whom were university students, trashed the American Embassy with rocks and other projectiles. In Chengdu, mobs set on fire the residence of the US consul-general.59 -- 104 of 345 -- 92 c h a p t e r 3 Judging by such a virulent outpouring of anti-Americanism, exactly one decade after prodemocracy students had erected a miniature Statue of Liberty in Tiananmen Square, the party’s patriotic education campaign obviously suc- ceeded beyond its own expectations. Indeed, most scholarly research on the rise of Chinese nationalism in the 1990s finds that the attitudes of the Chinese public at the time, in particular the attitudes of the younger generations, be- came more patriotic and more progovernment.60 Selective Repression One of the key lessons learned by the party leadership from the Tiananmen crisis was the need for a more effective coercive apparatus. As a result, the party undertook a comprehensive campaign in the 1990s to invest in the state’s coer- cive capacity.61 In April 1990 the party issued a key policy document on strength- ening domestic security. Its provisions included restoration of the Central Political and Legal Affairs Commission, a specialized party bureaucracy in charge of law enforcement that had been abolished by reformist party chief Zhao Ziyang in 1988. This resurrected commission was to supervise the strengthening of law enforcement and to coordinate implementation of the party’s security agenda. The document vows to wage a merciless struggle against “hostile forces, infiltration, and subversion.” It explicitly orders the establishment of urban mo- bile antiriot forces to quell demonstrations (China had not had specialized an- tiriot police to deal with the prodemocracy protesters in 1989).62 Ten months after the issuance of this document, the party released a second directive on domestic security, “Decision on Strengthening Comprehensive Management of Public Security.” On paper, this document appears to empha- size law and order as well as social stability, but it also includes provisions for tightening social control, such as monitoring the “floating population” (people without fixed household registrations) and surveillance of dance halls, printed materials, and venues for showing videos. It calls on local governments to in- crease funding for law enforcement.63 Investment in China’s coercive apparatus—police, courts, and procurator- ates—rose dramatically in the years after these documents were issued. From 1991 to 1995 the amount spent on these three branches of the state rose three- fold in absolute terms (from 10 billion yuan in 1991 to 30 billion yuan in 1995). By 2002, a decade after Deng’s southern tour, spending on these three branches would rise to 110 billion yuan, ten times the amount in 1991 (unadjusted for inflation).64 -- 105 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 93 The size of the police force more than doubled from 1989 to 2010 (from 769,000 to at least 2 million).65 Starting in the early 2000s, the party expanded the police units responsible for domestic surveillance and political repression (“domestic security protection”), adding probably more than ten thousand police devoted solely to dealing with political dissidents, underground reli- gious believers, and cult members.66 In mid-1990 the People’s Armed Police (PAP) began to form specialized antiriot units. By the end of the 1990s, most local police departments had established similar units.67 In the 1990s the party launched a series of initiatives to upgrade the capa- bilities of the surveillance state. In November 1991 the powerful Ministry of Public Security (MPS) issued new rules on surveillance of “key populations” (such as dissidents, activists in underground religious groups, and ex-convicts). In December 1991 the ministry established covert operations on university campuses. In May 1992 it directed local police to increase manpower to target Western “infiltration,” underground Catholic groups, and cults. At the direc- tion of the party, police intensified internet surveillance in July 1997, and in October 1997 it tightened control over foreign funding of Chinese social sci- ence research organizations.68 The decade saw a major expansion of the net- work of informants recruited by the police to act as the “eyes and ears” of law enforcement. For example, the number of “special intelligence personnel” (informers) employed by police in Shaanxi province nearly doubled between 1988 and 2001.69 The 1990s also saw the beginning of a well-funded program to upgrade the technological capabilities of the coercive capacity of the party-state. In No- vember 1991 the MPS convened a national conference on the modernization of law enforcement technology, marking the beginning of a drive to upgrade law enforcement with advanced surveillance technology.70 In 1998 the party formally approved the Golden Shield Project (the IT modernization program of the MPS that includes the “Great Firewall of China”).71 In addition to its sustained and massive investment in coercive capacity, during the Jiang era the party constantly refined its tactics of repression, often deploying methods used in soft-authoritarian regimes in other East Asian countries.72 Inviting known dissidents to “tea” as a subtle form of intimida- tion became a routine tactic, as was the use of family relatives and friends to engage in emotional blackmail against ordinary citizens who participated in peaceful petitioning. When brutal force was needed, local authorities would hire thugs to beat up the protesters. Aware that major public holidays, key anniversaries (such as the anniversary of the June 4 massacre), or visits by -- 106 of 345 -- 94 c h a p t e r 3 foreign dignitaries could become rallying points for collective protests, police would tighten security measures on those sensitive dates to prevent such dis- turbances from occurring.73 The regime became more selective in picking its targets. It prosecuted and jailed fewer dissidents, often preferring to charge dissidents with nonpoliti cal crimes (such as disturbing public order) instead of “subverting state power.” To decapitate political opposition at home and to placate Western govern- ments, which the post-1989 regime sought to woo in order to maintain access to capital, technology, and markets, the party forced into exile nearly all the best- known dissidents, such as Wei Jingsheng (the symbol of the Democracy Wall Movement in 1978–1979) and Wang Dan and Wang Juntao (leaders of the Tiananmen protests in 1989).74 Several key factors motivated the post-Tiananmen regime to massively increase investment in its coercive capacity but at the same time also to adopt more refined tactics of repression. Due to the party’s near-death ex- perience during the Tiananmen crisis, it came to appreciate that its coercive capacity was the ultimate guarantor of regime survival and that prevention of a similar crisis was far preferable to a brutal crackdown. The rapid growth of fiscal revenue during the booming 1990s also enabled the state to channel more resources into law enforcement and surveillance. The switch to soft- authoritarian tactics of repression allowed the party to target fewer political threats more effectively and to leave most of the population unaffected. Po- litically, selective repression served the party well. Most ordinary people enjoyed continual expansion of their personal freedoms as the economy thrived. This was translated into mass support for the regime. Geopolitically, soft-authoritarian repression helped reduce tensions between China and its key trading partners in the West, justifying that engagement with China of- fered tangible evidence that economic liberalization might lead to a political opening in the future. Despite adoption of more refined tactics of repression, the essential bureau- cratic organizations of totalitarianism and the mechanisms of deploying them for mass terror remained intact. The party could quickly mobilize these organizations when confronted with a direct and forceful challenge to its au- thority, as in the case of the protests staged by the Falungong spiritual group in 1999. After the party leadership issued an order banning this group, which allegedly had tens of millions nationwide followers, Chinese police resorted to extremely brutal methods to arrest, imprison, and torture its leaders and followers, effectively destroying the group as an organized force within only a -- 107 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 95 few years.75 The near-total destruction of Falungong foreshadowed the return of totalitarian rule under Xi Jinping more than a decade later. Co-optation of Social Elites A distinct feature of the post-1989 neo-authoritarian order is the successful effort by the party to expand its social base beyond workers and peasants, the two groups that made up the majority of party members but that had lost huge economic ground and political influence during the post-Mao era. In 1978, on the eve of Deng’s reform, peasants constituted 47 percent of party members, while workers accounted for nearly 19 percent. Only 1.6 percent of the 37 mil- lion party members were classified as “professionals, cadres, and students.”76 The majority of party members were poorly educated. In 1980, 11 percent of party members were illiterate, 45 percent had only a primary-school educa- tion, and a mere 3 percent had received a college-level education.77 As the party pivoted to a survival strategy centered on economic development, it needed to recruit individuals with better educational and professional quali- fications. Beyond the requirement for expertise that would be useful in manag- ing a complex economy, the party’s strategy was to co-opt the very social elites whom it had viewed as enemies or threats during the Maoist era. This tactic also contained a Machiavellian element: preempting elite-based opposition in Chinese society. Exclusion of elites with a higher social status and more eco- nomic resources could antagonize and even turn such social elites into op- ponents of the regime. Because repression of the intelligentsia and private entrepreneurs could endanger the party’s economic agenda, it therefore was no longer attractive, and co-optation became a preferred option. The broad outline of the party’s strategy of co-opting social elites was laid out in a September 1994 Central Committee decision on party building. Among the top priorities identified by the party were the appointment and promotion of a large number of loyal and talented young officials and recruit- ment of “outstanding elements” among young people and women.78 Initially, the focus of the co-optation strategy was the recruitment and promotion of well-educated individuals, in particu lar university students, a group the party had a strong incentive to win over given its role in leading the prodemocracy movements in the 1980s.79 (The party issued a specific directive in 2005 on strengthening recruitment of university students.)80 For example, the share of party members among undergraduates at prestigious Tsinghua University doubled from 8.3 percent to 16.5 percent between 1995 and 2005 (the share -- 108 of 345 -- 96 c h a p t e r 3 would rise to 29 percent in 2011).81 As the party controlled access to career opportunities, it had no difficulty luring talented and ambitious university students to join its ranks.82 The drive to recruit well-educated individuals made rapid progress in the 1990s, and toward the end of the post-Tiananmen era it had dramatically trans- formed the composition of the party. In 1990 only 10.3 percent of party mem- bers had received a college-level education or higher. A decade later, 21 percent of party members had a college-level education or higher.83 By 2000 the party would be unrecognizable to its founders. Of the 64.5 million members, work- ers and peasants accounted for about 44 percent (compared with 66 percent in 1979). The share of professionals had risen to 19 percent (from 1.6 percent in 1978).84 The share of workers and peasants in the party would continue to fall as the party recruited more college graduates and professionals. In 2011 workers and peasants made up 39 percent of party members, while managers (excluding full-time party and government officials), professionals, and col- lege students accounted for 27 percent. Close to 40 percent of party members had a college-level education or higher.85 After the party’s efforts to co-opt the well-educated yielded impressive re- sults, it shifted its attention to private entrepreneurs who had gained social status and enormous resources during the booming 1990s. The milestone was Jiang Zemin’s theory of the “Three Represents,” unveiled with great fanfare on July 1, 2001, the eightieth anniversary of the founding of the party.86 Ostensibly, Jiang was trying to advance a new ideological theory spelling out what the party stood for (or represented) to replace the party’s orthodox ideological doctrine that had emphasized revolution and struggle against capitalism. Ideo- logically, the “Three Represents” implicitly endorsed capitalism, which Jiang euphemistically but awkwardly termed “advanced social productive forces.” In practice, this framing opened the door for the party to admit as members pri- vate entrepreneurs—the very exploiting class whose destruction theoretically is the goal of orthodox communism. Even though Jiang’s “Three Represents,” which the party enshrined in its charter in November 2002 as “important thought,” do not appear to have done much to rejuvenate the party ideologically, the green light to recruit capitalists quickly had a notable impact on co-opting a new social group that was in control of a growing portion of the national economy. By 2000, private firms (excluding micro household businesses) employed over 24 million workers.87 Obviously, the party was eager to gain the support of this group of social elites. -- 109 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 97 Based on surveys conducted in the early 2000s of owners of private firms, in 1999 only 18 percent of them were party members.88 Following Jiang’s call to admit capitalists into the party, the share of private entrepreneurs who were party members rose rapidly. Survey results show that in 2002 that share had risen to 30 percent, compared with only 20 percent in 2000.89 Toward the end of the 2000s, the party was recruiting about 80,000 “managers and technical personnel” of private firms each year.90 To be sure, private entrepreneurs had mixed motives for joining the party. Many, if not most, sought the political status that came with party membership as a layer of protection of their wealth, or they believed that they could have more access to opportunities via membership. Additionally, having this new social group inside the party was, on the whole, a successful move to shore up support for the party in the rapidly changing society.91 Party membership was not the only enticement used to co-opt social elites. In the post-Tiananmen era, a select group of eminent intellectuals, profession- als, and private entrepreneurs were picked to be delegates to the local people’s congresses and the people’s political consultative conferences. The inclusion of these successful and well-known individuals conveyed the impression to the public that the party enjoyed their support.92 False Dawn: The Limits of Neo-Authoritarianism As illustrated, within a decade of Deng’s southern tour in 1992, the collective leadership under Jiang Zemin had successfully transformed Deng’s neo- authoritarian vision into a comprehensive strategy of regime survival. Its key pillars consisted of performance legitimacy, collective leadership underpinned by a fragile balance of power, expansion of popular support through the culti- vation of Chinese nationalism, selective repression, and co-optation of social elites. By and large, the party showed a remarkable degree of adaptation in the 1990s, and its new strategy served it well. Ideologically, the party was far more homogenous than perhaps at any time in its history. The purge after the Tiananmen crackdown eliminated the liberals at the top of the leadership. Ever fearful of elevating China’s equivalent of a Gorbachev to the top, the party, dominated by conservative technocrats, de- nied power to those with liberal leanings. At the same time, ultra-conservatives who resisted the market reforms were sidelined as well because their ideologi- cal orthodoxy was incompatible with the party’s conviction that its survival -- 110 of 345 -- 98 c h a p t e r 3 depended on performance legitimacy, which could be delivered by business- friendly policies. In terms of elite politics, ideological homogeneity was trans- lated into relative elite stability. In contrast to the 1980s, the Jiang era—as well as the Hu Jintao era—stands out mainly because of the absence of bitter ideo- logical clashes such as those that ended with the purge of Hu Yaobang, Zhao Ziyang, and their close associates. To be sure, conflicts among senior leaders existed, but they were over personality and power, not ideology. More impor- tant, such conflicts were contained, as evidenced by the fact that during the Jiang era, only one Politburo member was jailed on charges of corruption. The timing of the party’s pivot to neo-authoritarian rule in the 1990s could not have been more fortuitous. Economically, the reforms in the 1980s had built the foundations of a market economy—privatization of agriculture, a fast-growing private sector, and linkages with the global economy. The massive rural-urban migration coupled with the young population (nearly 90 percent of the population was under the age of 59 in 1990) became a sustained and powerful driver of growth during the subsequent two decades.93 Despite a few episodes of tensions between the United States and China, the external envi- ronment was relatively benign. Instead of efforts by Washington to contain China after the end of the Cold War, as Beijing feared, the United States pro- moted globalization as an instrument to integrate China into the global econ- omy, thus giving China unprecedented access to Western markets, capital, and technology. The tools deployed by the party to guard against domestic threats to its power proved surprisingly effective. The nationalism cultivated by the party generated a new source of mass support. Co-optation of social elites broad- ened the party’s base and improved the educational and professional qualifica- tions of party officials. More sophisticated tactics of political repression en- abled the party to contain emerging threats to its power. In the 1990s surveillance, intimidation, imprisonment, and exile neutralized the prodemo- cracy movement as a serious danger, and the party’s investment in a coercive apparatus paid off handsomely, as shown by the suppression of ethnic minor- ity unrest in Tibet and Xinjiang, the banning of Falungong, and the suppres- sion of worker unrest in the aftermath of the mass layoffs by bankrupt SOEs at the end of the decade.94 However, the neo-authoritarian order constructed in the 1990s under Jiang Zemin’s leadership had inherent flaws, which would become both more visible and more serious during the Hu era. Elite security was ensured not by rules and norms enforceable by a third party but by a fragile balance of power -- 111 of 345 -- N e o -Au t hor i t a r i a n i s m , 19 92 – 2 0 0 2 99 among rivals. Senior leaders with their respective extensive power bases in the party-state prevented the two party chiefs, Jiang and Hu, from turning collec- tive leadership into strongman rule, as Xi Jinping was able to do shortly after his rise in late 2012. Without durable institutional constraints, which are dif- ficult to establish and preserve even in democracies, elite security was certain to vanish once the underlying balance of power ceased to exist. In addition, the post-Tiananmen neo-authoritarian order was fundamen- tally incompatible with genuine political liberalization, democratization, and rule of law, thus diminishing the possibility that economic development under one-party rule could result in a transition to democracy. The reforms champi- oned by liberals and moderates in the party laid the foundation for a modern legal system. Landmark legislation such as the Criminal Procedure Law (1980), Economic Contract Law (1981), Foreign Company Law (1986), and Administrative Litigation Law (1989) were all passed in the 1980s. Despite their flaws, they marked a promising first step toward rule of law. Even with the booming economy, however, the progress in legal reform in the 1990s was mixed at best. The NPC enacted many more laws than it did in the 1980s, and judges and lawyers were also better educated and trained. But the party stead- fastly resisted any reforms that would make the judiciary more independent, and it frequently ignored or even violated the laws passed by the NPC. Con- sequently, by the end of the Jiang era, China’s legal system remained firmly under the control of the party despite its ostensible modern appearance of robed judges presiding over proceedings in newly built courtrooms.95 Substantive progress in developing a basic system of accountability was also minimal. With the support of the party, the NPC enacted an interim law per- mitting rural residents to elect “village committees” and their directors in 1987. Even though the “village committees” were civic organizations and thus lacked formal political authority or power, this move was initially hailed as another tentative step in the direction of grassroots democracy. By the 1990s, however, this route had turned out to be a dead end. The party allowed such elections throughout rural China, but it refused to take the next step of permitting com- petitive elections for township governments. (Townships constitute the low- est administrative units in the Chinese state.) Eventually, this experimental effort to build grassroots democracy in rural China fizzled out.96 Without rule of law and accountability enforced by a civil society or a free press, economic development under autocratic rule inevitably breeds systemic corruption. Although corruption in the 1990s appeared to be less rampant than it would be in the 2000s, the decade saw several major cases of corruption -- 112 of 345 -- 100 c h a p t e r 3 that were unprecedented in terms of the number of people and the amount of bribes involved.97 In the infamous Xiamen smuggling scandal, anticorruption investigators found that a criminal group had managed to smuggle into China more than 53 billion yuan worth of goods between 1996 and 1999 with the help of dozens of government officials, including a vice minister of public security and other senior officials in Fujian’s police and customs systems.98 Toward the end of the 1990s, cracks began to appear in the party’s survival strategy that had centered on economic performance, as evidenced by the rising social unrest.99 Among the drivers linked to the social unrest were the brutal enforcement of the party’s “one-child policy,” regressive tax-collection policies, illegal evictions in urban areas, seizure of the farmers’ land by local officials, factory closures, and unpaid wages.100 Even though most social pro- tests were small, isolated, and short-lived, this growing trend not only dented the party’s image of competence but also indicated that the pro-growth poli- cies pursued by the post-Tiananmen regime were harming a significant por- tion of the Chinese population, and the regime would likely lose support if inequality, corruption, and abuses of the rights of ordinary people continued to fuel popular resentment. Ultimately, economic reform pursued by a neo-authoritarian regime is likely to fall into the trap of a “partial reform equilibrium.” In a transition from a planned economy to a market economy, reform tends to stall after some initial efforts have been completed but more critical measures have yet to be undertaken.101 At the midpoint in the transition process, regimes initiating a transition will lose incentives to go all the way because, although partial re- forms improve economic efficiency and bolster party legitimacy, any further reforms are certain to weaken the regime’s control over the economy and un- dermine its power.102 To be sure, the full symptoms of this “trapped transition” were not yet plainly visible, at least in the economic realm, until Hu Jintao came to power in 2002, but the political logic behind a “trapped transition” was firmly embedded in the very neo-authoritarian vision that Deng be- queathed to Jiang in 1992. -- 113 of 345 -- 101 4 Stagnation in the Hu Jintao Era deng xiaoping, who had doggedly pursued his neo-authoritarian vision in the 1980s, almost certainly believed that this political order would have more staying power than orthodox communism. His immediate successor, Jiang Zemin, who had translated Deng’s rather abstract vision into actual party poli- cies in the 1990s with great success, also likely thought the post-Tiananmen order could endure. It is true that, in the wake of the Tiananmen crisis and the collapse of the Soviet Union, the party’s decision to embrace capitalism with no ideological reservations in order to save its rule was wiser than the only other alternative of returning to the orthodox communist system of the early 1950s. But Deng, Jiang, and other post-Tiananmen party leaders overlooked the most serious flaws of neo-authoritarian developmentalism: the gradual but inevitable loss of momentum of economic reform and corruption-induced regime decay. If anything, the post-Tiananmen neo-authoritarian order turned out to be more fragile and less durable than its architects had thought. When Hu Jintao succeeded Jiang in late 2002, signs of pathologies of neo-authoritarian developmentalism such as rampant official corruption, rising socioeconomic inequality, deteriorating governance, and growing social unrest had become inescapable. By the time Hu left office in November 2012, the rot inside the regime was so advanced that Xi Jinping, who succeeded Hu, was able to dis- mantle it with relative ease. On the surface, however, the post-Tiananmen order persisted without much change during the decade when Hu Jintao served as the party chief, 2002–2012. The Chinese economy sustained its rapid ascent mainly because China’s entry into the World Trade Organization (WTO) at the end of 2001 generated a boom in foreign direct investment and trade, while urbanization continued to funnel tens of millions of rural migrants into the manufacturing and service sectors. Despite rising incidents of social unrest, the party -- 114 of 345 -- 102 c h a p t e r 4 managed to use a mixture of carrots and sticks to maintain stability. Collective leadership was preserved, ensuring a high degree of security for the ruling elites at the top (with the exception of a politi cally motivated corruption in- vestigation of a Politburo member). By and large, the party stuck with the same domestic policies that had delivered unprecedented economic prosper- ity and political stability in the 1990s. If anything, it was during Hu’s decade that China marked its spectacular rise as a global power with the hosting of the Olympics in Beijing in August 2008. But a closer look at the Hu era reveals the growing cracks in the post- Tiananmen order. Economic reform lost its momentum because the party under Hu introduced no new measures to accelerate the building of a market economy. Instead, it doubled down on a flawed growth model that relied ex- cessively on investment at the expense of consumption. Inefficient state- owned enterprises retained their privileged positions in the economy. Growth was maintained largely thanks to the massive increase in foreign trade follow- ing the WTO entry and the rise of the real estate sector as a major domestic driver. In the meantime, the combination of repression of the freedom of the press, the lack of rule of law, and the party’s control of immense economic resources fueled corruption and made Dengist neo-authoritarian develop- mentalism increasingly look like crony capitalism. Practices symptomatic of regime decay, such as collusive corruption and bribing superiors for govern- ment office, became endemic. To be sure, the party under Hu’s leadership did try to address some of the social problems created by its single-minded focus on economic development during the Jiang era. The issues included rising inequality, inadequate social protection, and environmental degradation. Hu Jintao and Wen Jiabao, the premier, also attempted to make the economy less reliant on investment for growth. But their efforts were too little and too late. To make matters worse, the party responded to the global financial crisis in 2008 with a massive injec- tion of credit. Although the stimulus sustained growth temporarily, it blew a colossal debt bubble that would create huge financial risks and constrain growth in the future. It is tempting to blame Jiang Zemin for the stagnation of reform under Hu. Although he nominally retired in November 2002, Jiang retained his post as chairman (commander-in-chief) of the Central Military Commission. In ad- dition, he elevated at least four supporters to the PSC, which was expanded from seven persons to nine to accommodate Jiang’s scheme.1 Jiang continued to wield enormous influence even after giving up the position of chairman of -- 115 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 103 the CMC in 2004. Tellingly, judging by the fact that Hu did not succeed in obtaining the moniker “core leader,” which Deng had conferred on Jiang and Xi bestowed on himself, he failed to establish uncontested authority as party chief during his tenure in office. But Jiang’s political maneuvering was not the sole, or even the most important, cause of the effective demise of post-Mao reform in the Hu era. By all accounts, the neo-authoritarian model, which the party adopted fully in the wake of the crises of the Tiananmen crackdown in 1989 and the fall of the USSR in 1991, could no longer provide the intellectual guidance needed to perpetuate regime survival. With the selection of Xi Jin- ping as Hu’s successor in November 2007, the writing was already on the wall for the post-Tiananmen order. Building a Harmonious Society By the time Hu succeeded Jiang as general secretary of the CCP, the project of building the foundations of Deng’s neo-authoritarian order had largely been completed. On the economic front, Hu took over at a propitious time. After China’s formal accession to the WTO in 2001, FDI began to pour into China, and exports grew explosively. The powerful economic momentum meant that, unlike Jiang in the early 1990s, Hu faced little pressure to launch new reform initiatives. As a new leader, however, Hu needed to advance a political agenda that would bolster his authority and differentiate his performance from that of his predecessor. His challenge was to formulate and implement such an agenda without reversing Jiang’s policies or clashing with Jiang directly. Practically, the consensus-based decision-making process gave a veto to Jiang’s proxies on the PSC, making it difficult for Hu to effect a radical shift. These factors meant that policy change would occur only on the margins, with modest outcomes. At first glance, Hu seemed to have inherited a booming economy. But daunting socioeconomic challenges lurked underneath. Economically, growth had become more dependent on investment. In 1992 consumption and invest- ment accounted for 61.6 and 37.2 percent of GDP, respectively. By 2002, invest- ment accounted for 39.4 percent of GDP, while the share of consumption fell to 58 percent.2 This unbalanced growth model threatened future sustainability because ever-increasing investment would lead to excess capacity and dimin- ishing returns, whereas surging exports generated large trade surpluses but also tensions with China’s trading partners. Socially, the party’s obsessive focus on growth during the post-Tiananmen era had neglected environmental -- 116 of 345 -- 104 c h a p t e r 4 protection, income equality, and social services. Income inequality, perhaps the single most important indicator of the health of a society, worsened dra- matically from 1990 to 2002, with the Gini index rising from 0.322 to 0.42.3 The government also underinvested in healthcare during the Jiang era. The data in table 4.1 show that the share of health spending funded by the state fell from 20.8 percent to 15.7 percent between 1992 and 2002. During the same period, employers were also paying less for workers’ healthcare. This resulted in a significant increase in personal out-of- pocket spending on healthcare. In 1992 such spending accounted for about 40 percent of total healthcare spend- ing. A decade later, this ratio had risen to 57.7 percent, representing an increase of nearly 45 percent. As this ratio is used to measure access to healthcare, people have less access to healthcare in countries where personal out-of- pocket spending on healthcare is high. In comparative terms, personal out-of- pocket spending on healthcare in China in 2002 was about three times the global average (19.3 percent).4 Education is another area that fell victim to government neglect under Jiang Zemin. Public spending on education from 1992 to 2002 dropped during most of the decade, and by 2002 it had barely recovered to the level it had reached a decade earlier as a share of GDP. Measured as a share of total government spending, education outlays stagnated throughout this decade (table 4.2). During the Jiang era, environmental protection was not a priority, either. Spending on environmental projects was woefully low throughout the 1990s— consistently less than 0.24 percent of GDP. Only in the 2000s did spending on the environment exceed 1 percent of GDP (1.13 percent in 2000 and 1.30 percent in 2002).5 To Hu and Wen Jiabao, the new premier who succeeded Zhu Rongji in 2003, these socioeconomic challenges presented an opportunity to offer a table 4.1. Share of Healthcare Spending, 1992–2002 Year Government Employers Personal Out-of-Pocket 1992 20.8 39.3 39.8 1994 19.4 36.6 44 1996 17.0 32.3 50.6 1998 16.0 29.1 54.9 2000 15.5 25.6 59 2002 15.7 26.6 57.7 Source: ZGTJNJ, vari ous years. -- 117 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 105 table 4.2. Government Spending on Education, 1992–2002 Year As Share of Total Government Spending (%) As Share of GDP (%) 1992 15.1 2.71 1994 16.1 2.44 1996 16.2 2.35 1998 15.3 2.41 2000 13.8 2.58 2002 14.8 2.90 Source: ZGTJNJ 2014, e-book. different agenda that would ameliorate these imbalances. Although Hu and Wen did not have close ties to each other before their rise to the top, they became temporary political allies because they shared an interest in counter- ing the influence of Jiang’s faction. The outbreak of SARS in early 2003, which occurred just months after Hu became CCP chief, provided both Hu and Wen with an opportunity to show that their agenda would be an improvement. Their pitch for a kinder and gen- tler China apparently was well received because the SARS crisis had exposed the dark side of the party’s policy of growth at any cost. When the epidemic broke out, China lacked a basic public health infrastructure to provide an ad- equate response, such as early detection and warning, data analysis, and treat- ment facilities.6 Although the party relied on draconian measures to suppress a rapid spread of the virus, Hu and Wen followed up with a more comprehen- sive plan to address the country’s mounting social deficit. Hu spelled out its substance comprehensively at a July 2003 national confer- ence reviewing party performance during the SARS crisis. Calling for “coordi- nated development of the economy and society,” Hu maintained that even though economic development remained the party’s central task, it had to be sustainable and measured not only in terms of growth but also in terms of indi- ces such as environmental health and human development. He singled out the development of rural areas, ground zero of government neglect. Hu also pledged to invest more in public health, reform the poorly resourced healthcare system, and strengthen state capacity for order, stability, and crisis management.7 In October 2003, Hu’s agenda was given the fancy title, “Scientific Outlook of Development,” which, in 2007, the party enshrined into its charter as one of its ideological tenets. Its essence was sustainable or, in Hu’s signature phrase, -- 118 of 345 -- 106 c h a p t e r 4 “harmonious” development that maintains the right balance between speed and quality of economic development. In an important speech to high-ranking officials in February 2005, Hu further defined the party’s goal of building a “socialist harmonious society.”8 The highest-profile—and much applauded—step Hu took to achieve a “socialist harmonious society” was abolition of the agricultural tax in Decem- ber 2005. The amount of revenue generated by this tax—a levy on agricultural produce calculated on the basis of the land leased to farmers—was small, so the government could easily absorb the fiscal costs. Total revenue from various rural taxes (such as levies on tobacco leaves or on the nonagricultural use of arable land) was 93.6 billion yuan in 2005, the year before abolition of the ag- ricultural tax. In 2006 tax revenue from rural sources amounted to 108.4 billion yuan. This suggests that the unpopular agricultural tax generated a relatively small amount of revenue (tax revenues from all rural sources accounted for only 3.2 percent of total tax receipts in 2005).9 Hu’s reform also ended other regressive nontax levies that funded public services (such as education, public health, and law enforcement). Lost revenue was made up for with subsidies from the central government.10 Even though these measures did not signifi- cantly increase farmers’ net income, they were welcomed by Chinese farmers who had long resented paying the agricultural tax and other assorted admin- istrative fees that were collected by rural officials using brutal methods.11 Another high-profile reform enacted in the early phase of Hu’s tenure was abolition of a draconian regulation allowing local authorities to detain un- documented vagrants found in cities, based on the “Procedures for Detaining and the Repatriation of Vagrants and Beggars in Cities,” issued by the State Council in 1982. Local authorities routinely abused this administrative rule to extort money from migrants, who were frequently maltreated and beaten in detention centers run by local governments. In March 2003, at the height of the SARS crisis, a college graduate, Sun Zhigang, was detained by police as a vagrant in Guangzhou because he was not carrying the proper identification papers. Sun was beaten to death a few days after he had been transferred to a detention center for vagrants. This scandal shocked the country because college graduates were consid- ered elite members of society, and Sun’s horrific death was a devastating illustration of the cruelty of the regulation and the lawlessness of local law enforcement officials. Seizing the opportunity, in May 2003 three liberal legal scholars petitioned the Standing Committee of the NPC to review the consti- tutionality of the regulation. The combined political pressure from public -- 119 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 107 opinion and the legal challenge probably would not have been enough to force the new leadership to embrace a radical solution, such as abolishing the regula- tion. After all, the party could resort to strict censorship, and the NPC Stand- ing Committee controlled by the party could reject the petition summarily. However, the Hu-Wen administration surprisingly announced abolition of the regulation five weeks after the legal challenge. The most likely explanation is that the new leaders were looking to burnish their public image.12 Judging by available data, Hu’s project of building a “socialist harmonious society” achieved mixed results. His administration scored greater success in some areas than in others. The level of income inequality did not fall during his tenure, mainly because he failed to take any substantive measures, such as tax reforms or meaningful income support for the poor. Data collected by the National Bureau of Statistics show that income inequality rose slightly during Hu’s decade in power. When Hu left office in 2012, income inequality had al- ready returned to the 2002 level (table 4.3). Hu scored moderately better results in the area of environmental protec- tion, at least measured in terms of investment. Government spending on the environment steadily increased during his decade in office. Although spending stagnated during his first term, it rose meaningfully during his second term (table 4.4). Like spending on the environment, public expenditures on education stag- nated during Hu’s first term, but they rose measurably as a share of GDP dur- ing his second term. In 2003 education spending was 2.84 percent of GDP. In 2006 it was still only 2.93 percent. But it rose steadily from 2009 to 2012, and table 4.3. Estimates of the Gini Coefficient by the National Bureau of Statistics Year 2003 2005 2007 2009 2011 2012 Gini Coefficient 0.479 0.485 0.484 0.490 0.477 0.474 Source: China Yearbook of Household Survey 2018 (Beijing: China Statistics Press, 2018), 523. table 4.4. Government Spending on Environmental Protection, 2003–2012 Year 2003 2004 2006 2008 2010 2012 Environmental spending as share of GDP (%) 1.2 1.19 1.22 1.57 1.9 1.59 Source: ZGTJNJ 2008, e-book; ZGTJNJ 2013, e-book. -- 120 of 345 -- 108 c h a p t e r 4 by the time Hu left office in 2012, government spending on education had reached 4.28 percent of GDP.13 Hu made the greatest mark in terms of improving access to healthcare dur- ing his second term in power. He implemented a package of reforms in 2009 that significantly expanded access. In 2002, 45 percent of urban residents and 79 percent of rural residents had no health insurance. In 2010, a year after Hu’s healthcare reform, 95 percent of the population was covered by various health insurance schemes. This was achieved mainly through large government sub- sidies to cover premiums and to reimburse hospitalization costs.14 As a result, access to healthcare increased significantly, as measured by the dramatic de- cline in personal out-of-pocket spending on health. Hu’s reforms increased the share of spending covered by the government from 17 to 30 percent of total spending. The share of personal out-of-pocket spending on health fell from 56 percent in 2003 to 34 percent in 2012 (table 4.5). However, by the more commonly used measure of human welfare—the Human Development Index (HDI) developed by the United Nations Devel- opment Program (UNDP)—the progress made by Hu’s project to build a “socialist harmonious society” achieved a magnitude of improvement in Chi- na’s HDI from 2003 to 2012 that was similar to that gained during the Jiang period. The HDI rose 8 basis points, or an improvement of 15.7 percent under Jiang. During the 2003–2012 period, China’s HDI rose 9 basis points, repre- senting an improvement of 14.8 percent (table 4.6). Based on his record in addressing China’s social deficit, Hu’s decade in power may be divided into two phases. He scored marginal progress during his first term, most likely due to his lack of authority and the residual influence of Jiang Zemin. Since any substantial modification of Jiang’s policies that table 4.5. Spending on Healthcare by Source, 2003–2012 (%) Year Government Employers Personal Out-of-Pocket As Share of GDP (%) 2003 17 27 56 4.85 2004 17 29 54 4.75 2006 18 33 49 4.55 2008 25 35 40 4.63 2010 29 36 35 4.98 2012 30 36 34 5.4 Source: ZGTJNJ 2013, e-book. -- 121 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 109 prioritized growth would have been perceived as a repudiation of Jiang, Jiang’s proxies on the PSC and Jiang himself would not have supported such a course correction. Hu managed to do more to implement his agenda of building a “socialist harmonious society” during his second term, likely because of the dilution of Jiang’s power on the PSC after the fall 2007 Seventeenth Party Congress, which elevated Xi Jinping and Li Keqiang to the PSC and as desig- nated successors to Hu and Wen, respectively. The fiscal windfall produced by China’s rapid growth following WTO entry (government revenue grew at an annual average of 21 percent during 2002–2007) also allowed the party to al- locate more resources to social spending.15 Nevertheless, Hu’s “socialist harmonious society” was at best a modest suc- cess because the program adopted only partial measures that relied on moder- ate increases in government spending but did not change the underlying political incentives or institutional factors behind the rise in the social deficit. For example, promotion of party officials continued to depend on their meet- ing specific economic or fiscal targets, not their record in improving the liveli- hoods of citizens.16 Notably, Hu made no attempts to give ordinary people a stronger voice in determining government priorities, nor did he enact reforms that would hurt the interests of the powerful constituencies, such as SOEs, state-controlled health providers, education bureaucracies, and the party-state itself, all of which benefited from policies that channeled resources to the haves from the have-nots.17 This explains why Hu’s “socialist harmonious so- ciety” project had no impact on reducing China’s high-income inequality, which reached a peak during his tenure and remained unchanged upon his departure from office. The party under Hu did make the slice of the pie for ordinary people slightly bigger, but the bulk of the economic benefits from growth was still accessible only to an exclusive elite—most important, party and government officials and their family members. table 4.6. China’s Human Development Index, 1993–2012 Year Health Development Education Development Human Development Index 1993 0.762 0.424 0.527 2002 0.809 0.495 0.610 2003 0.815 0.507 0.621 2012 0.852 0.599 0.713 Source: UNDP, China National Human Development Report (2019), https:// hdr.undp.org / system / files / documents / nhdrcnpdf.pdf, 271–72. -- 122 of 345 -- 110 c h a p t e r 4 Social Unrest and the Rise of the Security State After the crushing of the prodemocracy movement in June 1989, the party faced negligible overt political opposition to its rule as most of leaders of the movement were either jailed or exiled. In the two decades after the Tiananmen crisis, however, a new source of threat emerged: various forms of collective protests by ordinary people who were being victimized by government poli- cies and official abuses of power.18 In the early 1990s the number of such pro- tests, officially labeled “mass incidents,” was in the thousands each year (for example, 8,700 “mass incidents” allegedly took place in 1993). Over time, such incidents grew more frequent and attracted more participants. In the public domain, there are few reliable official data on the number, size, and duration of mass incidents. In 2003, the beginning of the Hu-Wen era, around 60,000 mass incidents were reported. In 2006 the number of such incidents exceeded 90,000. The total number of participants in these incidents rose from an esti- mated 730,000 to over 3 million.19 Despite the catch-all label of “mass incidents,” these acts of protest and resistance had divergent causes, ranging from labor disputes, illegal land seizures, forced evictions, and environmental pollution to draconian enforce- ment of the one-child policy, oppression of ethnic minorities, and other con- flicts between the state and ordinary people. Data on collective petitions (considered one type of mass incidents) in Hunan for 1994–1995 and 2000– 2001 show that labor disputes accounted for the largest share of such inci- dents (roughly one-half). The second category of collective disputes (around 15 percent) involved rural issues (land seizures and brutal enforcement of government policies). Conflicts between workers and employers (mainly SOEs) made up the lion’s share of the collective protests in 2000–2001 mainly because the SOEs were struggling financially and their mass bankruptcies at the end of the 1990s had left millions of workers without minimal social pro- tections.20 A study examining only large-scale social protests (that included more than five hundred participants) from 2000 to 2010 reached similar con- clusions. Labor disputes in state and nonstate firms accounted for 53 percent of such incidents. Conflicts over land seizures and land use made up 16 percent. Protests over environmental pollution and ethnic oppression rep- resented a very small share (4 and 2 percent of total reported incidents, respectively).21 Although specific incidents of abuses of power or lawlessness by govern- ment officials might have triggered such protests, underlying flaws in the -- 123 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 111 Chinese system of governance were the deeper causes. One clear culprit was the system the party had developed to evaluate officials’ performance, which gave disproportional weight to economic growth and consequently incentiv- ized officials to favor actions that would boost growth in the short term regard- less of the social costs. Illegal land seizures or urban evictions might harm a large number of ordinary people, but the economic gains from developing real estate projects on the land could boost a local official’s chances for juicing up growth and making that official a more competitive candidate for promo- tion.22 Another institutional cause of the collective protests is the lack of peaceful channels of conflict resolution, especially when the state is party to the conflict. Despite the existence of a law allowing citizens to sue local offi- cials and to seek judicial relief, it seldom produces the desired outcomes because local officials effectively control the courts (and the party is literally above the law since it cannot be sued).23 Ironically, the party’s own efforts to improve governance may have even fueled the popular protests. In an effort to make post-Mao governance less arbitrary, the party has promulgated a large number of rules that ostensibly set boundaries on the exercise of power by government officials. But instead of improved governance, the existence of this large body of rules seems to have produced the worst of two worlds: Local officials ignore or violate these rules because they restrict their freedom of action, while ordinary people, aware of the rights annunciated by the rules, are more emboldened to assert their claims. This combination lies behind the rise of China’s “rightful resistance.”24 Even though the dramatic increase in the number of collective protests in the Hu-Wen era attracted extensive attention from journalists and researchers and alarmed the Chinese government, the immediate political impact of these incidents was limited. Most were set off by specific socioeconomic, not political, grievances. The demands of the participants were specific, such as requests for payment of back wages or return of illegally seized property. De- spite the label of “mass incidents,” large-scale protests were relatively rare. Because they were either poorly organized or unorganized altogether, the du- ration of such protests was short, with most incidents lasting only one to sev- eral days. Notably, such protests were geographically isolated and seldom spread beyond the boundaries of a county or district, thus limiting their im- pact.25 In addition, the party quickly learned how to quell such collective pro- tests by mixing repressive tactics (severe punishment of the protest leaders) with concessions (such as wholly or partially meeting the demands of the protesters).26 -- 124 of 345 -- 112 c h a p t e r 4 The rise of incidents of social unrest nevertheless prompted the party to embrace a comprehensive strategy to strengthen regime security, ushering in an era of “stability maintenance” (weiwen). To be sure, the party began to bol- ster its repressive capacity immediately after the Tiananmen crackdown in 1989, but it subsequently developed more refined tactics of repression. In the face of growing social unrest, the party doubled down on its investment in its repressive capacity. In November 2003 the party issued a key directive on domestic security, “The CCP Decision on Further Strengthening and Improving Public Security Work.”27 This directive lists a broad range of threats: “infiltration” by external and internal hostile forces, ethnic splittist forces, sabotage activities by reli- gious extremists and terrorist groups, illegal activities by Falungong and other “evil sects,” individuals with the potential of endangering state security and social stability, and mass incidents. The document pledges increases in fund- ing, an expansion of security forces, and adoption of advanced policing and surveillance technologies. During the Hu-Wen period, two hard-liners were put in charge of domes- tic security. Luo Gan, a protégé of former premier Li Peng, concurrently also served from 2002 to 2007 on the PSC as well as the party’s Central Political and Legal Commission (as director), responsible for domestic security. He was succeeded by Zhou Yongkang, who oversaw domestic security affairs from 2007 to 2012 (Zhou would be the most prominent victim of Xi Jinping’s purge in 2013). Due to the rapid increase in government revenue during the Hu-Wen era, the party was able to invest immense resources in its coercive apparatus. Nom- inal spending on law enforcement (police, procuratorate, and courts) rose from 110 billion yuan in 2002 to 711 billion yuan in 2012. Adjusted for inflation, this represents a real increase of 400 percent.28 Generous funding enabled the party to acquire new technological capabili- ties for surveillance. The first phase of the “Golden Shield” project was unveiled in 1998. The program, designed to modernize the information tech- nology systems of the Chinese police, was completed in 2005. According to the Ministry of Public Security, the Golden Shield contains basic population information, DNA data, and specialized software programs performing dedi- cated tasks. The infamous “Great Fire Wall of China,” a system of filtering and blocking information the party deems to be harmful or subversive, was part of the Golden Shield.29 However, the party’s strategy of neutralizing the threats of the information revolution went beyond the adoption of technology. It also -- 125 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 113 heavily relied on other tools, such as regulations (mandating real-name regis- tration of users of social media and requiring users of internet cafes to scan their national identification cards to gain access to the web) and organization (establishing a party-state bureaucracy, the Cyberspace Administration, and a specialized internet police unit).30 Tactically, the party learned to censor the internet with greater sophistication by prioritizing prevention of dissemina- tion of information likely to encourage collective actions.31 The Chinese model of “networked authoritarianism” has been remarkably effective in ad- dressing a novel threat that prominent observers, including former American president Bill Clinton, thought would be impossible to contain.32 Another key component of China’s techno-surveillance state, consisting mainly of ubiquitous video cameras and sensors, was also built during the Hu era. In 2004 the government launched the Skynet project (formally known as the “City Alert and Surveillance Technological System”), a hi-tech video and sensor surveillance program.33 As revealed in an official document, Skynet con- sists of an elaborate system of surveillance using high-definition cameras, fiber- optic cables, sensors, servers, special software applications, and data resources. It is capable of conducting real-time visual surveillance of streets, highways, and other public venues, and of storing images for various purposes. Repeated tech- nological upgrades later provided Skynet invisible electronic checkpoints equipped with cameras, license plate readers, Wi-Fi sniffers (to collect mobile phone information), and facial recognition technology.34 In addition to adopt- ing advanced surveillance technologies, in the mid-2000s the party established more specialized bureaucracies to oversee “stability-maintenance offices,” with a full-time staff and a large network of informants.35 Conceptually and institutionally, the party under Jiang Zemin can possibly be credited with introducing the essential framework of selective repression. Operationally, selective repression was significantly upgraded with financial resources and technological capabilities under Hu Jintao. Even though Hu’s rule is considered a period of political stagnation, this characterization obvi- ously does not apply to the case of strengthening the coercive capacity of the Chinese state. Civil Society and “Rights Defense” The party’s ability to maintain its political monopoly in spite of the rapid eco- nomic development in the post-Tiananmen era has raised doubts about the validity and applicability of modernization theory to China. The association -- 126 of 345 -- 114 c h a p t e r 4 between high levels of income and democracy, which is found in nearly all societies (with the exception of the oil-rich dictatorships), remains missing in China.36 However, it is both oversimplistic and untrue to claim that, even in the case of post-Tiananmen China, sustained and rapid economic develop- ment did not contribute to the growth of forces and movements normally associated with civil society and democratization. Influential studies on the process of democratizing authoritarian regimes demonstrate that bottom-up pressures produced by economic modernization alone do not lead to demo- cratic transitions. The most critical factor is the emergence of elites favoring political liberalization within the authoritarian regime.37 As I show in this sec- tion, sustained economic development in the post-Tiananmen era contributed to the rise of a broad but unorganized social movement that challenged one-party rule using flexible and sophisticated tactics. This “rights defense” movement featured activist lawyers and liberal journalists who could generate substantial political pressure on the party. To be sure, the party’s successful prevention of the growth of this movement into a broad organized political opposition was mainly the result of the regime’s coercive capacity and not of a failure of economic development to produce prodemocracy social forces. The rights defense movement can be traced to the tragedy of Sun Zhigang, a college graduate beaten to death in a detention center for vagrants in Guang- zhou, in March 2003. Shortly after this incident, public pressure forced the gov- ernment to abrogate the notorious regulation blamed for causing Sun’s death, marking the first major victory of the rights defense movement.38 Although individual acts of defiance against one-party rule occurred frequently during the Jiang era, they lacked the two defining characteristics of the rights defense movement of the Hu era: the role played by an informal coalition of lawyers, journalists, and human rights activists in asserting the constitutional rights of Chinese citizens, and the impact of public opinion that was amplified by the internet. Leaders of the rights defense movement were mainly activist lawyers who had received formal legal education in the post-Mao era and become the public face of the movement.39 The number of lawyers participating in the movement is unknown. Teng Biao, one of the leading human rights lawyers associated with the movement, estimates that, when it began in 2003, no more than three dozen lawyers were actively engaged in “rights defense.” But by 2015, perhaps as many as a thousand lawyers were associated with the movement.40 Yu Zhengsheng, the Shanghai party boss (2007–2012), has claimed that about 3 percent of China’s 270,000 lawyers were “rebellious,” implying that as many as 8,000 might have been engaging in activities the party disliked.41 -- 127 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 115 Compared with the Jiang era, the Hu era was a more favorable period for a social movement, such as the rights defense movement, to grow and gain influ- ence. The soft-authoritarian rule practiced by Jiang and Hu relied more on intimidation than on brute force, allowing a large gray area in which human rights activists could test the boundaries set by the regime. Because the party had promulgated a large body of laws and regulations that ostensibly claimed to protect the rights of ordinary people and, toward the end of his rule, Jiang himself promoted the slogan of “ruling the country according to law” (not the “rule of law”), human rights lawyers could take advantage of the very laws is- sued by the party to engage in activities that challenged its exercise of power.42 Additionally, the advent of the internet created a new and powerful platform for “rights defenders” to rally public opinion. When Hu became party chief at the end of 2002, the number of Chinese citizens with access to the internet was 59 million. By the end of 2012, 564 million Chinese people had access.43 Public Interest Litigation A core strategy of the activists in the “rights defense” movement was to chal- lenge the government on issues that resonated with the public, such as envi- ronmental pollution, employment discrimination, and food safety. Because suing the government in Chinese courts or advocating on behalf of the rights of victims of pollution and unsafe food was the only feasible option, public interest litigation became the most frequently used tactic of the “rights defend- ers” during the Hu era. One representative case illustrating how the rights defenders utilized public interest litigation to challenge the party is that of discrimination against individuals carrying the hepatitis-B virus. Hepatitis-B is one of the most prevalent diseases in China. Based on a sur- vey of blood samples collected at the end of 2014, it is estimated that 86 million Chinese carried the hepatitis-B virus at that time.44 But people infected with the virus were ineligible for employment regardless of their qualifications. In December 2003, a college graduate sued the government of Wuhu city in Anhui for determining that he was ineligible to take the civil service exam because he had tested positive for the hepatitis-B virus. His lawyer, a legal scholar spe- cializing in human rights law, convincingly argued that the provincial govern- ment’s prohibition against hepatitis-B virus carriers violated a national law and the constitutional rights of the applicant. The court of first instance ruled in favor of the applicant.45 The rare legal victory paved the way for removal of this discriminatory rule in 2005. -- 128 of 345 -- 116 c h a p t e r 4 Another representative case is the “Sanlu poisonous baby formula” case. In early September 2008 the government acknowledged that the Sanlu Group, one of the country’s largest producers of baby formula, had been adding a hazardous substance, melamine, to its products to raise their protein content. The contaminated baby formula made more than 300,000 children sick and caused at least six deaths.46 In the wake of the scandal, a group of human rights lawyers offered legal representation to the families of the children harmed by the tainted formula. Many lawsuits were subsequently filed against Sanlu. Under public pressure, the government punished some of the individuals di- rectly implicated in the scandal and launched a nationwide campaign to check future levels of melamine in baby formula.47 Advocating for the Voiceless The progrowth policies of the party in the post-Tiananmen era created both winners and losers. While the winners enjoyed a standard of living few could have imagined merely a decade earlier, the losers lacked advocates for their rights—until the emergence of the “rights defenders” in the early 2000s. Human rights activists and lawyers relied on the same playbook to advance their cause: After the emergence of a major scandal, they would offer legal representation to the victims and rally public opinion to pressure the govern- ment. In some cases, their efforts succeeded in forcing the government to take remedial actions. Even in cases where they failed to help the victims gain compensation or judicial relief, human rights activists managed to expose the callousness, incompetence, and corruption of the local authorities and to puncture the myth of the superiority of a prodevelopment autocracy. One such example is the case of slave labor in Shanxi. In May 2007 inves- tigative journalists uncovered a scandal that shocked the nation. Several politically connected operators of brick kilns were employing dozens of en- slaved laborers, including kidnapped underage boys and mentally handi- capped persons, and making them work under inhumane conditions. The ensuing public outrage forced the government to send a special investigation team from Beijing to punish the kiln operators and their political patrons. In the wake of the scandal, several human rights lawyers represented some of the victims in a civil suit seeking compensation. Although the court rejected the lawsuit, the publicity surrounding the scandal helped raise public aware- ness of labor rights and shine an unflattering spotlight on the image-conscious Chinese government.48 -- 129 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 117 Another representative case is the Henan HIV/AIDS scandal. In the 1990s poor rural residents in Henan province sold blood plasma to shady operations run by well-connected individuals. Because these individuals used the same but undisinfected needle to collect blood plasma, the practice resulted in transmitting the HIV virus to the sellers of the blood plasma. Worse still, the virus-carrying blood plasma was later used to treat other patients. In total an estimated 150,000 people were infected through these two transmission mech- anisms. But the Henan provincial government covered up the scandal. Lead- ing rights defenders tirelessly championed the cause of the victims and called on the government to take urgent action. Human rights lawyers also defended those victims who were demanding medical treatment.49 High-Profile Sensitive Cases Rights defenders—mainly lawyers and human rights activists—were promi- nent players in the most politically sensitive legal cases during the Hu era. They employed a well-honed strategy to assert the rights of Chinese citizens and expose the dark side of the post-Tiananmen order. Typically, activist lawyers would offer their services to victims of political persecution, corrup- tion, environmental pollution, and violators of food safety rules and labor laws. Once retained, the lawyers would vigorously assert the legal rights of these victims and contest, in criminal proceedings, the charges being leveled against them by the government. At the same time, the rights defenders used the media and the internet to rally public opinion to their cause. Although these efforts did not always succeed in winning justice in a legal system in the firm grip of the party, rights defenders sometimes managed to help their cli- ents avoid harsher penalties when acquittal was impossible. In the court of public opinion, the rights defenders seemed to be clear winners since their involvement generated popular support for their clients and undermined the party’s moral authority. One of the most high-profile cases that such rights defenders represented is that of the “Taishi village incident.” In July 2005 residents of Taishi village, near Guangzhou, started a process to impeach the director of the village com- mittee because of his mismanagement of village finances and suspected cor- ruption. However, the party viewed this incident as a direct challenge to its authority and dispatched riot police to the village to clear the protesting villa- gers from the offices of the village committee. During the two-month standoff between police and villagers, several human rights activists and lawyers went -- 130 of 345 -- 118 c h a p t e r 4 to the village to provide moral support and legal advice. The incident report- edly raised alarms at the highest level of the Chinese leadership. Although the government eventually relied on high-pressure tactics to quash the protest and restore control in the village, the incident represents another milestone in the rights defense movement during the post-Tiananmen era.50 The “Shaanbei oilfield litigation” is another high-profile case that demon- strates the potential of the rights defenders. After the Shaanxi provincial gov- ernment seized oil wells operated by private investors in 2003 and provided only nominal compensation, activist lawyers and several liberal publications came to the defense of the private investors. Despite government intimidation and threats, a number of human rights lawyers represented the investors in their lawsuit against the provincial government. The incident produced an unwelcome spotlight on the party. Although the lawsuit ultimately failed, the act of confiscation of private property discredited the regime’s pledge to re- spect private property rights.51 On occasion, rights defenders would score a rare victory, as in the case of Sun Dawu, a rural entrepreneur in Hebei province. In May 2003 Sun was ar- rested on charges of “illegal fund-raising.” Prosecution of Sun was based on a broad and vague legal provision that effectively prohibited private entrepre- neurs from raising private funds. Sensing an opportunity to defend the rights of private entrepreneurs, activist lawyers served as his defense counsel. With the support of liberal publications, the rights defenders created enormous public support for Sun and, at the same time, also discredited the govern- ment’s charges against him. Ultimately, he received a suspended light sen- tence.52 (Sun later became an outspoken critic of the government. In 2022 the Xi regime sentenced him to eighteen years in prison on made-up charges.) Judging by its measurable accomplishments, such as court victories, favor- able administrative actions, and reversal of unjust government policies, the rights defense movement during the Hu era achieved only modest successes. But its accomplishments reveal several important aspects of state-society rela- tions in that era. First, rapid economic progress in the post-Tiananmen era did create favorable socioeconomic conditions—in particular, an expansion of the middle class (represented by the human rights activists, liberal lawyers, and journalists in the rights defense movement) and access to new information technologies. These conditions enabled those grassroots champions of free- dom and rule of law to mount a sustained, albeit unorganized, social move- ment to assert the rights of the Chinese people. Second, the party’s attempt to burnish its image and promote economic growth with an ostensibly improved -- 131 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 119 legal system opened up the legal arena as a contested space for advocates of human rights and rule of law to challenge the party and test its boundaries. Third, the rights defense movement was part of the growth of Chinese civil society and had the potential of becoming a more organized and coherent force for democratization, as demonstrated by the rise of the New Citizens Movement, a 2003 civic group founded by the civil rights lawyer Xu Zhiyong that attracted a diverse group of supporters and played a leading role in the rights defense movement until the government banned it in 2013.53 Finally, bottom-up pressures for liberalization without the support of the reformers within the regime could win small battles in some instances but were insuffi- cient to promote systemic change. The absence of reformers in the top leader- ship of the party during the post-Tiananmen era made it impossible for this movement to realize its potential. Crony Capitalism and Corruption Official corruption is widely thought to have become more pervasive in the post-Mao era and, in particu lar, the Hu era.54 During the Jiang period, China was typically ranked among the bottom third of the countries surveyed (although the number of countries surveyed was smaller than that in later periods). Corruption appeared to have abated modestly during the Hu period. China’s ranking rose to the median of the countries surveyed, most probably because the surveys included more (and likely more corrupt) countries.55 Even though the Corruption Perception Index may not help us ascertain whether corruption grew worse in the Hu era than it was in the Jiang era, it is possible to rely on another measure to gauge corruption. Official data on the prosecution of bribery cases disclosed in Zhongguo falü nianjian (Law year- book of China) give us a more detailed picture of the intensity of corruption. We here include only bribery cases because China almost exclusively punishes bribe-takers who are party and government officials. Data on major bribery cases provide more convincing evidence that corruption intensified during this period (see table 4.7). The number of major bribery cases rose 6.7 times from 1998 to 2012, far outpacing the increase in the Consumer Price Index (1.4 times during the same period), indicating that inflation was a negligible factor in the dramatic increase in the number of major bribery cases.56 Data on the number of officials at the county level and above prosecuted for corruption may give us a glimpse of the scope of official corruption, i.e., the number of officials implicated in corruption cases. The annual reports of -- 132 of 345 -- 120 c h a p t e r 4 the Supreme People’s Procuratorate (SPP) show that the scope of corruption by this measure has expanded dramatically since the late 1980s (see table 4.8). Particularly notable is the significant increase in the number of higher-ranking officials (bureau level and above). The data for the 2013–2017 period, Xi’s first term, also show that his anticorruption campaign targeted far more higher- level officials than were targeted during previous periods, while lower-level officials (at the county level) were less affected. This may be interpreted as evi- dence of Xi’s weaponization of anticorruption prosecution to destroy political rivals and consolidate power.57 In addition to a measurable increase in the intensity and scope of corruption, corruption during the Hu era acquired characteristics normally associated with regime decay. Collusive corruption—cases involving multiple individuals— became widespread, as did the practice of bribing superiors for appointments and promotions. Government officials and businesspeople forged close rela- tionships that allowed the latter to bribe the former for lucrative government contracts, cheap land, underpriced state assets, and bank loans.58 In retrospect, the intensification of corruption during the Hu era was the result of a convergence of several factors, most of which were embedded in the table 4.7. Number of Major Bribery Cases Prosecuted, 1998–2012 Year Number of Major Bribery Cases 1998 1,847 1999 2,552 2000 3,658 2002 4,871 2003 5,424 2004 5,690 2005 6,042 2006 7,033 2007 8,045 2008 8,805 2009 9,875 2010 10,586 2011 10,927 2012 12,326 Note: Major bribery cases involve over 50,000 yuan. Source: Zhongguo falü nianjian, various years (Beijing: Zhongguo falü nianjian chubanshe). -- 133 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 121 nature of the post-Tiananmen political economy. The ruling elites had abun- dant opportunities to abuse their political power to engage in rent-seeking or self-enriching activities.59 Despite the regime’s unabashed endorsement of the pro-market reforms in the 1990s, the state continued to retain enormous influ- ence over the economy. It owned large commercial entities with trillions of yuan in assets. In 2002 state-owned and state majority-controlled industrial firms held 8.9 trillion yuan in assets (nearly two-thirds of total industrial assets). By 2012, the end of the Hu era, the state-owned or state-controlled industrial assets in these firms reached 31.2 trillion yuan (about 41 percent of total indus- trial assets).60 Despite the relative decline in their share, SOEs still directly controlled enormous assets, creating plentiful opportunities for officials to convert their political power into illicit income. Aside from industrial assets, the state also monopolized land rights, which it could lease to private entrepre- neurs for commercial development. Unsurprisingly, sweetheart deals between private developers and local officials turned real estate into one of the most corrupt sectors in China during the Hu era.61 China’s government-funded in- frastructure boom that began in the 1990s also spawned sector-wide corruption because local officials in charge of building highways could dole out contracts to construction companies in return for bribes. Between 1995 and 2014, seven- teen directors of provincial transportation departments were arrested on charges of corruption. The vast amounts of bribes that they received necessi- tated severe punishment: One was executed, another received a suspended death sentence, and five were imprisoned for life.62 The sectors singled out by China’s top prosecutor for bribery investigations in 2008—infrastructure projects, sale of land rights, transfer of property rights table 4.8. Number of Officials Criminally Prosecuted Period County Level Bureau Level Provincial- Ministerial Level 1988–1992 4,451 173 5 1993–1997 2,903 265 7 1998–2002 12,830 (all three levels) 2003–2007 12,964 930 35 2008–2012 12,193 950 30 2013–2017 15,234 2,405 122 Source: “Work Report of the Supreme People’s Procuratorate,” https:// www.spp.gov.cn / spp / gzbg / index .shtml. -- 134 of 345 -- 122 c h a p t e r 4 (of SOEs), purchase and sale of medicine, government procurement, and de- velopment of natural resources—illustrate that state control of assets, regula- tory approvals, and project financing are some of the root causes of corrup- tion.63 Po liti cally, two factors likely fueled official corruption in the post-Tiananmen era. First, the neo-authoritarian model of development that combines political repression with capitalism can make corruption more dif- ficult to control because of the suppression of a civil society and the lack of press freedom. One of the most effective approaches to combatting official corruption is to rely on civil society and a free press to act as public watch- dogs.64 However, the space for civil society in the post-Tiananmen era was extremely compressed due to the party’s paranoia about the emergence of an organized opposition. The regime also maintained tight press censorship (al- though it would become even worse during the Xi era). Second, the party’s primary approach to fighting corruption—waging pe- riodic political campaigns—was largely ineffective. The sole bureaucratic organizations charged with the task, the party’s own discipline inspection committees, lacked independence and were easily politicized.65 The effects of the anticorruption campaigns were short-lived also because the officials on the take would simply lie low during the campaigns and then resume stealing once the political heat had subsided.66 The fragile balance of factional power at the top levels of the leadership similarly constrained the party’s ability to combat corruption because of the implicit mutual security pact among top leaders. No single leader was powerful enough to launch a sustained anticor- ruption drive that could potentially send his rivals and their followers to jail (as Xi did immediately after gaining power). Because the collective leadership in the post-Tiananmen era made decisions through consensus, prosecuting senior officials (those at or above the ministerial or provincial level) likely required unanimous agreement among the members of the Politburo or the PSC. This arrangement may explain why relatively few ministerial-level and provincial-level officials were prosecuted in the post-Tiananmen era and why the number jumped in the Xi era. Although the unspoken mutual security pact at the top of the regime probably helped maintain leadership cohesion and limited the weaponization of anticorruption investigations, it also made it more difficult to contain corruption. Even though corruption in the Hu era was widespread, it is difficult to cal- culate its economic costs. On the surface, the pervasive corruption did not lead to a slowdown of growth.67 But the economic costs of corruption were likely reflected in performance data that are not captured by growth. For -- 135 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 123 instance, the costs of “white elephant” infrastructure projects and inflated prices of goods procured by the government actually boosted GDP growth because of the use of expenditures in growth accounting. Since goods and services tainted by corruption are typically of inferior quality, measuring the economic costs is methodologically difficult. Research on corruption never- theless shows that most of its costs tend to be indirect and manifested in high income inequality, inadequate social services, poor food safety, environmental degradation, and social unrest— exactly the socioeconomic pathologies widely observed during the Hu era.68 Politically, endemic official corruption during the Hu era created favorable conditions for the return of a ruthless strongman such as Xi Jinping. As cor- ruption permeated the regime and a large number of officials were tainted, they became easy targets for a potential strongman who could purge rivals and amass huge power under the guise of cleansing the party. This is precisely what occurred during Xi’s first term. The Beginning of the End of the Post-Tiananmen Order On the surface, the Hu era seems to be almost a seamless continuation of the Jiang period. With the exception of the purge of one Politburo member, Shanghai’s party boss Chen Liangyu, elite politics was relatively stable. But trou ble was brewing beneath the façade of elite unity. The two major factions—the “Shanghai Gang,” led by the retired Jiang Zemin, and the “Youth League faction” (tuanpai), under the aegis of Hu Jintao—had no real ideological differences over policy as they both were committed adherents to Deng’s neo-authoritarian vision. But at the same time they were fierce rivals for power over personnel appointments. This rivalry would peak in 2007 with the party selection of Hu’s successor. The impasse between the two factions ended with the anointment of a dark horse, Xi Jinping—who was unaffiliated with either faction—as future party chief. This fateful deci- sion would later change the course of history. The designation of Xi, how- ever, did not completely settle the issue of succession. As Xi was seen as a potentially weak leader because he lacked his own power base, ambitious party apparatchiks, in par ticular Bo Xilai, who was promoted to the Polit- buro in 2007, began to maneuver for more power in the run-up to the leader- ship transition scheduled for late 2012. The ultimate outcome of Bo’s power grab was a spectacular and sordid scandal that not only ended his political career but also put a fitting end to the two-decade-long post-Tiananmen era, -- 136 of 345 -- 124 c h a p t e r 4 fully exposing the rot and decay that had been accumulating beneath the ever-prospering economy. The rivalry between the Shanghai Gang and the Youth League faction reached its peak ahead of the Seventeenth Party Congress in 2007, which was scheduled to select Hu’s successor. The most widely circulated rumor is that in that year the deadlocked party leadership conducted an informal poll of more than four hundred top officials, and Xi came up on top of his rival, Li Keqiang, a former CYL leader and Hu’s protégé.69 Xi was subsequently pro- moted to the Politburo Standing Committee in 2007 and was slated to succeed Hu in 2012. Li Keqiang, also elevated to the PSC, was ranked below Xi and would be the future premier. Although this version of the events of 2007 lacks documented evidence, several factors apparently converged to produce this surprise outcome. The most important factor in Xi’s favor was that the Shanghai Gang could not put forward a competitive candidate. Chen Liangyu, a protégé of Jiang and former Shanghai party chief, might have been a plausible candidate even though he would be 61 in 2007, six years older than Xi, and he would be 66 if he were to succeed Hu in 2012. But he was purged by Hu on corruption charges in 2006, most likely as a preemptive move to clear the path to the top for Li Keqiang.70 With no candidate of its own, the strategic goal of the Shanghai Gang was to deny the Youth League faction the top prize, even if it had to consent to pick- ing someone who was not part of its network. In terms of his “princeling” family background and political career, Xi had no prior contact with the Shanghai Gang. But his political prospects bright- ened significantly on the eve of Jiang’s retirement as party chief in 2002. Al- though Xi had spent seventeen years in Fujian province, climbing from the position of deputy mayor of Xiamen (in 1985) to Fujian’s governor (in 2000), he had a lackluster record as an administrator.71 Nevertheless, Jiang gave Xi a critical career boost by making him party chief of Zhejiang in late 2002 and placing him in a favored position for promotion to the Politburo in 2007. Ji- ang’s role in Xi’s rise in 2002 indicates that he probably saw Xi as a potential ally despite his lack of ties with Jiang’s Shanghai Gang. The inherent weakness of the Youth League faction in general, and the weak leadership of Hu Jintao in particu lar, further contributed to the faction’s 2007 defeat in the succession struggle, to Xi’s benefit. On paper, the Communist Youth League seems to be an impressive political organization. With more than 73 million members (in 2023) and branch organizations spanning the entire country, CYL officials are on a fast track to promotions in the party’s -- 137 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 125 organizational hierarchy.72 In the post-Mao era, two national leaders of the league, Hu Yaobang and Hu Jintao, became the party’s general secretary. The third, Hu Qili, was made a PSC member and a future successor before he was dismissed after the Tiananmen crackdown. However, senior leaders promoted from the CYL have one glaring weak- ness. With the exception of Hu Yaobang, who climbed to the top of the CYL by starting as a local official in Sichuan, most league members who ascended to the top lacked local administrative experience as party chiefs. Typically, they began their political careers inside the CYL and then helicoptered to provincial governments to gain the requisite experience before they could be promoted to national-level leadership. This path to the top may have put some CYL officials on a faster track to the top than most CCP officials, but it also tended to produce weaker leaders.73 First, the CYL as an ancillary organization of the party does not have real administrative authority, so its leaders have few opportunities to gain executive experience at the local levels. When the lucky few are promoted to the top, they are untested and unproven leaders. Second, due to the status of the CYL as an ancillary organization of the party, the league has no say in the distribution of government resources, making it impossible for its officials to trade favors with local party officials or other elites or to build up their own networks. As a consequence, CYL stars such as Hu Qili, Hu Jintao, and Li Keqiang rose to the top mainly due to the support of powerful patrons. Hu Jintao, the only former head of the CYL to become CCP chief after the fall of Hu Yaobang, owed his good for- tune to Deng Xiaoping, who designated him as Jiang’s successor—an arrange- ment Jiang could not undo. But when the party had to pick Hu’s successor, the weakness of the CYL became evident. Its power could not match that of the Shanghai Gang, which was determined to prevent another former CYL leader from taking over the party’s top post. Li Keqiang, the CYL candidate, appeared to be a clone of Hu. Like Hu, he had risen to the top of the CYL, and later he had heli cop tered to Henan and Liaoning to burnish his credibility and experience. Also like Hu, Li was colorless and had no track record as a dynamic and capable leader. Furthermore, Li’s patron was Hu Jintao, not Deng Xiaoping. Deng’s support and authority ensured Hu’s appointment as Jiang’s successor, but in 2007 Hu had nowhere near the same amount of prestige and power as Deng had in 1992 to pick a successor. Hu Jintao is commonly believed to be the weakest of all Chinese leaders in the post-Mao era.74 He had no close allies on the powerful PSC during his first -- 138 of 345 -- 126 c h a p t e r 4 term, and he could count on only one member (Li Keqiang) during his second term. By contrast, his predecessor Jiang, with at least four supporters on the PSC during Hu’s decade in power, could constrain Hu’s exercise of power.75 In retrospect, however much Hu might have wanted Li to be his heir, he lacked the clout to make it happen. Even though the details of the succession struggle in 2007 may never be fully known, its outcome—the selection of Xi Jinping—would change China’s trajectory decisively, and disastrously, after 2012. To be sure, before Xi was made Shanghai party chief in 2007 after the fall of Chen Liangyu, he was a plausible successor but not in the top tier. If it is indeed true that Hu Jintao’s purge of Chen was intended to remove a potential obstacle to Li Keqiang, he achieved just the opposite: He actually paved the way for Xi to move to the front row. When the party was forced to pick a successor, the impasse between the Shanghai Gang and the Youth League faction resulted in an apparent com- promise—a successor seen as unaffiliated with either group. After the Sixteenth Party Congress ended in November 2007, the struggle for power at the top only intensified. By that time, the influence of the Shang- hai Gang was beginning to wane because its chief patron, Jiang Zemin, was 81 and had been in retirement for five years. His associates on the PSC were all expected to step down in 2012. In the meantime, Xi, the designated successor, was perceived to be a weak leader because he had no faction of his own. The political landscape at the top of the regime appeared to open up opportunities for ambitious apparatchiks to jockey for power in the post-Hu era. As with other power struggles in dictatorships, the political maneuvering during Hu’s second term is shrouded in secrecy and spiced up with unsubstan- tiated rumors. But two characters feature prominently during this period. The first and most well-known is Bo Xilai, another princeling and newly promoted member of the Politburo and party chief of Chongqing. The second and more obscure figure is Ling Jihua, the director of the powerful General Office of the Central Committee and Hu’s long-serving chief of staff. The salacious allega- tions about Ling’s machinations are impossible to verify,76 but because he is one of the four “biggest tigers” (senior officials) whom Xi arrested at the height of his anticorruption campaign, it is reasonable to believe that Xi saw Ling as a lethal threat. By comparison, the scandal involving Bo Xilai and his family is well-known. The most revealing part of Bo’s saga, for the purpose of understanding elite politics during the second half of Hu’s rule, is not Bo’s spectacular fall in early 2012 or the sleazy details of the corruption in his family, but his -- 139 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 127 attention-grabbing antics to brand himself as a new type of leader during his tenure as Chongqing’s party chief. Almost as soon as Bo Xilai became Chongqing’s party chief in late 2002, he embarked on a risky strategy of promoting himself as a future member of the PSC (mainly because the top two slots—the party chief and the premier—had already been assigned to Xi and Li Keqiang). Unlike Xi, who had shunned the limelight so he would not be seen as an ambitious and potentially dangerous leader, Bo gambled that his only path to the party’s most powerful body was to market himself as a more dynamic and creative leader, far different from the risk-averse and colorless apparatchiks who had made up the overwhelming majority of the party’s senior echelons in the post-Tiananmen era. Bo’s campaign consisted of two tracks, both with a populist touch. Ideologi- cally, he revived Maoist symbols with a campaign of “singing red” by organizing mass performances of revolutionary songs popular during the Maoist era. Given his family’s suffering under Mao, Bo might not have been a real Maoist. But he apparently calculated that invoking Maoist symbols would resonate with a population concerned about high socioeconomic inequalities and ram- pant materialism. As no other senior apparatchiks dared to flaunt Maoist sym- bols, Bo’s strategy succeeded in attracting enormous publicity and made him into an instant political star. Simultaneously, Bo launched a ferocious crack- down on alleged “organized crime” (dahei, literally smashing black). This drive led to the arrest and execution of local officials and private businesspeople accused of “organized crime.” He dramatically expanded the police force as part of his “Safe Chongqing” campaign. This combination of Maoist ideologi- cal revival and cultivation of a public image as a strongman made Bo a popular figure among the local population.77 But Bo’s unabashed campaign of self- promotion also earned him many enemies. Liberal scholars and private entre- preneurs saw him as a dangerous ultra-leftist. His rivals in the party were alarmed by the prospect of having this ambitious and ruthless man as one of the top leaders in the post-Hu era. The most remarkable—and revealing—aspect of Bo’s attempted power grab before his fall in March 2012 is that he almost succeeded. During his campaign of “singing red and smashing black,” not a single senior leader dared to criticize him. Nearly all members of the PSC, including Xi, visited Chongqing as an en- dorsement of Bo’s “Chongqing model.” Only Hu and Wen did not go to Chongq- ing. Bo might have secured one of the seats on the PSC at the Eighteenth Party Congress in November 2012 if his police chief, Wang Lijun, had not exposed the murder of a British businessman by Bo’s wife in November 2011.78 -- 140 of 345 -- 128 c h a p t e r 4 In retrospect, the greatest beneficiary of Bo’s political demise was Xi (who allegedly played a crucial role in urging the PSC to pursue a thorough investi- gation of Wang Lijun in hopes of implicating Bo).79 Had Bo been promoted to the PSC in fall 2012, he would have made a formidable rival to Xi, likely complicating the latter’s efforts to consolidate power. Ironically, although Xi sent Bo to prison for life in August 2013, he has copied the tactics Bo had used in building up his authority and image in Chongqing. Instead of an anticrime drive, Xi launched a wide-ranging crackdown on corruption to destroy political rivals and amass power. Ideologically, Xi went even further than “sing- ing red”—he launched a comprehensive movement of orthodox ideological indoctrination to return the party, which he believed had become too cor- rupted by materialism, to its revolutionary roots. Fatal Flaws of Dengism The fall of Bo Xilai is a fitting coda of the post-Tiananmen political order. By the time the once-swaggering princeling was brought down by his own hubris and political enemies, the foundations of the neo-authoritarian order, envi- sioned by Deng and constructed during the Jiang era, had begun to crack. Elite unity was fraying as power struggles assumed an increasingly vicious nature. The fragile balance of power was on the verge of collapse as the Shanghai Gang was losing influence due to the advanced age of its principal patron, Jiang Zemin, while the Youth League faction lacked the strength to become an ef- fective countervailing force. A new generation of politicians unaffiliated with either faction, such as Xi and many others, was poised to rise to the top and to fundamentally reshape the elite landscape. Because of the unsustainable investment-driven growth model and the lack of economic reforms during the Hu era, the economy was beginning to lose steam, threatening to undercut the party’s claim to performance legitimacy. If the incidence of mass protests is a measurement, tensions between the state and society were greater than at any time since the Tiananmen crackdown. Co-optation of elites might have se- cured some support from wealthy private businesspeople, but at the price of rampant corruption as ruling elites and well-connected entrepreneurs forged a self-serving alliance. Chinese leaders also appeared to have abandoned Deng’s dictum of “keeping a low profile” on foreign policy as they began to flex their muscles abroad in the belief that their moment in the sun had arrived. The only pillars of the post-Tiananmen order that remained intact were the -- 141 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 129 party’s security apparatus, now equipped with the most advanced surveillance technologies, and Chinese nationalism. To be sure, the post-Tiananmen order could conceivably have lasted longer if Li Keqiang, instead of Xi Jinping, had become party chief in November 2012. It was Xi who demolished the post-Tiananmen order. Before the rise of a neo- Stalinist figure like Xi, few would have imagined that Hu’s successor could reverse Deng’s policy of reform and opening and reimpose totalitarian control on the party and on a Chinese society that had been so thoroughly trans- formed by two decades of economic modernization. In retrospect, Xi’s speedy dismantling of the post-Tiananmen order— without much resistance in the party to boot—suggests that forces larger than the ambitions and ideological visions of a princeling were at work. In other words, the post-Tiananmen order contained the seeds of its own destruction. Under Xi, it came to a quick and abrupt end. Had a diff erent leader succeeded Hu, the decaying order might have experienced a slower death, but it would nevertheless have met its end. Like other dictatorships, the party in the post-Tiananmen era could not evade the law of negative selection: Its power and privileges mainly attracted opportunists who embraced the regime for personal gain, not out of genuine ideological commitment. As patronage and corruption became the principal means to get ahead in the regime, only apparatchiks with fewer scruples had a better chance to gain power, thus creating a dynamic of bad money driving out good money. Over time, less capable but more venal and sycophantic apparatchiks came to dominate the ranks of the regime. Institutionally, the degeneration of elites created favorable conditions for the rise of a ruthless personalistic ruler because they were too compromised by their record of cor- ruption or too cowardly to put up a fight.80 The post-Tiananmen order unraveled also because of the inherent limita- tions of Deng’s neo-authoritarian model. Transition from a centrally planned economy to a market economy under a Leninist regime faces impossible odds because such a transition will necessitate a near-total withdrawal of the state from the economy, fatally weakening a Leninist party-state’s control of the economy. It is worth recalling that market reform was Deng’s tactic to save the party, not his ultimate goal. As a pragmatic Leninist, he embraced capitalism out of necessity, not out of ideological conviction. Toward the end of the Hu era, however, the logic of a “partial reform equi- librium” set in. The remarkable economic achievements after the Tiananmen -- 142 of 345 -- 130 c h a p t e r 4 debacle, likely unanticipated by the regime (or anyone else, for that matter), boosted the party’s legitimacy and confidence but also perversely diminished incentives to carry out further reforms.81 The most insidious aspect of a “par- tial reform equilibrium” is that this status quo offered maximum benefits to the party if it could be preserved. As a partially reformed economy was far more efficient than a centrally planned economy, the party could claim a higher degree of performance legitimacy. At the same time, this equilibrium also allowed the party to maintain a substantial degree of control over the economy and enabled the ruling elites to wield their political influence to ex- tract personal benefits. Consequently, the regime had no desire either to re- turn to a Maoist system or to advance to a full market system. But a “partial reform equilibrium” cannot be sustained forever. The combination of corrup- tion and systemic inefficiency in the partial reform economy began to sap China’s economic dynamism on the eve of Xi’s takeover. The growth of private wealth, expansion of a middle class, and emergence of a nascent civil society constituted yet another existential threat to the post- Tiananmen order. Although the party had invested massive resources in sur- veillance and had acquired an unprecedented coercive capacity toward the end of the Hu era, it also began to encounter more direct and well-organized chal- lenges to its authority from many directions—ethnic minorities in Tibet (which in 2008 experienced the region’s most violent uprising in two decades) and Xinjiang (which saw China’s most deadly ethnic riot in July 2009), under- ground religious and cult groups, human rights activists, environmental move- ments, and ordinary people victimized by government policies and abusive officials. Despite the regime’s formidable capacity to quell these challenges, it would have to resort to more brutal tactics to deter and suppress societal op- position forces. On the external front, the durability of the post-Tiananmen order critically depended on stable and largely cooperative relations with the West, its pri- mary source of technology, market access, and capital. The strategic restraint urged by Deng served China well. However, there were two fundamental flaws in Deng’s “hide and bide” strategy. First, ideological hostility toward the West’s capitalist democracy was deeply embedded in the party, which saw the US-led West as an existential political threat and its economic engagement with China simply as an instrument of “peaceful evolution” or regime change. Such inse- curity, if not paranoia, limited the extent of the West’s economic engagement with China because China would prioritize regime security over economic benefits, and the West would understandably erect safeguards against a -- 143 of 345 -- S t a g n a t ion i n t h e H u J i n t a o E r a 131 potential geopolitical adversary that was rapidly gaining strength through glo- balization. Second, China’s rapid growth in the post-Tiananmen era radically transformed the global balance of power and changed its leaders’ strategic calculus. When Deng prescribed strategic restraint in the wake of the Soviet collapse, it was not so much a stroke of geopoliti cal genius as a concession to reality: China was simply too weak to be assertive. All this would change toward the end of the Hu era. Finally, due to its growing power, China felt confident enough to take steps to extend its global influence, even at the risk of antagonizing the West, particularly the United States. Xi Jinping would later adopt a far more systematic and aggressive foreign policy, but China’s strategic overreach actually began under the leadership of Hu Jintao.82 -- 144 of 345 -- 132 5 China’s Economic Miracle based on china’s rapid growth in the post-Tiananmen era, it is tempting to think that this was primarily due to the party’s neo-authoritarian development model. But such a conclusion is at most just partly correct because many other factors likely played a greater role in supercharging economic growth in the two decades following Deng Xiaoping’s southern tour in early 1992.1 Certainly, the party’s single-minded focus on economic development gave rise to an in- centive structure that motivated local officials to prioritize growth. Reforms carried out in the 1990s helped lay some of the critical institutional founda- tions of a market economy. Additionally, the Chinese state’s unrivaled capacity for mobilizing resources enabled the country to invest in physical capital, such as factories and infrastructure, on an unprecedented scale. However, a closer look at the underlying drivers of sustained economic growth in the post- Tiananmen era makes it clear that the most important foundations had actu- ally been laid in the 1980s. A dynamic private sector that would evolve into the most powerful and efficient productive force in the post-Tiananmen era was created in the 1980s. The opening to the outside world, another critical step taken in the 1980s, allowed China to capitalize on the globalization boom in the post–Cold War era. The highly favorable demographic structure enabled China to benefit from an abundant supply of young workers and a low old-age dependency ratio. Cooperative relations with the West helped China gain sup- port for accession to the World Trade Organization and become a trading superpower. Unfortunately, favorable economic and geopolitical factors seldom last for- ever. China’s post-Tiananmen economic miracle conceivably could have be- come even more spectacular and endure longer had its leaders undertaken more radical reforms to complete the country’s march to a full market econ- omy. Yet, the logic of path dependence again precluded this possibility. Instead -- 145 of 345 -- C h i n a’s E c onom ic M i r a c l e 133 of taking advantage of favorable structural factors to implement the difficult reforms, the party in the Hu Jintao era was trapped in a “partial reform equi- librium.” The hybrid economy that emerged in the 1980s turned out to be far more difficult to reform. Strong economic performance reduced the party’s incentive to risk tougher reforms. Its choice of an investment-driven develop- ment model became an addiction despite evidence of its diminishing returns in the Hu era. Further reduction of the state’s influence over the market, espe- cially through the privatization of state-owned enterprises, was politically unthinkable because the party saw them as the economic foundations of its monopoly of power. When China’s economic momentum began to decelerate in the second half of Hu’s decade in power, the party took the easy way out. Instead of painful structural reforms, it turned to credit-funded stimulus and blew an epic investment bubble that would burst and mire the economy in stagnation a dozen years later. In retrospect, party supremacy over market— the sine qua non of Dengism and the ultimate destiny of neo-authoritarian developmentalism—meant that the party would not permit considerations of economic efficiency to subvert its goal of regime survival. In this light, China’s economic miracle in the post-Tiananmen era could not last. Economic Achievements Judging by measurable data, China’s economic performance from the time between Deng’s historic southern tour in 1992 and the end of Hu Jintao’s rule in 2012 was among the most impressive in the annals of development. Al- though the quality of Chinese growth is marred by extensive environmental degradation, high income inequality, and rampant corruption, its quantitative achievements are undeniable. Factoring in the economic accomplishments of the 1980s, China transformed itself from an impoverished agrarian society to a moderately prosperous one within one generation. The main driver of this economic revolution was sustained growth in the post-Tiananmen period (table 5.1). During the two “miracle decades” (1993–2012), the Chinese econ- omy grew at an annualized rate of 10.2 percent. The size of the Chinese econ- omy in 2012 was nearly twenty times larger than that in 1992 in dollar terms (from $0.427 trillion to $8.53 trillion) and ten times larger in purchasing power parity (PPP) (from 1.47 trillion to 15.12 trillion).2 During this period, China also became a foreign trade powerhouse. The volume of exports rose more than elevenfold, and imports increased by the same order of magnitude (table 5.2). The explosive growth of Chinese foreign -- 146 of 345 -- 134 c h a p t e r 5 trade turned the country into the world’s largest exporting economy within the two decades after the end of the Cold War. In 1992 China’s share of global exports of goods (including Hong Kong) was 5.2 percent, placing it behind the United States, Germany, Japan, and France as the world’s fifth-largest ex- porter. By 2012, China’s share of global exports of goods (including Hong Kong) reached 13.9 percent, making it the world’s largest exporter (a position it continued to hold in the mid-2020s).3 As a result of government support, Chinese exports included a large share of electronics and manufactured goods that were technologically more sophisticated than those of other economies at a comparable income level.4 Burgeoning exports filled China’s foreign ex- change coffers to the brim. In 1992 the country had only $19 billion in hard currency reserves. Two decades later, it boasted the world’s largest foreign exchange reserves ($3.3 trillion).5 Economic growth in the post-Tiananmen period also urbanized a predomi- nantly rural society. In 1992 only 27.5 percent (or 322 million) of the population lived in urban areas. By 2012, 52.6 percent (or 712 million) of the population were urban residents.6 The structure of the economy was transformed beyond recognition as the modern sectors (industry and services) dominated eco- nomic activities by 2012. In 1992 agriculture, industry, and services accounted for 21.8, 43.5, and 34.8 percent of GDP, respectively. By 2012, the share of table 5.1. GDP Growth, 1993–2012 Period Average Annual GDP Growth Rate (%) 1993–1997 13.1 1998–2002 8.2 2003–2007 11.7 2008–2012 9.2 Entire period 10.2 Source: Calculated from data in ZGTJNJ 2013, e-book, https:// www.stats.gov.cn / sj / ndsj /. table 5.2. Foreign Trade (in billion USD) Period Imports Exports Total 1993–1997 633 696 1,329 1998–2002 1,070 1,220 2,290 2003–2007 3,983 3,381 7,364 2008–2012 7,096 8,140 15,236 Source: Calculated from data in ZGTJNJ 2013, e-book. -- 147 of 345 -- C h i n a’s E c onom ic M i r a c l e 135 agriculture had declined to 10.1 percent, while the shares of industry and services were 45.3 and 44.5 percent, respectively.7 The standard of living for the average Chinese rose from 1,262 in PPP in 1992 to 11,169 in PPP in 2012, a nearly tenfold improvement.8 Due to sustained high growth, the scale of the reduction in poverty during this period was unprecedented. On the eve of Deng’s reform and opening, China had 770 million people living in poverty, of whom 658 million were living in rural areas. By 2013, the number of rural poor had fallen to 82 million (8.5 percent of the rural population). In other words, economic growth reduced the number of rural poor by 576 million between 1990 and 2013.9 Economic Reform and the Chinese Miracle The post-Tiananmen leadership benefited enormously from the legacy of re- form implemented by Zhao Ziyang and the other liberal reformers in the 1980s. When Deng reignited reform in 1992, most of the basic institutional framework for a market-oriented economy had already been laid. Agriculture, for example, had been privatized, freeing up an immense pool of surplus labor to engage in more productive activities in manufacturing and services. A dy- namic private sector had firmly established itself as a new engine of growth. (In 1991 nonstate firms were generating 47 percent of industrial output.)10 China’s linkages to the world economy through trade and investment were fully restored by the beginning of the 1990s. Geopoliti cally, China’s ties with the West survived the shock of the Tiananmen crackdown despite the (mostly symbolic) sanctions imposed by its main trading partners in protest. With the end of the Cold War in 1991, China managed to preserve its commercial ties with the West. Instead of being cast aside or isolated, China joined the high tide of globalization championed by the United States, then the world’s sole superpower. Conservative resistance to more radical economic reforms collapsed after Deng’s southern tour in early 1992. In November 1993 the party issued a comprehensive package of reform, “Resolution on Several Questions on the Construction of a Socialist Market Economic System.”11 With Jiang Zemin’s support, Executive Vice Premier Zhu Rongji sidelined the conservative pre- mier Li Peng and supervised the major institutional reforms laid out in the resolution. The first measure—unification of exchange rates and a major devaluation— went into effect on January 1, 1994. Prior to this reform, China had two -- 148 of 345 -- 136 c h a p t e r 5 exchange rates, with a highly overvalued official exchange rate. Yi Gang, who later became China’s central bank governor, has recalled that the average of- ficial rate in 1993 was 5.6 yuan to the dollar, while the average market rate was 9.04 yuan to the dollar, implying an overvaluation of roughly 60 percent.12 The dual exchange rates encouraged Chinese firms to withhold their foreign ex- change earnings from the central government, fueling black market transac- tions and disincentivizing exports. The positive impact of the exchange rate reform was felt instantly. The Chinese yuan was effectively devalued by 60 percent, thus making exports highly competitive. The unification of the exchange rates also simplified the administration of foreign exchange and en- couraged firms to export.13 Chinese exports in 1994 rose 32 percent vis-à-vis 1993 (in 1993, exports had grown only 8 percent over 1992). China’s foreign exchange reserves more than doubled in 1994 (from $21.1 billion in 1993 to $51.6 billion in 1994).14 A revamped fiscal system that recentralized government revenues was also put in place on January 1, 1994. In the 1980s Beijing had resorted to a form of “fiscal contracting”—or tax-farming—to incentivize local governments to in- crease economic output. Under fiscal contracting, local governments could keep surplus revenues after meeting their previously negotiated quota with Beijing. Although fiscal contracting contributed to local economic dynamism, it also had several major shortcomings. The most serious was a decline in the share of revenue collected by the central government because this arrange- ment ensured that local governments reaped more benefits of the growth than did Beijing. As a result, the share of the central government was only 22 percent of total government revenue in 1993.15 Lack of fiscal resources limited Beijing’s ability to fund infrastructure and other expensive capital projects. Fiscal con- tracting also encouraged “local protectionism” as provincial governments erected trade barriers to products from other regions so as to protect their local industries.16 In 1993 Zhu Rongji personally negotiated with provincial leaders an agree- ment on a new fiscal system that would recentralize revenue. At the heart of the reform was the introduction of a national value-added tax, which dramati- cally broadened the tax base. The central government would receive 75 percent of the value-added tax, with the remainder going to local governments. Local governments could also collect other taxes, but they contributed a much smaller share of taxes. In 1995, one year after the new system went into effect, the value-added tax accounted for 43 percent of total tax revenue.17 To sweeten the deal, the central government allowed local authorities to keep income -- 149 of 345 -- C h i n a’s E c onom ic M i r a c l e 137 from the leasing of land, thus giving birth to the so-called land-based fiscal system (tudi caizheng). In subsequent years, the central government’s share of fiscal revenue rose dramatically. (During 1996–2000, it shot up to 50 percent.)18 Like all reforms, the fiscal recentralization in 1994 produced winners and losers. In this case, the winner was clearly the central government, which was able to capture the lion’s share of the tax revenue generated by China’s fast-growing economy in the post-Tiananmen era. Its abundant revenue allowed Beijing to invest in infrastructure, military modernization, and domestic security. The losers were the local governments that subsequently experienced chronic budgetary shortfalls and had to rely increasingly on income from the sale of land-user rights and bank loans to fund their investments and operations. A lack of fis- cal resources also limited the local governments’ ability to pay for social services.19 On balance, however, the fiscal reform of 1994 largely accom- plished Beijing’s objectives, despite the mixed outcomes. The fiscal system became more stable, and the lower budget deficits helped contain inflation (from 1980 to 1990 the consumer price index rose 11.6 percent on average an- nually, but in the decade following implementation of the new fiscal regime the increase averaged only 6.8 percent per annum).20 The central government acquired ever-increasing resources to invest in high-priority projects. The negative effects of the new fiscal system did not become clear until roughly two decades later, when local governments began to borrow heavily from banks to finance their capital projects, thus accumulating a huge amount of debt that they could not repay.21 A third major reform in the 1990s was the establishment of a modern finan- cial system and increased independence of the central bank, the People’s Bank of China (PBOC). At the end of 1993, the State Council announced a compre- hensive overhaul of the financial system.22 During the Maoist period, China had no commercial banks. Few financial reforms were carried out in the 1980s as such reforms were technically too complicated and too risky to undertake in a transition economy. But because a modern financial sector is critical to mobilizing savings and allocating capital, the party identified reform of the financial sector, in particular the establishment of a modern banking sector, as a priority in its resolution on pro-market reform issued at the November 1993 Central Committee plenum. Financial sector reform encompassed three subsectors: banking, insurance, and capital markets (equity and bonds). Because the insurance industry was relatively small and the tightly regulated capital markets played only a minor -- 150 of 345 -- 138 c h a p t e r 5 role in channeling savings into investments, the most critical sector was bank- ing, the largest component of China’s financial system. The most successful part of the financial reform carried out in the 1990s, also led by Zhu Rongji, was the reform of the PBOC. Local governments had wielded substantial influence over the central bank, whose local branches were set up according to the administrative hierarchy of the state (for example, the PBOC had a branch office in each province and city). Since local governments appointed the leadership and staff of these offices, they could influence the PBOC. Zhu’s reform established larger regional PBOC offices responsible for multiple provinces and filled them with officials appointed by the PBOC, making the central bank less dependent on local governments and increasing the technocratic capabilities of its local staff.23 (Xi Jinping would reverse this reform in 2023 and increase party control of monetary policy.) However, the other components of the banking-sector reform achieved mixed results. On the positive side, the reform increased competition in the banking sector and improved supervision, albeit from a very low level. Al- though the five largest state-owned banks (the Industrial and Commercial Bank of China, Construction Bank of China, Bank of China, Agricultural Bank of China, and Communications Bank) continued to dominate, reform in the 1990s brought in a large number of smaller banks with a diverse set of owners (mostly local governments, state-owned companies, and private and foreign investors), thus moderately increasing competition.24 Separating policy lend- ing from commercial lending, at least technically, the reform created a better division of labor in the financial sector. The policy to allow major Western banks, such as Bank of America, HSBC, and Singapore Development Bank, to purchase up to 20 percent of equity ownership in Chinese banks in the early 2000s was another positive step toward strengthening the financial health of the banking sector and introducing more sophisticated banking practices. At the same time, the banking reform in the post-Tiananmen era did not create a truly market-based system. The state-controlled banks continued to channel a disproportionate amount of credit to the SOEs and to discriminate against the more efficient private firms. One survey of private firms at the end of the 1990s found that bank loans provided only 4 percent of the start-up capital and about 9 percent of the operating funds of private firms.25 Conse- quently, private firms often had to resort to bribery to gain bank credit or had to tap into the more costly and less stable shadow banking system for credit.26 Progress in developing other parts of the financial system, such as equity and debt markets, was similarly uneven. China established these markets in the -- 151 of 345 -- C h i n a’s E c onom ic M i r a c l e 139 early 1990s, but initially it limited access only to state-owned enterprises and other state entities. Even after private firms were allowed access, an effective quota system led to a complex and time-consuming process to obtain approvals to raise capital. Foreign investors could only invest in B-class shares, which had far less liquidity than the A-class shares that were available to domestic inves- tors. Although China’s equity markets grew significantly in the post-Tiananmen era and would boast about 2,500 listed companies, with a total market value of 23 trillion yuan (over $3 trillion) in 2012, they remained a secondary channel through which firms could raise capital. By comparison, the outstanding credit of the banking system in the same year was 63 trillion yuan, nearly three times larger than the total market value of Chinese stocks.27 Reform of the SOEs, which made little progress in the 1980s, was another priority of the government in the 1990s. However, because the party initially resisted large-scale privatization and mass bankruptcy of unprofitable SOEs due to ideological concerns and worries about social unrest, it preferred mostly half-measures, such as leasing, mergers, and a comprehensive program of “es- tablishing a modern enterprise system based primarily on state ownership.”28 The party’s conception of a “modern enterprise system” appeared to be inspired by the corporate governance system prevalent in the West. Chinese reformers hoped that by adopting a Western-style corporate governance system they could make SOEs more efficient without changing their ownership. As a consequence, many large SOEs went through mostly cosmetic changes, such as establishment of a board of directors, regular financial disclo- sures, and audits conducted by professional firms. Some were listed on domes- tic and international stock exchanges to attract nonstate minority investments and to create external pressures and oversight as tools to increase SOE effi- ciency. Yet, these reforms did not divest the state of complete or partial owner- ship. Most crucially but logically, the SOEs continued to serve the interests of the party, which retained effective control over these firms through manage- ment appointments. In theory, the party’s “modern enterprise system” was supposed to maximize efficiency and improve the financial performance of the SOEs. In reality, the party’s most important objective in retaining control over the SOEs was not to increase their economic value but to use them as tools to maintain a patronage system to reward loyalists, to implement indus- trial policy for regime and national security purposes, and to allocate SOE investments to balance factional and regional competition for resources. The subordination of economic efficiency to the party’s self-interests inevitably meant that efforts to build a “modern enterprise system” would unlikely -- 152 of 345 -- 140 c h a p t e r 5 succeed in turning the SOEs into truly efficient and competitive firms. Indeed, the cosmetic reforms implemented in the 1990s failed to address most of the long-standing SOE problems, such as soft-budget constraints, low profitabil- ity, bloated employment, and excess wages and benefits.29 In 2003 the party tried a different approach—it decided to imitate Singa- pore’s model of managing state-owned assets. As in China, Singapore’s largest firms are state-owned or state-controlled. But the city-state established an agency—Temasek—to which the state transferred its shares so it could func- tion as a more independent and effective supervisor. China thus set up its own version of Temasek—the State Asset Supervision and Administration Com- mission (SASAC)—in 2003. Its mandate was to exercise the power of the owner of the asset and monitor SOE operations and financial performance. Initially it was responsible for overseeing about two hundred large “centrally owned SOEs,” whose state-owned shares were transferred to SASAC. Prov- inces also formed their SASAC equivalents to oversee provincially owned enterprises. Theoretically, this new bureaucracy would assume sole responsi- bility for management and prevent other state bureaucracies from interfering. Unlike Temasek, however, SASAC had one fatal design flaw. In Singapore, the ruling People’s Action Party does not appoint management of the country’s SOEs, leaving the responsibility to Temasek. But in China, the CCP’s Organization Department, not SASAC, is empowered to appoint or remove SOE management, thus significantly weakening the supervisory role of SASAC.30 Consequently, the setting up of SASAC produced no meaningful improvement in efficiency, as demonstrated by the persistent underperfor- mance of SOEs relative to private firms in terms of profitability, generation of employment, and debt levels.31 Ironically, the most successful measure implemented by the party to reform the SOEs was the one it wanted to talk about the least: privatization and mass bankruptcy of loss-making small and medium-sized enterprises. In the mid- 1990s the overall strategy of reforming SOEs was to “grasp the large and release the small”—focusing on improving the large SOEs but letting the smaller SOEs sink or swim. “Grasping the large” achieved at best modest results, as illustrated by the outcomes of corporatization and the experience of SASAC. “Releasing the small” meant, literally, allowing small and medium-sized SOEs to be restructured or liquidated through whatever means that could take these zombie firms off the hands of the government. Initially, releasing the small proceeded slowly and cautiously, and it appeared to take the form of manage- ment buyouts (insider privatization), mergers, and leasing. This process -- 153 of 345 -- C h i n a’s E c onom ic M i r a c l e 141 created opportunities for SOE management and well-connected private en- trepreneurs to obtain state assets at steep discounts.32 After the East Asian financial crisis of 1997, Chinese leaders endorsed a drastic solution: the mass bankruptcy of small and medium-sized SOEs that could no longer be sustained without endangering the undercapitalized bank- ing system. Judging by official data, this was carried out in 1998 quickly and most probably with no prior planning. The number of industrial SOEs in 1997 was 110,000, representing a moderate decline of about 17,000 over 1996, and with the overall number of SOEs peaking at 127,600. This indicates that releas- ing the small began in 1997 but proceeded slowly. However, the shock of the East Asian financial crisis, which led to the collapse of currencies in Thailand, South Korea, and Indonesia and the fall of the long-ruling Suharto regime in Indonesia, forced Chinese leaders to take the unprecedented step of closing, in the industrial sector alone, nearly 55,000 SOEs and laying off 13 million workers in 1998. In 1999 they shuttered an additional 3,400 firms and laid off roughly 12 million workers.33 Economically, releasing the small definitely achieved its desired objective of ridding the state of massive liabilities. But this achievement came with enor- mous social costs, as tens of millions of workers in the bankrupt SOEs were cast out on their own, most with no social safety net. Many fell into poverty.34 Even though the government faced waves of demonstrations by the large num- ber of laid-off workers, it managed to contain and ultimately suppress them through coercive means.35 The housing reform launched in the mid-1990s created a powerful new en- gine of growth. In July 1994 the State Council released a package of policies to privatize state-owned housing. Subsequently, state-owned housing units rented to employees in government-affiliated entities were privatized at heavily subsidized prices. Four years later the State Council issued a document pro- moting development of a private real estate market to address the housing shortages. In retrospect, the real estate boom during the subsequent two decades constituted a powerful engine of growth before it began to lose steam in the mid-2010s.36 On balance, the reforms of the 1990s achieved mixed results. On the posi- tive side, they strengthened the fiscal system significantly and made the finan- cial system moderately more market-oriented. Policies to privatize housing and promote the real estate market unleashed a powerful source of growth. But the efforts to reform the SOEs were largely unsuccessful. The strategy of “grasping the large and releasing the small” preserved state control over big -- 154 of 345 -- 142 c h a p t e r 5 firms in strategic sectors, such as telecommunications, energy, transportation, and finance, but did not improve their efficiency. The mass bankruptcy of small and medium-sized SOEs did succeed in shutting down the loss-making firms that the state could no longer support, thus producing an improvement in efficiency, but this was carried out in a hasty and chaotic manner that im- poverished tens of millions of workers. Ascendance of the Private Sector If the party’s efforts to reform the SOEs in the post-Tiananmen era ended mostly in failure, an unintended consequence of this setback was the rapid rise of the private sector, which consisted of private domestic and foreign-invested firms. As described earlier, the government’s inability to turn around the inef- ficient SOEs with half measures finally forced it to embrace mass bankruptcy of the small and medium SOEs in 1998–1999. This solution, adopted out of desperation to avoid wrecking China’s banking system, caused massive losses of jobs and income for those workers employed in these firms. However, the exit of tens of thousands of SOEs also created opportunities for the private sector. The fire sale of the assets of the bankrupt SOEs allowed their managers to obtain them cheaply and to set up their own businesses, often in controver- sial if not illicit collaboration with private entrepreneurs. Ironically, the lack of a comprehensive program of privatization conceived and approved by the central government enabled local authorities and SOE management to adopt flexible, innovative, and often questionable methods of transferring the assets of the struggling or bankrupt SOEs to private entities.37 Because most of these transactions were conducted opaquely and the purchas- ers of the SOE assets were managers and well-connected private entrepre- neurs, conservatives and the so-called new left—scholars opposing neoliberal reforms because they were exploitative—vociferously denounced the deals as an “erosion and loss of state assets,” insisting that assets sold to management and private entrepreneurs were deliberately and significantly underpriced at the expense of the Chinese people, who nominally owned these assets.38 Aca- demic research, indeed, provides evidence that these assets were sold cheaply during privatization. Large-scale, officially sanctioned national surveys of pri- vate firms conducted in the early 2000s reveal that, on average, the assets of the SOEs were underpriced by about 20 percent. Managers who bought these assets enjoyed a discount of 30 percent.39 -- 155 of 345 -- C h i n a’s E c onom ic M i r a c l e 143 However, critics decrying privatization as a process in which state-owned assets were sold too cheaply apparently ignored two crucial factors. First, those willing to buy the assets of the underperforming or nearly bankrupt SOEs took enormous risks and understandably demanded deep discounts. Second, China had no functioning institutions that could price such assets correctly. It was impossible to determine the appropriate price at which such assets should be sold. In any case, the mass bankruptcy of tens of thousands of SOEs and the quick disposal of their discounted assets most likely boosted economic performance during the Hu era. With one stroke, privatization achieved three objectives: ending the waste of precious resources on zombie firms, saving the banking system, and transferring underperforming assets to private firms that could deploy them more productively. One study shows that, after privatiza- tion, private firms utilizing the same assets that were previously owned by collective firms could increase their output on average by 5–7 percent. Since private firms were more efficient than collective firms, it is reasonable to as- sume that the assets of SOEs in the hands of private firms would be utilized even more productively.40 Parallel to the privatization of small and medium SOEs was the conversion of TVEs into private firms. Since a large number of these were private firms that had disguised themselves as TVEs when they were first established in the 1980s, part of this process was not privatization but normalization. The real owners—rural entrepreneurs who had established them—simply gained for- mal legal title to their property. Another part of the process involved the priva- tization of collectively owned assets. The transformation of TVEs into private firms began in southern Jiangsu in 1994 and quickly spread to other parts of the country. Nearly all TVEs had been converted to private firms by the end of the Jiang era.41 This is evidenced by the rapid decline of employment in “collectively owned” firms (in all sectors) and the corresponding rise of em- ployment in private firms from the mid-1990s to 2002 (table 5.3). The positive impact of the privatization of TVEs was the emergence of some of China’s largest and most successful private corporations, such as Fuyao Glass (which later became one of the world’s leading makers of automobile glass, as featured in the Oscar-winning documentary, American Factory), Wanxiang Group (maker of auto parts), and Hope Group (agrobusiness). Privatization in the 1990s enabled the private sector to eclipse the state sec- tor as the most important engine of economic growth and job creation during -- 156 of 345 -- 144 c h a p t e r 5 the post-Tiananmen period. In terms of employment, the state sector em- ployed 103.5 million people in 1990, compared to only 1.7 million in private firms. By 2012, employment in the state sector had declined to 68.4 million, while that in private firms had increased to 113 million (table 5.4). The decline in the number of SOEs in industrial sectors was most pronounced. For ex- ample, SOEs in the manufacturing sector employed 34.4 million people in 1993. By 2002, their employment had fallen to 9.8 million, a decrease of more than two-thirds. SOEs in mining and construction saw their employment fall by more than half during the same period.42 The output of SOEs plummeted correspondingly. In 1993 SOEs accounted for 43 percent of China’s total indus- trial output. By 2011, their share had fallen to 26 percent.43 Fast-growing domestic private firms became a powerful force in China’s industrial sector. In 1993 the share of industrial output by domestic nonstate firms reached 47 percent. By 2011, private firms contributed 46.6 percent of industrial output, and foreign-invested firms accounted for 25.8 percent (about table 5.3. Employment in the Post-Tiananmen Era (in millions) Year SOEs Collectively Owned Firms Private Firms* 1990 103.5 35.5 1.7 1995 112.6 31.5 9.6 1997 110.4 28.8 13.5 1998 90.5 19.6 17.0 1999 85.7 17.1 20.2 2002 71.6 11.2 34.1 2012 68.4 5.9 113.0 * Both urban and rural; private firms do not include individual (geti) businesses. Source: ZGTJNJ 2013, e-book. table 5.4. Utilized FDI, 1993–2012 (in billion USD) Period Utilized FDI 1993–1997 187 1998–2002 226 2003–2007 313 2008–2012 516 Total 1,242 Source: Calculated from ZGTJNJ 2013, e-book. -- 157 of 345 -- C h i n a’s E c onom ic M i r a c l e 145 the same as the SOEs), while the share of collectively owned firms fell to 1.3 percent.44 Even though the party did not actively promote the private sec- tor, it deserves credit for taking the crucial political steps to give it legitimacy and protection. In March 1999 the party-controlled National People’s Con- gress passed a constitutional amendment that formally recognized the legal status of nonstate economic entities. Jiang’s theory of the “Three Represents,” first unveiled in early 2000 and written into the party’s charter in 2002, elevated the political status of private entrepreneurs by identifying them as a group the party should represent and recruit. Globalization China’s opening in the post-Tiananmen era was more aggressive and far- reaching than its domestic reforms. Policies to attract FDI and increase ex- ports in the post–Cold War era were necessary for China to build commercial ties with the triumphant West and to avoid geopolitical isolation. At the same time, the globalization championed by the United States and its allies after the end of the Cold War provided China with an unprecedented opportunity to utilize its comparative advantage of cheap labor to compete for a larger share in the global marketplace. Zhao Ziyang should receive credit for the strategy of closely integrating China into the world economy in the late 1980s when he proposed prioritizing development of the coastal areas as platforms to connect with the global economy. Although Zhao was purged during the Tiananmen crisis, his economic strategy not only survived him but also yielded spectacu- lar outcomes few Chinese leaders could have imagined in the 1980s. One measurement of China’s embrace of globalization in the post- Tiananmen era is its success in attracting FDI. Between 1979 and 1989, foreign firms invested about $16 billion in China. But starting in 1992, foreign investors dramatically increased their bets on China. In 1992 alone, they invested $11 billion in China.45 In the subsequent two decades, the amount of FDI would reach a staggering $1.24 trillion (table 5.4). Several factors turned China into a favored destination for direct invest- ments by foreign companies. In the early 1990s the government opened up more cities, including the major cities along the Yangtze River (such as Chongqing and Wuhan) and all inland provincial capitals, to foreign investors and allowed them to offer the same preferential terms as were initially made available only to foreign investors in the SEZs. To compete for foreign capital, local governments built large industrial parks and provided subsidies, such as -- 158 of 345 -- 146 c h a p t e r 5 cheap land and tax holidays. The most important city to become a giant SEZ in the early 1990s was Shanghai’s Pudong area. With Deng’s constant prodding, the government approved the city’s proposal to open up Pudong to foreign investors in the 1990s. Within a few years, the area was transformed into a high-tech manufacturing hub built mainly with foreign direct investment.46 Furthermore, the process to approve FDI projects was simplified and decen- tralized. In Guangdong, for example, the government allowed cities to approve projects under $30 million and counties to approve projects under $15 mil- lion.47 Liberalized rules were adopted so that FDI projects not on the “re- stricted” or “prohibited” lists were all allowed.48 Further liberalization measures implemented in the early 1990s included amendments to the laws on joint ventures and wholly foreign-owned enterprises and passage of new laws and regulations on income tax, intellectual property, and foreign ex- change that made it easier for foreign investors to conduct business.49 As a result, foreign firms were permitted to form retail joint ventures in several major cities and to become involved in natural resource exploration. They could also invest in power generation and infrastructure using the build- operate-transfer model. American International Group (AIG) was given a coveted license to sell some insurance products in Shanghai, and foreign banks could conduct local currency transactions.50 Although the government’s policies definitely helped make China an attrac- tive destination for FDI, other factors were in its favor as well. Perhaps the most important was timing. The revival of the country’s reform and opening after the Tiananmen crackdown occurred just after the end of the Cold War and the beginning of the high tide of globalization. In East Asia, Japan and the four little dragons—Hong Kong, Taiwan, Korea, and Singapore—began to lose their competitiveness in labor-intensive manufacturing, forcing their companies to relocate elsewhere. Because of its vast pool of cheap labor and its geographi cal proximity, China was an ideal destination. In 1992 the average hourly wage of a Chinese manufacturing worker was a mere 1.27 yuan, or $0.16 at the unofficial exchange rate of 8 yuan to one dollar.51 By one estimate, the wage of Chinese manufacturing workers in the early 1990s was the lowest in Asia.52 China enjoyed an additional unique advantage: its huge diaspora in the region. Successful ethnic Chinese entrepreneurs in Hong Kong and Taiwan, in particu lar, were eager to utilize their cultural and social connections to the mainland as a competitive edge in identifying investment opportunities.53 Official data for 1997–2006, for example, show that investors from Hong Kong -- 159 of 345 -- C h i n a’s E c onom ic M i r a c l e 147 alone accounted for about 35 percent of total FDI utilized during this period, with Taiwan contributing about 6 percent.54 The amount of FDI flowing from Hong Kong was likely inflated due to the practice of “round-tripping”— mainland Chinese firms would first transfer their capital to the former British colony and then use the same capital to invest in the mainland as FDI so they could enjoy greater legal protections and take advantage of the preferential treatment Beijing had granted to foreign investors.55 China also had a geopolitical turn of good fortune in the early 1990s. The United States and its allies decided to continue their policy of engagement and integration with China despite the Tiananmen crackdown and the end of the Cold War, which overnight had reduced China’s strategic value to the West. President Bill Clinton’s 1994 decision to stop linking China’s most-favored nation (MFN) trading status to its human rights record lifted a dark shadow over Sino-American commercial ties. Additionally, the party’s renewed commitment to reform and opening after Deng’s southern tour in 1992 and the explosive growth momentum unleashed thereafter significantly brightened China’s economic future, making the coun- try not only a cost-competitive and business-friendly export platform but also a fast-growing market for Western goods and services. The fierce competitive dynamics that pitted Western firms against one another in outsourcing their production to low-cost manufacturers benefited China immensely, since com- panies reluctant to invest in China would likely be outcompeted by their rivals that could take advantage of China’s lower labor costs and large market. In the 1990s domestic Chinese firms were not strong enough to compete against foreign firms. With government policies giving foreign firms many advantages denied to domestic firms, foreign investors could count on capturing a signifi- cant share of the Chinese market.56 Massive inflows of FDI brought China bountiful benefits. In 1993 foreign- invested firms employed 2.87 million people. By 2012, more than 22 million Chinese were working in these companies.57 In addition to the employment, capital, and technology that came with FDI, such investments generated sig- nificant spillover effects and improved the efficiency of Chinese firms. Foreign- invested firms allowed to sell goods inside of China increased competition in the marketplace, forcing domestic firms to improve their productivity and services. FDI firms also added to China’s human capital by training a large pool of skilled labor and management. Once they reached a critical mass, such firms helped create local supply chains and form clusters of specialized industrial ecosystems, such as electronics in Shenzhen and Kunshan (near Shanghai). -- 160 of 345 -- 148 c h a p t e r 5 The transfer of tangible and intangible know-how to domestic Chinese firms via the FDI process was invaluable, albeit difficult to calculate.58 The most significant impact of FDI in the post-Tiananmen era was on Chi- na’s foreign trade. As part of the global trend of outsourcing manufacturing to countries with low labor costs, the majority of foreign firms used China as a processing center that assembled imported components to make products for export. Called “processing trade,” this model served the interests of foreign investors well because they could utilize China’s ultra-cheap labor and thus reduce costs. For China, FDI made the country a global foreign trade jugger- naut. In 1992 foreign-invested firms accounted for 26 percent of China’s total foreign trade in goods and 20 percent of its exports. By 2012, the share of foreign-invested firms in China’s total foreign merchandise trade rose to 50 percent.59 The rapid increase of foreign-invested firms in imports and ex- ports reflects the role of “processing trade.” Indeed, the share of processing trade rose steadily during the post-Tiananmen era, hovering between 50 and 57 percent of total exports from 1996 to 2006. FDI-funded firms accounted for 75–85 percent of China’s processing trade between 2002 and 2008. Processing trade began to decline slightly toward the end of the Hu era. In 2012, 47 percent of China’s merchandise trade was processing trade.60 Foreign Trade and the WTO The explosive growth of foreign trade in the post-Tiananmen era was one of the most important factors behind the Chinese economic miracle. Although China began to liberalize its foreign trade in the 1980s, the pace was greatly accelerated in the 1990s, resulting in sustained growth in that trade. The vol- ume of merchandise trade grew more than tenfold from 1993 to 2012 due to a combination of government-initiated reforms, luck, and specific policies (table 5.5). The State Council radically liberalized foreign trade with a set of new policies in 1994, including a series of tariff reductions that brought down the average import tariffs from well over 50 percent in the early 1980s to 17 percent in 1998.61 The tariffs would be cut even further after China’s entry into the WTO in 2001.62 The government also ended subsidies to exporters to create a more level playing field, lowered entry barriers to foreign trade, and made the renminbi freely convertible for the purpose of foreign trade. The government passed a new Foreign Trade Law in 1994, authorizing any com- pany to engage in such trade if it registered with the government and could find an agent to serve as intermediary. This measure significantly increased -- 161 of 345 -- C h i n a’s E c onom ic M i r a c l e 149 competition in foreign trade because previously only firms approved by the government could engage in that trade. As a result of this reform, nonstate (mainly private) domestic firms gained a growing share of foreign trade. In 1992 they accounted for only 1 percent of total foreign trade (SOEs accounted for 72.5 percent). By 2000, their share had risen to 4.7 percent (compared with a SOE share of 45 percent).63 At the end of the Hu era, domestic private firms accounted for 31.6 percent of China’s foreign trade, second only to the share of foreign- invested firms at 49 percent (the share of SOEs had fallen to 19.4 percent).64 In 2019 domestic private firms overtook foreign-invested firms as the largest contributor to foreign trade.65 To promote exports, China sweetened the incentives for exporters. The new foreign exchange policy that became effective in January 1994 allowed exporters to buy and sell foreign currency freely through the banking system. Exporters could also get a rebate from the VAT on their goods, a common international practice, to be more competitive. The Export-Import Bank of China was established in 1994 to finance foreign trade. Although both increas- ing competition and making exports more attractive were useful, the single most effective export-promotion policy was undoubtedly the one-time major devaluation of Chinese currency in January 1994 that not only unified ex- change rates but also made Chinese exports much less expensive. In 1993 the official exchange rate of the renminbi was 5.77 yuan to the dollar. In 1994, the rate was 8.7 yuan to the dollar, representing a devaluation of over 50 percent.66 Taken together, these factors vaulted China to the front row of global trading nations. In 1993 China (including Hong Kong) was the world’s fourth largest trading nation, with 6.1 percent of world trade. By 2012, China and Hong Kong accounted for 14 percent of global trade and claimed the number one spot.67 China’s formal entry into the WTO in December 2001 was the most impor- tant event after Deng’s southern tour in 1992 that altered the country’s eco- nomic trajectory. China applied to join the General Agreement on Tariffs and table 5.5. Foreign Trade (in billion USD) Period Imports Exports Total 1993–1997 633 696 1,329 1998–2002 1,070 1,220 2,290 2003–2007 3,983 3,381 7,364 2008–2012 7,096 8,140 15,236 Source: ZGTJNJ 2013, e-book. -- 162 of 345 -- 150 c h a p t e r 5 Trade (GATT), the predecessor of the WTO, in 1987. But the country’s non- market economy, protectionist trading practices, and enormous potential to disrupt global trade due to its size made it difficult for the United States and Europe to support the application. China’s bid languished until the late 1990s, when Jiang Zemin and Zhu Rongji put their support behind a renewed drive to gain accession, most likely to use WTO entry to spur a new round of eco- nomic reform at home and to seek further integration with the global econ- omy. Although Zhu personally led the critical negotiations toward the end of the process in 2000, Jiang’s political support was crucial because China’s trade partners were demanding many concessions as conditions for Chinese entry. The most important concession was that China had to forgo the preferential terms accorded to developing country members of the WTO. To assuage fears of a flood of Chinese exports, China also accepted the “safeguards” demanded by its key partners, such as the United States and the European Union, allow- ing them to take unilateral measures against Chinese exports to protect their industries. The timing of China’s renewed bid was propitious because President Clin- ton, a strong US proponent of engagement with China, saw China’s accession to the WTO as a strategic opportunity to bind China closer to the West-led economic order and to advance America’s own economic interests. Sensing the enormous potential of a more liberalized China market after WTO entry, corporate Ameri ca furiously lobbied a skeptical Congress, which reluctantly passed a bill in late 2000 granting China permanent normal trading status to pave the way for its WTO accession.68 China’s entry into the WTO has remained a hotly debated issue. Geopo- litically, after US-China relations turned completely adversarial toward the end of the first administration of Donald Trump, some argued that US eco- nomic engagement with China in the post–Cold War era, including support for its entry into the WTO, had been an epic strategic blunder.69 In 2023 sev- eral hard-line senators introduced legislation to strip China of its permanent normal trading status. Whether China has lived up to its commitments re- mains similarly controversial.70 What is not controversial is that China’s WTO entry radically reshaped the landscape of global trade and supercharged its domestic economic development until the momentum dissipated toward the end of the post-Tiananmen era. The impact of WTO accession on FDI and foreign trade was instant and dramatic as foreign investors rushed to China to take advantage of its commit- ments to open its domestic market for services and to build manufacturing -- 163 of 345 -- C h i n a’s E c onom ic M i r a c l e 151 facilities for exports. In the five years (2002–2006) immediately following WTO entry, inbound FDI grew at an annualized rate of 36 percent, averaging $59 billion a year. Even more FDI flowed into China thereafter. During 2007– 2011, foreign investors poured $478 billion into China. Altogether, FDI totaled $775 billion in the first decade following China’s WTO accession.71 The inflow of FDI and China’s greater access to global markets granted under WTO rules precipitated explosive growth in foreign trade and, within a decade, made China (excluding Hong Kong) the world’s second largest trad- ing nation after the United States. In 2001, on the eve of China’s WTO entry, its total foreign merchandise trade was $509.6 billion (exporting $266 billion in goods). A decade later, China’s total merchandise trade had skyrocketed to $3.64 trillion. Its exports reached $1.9 trillion, surpassing Germany as the world’s largest exporter by volume (but not by value-added).72 The most beneficial impact of China’s WTO entry has been to make its economy more efficient and able to grow faster through three channels: an increase in foreign trade due to liberalization, a dramatic rise in FDI, and ef- ficiency gains produced by implementation of the reforms China pledged to undertake and by the rising competition from greater access to the Chinese market by foreign manufacturers and service companies (such as retail).73 Areas more exposed to WTO entry experienced greater productivity growth due to accelerated development of the modern sector (manufacturing and services) and a more rapid shrinking of the agricultural sector.74 The magni- tude of the boost in growth delivered by WTO accession is substantial but difficult to measure precisely. One study comparing China’s growth performance from 2002 to 2007 with that of a group of developed and devel- oping countries finds that accession increased China’s real growth rate by 2.5 percentage points each year, implying that without WTO accession, Chi- na’s average growth rate during this period would have been 8 percent, instead of 10.5 percent.75 However beneficial, WTO accession was a one-off event, and the momen- tum it generated gradually petered out. Instead of taking advantage of the fa- vorable economic environment after WTO accession to implement more market-oriented reforms, the government continued to protect SOEs, main- tain hidden barriers to critical sectors (such as financial services and energy), and pursue industrial policies prioritizing technological self- sufficiency.76 Debate over whether China fulfilled its accession commitments also began to surface almost immediately after it became a WTO member. Trade tensions with its key trading partners, in particu lar the United States, rose as Chinese -- 164 of 345 -- 152 c h a p t e r 5 exports surged and the promised economic bounties to Western firms in terms of market access failed to fully materialize. The most contentious issues were China’s poor protection of Western intellectual property rights, industrial policy, and regulatory restrictions on services and agricultural imports.77 Globalization might have been more beneficial for China than it was for any other developing country. But it was not all good news for the developed economies. The combination of technological progress and globalization was responsible for a significant reduction of manufacturing employment in high- income countries. Because after its WTO accession China had become the world’s largest exporter of manufactured goods, and because it maintained huge trade surpluses with the advanced economies, in particular the United States, China was blamed for the loss of millions of blue-collar jobs. President Barack Obama managed to contain trade tensions with China, but China’s rise as a global manufacturing superpower has had a lasting impact on Ameri ca’s political landscape. Research by labor economists shows that trade exposure drove American working-class voters, who had turned against globalization, to the Republican Party and put Donald Trump in the White House in 2016 (and brought him back to power in 2024).78 Strong Economic Fundamentals The Demographic Dividend Among the strong economic fundamentals that contributed to the Chinese “economic miracle” in the post-Mao era, the so-called demographic dividend is likely the most important. “Demographic dividend” refers to the gains from a decades-long period during which a country’s labor force grows more rapidly than its population, resulting in more producers than consumers. However, not all countries with a favorable population structure (a large working-age population and a relatively small population of retirees) can reap this dividend because the productive utilization of a large labor force depends crucially on appropriate government policies affecting human capital accumulation through education and healthcare, savings, investments, and trade. Countries with the right policies during this window of demographic opportunity, as the countries in East Asia had, achieve higher rates of growth than those who do not have such policies. During the 1960–2000 period, the demographic divi- dend in Korea, Singapore, and Thailand contributed roughly one-third of the rise of per capita income, compared with only 16 percent of the rise of per -- 165 of 345 -- C h i n a’s E c onom ic M i r a c l e 153 capita income in the Latin American region.79 China’s population transition to an era of low birth and death rates actually began in the late 1960s. But dur- ing the Maoist era, the demographic dividend was wasted due to the radical economic policies and political turmoil. The favorable structural factors did not begin to drive economic development until the reform era.80 A population with low dependency ratios (more workers than both the old-age and young populations) contributes to economic development through two mechanisms. The first is the accumulation of savings due to the low dependency ratio and the extra savings that can fund investments in physi- cal and human capital. The second mechanism is the development of capital markets because workers need to save for their retirement and thus require a more sophisticated financial system.81 Evidence of China’s population transition can be seen in the dramatic fall in its birth rate starting in the mid-1960s. The country’s birth rate peaked at 4.3 percent in 1963. By 1969, the birth rate had fallen to 3.4 percent, and in the 1970s the birth rate averaged 2.4 percent per year.82 The sustained lower birth rate coupled with the low mortality, following a period of high birth and low mortality rates (the 1950s and early 1960s), resulted in a population structure with a low dependency ratio. According to the 1990 census, China’s working-age population was 60 percent of its 1.13 billion people, while its old-age population (age 60 for men and 55 for women) was only 10 percent of the population, making the old-age dependency ratio 6 to 1 (six workers supporting one retiree). Those under 14 years of age accounted for 28 percent of the total population. So the total dependency ratio was slightly less than 3 to 1.83 Studies of the magnitude of the effect of China’s demographic dividend on economic growth show a substantial positive impact. One frequently cited article estimates that between 1982 and 2000, the demographic dividend contributed about 27 percent of China’s per capita GDP growth. Another study finds that changes in the age structure of the Chinese population added about 20 percent to its per capita GDP growth between 1990 and 2005.84 One unique characteristic of China’s demographic dividend is the massive transfer of surplus labor from rural areas to the cities. This process was set in motion in the 1980s by the decollectivization of agriculture, which raised pro- ductivity in the agricultural sector significantly and freed up a huge pool of surplus labor. In the 1980s the rural surplus labor was transferred mainly to the TVEs. Starting in the 1990s the boom in coastal areas and large cities attracted even more rural laborers who were migrating from villages to urban areas where they could earn higher wages in manufacturing, construction, and -- 166 of 345 -- 154 c h a p t e r 5 services. Estimates vary about the exact number of rural laborers transferred from the agricultural sector to manufacturing and services. The National Bu- reau of Statistics reports that 268.9 million rural laborers had transferred to the modern sector by the end of 2013.85 The infusion of a labor force that was larger than the population of most countries into manufacturing and services enabled China to keep wages low and maintain its competitiveness. More important, because the transfer of labor from a sector in which labor productivity is low to one in which one unit of labor can produce more value delivers a one-time improvement in labor pro- ductivity. The epic transfer of hundreds of millions of rural laborers to the mod- ern sector in the post-Mao era (with most of this transfer taking place in the post-Tiananmen era due to the relaxation of restrictions on internal migration) accounted for a significant rise in productivity.86 Estimates of the one-off boost in productivity due to the transfer of labor from less productive sectors (agri- culture and SOEs) vary. According to one study, labor transfers from agricul- ture to nonagricultural sectors during 1978–1998 contributed about one-fifth of per capita GDP growth in China. Another study shows that relocating labor from agriculture to the nonagricultural sectors during 1991–2003 accounted for roughly 26 percent of Chinese growth in labor productivity. For the 1978–2015 period, the transfer of labor from less productive sectors to more productive sectors was responsible for 45 percent of the increase in labor productivity.87 However, China’s demographic window of opportunity began to close toward the end of the post-Tiananmen era. By 2012, the country had reached the “Lewis Turning Point,” whereby rural surplus labor was exhausted and wages were beginning to rise rapidly.88 Due to the party’s draconian one-child policy, which restricted urban families to one child and rural families to two, China quickly confronted a far more adverse demographic landscape—low birth rates and a rapid rise in aging—in the 2010s. In 1990 the total dependency ratio was 3 to 1. But the population structure indicates a continuation of the demographic dividend because roughly two-thirds of dependents were under age 15 and the elderly population constituted only 9 percent of the working population. By 2012, the share of the population under age 14 had fallen to 223 million (compared with 323 million in 1992), while the number of those aged 65 and above had risen to 127 million (in 1992 there were 72 million people in this age-group), raising the old-age population dependency ratio to nearly 13 percent.89 Therefore, demographic aging began to act as a drag on future economic growth. -- 167 of 345 -- C h i n a’s E c onom ic M i r a c l e 155 High Savings and Investments The positive impact of the demographic dividend on China’s growth in the post-Mao period is a much less disputed factor than the role of savings and investment. Like other fast-growing economies in East Asia, the story of the Chinese “economic miracle” also features high savings and investment rates. As an influential World Bank study of the East Asian development experience argues, high savings and high investment rates were the most important factors behind the region’s post–World War II developmental success.90 Even those economists who maintain that there was no such thing as an economic miracle in East Asia acknowledge that high investment rates made the region an eco- nomic development star after World War II.91 Not surprisingly, economists examining the sources of growth in post-Mao China also disagree on whether an increase in total factor productivity (TFP) or an increase in investment played a more important role in the Chinese eco- nomic miracle. Some insist that TFP growth in the private sector and agricul- ture after reform began accounted for most of the increase in per capita GDP growth because the state sector, which had invested more than half of the capital during the period covered by the study (1978–2007), wasted a signifi- cant amount of its investment.92 Other economists, however, give more credit to investment. One study covering the 1978–2004 period finds that investment contributed 44 percent of the output of each worker, and TFP accounted for 49 percent. Another study examining the sources of growth during the 1978– 2005 period produces similar results.93 At the heart of this esoteric debate is the sustainability of China’s growth. If China’s growth is driven primarily by investment and not by growth in pro- ductivity, it will eventually grind to a halt because of the law of diminishing returns (each additional unit of investment will produce less of an increase in output). But if China’s growth is due more to rising productivity than it is to investment, its growth will be more sustainable. What is not disputed, however, are the sustained high levels of savings and investment in the post-Tiananmen era. Even though the sources of growth— whether productivity growth or high investments—will remain a subject of academic debate, the undeniable fact is that China could not have achieved its sustained high growth without an abundant source of capital. As table 5.6 shows, its savings and investment rates were extremely high throughout the post-Tiananmen period, reaching a peak toward the end of the Hu era. -- 168 of 345 -- 156 c h a p t e r 5 Even compared with its neighbors in East Asia that are known for high sav- ings and investment rates, China stands out during this period. In the Jiang era, its savings rate was 25 percent more than the regional average, and its in- vestment rate was 12 percent higher. This gap would grow even further in the Hu era. On average, China saved a whopping 43 percent more than its neigh- bors and invested 35 percent more.94 China was able to maintain high rates of investment mainly because of its abundant domestic savings, not because of FDI. Although utilized FDI totaled $1.24 trillion during 1993–2012, it was only a fraction of China’s total investment. In 2012 alone, China invested $5.3 trillion in fixed assets. In the same year, inbound FDI was $111 billion, roughly 2 percent of total fixed asset investments.95 The reasons for China’s high savings rate are not only hotly debated but also reflective of some of the flaws in the Chinese political and economic systems. In terms of the positive factors contributing to high savings, the most obvious is the combination of high growth and the demographic dividend. China ex- perienced a virtuous cycle during most of the reform era—the reforms in- creased productivity and growth, resulting in higher income. Reinforced by the demographic dividend, more income was saved.96 Another factor is simply rational human behavior. According to the life-cycle hypothesis, people save when their income is high so they will have money to spend when they have no income. Indeed, China’s reform and opening produced higher growth and hence higher income, and as a result individuals rationally saved more.97 This explanation is intuitively persuasive, but it does not address the unique and largely adverse circumstances in China’s transitional economy during the post- Mao era. One casualty of the reforms is the (limited) socialist welfare state and the employment security of workers in urban areas. Uncertainty about future income in a transition economy motivated Chinese households to save more.98 The theory of “precautionary savings” appears to make more sense in table 5.6. Savings and Investment Rates (as a share of GDP) Period Average Gross Domestic Savings (%) Average Gross Domestic Capital Formation (%) 1993–1997 40.9 33.3 1998–2002 38.1 33.3 2003–2007 45.8 38.8 2008–2012 50.0 43 Source: World Bank, https://databank.worldbank.org/source/world- development-indicators#. -- 169 of 345 -- C h i n a’s E c onom ic M i r a c l e 157 the Chinese context because, during much of the reform era, China did not provide sufficient social services (such as publicly funded healthcare or educa- tion) or a social safety net (pensions or unemployment insurance), forcing individuals to set aside a portion of their income for such future expenditures. Another factor unique to China that also forced people to save more was the high housing prices that motivated potential home purchasers to save for down payments.99 Although high domestic savings are critical to funding China’s massive in- vestment in infrastructure, alone they cannot sustain its economic develop- ment. Savings are expected to fall as China exhausts its demographic dividend and must provide for its rapidly aging society. If savings are not productively invested, they will not generate sufficient returns to cover pensions. The latter probably is far more challenging because China’s state-dominated financial system and capital controls (which prevent Chinese households from invest- ing abroad) limit investment options and potential returns. Instructively, the only class of assets that appears to have generated high returns is housing, in contrast to the equity market that has not delivered any returns despite its high volatility between 2008 and 2016.100 Losing Momentum No one was in a better position to sound the alarm about the Chinese econ- omy than China’s premier, the country’s chief economic manager. While the rest of the world was admiring China’s economic miracle, Premier Wen Jiabao, uncharacteristically frank for a senior party official, told journalists at a press conference after the conclusion of the annual session of the NPC in March 2007 that the Chinese economy had “huge” (juda) problems—“the same persistent problems of instability, imbalances, lack of coordination, and unsustainability.” In par ticular, Wen singled out the excessive investment growth rate, amount of credit, and liquidity; the large imbalances in foreign trade and the current account and between investment and consumption; excessive dependence on investment and exports to generate growth; and un- sustainable environmental degradation.101 When he delivered his work report to the NPC in March 2013 before retiring as premier, he reiterated his warning that economic imbalances, lack of coordination, and unsustainability contin- ued to be prominent problems.102 The premier’s warning reveals the weaknesses of China’s economic devel- opment model in the post-Tiananmen era. Even though the party delivered -- 170 of 345 -- 158 c h a p t e r 5 two decades of spectacular growth, exceeding its own expectations, many of the factors that contributed to this economic miracle either were one-off or began to yield diminishing returns toward the end of the Hu era. If the party had adopted substantive reforms to correct these imbalances when Wen first sounded the alarm in 2007, the Chinese economy would likely have been in better shape than it was when Hu and Wen left office in 2012/2013. But that did not happen. Instead of addressing the worsening macro- economic imbalances through reform, the party under Hu merely rode the momentum generated by China’s WTO entry, the housing boom, and the demographic dividend. When the global financial crisis (GFC) of 2008 hit, the leadership reacted with a massive credit-fueled stimulus package that avoided a recession over the short term. But the price was high. The party’s panicked response to the GFC drastically increased the overall level of debt in the economy and led to a gigantic housing bubble. This credit-fueled invest- ment cycle began to unwind around 2021 when the housing bubble popped and local government debt threatened to unleash a financial crisis. In retro- spect, the party’s stimulus package at the end of the Hu era merely delayed China’s economic reckoning. Macroeconomic Imbalances and Falling Productivity By the end of the Hu era, most economic indicators were flashing yellow, or even red, signaling the end of the Chinese economic miracle. GDP recorded its last double-digit growth rate (10.3 percent) in 2010. Growth would fall to 6.4 percent in 2019, the year before the Covid-19 pandemic.103 Judging by the structure of the Chinese economy, growth had become excessively dependent on investment (table 5.7). An economy that relies too much on one of the three drivers of growth—consumption, investment, and trade—can become vulnerable if this main driver loses momentum. In the Chinese case, the economy was most balanced in the 1980s, when Zhao Ziyang was the premier in charge of it. Con- sumption contributed, on average, 64 percent of the growth, and investment accounted for 31 percent. The ratio began to shift toward investment in the Jiang era, during which time foreign trade also claimed a much higher share of the source of growth. Nicholas Lardy, a leading authority on the Chinese economy, argues that macroeconomic data show that the Chinese economy became “highly imbalanced” in about 2003, the year Hu began his decade in power.104 At the end of the Hu era, the economy was less dependent on trade, as the contribution of trade to growth had fallen to 3.4 percent, most probably due -- 171 of 345 -- C h i n a’s E c onom ic M i r a c l e 159 to the decline in external demand following the GFC. But the domestic imbal- ances in the economy deteriorated, with investment contributing on average 52.4 percent of the growth during Hu’s decade in power and consumption falling to 44.2 percent. Data from Hu’s second term reveal even worse imbal- ances. During 2008–2012 investment accounted for an average of 56.5 percent of GDP growth, while trade brought down 6.2 percent of the growth because of the slump in world trade after the 2008 GFC.105 An economy overly reliant on investment as a source of growth faces two problems. First, investment typically yields diminishing returns: More capital is needed to generate an additional unit of output. This phenomenon is usually captured by the term “incremental capital output ratio” (ICOR). This ratio measures the unit of capital needed to generate an additional unit of output. Higher ICOR numbers indicate a greater need for capital investment to sus- tain growth. One estimate shows that China’s average ICOR was 3.6 during 1983–1992, 4.0 during 1993–2002, and 4.3 during 2003–2012. Although it is de- batable whether China’s ICOR is too high, the upward trend is self-evident. In the Xi period, China’s ICOR would rise even more rapidly (averaging 5.8 in 2010–2019).106 A more nuanced analysis of China’s rising ICOR finds that capital-intensive housing and infrastructure investment accounted for the bulk of this increase.107 This explanation contains both good news and bad news. The positive interpretation is that China may have room to invest in the more productive sectors of the economy, such as manufacturing and services. The bad news is that the two engines behind the country’s economic miracle— infrastructure and housing—cannot be sustained due to their high capital intensity coupled with their lower returns. Second, excessive investment raises the risk of waste. High investment can lead to excess capacity, a chronic problem plaguing industries such as coal, steel, automobile, construction, and solar panels in China.108 If SOEs under- take investment, the return on capital is much lower than it is in the private sector (private firms produced returns on capital that were roughly 50 percent higher than returns on capital in SOEs during the 2000s). Indeed, Chinese SOEs consistently have higher debt and report far lower returns on invested capital than do private and foreign firms. In the second half of the Hu period, the performance of SOEs relative to private and foreign firms became even worse. During the entire Hu period, SOEs recorded losses averaging 0.5 percent of GDP each year, indicating an inefficient use of capital.109 In addition to dramatic structural imbalances and a rising capital intensity, a third indicator of the flagging economic momentum that appeared at the end -- 172 of 345 -- 160 c h a p t e r 5 of the Hu era is the slowing of productivity. One study of the sources of growth during the post-Mao period indicates that the increase in TFP accounted for 20 percent or more of the growth of output before 2008. However, the contri- bution of TFP to GDP growth became negative after 2009.110 Another study shows that the contribution to GDP growth from the rise in TFP averaged 15 percent from 1980 to 2007, but TFP did not contribute to GDP growth from 2007 to 2012; in fact, TFP growth itself was negative in this period, implying declining economic efficiency.111 Several factors likely led to the fall in pro- ductivity during the second half of the Hu era. The principal culprits were the party’s failure to adopt more reforms to improve economic efficiency and its massive stimulus package in response to the GFC that channeled investments into the inefficient state sector and the unproductive infrastructure.112 Party Response to Global Financial Crisis in 2008 The GFC occurred at a time when the Chinese economy was at a crossroads. Its economic structure had become even more unbalanced than when Hu began as premier six years earlier. In 2007 consumption and investment con- tributed 40 percent to GDP growth, respectively, while foreign trade, due to China’s whopping trade surplus of $261.8 billion, accounted for 20 percent. The boom in foreign trade following China’s WTO entry made the Chinese economy heavily dependent on exports prior to the GFC. The positive effects of China’s WTO entry took about three years to show up in China’s trade data, most likely because of the time lag between the relocation of manufacturing facilities to China and their exports. During 2002–2004 foreign trade contrib- uted an average of only 5 percent of GDP growth. But between 2005 and 2007 it accounted for an average of 21 percent of growth.113 Due to tight regulations and capital controls, the Chinese financial system was insulated from the turmoil in global financial markets. However, China’s table 5.7. Contributions to GDP Growth (%) Period Consumption Capital Formation Foreign Trade 1980–1989 64.3 31.0 4.7 1993–2002 52.2 40.2 7.6 2003–2012 44.2 52.4 3.4 Note: Average contributions during each period. Sources: ZGTJNJ 2008 (Beijing: Zhongguo tongji chubanshe, 2009), 57; ZGTJNJ 2013, e-book. -- 173 of 345 -- C h i n a’s E c onom ic M i r a c l e 161 foreign trade immediately felt the impact of the GFC as demand for Chinese exports in the crisis-ridden Western economies declined dramatically. In re- sponse, the party rolled out a massive stimulus package to avoid a recession. This package consisted of two sources of funding. The fiscal spending that was announced in November 2008 amounted to 4 trillion yuan (about $486 bil- lion, or 14 percent of GDP). Most of the stimulus targeted infrastructure proj- ects. Despite its nominally large size, it is difficult to determine the actual amount of the fiscal stimulus because cash-strapped local governments were supposed to cover the bulk of the spending.114 The other source of funding was bank loans, which provided most of the stimulus. Between Decem- ber 2008 and December 2009 alone, Chinese banks lent out 11 trillion yuan in new loans, almost triple the amount of the announced fiscal stimulus.115 Judging by China’s macroeconomic performance in the immediate after- math of the GFC, the party appears to have made the right call. Exports in 2009 fell 16 percent from 2008, but they recovered strongly in 2010. Neverthe- less, the GFC marked the end of China’s export-driven growth. Foreign trade was a negative contributor to growth between 2008 and 2011, and it would not resume its role as an engine of growth until 2019.116 The injection of massive credit into the economy did succeed in achieving the party’s goal of maintain- ing growth. In 2008 the country reported growth of 9.6 percent (a significant fall from the 14.2 percent growth in 2007). Growth in 2009 and 2010 was 9.2 and 10.4 percent, respectively.117 Even though some economists hailed the party’s response, in retrospect it was a costly mistake that led to a rapid buildup of debt in the economy, a wors- ening misallocation of resources, and the subsequent decline in productiv- ity.118 Arguably the greatest—and most negative—legacy of China’s response to the GFC is the rapid increase in debt. According to the Bank of Interna- tional Settlements, the debt of China’s nonfinancial sector averaged 140 percent of GDP from 2000 to 2008 (it was 139 percent of GDP at the end of 2008). But the debt of the nonfinancial sector reached 175 percent of GDP at the end of 2009, a net increase of 36 percentage points. This implies that China’s credit- fueled stimulus package was more than one-third of its GDP—probably the largest in peacetime history. Although the pace of credit slowed in 2010 and 2011, by the time Hu left his position as CCP general secretary at the end of 2012, total outstanding debt had risen to 192 percent of GDP, a historic record. Judging by the sustained buildup of debt in the Xi era, as will be discussed later, the party’s debt-driven stimulus seems to have opened the door for Xi, during his first term, to rely on credit expansion to keep growth from falling -- 174 of 345 -- 162 c h a p t e r 5 from a cliff as a substitute for reform. (Debt to GDP would reach 297 percent by the end of Xi’s second term in December 2022.)119 The rapid buildup of debt most likely created a large amount of nonper- forming loans because SOEs and local governments had borrowed the bulk of the new credit created in 2009.120 Researchers at the International Monetary Fund estimate that half of the new credit made available after 2008 went to SOEs.121 Of all the outstanding debt to the nonfinancial sectors at the end of 2012, SOEs and local government financing vehicles (LGFVs) accounted for 37 percent.122 Because inefficient SOEs do not generate enough profits to repay their loans and local governments frequently invest in wasteful projects, relying on revenue from the leasing of land to cover their financial liabilities, it is reasonable to assume that a significant portion of the borrowing after the GFC ended up as nonperforming loans in the financial system. In addition to misallocating massive amounts of resources to inefficient producers and drag- ging down productivity, the party’s response to the GFC limited the space for future monetary policy and made the financial sector more vulnerable to a debt crisis. One lasting legacy of the stimulus package is the housing bubble that it created. Data on floor space under construction reveal a massive increase of construction in both commercial and residential real estate. In the four years before implementation of the stimulus package (2005–2008), the total amount of space under construction was 177 million square meters. In the four years following the stimulus package, floor space under construction ballooned to 313 million square meters. Floor space under construction between 2009 and 2012 exceeded the combined total in the prior eight years.123 Although the bubble would grow even bigger during the Xi era, it was a dark cloud hanging over the Chinese economy. When the real estate sector crashed during the Covid-19 pandemic in 2021–2022, a powerful engine of growth became the heaviest drag on the Chinese economy. Summary This account of the unprecedented economic growth that China achieved in the two decades following Deng Xiaoping’s tour of southern China in 1992 illustrates the diverse factors that made this “miracle” possible and the obsta- cles to its sustainability. The reforms implemented by the party played a posi- tive role. Even though these measures, rolled out mostly in the 1990s, were partial and oriented toward strengthening state control over the financial -- 175 of 345 -- C h i n a’s E c onom ic M i r a c l e 163 sector and the fiscal system, they helped make the economy more open, market-oriented, and productive.124At the same time, however, these partial reforms did not fundamentally change China’s economic system. The state— in reality, the party—retained control over the most vital economic sectors. The share of SOEs in the economy remained too large to make China qualify as a market economy. Most of the growth during this period should be cred- ited to the private sector, globalization, and favorable structural factors. The post-Tiananmen economic model began to unravel during Hu Jintao’s second term, as indicated by falling productivity growth and worsening eco- nomic imbalances. This process coincided with the emergence of cracks in the post-Tiananmen political model. In retrospect, the end of the Chinese miracle was almost inevitable. The beneficial effects of the demographic dividend and globalization had either dissipated or disappeared toward the end of the Hu era. In the meantime, the lack of reforms to address high income inequality, inefficient SOEs, macroeconomic imbalances, and the insufficient provision of social services made the economy less dynamic.125 In the aftermath of the GFC, the party took the path of least resistance: It opened the spigot of credit to fund infrastructure and to inflate a gigantic housing bubble. Even though the party managed to sustain high growth for the short term, its stimulus package worsened the economic imbalances, chan- neled resources to the least productive sectors, and saddled the economy with a heavy debt burden that would eviscerate its vitality during the subsequent decade. Fittingly, the end of the Chinese miracle also marked the end of the post-Tiananmen neo-authoritarian order and the beginning of a new, and darker, era of neo-Stalinist rule. -- 176 of 345 -- 164 6 Revival of Totalitarianism Under Xi Jinping before xi Jinping officially became the general secretary of the CCP in No- vember 2012, few would have thought that he could reverse most of Deng’s reforms and bring back a form of totalitarian rule within only a few years after his rise. Given the transformative socioeconomic changes China had experi- enced in the post-Mao era, such a scenario was simply unthinkable. Yet, like most inconceivable events in history, the revival of totalitarianism under Xi becomes almost self-evident only in hindsight. By the time he assumed power, as discussed at the end of chapter 4, the post-Tiananmen order was beginning to unravel. But the political reality of the early 2010s precluded a potential path to democracy through elite-initiated reform. Although fraying elite unity, per- vasive corruption, and dissipation of economic dynamism indicated that the party was in trouble, the regime was not in a serious enough legitimacy crisis to precipitate a split between soft-liners and hard-liners, a prerequisite for an elite- led transition.1 Even more important, the absence of liberal reformers in senior leadership positions made this prospect unrealistic. Politically, the path of least resistance for Xi would have been muddling through, as Hu had done throughout his decade in power. This would have required the party to continue its post-Tiananmen survival strategy, but with greater tactical dexterity. The party was not facing an imminent existential threat, so it did not need to adopt dramatic reforms. It seemed to make sense to keep a strategy that had enabled it to enjoy two decades of unprecedented peace, prosperity, and stability. Hu articulated the rationale of playing it safe more succinctly than anyone else. In his last political report to the party on the opening day of the Eighteenth Party Congress in November 2012, he bluntly stated that as long as the party does not zheteng (a colloquial expression best -- 177 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 165 translated as “engage in useless and self-destructive actions”), it would reach its goal of making China a “prosperous, strong, democratic, civilized, and harmo- nious modern socialist nation.”2 At the time, Hu’s use of zheteng on such a for- mal party occasion raised eyebrows. Although Hu’s invocation of this phrase was treated as a lame excuse for doing little during his tenure, his political wis- dom became clear soon after Xi began to do precisely the opposite, plunging the party into its most turbulent era since the end of the Maoist period. If insecurity motivated risk-averse leaders like Hu to prefer muddling through, the same sense of insecurity could also drive someone like Xi to opt for a radically diff erent course—confronting perceived threats by reviving to- talitarianism and reasserting party control over Chinese society. Even though few had thought Xi would embark on such a path, it was this new survival strategy that he started to implement immediately after taking office. The only part of his strategy incongruent with the regime’s sense of insecurity was an expansionist foreign policy. Although one might expect an insecure regime to avoid provoking powerful external foes, Xi did the opposite. Most likely he sensed strategic opportunities created by the global financial crisis and Amer- i ca’s relative decline in the 2000s. The rapid rise in Chinese power likely made Xi confident that the West would not push back, even if China jettisoned Deng’s dictum to “keep a low profile.” Xi’s personal ambitions and commitment to the preservation of CCP rule most likely had motivated him. Motives alone, however, could not explain the ease with which he dismantled the post-Tiananmen order and reestablished a form of neo-Stalinist rule. He needed enablers—not just shrewd and ruthless henchmen, but also institutional tools—to bring back totalitarian rule. It turned out that such tools were readily available, as more than three decades of economic reform had left the fundamental institutions of totalitarianism largely untouched. To reimpose strict control on Chinese society, Xi could mobilize the regime’s potent repressive apparatus, modernized and strength- ened by huge investments and advanced technology in the post-Tiananmen era. To reestablish strongman rule, he could weaponize anticorruption inves- tigations to purge political rivals, most of them made vulnerable by their involvement in shady deals. With no civil society, rule of law, or genuine “inner-party” democracy, Xi faced no institutional constraints in exercising his newly acquired power. Only with the revival of totalitarian rule under Xi can we appreciate the tragic consequences of Deng Xiaoping’s steadfast resistance to political reform in the 1980s when a narrow path toward a more open and free China existed. -- 178 of 345 -- 166 c h a p t e r 6 The Xi Jinping Manifesto Before he rose to the pinnacle of power in November 2012, Xi was a consum- mate practitioner of “hiding your strength and biding your time,” except that he applied this Dengist foreign policy strategy to politics within the CCP. Xi had carefully maintained a low profile and kept his ideas to himself. But once he attained supreme power, he wasted no time in articulating his vision. On a tour of Guangdong in December 2012, about one month after his appointment as party general secretary, he gave a speech to local officials on the greatest threats facing the party. Although the speech was never made public, its leaked content reveals a man whose political agenda had been decidedly shaped by the lessons he had drawn from the fall of the Soviet Union. Notably, Xi made no reference to the abysmal economic performance of the Soviet regime, its imperial overreach, or the Cold War with the United States. Instead, he attributed the collapse of the Soviet Union to the loss of “ideals and convictions” among its elites. He lamented that, when the Soviet Union was dissolved, “in the end nobody was a real man, nobody came out to resist,” apparently forgetting about the failed coup staged by the hard-liners in August 1991. His choice of words—“real man”—was especially significant because it appeared to imply that Xi thought the Soviet regime was too soft and cowardly. Unlike Deng, who sent in the military to crush the prodemoc- racy movement in 1989, Soviet leaders were too squeamish to use mass vio- lence against their own people.3 These fragments of Xi’s informal conversation with local officials in 2012 give us a glimpse of the two main components of his strategy to prevent the party from following the Soviet path: reviving ideological indoctrination within the regime and escalating repression against its opponents. On Janu- ary 5, 2013, shortly after his trip to Guangdong, Xi delivered what appeared to be a political manifesto to new members of the CCP Central Committee at a special training class at the Central Party School in Beijing. Significantly, the party released only a brief summary of this speech in January 2013.4 It did not publish its full content until April 2019, most probably because the fuller ver- sion of Xi’s speech not only signaled a fundamental deviation from Dengism but also because it unabashedly advocated views closely associated with ideo- logical “ultra- leftism.”5 Xi’s political manifesto, like the leaked content of his talk in Guangdong in December 2012, contained few references to the importance of economic de- velopment as the party’s fundamental guiding principle. Instead, Xi reminded -- 179 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 167 his audience that “socialism with Chinese characteristics” was socialism and not “other isms.” This system, according to Xi, would demonstrate its superior- ity as it became more mature and allowed China to prosper and exercise more influence in the world. Xi also mentioned the Soviet collapse, albeit without impugning the “manhood” of the Soviet regime. Xi castigated “historical nihil- ism,” which later became Xi’s favorite phrase whenever he referred to any ef- forts to establish the historical truth. In his judgment, the Soviet regime had been negligent in controlling the ideological domain and allowing hostile forces to comprehensively “negate” Soviet history and the Soviet leaders, such as Lenin and Stalin, thus “causing confused thinking.” He used the Soviet ex- ample to warn against “negating” the Maoist period. This section of his speech represented the strongest endorsement of Mao by a top Chinese leader in the post-Tiananmen era. It also signaled Xi’s intention to tighten party control over the ideological sphere. Xi concluded his speech by underscoring the imperative to reinvigorate the regime’s ideological commitment to communism as its ultimate goal. The loss of this goal, Xi warned, would lead the party astray ideologically, causing it to degenerate into “utilitarianism and pragmatism.” He singled out the new ideo- logical doubts, materialism, self-centeredness, passivity, and loss of faith in communism among party members as completely incompatible with the ideo- logical values and historical mission of communism. Unlike his predecessors, such as Jiang Zemin and Hu Jintao, who routinely recited Communist ideological clichés but seldom allowed them to dictate policy, Xi turned out to be a true believer who meant what he said. When the full text of this political manifesto was released in the party’s flagship ideologi- cal publication, Qiushi, in April 2019, Xi had been in power for six and half years and had already succeeded in turning the abstract ideas expressed in the manifesto into actual policy. In retrospect, Xi’s speech in January 2013 marked the return of orthodox ideology as the party’s guiding principle and the end of an era during which the party’s top leadership treated economic performance as vital to regime survival.6 The specific components of the political order Xi envisioned in early 2013 and later constructed differed qualitatively from the post-Tiananmen neo- authoritarian order. Under Jiang and Hu, the party relied on a diverse set of tools to maintain elite unity and popular support at home and stable ties with the West abroad. In contrast, the new political order under Xi’s rule rests on different pillars: centralized one-man rule built on personality cult, rule of fear through constant purges and repression, prioritization of regime security over -- 180 of 345 -- 168 c h a p t e r 6 economic performance, revival of orthodox ideology and political rituals, and an expansionist foreign policy reinforced by a triumphant nationalist narrative—“the China dream.”7 As this new order relies on the regime’s coer- cive apparatus more than mass movements, it resembles classic Stalinist bu- reaucratic totalitarian rule, not Maoist antibureaucratic totalitarian rule.8 Xi’s neo-Stalinist agenda was ambitious, risky, and, around the time of his ascent to the top, apparently unpromising. As a compromise choice to succeed Hu, Xi was selected most likely because he was seen as a weak leader without an extensive network of powerful allies. Taking on the entrenched factions headed by Jiang and Hu could be dangerous because they had planted their supporters in key party positions during their two decades in power. Adopting more repressive tactics and reverting to statist economic policies would likely encounter resistance from below. Indeed, before Xi’s formal appointment as party chief in late 2012, there was debate whether Xi was a closet reformer with a more liberal agenda than his predecessors.9 Only after his (manhood) talk about the fall of the Soviet Union was leaked in February 2013 did some begin to develop a sense of foreboding. Fears that Xi was taking the party in a more hard-line and anti-Western direction were reinforced when the leaked content of a key document issued by the General Office of the Central Committee in April—known as Document No. 9—received widespread attention (more on this later).10 By the summer of 2013, when Xi launched a massive crackdown on social media, it was clear that his neo-Stalinist project was well under way.11 War on Corruption Prior to Xi’s rise, the party had frequently launched anticorruption campaigns to discipline its officials. These campaigns were relatively short in duration, targeting mostly mid- to lower-level functionaries to reestablish party author- ity and to appease public anger. Although these campaigns seemed to curb corruption for a brief period of time as officials tended to lay low to avoid being caught, their long-term impact was modest at best.12 Politi cally, the top leaders were careful not to weaponize corruption investigations against their rivals. The two exceptions—the fall of Politburo members Chen Xitong (in 1995) and Chen Liangyu (in 2006) on corruption charges—proved the rule. The apparent infrequent weaponization of corruption in elite rivalry was most likely the result of the fragile balance of elite power in the post-Mao era, which prevented the top leader—Deng, Jiang, or Hu—from resorting to this tool, except on rare occasions (Deng did not touch it at all). According to the -- 181 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 169 CCP charter, only the Politburo has the power to expel a member of the Cen- tral Committee for violation of party discipline.13 This meant that a top leader had to win support from rival factions to topple any senior official on corrup- tion charges. The presence of rival factions on the Politburo raised this proce- dural hurdle as all members shared a similar interest in preventing one faction from dominance through the subterfuge of anticorruption investigations. In practice, the party’s procedural stipulations grant enormous investigative authority to the head of the Central Discipline Inspection Commission (CDIC), the sole body empowered to investigate senior officials.14 Instruc- tively, to prevent the party chief from using anticorruption investigations to purge his rivals, top leaders in the post-Mao era usually picked for this position someone who was not a close ally of the top leader. Chen Yun, the first chief of the CDIC, was actually Deng’s rival. During the Jiang period, the head of the CDIC was someone from a rival faction. In Hu’s first term, the CDIC was led by an apparatchik perceived to be close to Jiang. In his second term, an- other official who had quickly risen under Jiang was in charge of the CDIC. Even though the Politburo or the PSC must approve the opening of a formal investigation into a senior official, the head of the CDIC could play a critical role in this process. As the CDIC would conduct “preliminary verification” of alleged violations, it was in a position to gather sufficient evidence to make it difficult for the Politburo to block an investigation. The practice of appointing someone who was not an ally of the party chief to be the head of the CDIC ended in November 2012 when Xi’s close associate, Wang Qishan, was chosen to take it over. Xi likely had insisted on giving Wang the anticorruption portfolio so that he would have a trusted ally to supervise his war on corruption. With his direct control of the CDIC’s investigative ca- pabilities, Wang could be counted on to produce dossiers containing incrimi- nating evidence against rivals that was too strong for the Politburo members to reject. In terms of objectives, targets, ferocity, and duration, Xi’s anticorruption campaign differed qualitatively from all previous such efforts. What defines Xi’s war on corruption is its objective of systematically dismantling the net- works of power formed under Jiang and Hu, neutralizing rivals, and establish- ing his dominance.15 Also notable is the fact that Xi’s campaign focused on high-level officials and their allies in local governments, whereas previous campaigns had ensnared mostly mid-level or junior officials. Tactically, Xi opted for much harsher penalties. Disgraced top leaders, including a former PSC member (Zhou Yongkang), four former Politburo members (Bo Xilai, -- 182 of 345 -- 170 c h a p t e r 6 Guo Boxiong, Xu Caihou, and Sun Zhengcai), and Hu Jintao’s former chief of staff (Ling Jihua) were given life sentences. In terms of duration, previous anticorruption drives were short-lived, but Xi’s campaign was open-ended. In 2022, for example, a decade after the beginning of his campaign, the party claimed to have investigated (in reality, detained) 32 “centrally supervised” (zhongguan) high-ranking officials, the most since 2018, and 410 mid-level officials.16 Because 2022 was the year of the scheduled Twentieth Party Con- gress at which Xi planned to secure an unprecedented third term, it seemed likely that he dialed up the anticorruption campaign to deter potential op- position. Xi escalated the purge further in 2023 and 2024, likely to shore up his authority during a period when the Chinese economy was struggling with deflation and an epic real estate crash. In 2023, 47 “centrally supervised” officials were investigated; in 2024, 60 such officials, including two retired provincial party chiefs, were investigated.17 Anticorruption investigations thus became Xi’s potent weapon to intimidate and purge rivals and potential threats. A review of the course of Xi’s anticorruption drive shows that, from the outset, he had clear political priorities. The first was to neutralize any threat to his power posed by those with ties to the domestic security apparatus and the military. Consequently, the first prominent target of Xi’s purge was Zhou Yongkang, a former PSC member and a powerful domestic security chief with close ties to Jiang. An investigation into Zhou began almost as soon as Xi rose to the top. To build a case against Zhou, the CDIC detained several senior officials who had worked with him and could provide incriminating materials. The CDIC also cast a wider net, investigating family members and relatives of the main targets because they could be forced to cooperate. In the case against Zhou Yongkang, it took roughly one year for the CDIC to complete its inves- tigations. The PSC formally placed him under investigation in July 2014; eleven months later, he was convicted of accepting bribes totaling 130 million yuan and leaking state secrets to his personal fortune teller, for which he re- ceived a life sentence.18 The fall of Zhou, the first former PSC member to be jailed in the post- Mao era, sent shockwaves throughout the party-state as it showed that no one was safe under Xi’s rule. But that was just the beginning. In March 2014, shortly after the PSC approved an investigation into Zhou’s activities, Xu Caihou, a former Politburo member and vice chairman of the CMC, was placed under investigation as well. Several months later, Xu was expelled from the party and transferred to a military court for prosecution. He died in March 2015, before -- 183 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 171 his trial. Xu’s colleague and fellow Jiang ally, former Politburo member and CMC vice chairman Guo Boxiong, was investigated for corruption in April 2015 and received a life sentence in July of the following year. The purge of Xu and Guo served another one of Xi’s critical objectives—to seize control of the military. Aware that his own survival would be imperiled without the support of the PLA, Xi launched the most far-ranging purge of the senior ranks of the military since the 1971 fall of Lin Biao, a legendary general and Mao’s main ally during the Cultural Revolution. By Novem- ber 2015, Xi’s campaign had ensnared forty-five generals for alleged corrup- tion.19 The purge of generals suspected of being disloyal became a constant feature of Xi’s rule. In subsequent years, more high-ranking generals, including a former chief of the General Staff and head of the PLA’s Political Department, fell victim to Xi’s anticorruption investigations. According to a tally by the highly respected journal Caixin, seventy-five generals were arrested between November 2012 and October 2019.20 The removal of generals who had been promoted when Guo and Xu were effectively in charge of military personnel matters (2002–2012) accomplished two goals for Xi: With one stroke, he neu- tralized the potential threat posed by their supporters in the military and paved the way to appoint his own supporters to those positions. Xi deployed the same tactic to purge senior officials and their supporters in local governments. As shown by the number of officials ranked at bureau level or above who were criminally prosecuted during Xi’s first term, his cam- paign evidently was focusing on senior and mid-level officials in order to de- stroy entire networks.21 Because the party did not disclose the ranks of those officials who had been criminally prosecuted during the Hu era, we have to use data from the Jiang era as a comparison. According to the CDIC, between October 1992 and June 1997, 1,673 bureau-level and 78 ministerial- or provincial- level officials were prosecuted for corruption. Between October 1997 and Sep- tember 2002, Jiang’s last term in office, 2,422 bureau-level and 98 ministerial- or provincial-level officials were prosecuted for corruption. During Xi’s first term, by comparison, 8,900 bureau-level and 440 ministerial- or provincial-level officials were prosecuted for corruption, representing a huge increase in each category.22 A close examination of the highest-ranking targets of Xi’s anticorruption campaign reveals that he prioritized the purge of full and alternate members of the Central Committee who typically occupied the most impor tant pro- vincial and ministerial positions. Again, the contrast with his predecessors is illuminating. Between 1992 and 2012, only seventeen full and alternate -- 184 of 345 -- 172 c h a p t e r 6 members of the Central Committee were prosecuted for corruption. During Xi’s first decade in power, forty-nine full and alternate members of the Cen- tral Committee were punished for corruption (and most sentenced to long prison terms).23 In his second term, Xi’s top priority was to purge the domestic security apparatus of officials who were suspected of political disloyalty. As a comple- mentary effort, the purge of the so-called political-legal sector would com- pletely cement Xi’s control of the coercive apparatus. In January 2018, two months after Xi got a second term, he launched a campaign ostensibly to root out organized crime and its “protective umbrellas”—officials in the domestic security apparatus suspected of shielding criminals from the law.24 The cam- paign quickly claimed several high-ranking officials, including secretaries of CCP provincial political-legal committees (who typically had served as pro- vincial police chiefs) and an incumbent vice minister of public security, Sun Lijun, who was allegedly the ringleader of a cabal of corrupt officials in the security apparatus.25 In February 2021 Xi launched a separate campaign, “Education and Recti- fication of the Nation’s Political-Legal Ranks,” explicitly targeting officials in the domestic security sector. As this purge was overseen by Xi’s loyal ally Chen Yixin and launched roughly twenty months before the Twentieth Party Con- gress, at which Xi was expected to seek a third term, its political objectives— removing security officials suspected of disloyalty and intimidating potential threats—were self-evident. A large number of officials fell victim to this round of purges, and many had held senior positions. Fu Zhenghua, a former Central Committee member and executive vice minister of public security, was given a suspended death sentence in September 2022. Another former vice minister of public security who had overseen anticorruption in the Ministry of State Security (MSS), China’s secret police, was detained in March 2022 and given a suspended death sentence in January 2023. By July 2022 this campaign had brought down nearly three dozen senior local law enforcement officials, in- cluding nine secretaries and deputy secretaries of the provincial legal-political committees.26 Many lower-ranking law enforcement officials also fell into the dragnet. Within the first six months of the campaign, 12,576 police officers had turned themselves in.27 Following this purge, Xi was able to install his loyalist, Wang Xiaohong, as the new minister of public security. Chen Yixin became minister of the MSS in March 2023, thus giving Xi total control over the secu- rity apparatus. -- 185 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 173 Despite the scale of the purges, Xi introduced institutional changes to make anticorruption investigations an even more powerful instrument against po- tential threats. Three weeks after his installation as party chief, the Politburo issued a set of rules limiting official entertainment, meetings, issuance of docu- ments, use of government vehicles, and media coverage of the activities of party leaders.28 Violators would be punished (although these rules apparently do not apply to Xi, who has received lavish media coverage). In addition, Xi revised the party’s disciplinary code and the procedures for anticorruption investigations to bolster his personal authority and to make any expression of dissent against the top party leadership a punishable infrac- tion of the law. A comparison of the party’s disciplinary code formalized under Hu in December 2003 and its revised version published in October 2015 re- veals several crucial changes made to suppress potential opposition to Xi’s authority. Most notably, the revision added several punishable political viola- tions, such as “wantonly discussing major policies of the party-state and un- dermining the party’s centralized unity, smearing the images of the party and the state, denigrating the top leadership of the party and the state, or distorting the history of the party or of the military.” Unauthorized public statements on major policy issues that should be within the “purview of the party center” could result in severe penalties as well.29 To expand the party’s disciplinary reach beyond party members, Xi set up a super agency—the National Supervisory Commission—in March 2018. Even though this commission was to be staffed by the same personnel as the CDIC, the law establishing it gave it power to investigate and punish nonparty members who work in SOEs and in publicly funded entities, such as hospitals, universities, cultural institutions, and nongovernmental organizations. The commission and its local agencies were also empowered to detain the subjects of investigation for up to six months without court approval or judicial review.30 It is tempting to credit Xi’s unrelenting crackdown for curbing official corruption. But the continuous stream of disgraced officials accused of corrup- tion years after the beginning of Xi’s campaign suggests that his war on corruption had at most a partial impact on curbing corruption. In all likelihood, Xi’s other policies—such as suppressing press freedoms and civil society and shifting resources to the state sector—either facilitated or made it difficult to fight cor- ruption.31 This outcome should not be surprising because the principal objec- tive of Xi’s crackdown on corruption was for him to gain political dominance. In this regard, the campaign has evidently served him well. -- 186 of 345 -- 174 c h a p t e r 6 Power Grab Taking advantage of the momentum of his anticorruption drive, Xi wasted little time to consolidate power. He scored his greatest victory in October 2016 when the Central Committee formally granted him the title of “core leader.” ( Jiang’s designation, conferred on him by Deng, was a less significant achievement.)32 Underscoring Xi’s newly obtained political supremacy, the Central Committee communiqué announcing the elevation of his status called on the party to “firmly and unswervingly preserve and defend the authority of the party center and its centralized and unified leadership,” an obvious reference to Xi.33 Besides gaining this coveted title, Xi had scored other major victories. He successfully grabbed power that normally would belong to the premier. This was accomplished by establishing “leading small groups” that effectively took away power to make policy on specific issues from the State Council. For in- stance, he formed the “Central Leading Small Group on Comprehensively Deepening Reform” in November 2013 and appointed himself as its chairman. Because of its broad mandate, any new reform or policy change required its approval, thus allowing Xi to control more directly the overall political and economic agendas. Other new leading small groups Xi established and also headed at the beginning of his first term oversaw cybersecurity and military reform. In addition, he chaired preexisting leading small groups on foreign policy, Taiwan affairs, and finance.34 Another tactic he used to amass power was a systematic revision of the party’s organizational rules and the updating of its resolutions on history to formalize and legitimize his personal authority and expand his power. Imme- diately after the conclusion of the Nineteenth Party Congress in October 2017, the Politburo issued the “Regulations on Strengthening and Maintaining the Party Center’s Centralized and Unified Leadership.” Although the full text of this document has not been made public, the official media have disclosed some of its key points. First, the regulations emphasize absolute loyalty to Xi, as indicated by the statement that the Politburo must “resolutely maintain General Secretary Xi Jinping’s status as the core of the party center and the entire party.” In addition, the regulations require Politburo members to “pro- actively report major issues to the party center for deliberation, studiously implement decisions and plans of the party center, and make timely reports on their significant progress . . . (and) self-consciously struggle against words and acts that . . . harm the party center’s centralized leadership and unity.” To enforce these rather abstract requirements, the regulations include an -- 187 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 175 unprecedented rule mandating that Politburo members must submit annual written self-evaluations of their job performance to the general secretary (i.e., Xi). This provision, which recalls the Maoist “self-criticisms” the late dictator regularly forced his colleagues to make, grants Xi additional leverage over Po- litburo members, who must perform this annual exercise in full awareness of the adverse consequences of an unfavorable evaluation of their performance. In addition to the Politburo members, other senior leaders, such as the mem- bers of the Secretariat of the Central Committee, the CDIC, the party organizations within the Standing Committee of the NPC, the State Council, the Chinese People’s Political Consultative Conference, the Supreme People’s Court, and the Supreme People’s Procuratorate, are required to submit similar self-evaluations to the PSC and the Politburo, thus allowing Xi to more di- rectly control the critical central organs of the regime.35 To bolster the legitimacy of his personal authority, Xi undertook to rewrite a landmark document issued under Deng to prevent the return of a Mao-like figure. In February 1980 the Central Committee had approved a historic docu- ment, the “Guiding Principles for Inner-Party Political Life” that explicitly established collective leadership and prohibited personality cults.36 As this document would stand in the way of Xi’s goal of replacing collective leadership with one-man rule and fortifying his power with a personality cult, the Central Committee, most likely under pressure from Xi, revised it at the same plenum that granted Xi the title of “core leader” in October 2016. A comparison of the two documents shows that the revision completely removes the prohibition against personality cults and downplays the principle of collective leadership, while, in an obvious reference to Xi, placing strong emphasis on the authority of the “core leadership.”37 The party’s celebration of its centennial in 2021 provided another opportu- nity for Xi to burnish his credentials as a great leader. The Central Committee issued a historic resolution in November of that year, ostensibly to summarize the party’s experiences during the past century. But in a comparison of two similar documents, the one issued by Mao in 1945 and the other by Deng in 1981, Xi’s version focuses mostly on the party’s self-proclaimed accomplish- ments during Xi’s nine years in power—the so-called “New Era.” Roughly 19,000 of the resolution’s 36,200 characters are devoted to Xi’s period in power, while the sections covering the prior ninety-one years of party history contain only 10,000 characters.38 Xi’s efforts to revive a personality cult go well beyond passing resolutions glorifying his leadership. Coverage of his activities dominates the official -- 188 of 345 -- 176 c h a p t e r 6 media. His published works are on prominent display in bookstores. Judging by the number of published volumes of his collected works, those by Xi exceed those by all other Chinese leaders, including Mao. In February 2022 the first volume of Selected Letters of Xi Jinping was published, implying that future volumes would be forthcoming (among Xi’s predecessors, only one volume of Mao’s Selected Letters was published). This honor was not accorded to Deng or any other revolutionary leader. By June 2022, four volumes of Xi’s speeches on governance had been published, equaling the number of volumes of Mao’s Selected Works released during Mao’s time in office (Deng, Jiang, and Hu were limited to three volumes each). In 2023 the party released two additional vol- umes, Selected Readings of Xi Jinping’s Works as well as a college textbook, Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era. Judging by the outcome of the Nineteenth Party Congress in October 2017, Xi’s neo- Stalinist tactics evidently paid off. On the eve of the gathering, Xi arrested Sun Zhengcai, a Politburo member affiliated with the Jiang faction who had been seen as a potential candidate for the position of party chief. (Sun was later sentenced to life in prison for alleged corruption.) The prosecution of Sun was evidently carried out to intimidate rival factions that might have been standing in the way of Xi’s plans to remake the top party leadership at the upcoming party congress. As expected, the congress cemented Xi’s political dominance: Two-thirds of the twenty-five Politburo members were his acolytes. Of the six other mem- bers of the PSC, Xi could count at least four as allies (one of them was in charge of the powerful CDIC). His loyalists were also made party chiefs of the most important provinces, such as Beijing, Shanghai, Guangdong, Chongq- ing, and Xinjiang. Most impor tant, at the same party congress Xi revealed his intention of breaking the implicit two-term limit for the general secretary. At the Seven- teenth Party Congress in 2007, when Hu was about to start his second term, the party designated his successor, Xi, after intense internal jockeying. A decade later, however, Xi prevented the designation of an heir-apparent since no newly promoted members of the PSC were under 55 (the ideal age for a potential successor because that person would be 60 when appointed party chief at the next party congress and then could serve two five-year terms). Having stacked the Politburo with supporters, Xi immediately took the re- quired procedural steps to break the implicit term limits. Of his three positions—CCP general secretary, chairman of the CMC, and state president— only one, the state president—was subject to an explicit constitutional limit. -- 189 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 177 Even though this position is largely ceremonial, the party chief must also hold the title of state president to engage in top-level foreign affairs. Diplomatic pro- tocols usually do not allow foreign heads of state to meet the leader of a political party. Xi thus had to abolish the constitutional term limit for the state president as a first step to extend his rule indefinitely. In January 2018 the Politburo approved a package of constitutional amend- ments that contained the abolition of the presidential term limit even though the meeting’s press release did not refer to this par ticular amendment. In March the annual NPC meeting, the rubber-stamp parliament, duly approved the abolition of presidential term limits, signaling Xi’s intention to serve in defi nitely.39 At the Twentieth Party Congress in October 2022, Xi easily obtained a third term as CCP general secretary, and by the time of the conclusion of the con- gress, he had achieved total political dominance. Implicit norms on term and age limits no longer applied to him or to his followers. In addition to giving himself a third term, Xi kept on the Politburo two supporters who were over the implicit mandatory retirement age of 68, but he also forced out two rivals, Premier Li Keqiang and PSC member Wang Yang, who were under 68. A for- mer Politburo member, 59-year-old Hu Chunhua, was not reappointed because he was a protégé of Hu Jintao (no relation) and a possible contender for future party chief. At the Twentieth Party Congress, Xi also prevented the designation of a potential successor. Flash the Sword Shortly after Xi delivered his political manifesto, “Some Questions on Main- taining and Developing Socialism with Chinese Characteristics,” at the Cen- tral Party School in January 2013, the General Office of the Central Committee, which at that time was directed by Xi’s close ally, Li Zhanshu, issued the now- infamous Document No. 9, “Communiqué on the Current State of the Ideo- logical Sphere.” The document identifies “erroneous ideological trends” that must be “watched.” The document was issued on April 22, 2013, but it was never made public, most likely because it would reveal Xi’s hard-line ideologi- cal stance. When it was leaked in August 2013, its contents confirmed Xi’s hos- tility to liberal ideas. According to Document No. 9, the party must tighten control over the media and guard against seven subversive ideas—Western constitutional de- mocracy, universal values, civil society, economic neo-liberalism, the Western -- 190 of 345 -- 178 c h a p t e r 6 concept of press freedom, historical nihilism (exposing the party’s dark past), and questioning the nature of socialism with Chinese characteristics. In addi- tion to listing these ideas that could directly undermine party legitimacy, Document No. 9 also sounds an alarm about subversive dissident activities, such as agitation for political reform, human rights, press freedom, and public disclosure of officials’ assets. It warns that Western diplomatic missions, media, and NGOs were engaging in various activities inside of China to culti- vate opposition forces and to conduct “cyber infiltration.” According to the authors of Document No. 9, the West represents an existential threat because it seeks regime change through “Westernizing, splitting, and color revolu- tions.”40 Despite the dire warnings in Document No. 9, the party waited until August 2013 before launching a full-scale crackdown on the dangerous trends identified in the document. Liangjian, or flash your sword, is an apt metaphor for Xi’s get-tough-on- dissent approach, and, unsurprisingly, it quickly became a popular phrase in the official media despite its association with intimidation and violence. In all likelihood, Xi first invoked this phrase at the National Meeting on Publicity and Theoretical Work in August 2013, even though the phrase cannot be found in the published version of his speech. Nevertheless, two clues suggest Xi him- self likely used this phrase at this conference. First, the published official ver- sion of Xi’s speech, most probably sanitized, urges the party to “maintain an initiative and fight successful offensive battles” (zhudong zhang) on fundamen- tal political issues.41 Second, the official media published summaries of the reflections by all thirty-one provincial propaganda chiefs (who almost cer- tainly attended the conference) on Xi’s speech. Notably, ten used the phrase “dare to flash your sword” (ganyu liangjian). As it is customary for provincial propaganda chiefs to regurgitate key points made by the party chief (in this case, Xi), it is reasonable to conclude that they were merely parroting one of the most emphatic points Xi made at the conference.42 Events that transpired subsequently show what liangjian meant—it was a concerted preemptive campaign against a potential “color revolution,” marking a fundamental shift from the party’s stance toward dissent in the post- Tiananmen era. Both Jiang and Hu had adopted a defensive or reactive strat- egy of repression: They usually cracked down on dissent in response to overt challenges to party authority or actions by the country’s small community of dissidents who crossed the regime’s threshold of tolerance. From the very be- ginning, however, Xi’s campaign assumed a preemptive or offensive nature. Instead of responding to overly aggressive challenges to one-party rule, his -- 191 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 179 campaign targeted the very sources that could generate, maintain, and repro- duce such threats: social media, human rights activists, lawyers, liberal aca- demics, ethnic minorities, NGOs and their foreign supporters, and protest movements in Hong Kong. This campaign is also notable for its blitzkrieg tactics: The crackdown was carried out at lightning speed. Targets of the re- pression received harsh punishments, extra-judicial mass incarcerations, or long prison sentences, which the party had eschewed during the pre-Xi period. In another qualitative departure from his predecessors’ tactics in dealing with threats to the party, Xi sought to reinforce his metaphoric “sword” through institutionalization and the party-controlled legal system. As a result, new bu- reaucracies overseeing cybersecurity and national security were established. New laws and regulations, such as those governing foreign NGOs, cybersecu- rity, and internet use, were issued to add a veneer of legality to the emerging neo-Stalinist order. The first target of this preemptive campaign was social media, which had gained unprecedented reach and influence due to the popularization of smart phones. Not coincidentally, the crackdown on social media began on Au- gust 20, 2013, the same day that the national publicity conference ended. Police in Beijing arrested Qin Zhihui, a well-known blogger with a mass following, on charges of fabricating online rumors. Three of his colleagues were arrested as well. Charles Xue, a Chinese American businessman with over twelve million verified followers on Weibo (a Chinese microblogging website), was detained on August 23 for “patronizing a prostitute.” He later appeared on national TV confessing his crime, evidently against his own will. Several hun- dred netizens were arrested, detained, or punished between August 20 and 31 in this nationwide crackdown, which was carried out to implement Xi’s order for a “serious blow” against internet “rumors.”43 On September 6 the party-controlled Supreme People’s Court and Supreme People’s Procuratorate issued a joint “ legal interpretation” that made “internet libel” a criminal of- fense. If a piece of “libelous information” receives more than five thousand clicks or is forwarded more than five hundred times, its author will receive severe punishment.44 The effect of “flashing” this metaphorical “sword” was instant: by singling out well-known social media influencers, the party tamed China’s once-vibrant social media practically overnight, a feat few had thought was either conceivable or feasible.45 To institutionalize the party’s strict control over cyberspace, Xi established the “Central Leading Small Group on Cybersecurity and Informatization” in February 2014. He personally chaired this committee and appointed a party -- 192 of 345 -- 180 c h a p t e r 6 propaganda official, Lu Wei, to direct its daily operations. (In March 2018 Xi elevated the “leading group” to the status of a central commission and made himself its chairman.) Lu Wei, a ruthless apparatchik, faithfully implemented Xi’s orders and instituted a series of new censorship measures (including a requirement that all social media users register their accounts with their real names so the authorities could identify them).46 The Cyber Security Law passed in November 2016 is another attempt to solidify party control of the internet as it strictly forbids anyone from “using the internet to engage in ac- tivities that endanger state security, reputation, and interests, or instigate the subversion of state power, the socialist system . . . fabricate and disseminate false information.”47 Around the same time as the crackdown on social media, the party began a separate campaign against well-known human rights activists and dissidents. During the Jiang and Hu periods, the regime had dealt with most dissidents using less repressive tactics. They were placed under routine surveillance and occasionally harassed, but most remained free. However, under Xi’s new pol- icy of “flashing your sword,” they were not only arrested but sentenced to long prison terms under trumped-up charges, such as “picking quarrels and provoking trou ble” and “disturbing public order”—the two criminal charges the regime favored using against its opponents. In July 2013 Xu Zhiyong, a Beijing-based legal scholar who had gained fame a decade earlier for petitioning the NPC to abolish the harsh antivagrancy regulation, was arrested for “disturbing public order.” Xu had founded the New Citizens Movement in 2010 to promote constitutional rule, equal rights, and government transparency. During the Hu period, the authorities largely left him alone, even allowing him to run for—and win two times—a seat in a district people’s congress in Beijing. Apparently to make Xu an example, the party sentenced him to four years in prison in 2014. (In 2020 he was rearrested and later received a sentence of fourteen years.) The party flashed its biggest metaphoric sword on July 9, 2015, when it con- ducted a nationwide crackdown on human rights lawyers. Police detained more than three hundred lawyers who had been active in the rights defense movement. Many were later debarred and imprisoned. Like the campaign to silence social media in August 2013, the blitzkrieg against human rights lawyers instantly destroyed a nascent but largely informal political movement seeking modest incremental change through the legal system that the party itself had established and controlled. Based on the limited success of these lawyers in seeking judicial relief for their clients during the less repressive Hu era, they -- 193 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 181 did not present a serious threat to one-party rule. But in Xi’s “new era,” no form or degree of dissent could be tolerated. Indeed, in the eyes of Xi’s regime, human rights lawyers exploiting the loopholes and formal procedures of Chi- na’s legal system were far more dangerous because they were more resourceful, sophisticated, and difficult to deal with than the less well-educated workers and farmers. They could not only expose the regime’s hypocrisy and brutality but also set examples for challenging its rule peacefully and, on occasion, successfully.48 Labor organizers came under attack in April 2014 when a court in Guang- zhou convicted eleven labor activists for “disturbing public order.” In Decem- ber 2015 at least three leaders of the workers’ rights movement in Guangzhou were arrested for “gathering a crowd to disturb social order.”49 Supporters of labor rights were not left alone, either. In the fall of 2018, police conducted a nationwide crackdown on self-proclaimed Marxist students involved in pro- testing against violations of labor rights.50 Compared with the repressive tactics previously used by the party against labor organizers, which mainly consisted of intimidation and harassment, Xi’s campaign against labor rights activists was decidedly an escalation in terms of state-sponsored violence as it used criminal charges, such as “picking quarrels and provoking trouble,” to convict and im- prison them.51 The crackdown on other civil society organizations similarly followed this new approach of “authoritarian legality.”52 Liberal academics were not spared in the crackdown. Academics whose lectures or online speech contained views contradicting or violating official orthodoxy were either warned or dismissed. Based on a partial record of aca- demics fired under Xi’s rule, this campaign started in late 2013 when a law professor at the prestigious East China University of Political Science and Law in Shanghai was fired for posting an online article critical of the party.53 Al- though the precise number of academics fired thereafter is unknown, as of the end of 2019, dozens of university faculty had reportedly lost their jobs because of their political views.54 A small number of professors received even more severe punishment. A prominent law professor at Tsinghua University who had published an open letter critical of Xi and the party’s handling of the Covid-19 pandemic in early 2020 was arrested on a trumped-up charge of “pa- tronizing a prostitute” in July 2020 and subsequently fired.55 In Guizhou, an academic was sentenced to four and half years in prison in August 2023 for his out spoken views.56 To ensure the routinization of ideological control on university campuses, the party increased its use of student informants and installed video cameras -- 194 of 345 -- 182 c h a p t e r 6 in classrooms to record professors’ lectures. Again, even though the authorities began to deploy student informants after the crushing of the student-led prodemocracy movement in 1989, the use of student informants under Xi is far more systematic, extensive, and aggressive.57 Another measure of institu- tionalizing ideological repression on university campuses is the issuance of the “Ten Professional Principles” by the Ministry of Education in November 2018. Principle no. 3 explicitly prohibits faculty from “using classrooms, forums, lectures, information networks, and other channels to express and share er- roneous views or to fabricate false or unhealthy information.”58 Obviously, this “principle” gives the authorities a handy tool to punish academics for their political views. Despite official restrictions, Western NGOs were able to establish a modest presence inside China prior to Xi’s rise. After Xi became party chief, however, the regime’s paranoia about foreign NGOs, perceived to be potential instiga- tors of “color revolutions,” reached a new level. In April 2016 the NPC passed a new law on foreign NGOs that imposed onerous administrative burdens and significantly raised security risks for operating in China. Among other things, the law orders foreign NGOs to register with Chinese police, the designated enforcement agency that has broad authority over nearly all aspects of the operations of foreign NGOs. For example, the requirement that foreign NGOs must provide the police with advance notice of their planned activities is obvi- ously intended to discourage their activities.59 The law, which affected more than seven thousand foreign NGOs when it went into effect, allowed no grace period, forcing many to suspend operations immediately. By early 2018, only 350 foreign NGOs had reregistered under the new law, suggesting that 95 percent of the foreign NGOs might have exited the country.60 Judging by this metric, the law has evidently achieved its objective. As surveillance of the population constitutes a key pillar of Xi’s neo- Stalinist order, the party has made the upgrading of mass surveillance a top state prior- ity. In the post-Tiananmen era, the regime had rolled out two high-tech sur- veillance programs, Golden Shield and Skynet, that allowed police to utilize a vast digital database, a cyber surveillance apparatus, and networked cameras and sensors to keep track of the activities and speeches of Chinese people. After Xi came to power, the surveillance state received several technological and organizational upgrades. The first program singled out for upgrading was grid management, which divides a community into several grids, each with roughly a thousand residents. The grid is supervised by an official and pa- trolled by a grid attendant, each equipped with a mobile device to report any -- 195 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 183 incidents. This program was listed as a key task at the Central Committee plenum in November 2013.61 In June 2014 the State Council issued an outline to build a “social credit” system.62 Although this technologically challenging system remains a work in progress, its potential surveillance capabilities can make the dystopia depicted in George Orwell’s 1984 a reality in China. In May 2015 the government launched a new high-tech surveillance project, Sharp Eyes, which uses newer technologies, such as facial recognition and cloud computing, to upgrade Skynet and extend video surveillance to the countryside.63 Crackdown on the Periphery The party has always perceived China’s peripheral regions, whether areas with large populations of ethnic minorities such as Tibet and Xinjiang or newly regained territories such as Hong Kong and Macau, as areas harboring separat- ists or dissidents who are supported by hostile external forces. In the post- Tiananmen era the party abandoned a more conciliatory approach in favor of a more repressive policy to maintain China’s grip on these areas. However, as resistance to Chinese rule continued in spite of the tightened security measures, the party under Xi decided to escalate the repression to an unpre- cedented level. Xinjiang, the northwestern province that was not formally incorporated into China until the late nineteenth century, quickly became the epicenter of conflict between its largest ethnic minority group, the Uighurs, and the Han Chinese. To be sure, political violence and separatism in the region had been on the rise after the end of the Cold War as resentment of Chinese rule grew among ethnic minority groups that sought more autonomy.64 But Beijing was able to use both carrots (economic development) and sticks (the “war on terror”) to maintain an uneasy peace in Xinjiang.65 This fragile equilibrium collapsed on July 5, 2009, when violent clashes between ethnic Uighurs and Han Chinese erupted in Urumqi, the capital of Xinjiang, killing several hun- dred people. The violence persisted afterward despite heightened security measures.66 In response to the deteriorating conditions in Xinjiang, Xi opted for draco- nian measures to eradicate the so-called three evils—fundamentalism, sepa- ratism, and terrorism. He paid a personal visit to the region in May 2014, and in August 2016 he appointed Chen Quanguo, a hard-liner with extensive back- ground in security, as Xinjiang’s new party chief. Prior to his appointment in -- 196 of 345 -- 184 c h a p t e r 6 Xinjiang, Chen had demonstrated, as party chief in Tibet from 2011 to 2016, an ability to pacify ethnic unrest. During his tenure in Tibet, he had introduced new security measures and largely succeeded in ending a wave of self- immolations by Tibetans protesting Chinese rule.67 Xi’s mandate for Chen in Xinjiang was to restore stability at all costs. Consequently, with Xi’s support, Chen put more than one million ordinary Uighurs and other ethnic minorities in concentration camps, euphemistically called “vocational training schools.” Local officials had complete discretion to incarcerate Uighurs in these camps. The detainees were reportedly subject to brainwashing and routine abuse.68 Si mul taneously, the government adopted strict surveillance measures and restrictions on the lives of Uighurs.69 Tactically, the harsh security measures seemed to have accomplished Xi’s goal of pacifying ethnic unrest in Xinjiang, judging by the near disappearance of reported acts of violence. Politically, however, China has paid dearly. Its persecution of the Uighurs, for which the West has imposed sanctions, has been labeled “genocide” by many Western countries. In terms of long-term consequences, the brutal treatment of the Uighurs will almost certainly foster more extremism and boost support for separatism in the future. When China signed an agreement with the United Kingdom in 1984 on the return of Hong Kong to China in July 1997, Deng Xiaoping pledged that the British colony would retain its economic and social systems for fifty years and enjoy a “high degree of autonomy.”70 Subsequently, the NPC passed the Hong Kong “Basic Law,” the city’s mini-constitution, in April 1990, formalizing its autonomy and China’s commitment to maintaining the economic and social systems of Hong Kong for fifty years. But the Sino-British agreement on Hong Kong and the Basic Law left two critical issues unresolved. One was democratic self-rule in Hong Kong, and the other was a National Security Law that the city’s legislature was supposed to adopt after 1997. On the first issue, China made a vague promise that gradually the city’s chief executive and Legislative Council would be elected through universal suffrage. After 1997 Hong Kong’s chief executive was elected by an “election committee” of 1,500 unelected individuals, most of them pro-Beijing. The city’s seventy-seat Legislative Council was also elected largely undemo- cratically, with half of its members elected directly and the other half indirectly by “functional constituencies.” On the second issue, Article 23 of the Basic Law requires that Hong Kong pass its own law on national security. As the article could easily result in a law restricting the city’s civil rights and freedoms, it was seen as a persistent existential threat to the “one country, two systems” model.71 -- 197 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 185 Yet, it would take nearly two decades before conflict over democracy and civil liberties between the CCP and the people of Hong Kong led to the death of the “one country, two systems” model. On the surface, China largely hon- ored its part of the deal until the rise of Xi Jinping in 2012. The only significant foreshadowing of the eventual demise of the “one country, two systems” model were the mass protests against the city leadership’s attempt to pass a National Security Law in 2003, which forced Hong Kong’s pro-Beijing chief executive to abandon the plan. However, tensions over political rights, protec- tion of civil rights, and identity were never far below the superficial calm.72 Shortly after Xi became CCP chief in late 2012, prodemocracy forces began to pressure Beijing more aggressively to honor its promise of universal suf- frage. In March 2013 three academics called for a civil disobedience movement, “Occupy Central,” the key demand of which was the replacement of Hong Kong’s undemocratic electoral system with direct democratic elections. In- stead of a positive response, the Chinese government issued a hard-line white paper on Hong Kong in June 2014 that flatly rejected the idea of instituting universal suffrage in the city. Most ominously, the white paper claimed that the central government has “comprehensive governing authority” over the city, a key concept that later helped legitimize Beijing’s adoption of the 2020 National Security Law that effectively ended “one country, two systems” in Hong Kong.73 If Beijing expected this document to pacify the demands for democracy in Hong Kong, it achieved the opposite effect. From the end of September to mid-December 2014, tens of thousands of students launched what came to be known as the “Umbrella Movement”—a series of peaceful sit-ins in the busiest section of the central part of Hong Kong. Although the movement failed to force Beijing to back down, the outpouring of public support for the demon- strators and outrage against the use of excessive force by the police became a harbinger of the far larger confrontation between Hong Kong citizens and Beijing that would take place five years later.74 The display of defiance by Hong Kong’s prodemocracy activists appeared to have hardened Xi’s resolve. In July 2017, at the ceremony marking the twen- tieth anniversary of Hong Kong’s return, Xi delivered a thinly veiled threat against the city’s prodemocracy forces. He warned, “Any activities that harm national sovereignty and security, challenge the power of the central govern- ment and the authority of the Basic Law, and use Hong Kong to conduct in- filtration and sabotage against the mainland . . . violate our bottom line and are absolutely not permitted.”75 -- 198 of 345 -- 186 c h a p t e r 6 Two years later, Hong Kong’s prodemocracy forces tested Xi’s “bottom line” when they organized mass protests against proposed legislation on ex- traditing Hong Kong residents to the mainland for criminal prosecution. Launched in March 2019, these protests grew progressively larger and eventu- ally resulted in violent confrontations with the police. On several occasions, an estimated one to two million protesters marched in the streets. Clashes between police and protesters paralyzed the city, Asia’s premium commercial hub, for days. This round of protests, known as the “anti-extradition” move- ment, ended in January 2020 after Hong Kong was locked down due to the Covid-19 pandemic.76 The anti-extradition movement was apparently the last straw for Xi. In May 2020 the NPC passed a National Security Law for Hong Kong in a clear violation of both the technical provisions of the Basic Law (which stipulates that only the city’s Legislative Council can pass such a law) and China’s pledge to maintain Hong Kong’s social and economic systems for fifty years. The law, which effectively guts the city’s rule of law and deprives its citizens of their civil liberties, went into effect on July 1, 2020. Following implementation, Bei- jing dispatched its own security agents to the city as Hong Kong police, almost certainly under the direction of Beijing, arrested and charged protest organizers and civic leaders. Deng’s much-vaunted “one country, two systems” model lasted a mere twenty-three years.77 Although Xi crushed the prodemocracy movement in Hong Kong, the costs for China, the CCP, and Xi himself were horrific. The United States ter- minated its preferential treatment for the city. The end of the rule of law in Hong Kong also fatally damaged the city’s status as a center of commerce, resulting in the exodus of Western businesses and talent to other parts of Asia, mostly Singapore.78 Internationally, China lost its credibility. The crackdown in Hong Kong, seen widely as unnecessary, excessive, and self-destructive, served only to reinforce the view that a powerful autocratic China cannot be trusted and must be confronted. What Made the Return of Totalitarian Rule Possible Few could have imagined the transformative changes Xi brought about al- most single-handedly within a decade of rising to the top. The reversion to neo-Stalinist rule is all the more remarkable—and puzzling—given Xi’s weak powerbase and the massive socioeconomic modernization China experi- enced in the post-Mao era. In all likelihood, Xi himself probably did not -- 199 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 187 anticipate the relative ease with which he could dismantle the post-Tiananmen order and restore a regime bearing the essential characteristics of neo- Stalinism: personalistic rule, permanent purges, ruthless repression, and an expansionist foreign policy. Xi could reconstruct a neo- Stalinist order against ostensibly poor odds primarily because the regime’s totalitarian institutional framework had re- mained largely intact in spite of the post-Mao economic reforms and opening to the West. Indeed, even a cursory comparison between China in 1979 and China in 2012 shows that foundational institutions of totalitarianism re- mained essentially untouched by the country’s “reform and opening.” Most critically, the institutional pillar of totalitarianism—a Leninist party-state— was completely preserved. The CCP’s closed and hierarchical organizational structure and procedures for leadership selection were not fundamentally different in 2012 from what they were in 1979. Despite attempts to separate the party from the state, the party remained deeply entrenched in and domi- nant over the state. Its organizational penetration of Chinese society, down to the neighborhood and village levels, had deepened and expanded rather than withering, allowing the party to retain its unrivaled capacities for social control and political mobilization. Almost equally critical was the party’s control of instruments of state vio- lence without any constitutional or legal constraints. To be sure, the indis- criminate mass terror of the Mao era was replaced by selective repression. But the party had at its disposal the military, the secret police, and a vast surveil- lance apparatus to guard its political monopoly. When necessary, as demon- strated by the crackdown on the Tiananmen movement and the suppression of the Falungong spiritual group, the party could mobilize state violence to crush any challenges to its power. The revival of totalitarianism under Xi would not have been possible without a coercive apparatus that received massive state investments during the post-Tiananmen era.79 Although the post-Mao reforms eroded the regime’s capacity to control the economy and its access to information, the party-state could easily reassert its control when necessary. Economically, the regime retained the “commanding heights” of the economy, such as the financial system, energy, transportation, and telecom services. It also monopolized ownership of land and wielded immense regulatory power. Aware of the threats posed by free flows of infor- mation, the party maintained strict control of the media and, when confronted by the internet, quickly adopted effective countermeasures to neutralize the information revolution.80 -- 200 of 345 -- 188 c h a p t e r 6 Prior to Xi’s rise, three features of a classic totalitarian regime were missing: One was a domineering totalitarian leader. But that was largely a historical accident because the fragile balance of power at the top prevented the reemer- gence of a Stalinist or Maoist dictator. Also missing were the permanent purges, thanks to the collective leadership maintained by the same balance of power. The third missing feature was an official ideology legitimating party rule. Although the CCP never formally abandoned its Communist ideology, in reality the ideology atrophied due to the general worldwide failure of Com- munist regimes and Mao’s disastrous rule. Economic performance became the party’s real source of legitimacy, while pragmatism, not orthodox ideology, dictated policy. Of these three missing features of classic totalitarianism, the first two could be easily revived, as demonstrated by Xi’s record. Once the fragile balance of power ceased to exist, the party had no means to prevent a ruthless leader from restoring one-man rule and reviving permanent purges to terrorize the party. Reinvigorating the orthodox Communist ideology was, by comparison, a far more challenging undertaking, even for Xi, because it held little appeal to a party and a society thoroughly secularized by the socioeconomic changes and the post-Mao era contacts with the outside world. Ironically, although Xi reversed Deng’s policy of reform and opening, he owes much of his success to Deng’s commitment to one-party rule and to his personal political interests. In saving the party from Mao’s disastrous rule, Deng’s consistent strategy was to change economic policy without endanger- ing one-party rule. The most important of his “four cardinal principles” is the political supremacy of the party. For Deng, reform and opening were simply the means to save the CCP and to perpetuate its rule. Specifically, Deng left two political legacies that later greatly facilitated Xi’s efforts to restore totalitar- ian rule. The first was his unwavering opposition to any political reform or to any ideological liberalization that might weaken party rule or expose its dark side. Deng’s conservatism precluded a thorough reckoning of the disasters of the Maoist era or a liberalization that could lead to a stronger civil society or had the potential to resist any reversion to totalitarian rule. Most critically, Deng’s purge of Hu Yaobang in 1987 and Zhao Ziyang in 1989 decimated the liberals in the party and decisively shifted the balance of power in favor of the hard-liners. The second legacy was Deng’s flawed reforms to preserve collective leader- ship and prevent the return of a Mao-like figure. The formal provisions on term limits, mandatory retirement, and rights of party members were intentionally -- 201 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 189 left vague and impossible to enforce. For example, the only explicit term limit was that imposed on the state president, the least important of the three posi- tions held by the regime’s top leader (the other two being the general secretary and the chairman of the CMC). But as the party made it easy to change the constitution, this limit too could be abolished without much trouble, as Xi did in 2018. Deng himself set a bad example by violating the rules he tried to es- tablish. He held on to power despite his advanced age and lack of formal titles. He made a mockery of the party’s formal procedures by holding private meet- ings with senior leaders in his home rather than allowing the Politburo Stand- ing Committee to act in its capacity as the party’s top decision-making body. His most momentous decisions were made mostly by himself or in consulta- tion with a small number of aging revolutionaries. Most important, although Deng paid lip-service to “democratic political life within the party,” he made no attempt to establish inner-party democracy, depriving the party of a mecha- nism to hold its leaders accountable and to block the return of a Mao-like figure. The survival of collective leadership and adherence to the procedures and norms of succession in the post-Deng era created the deceptive impression that Deng’s reforms were effective and durable. Overlooked was the difficulty, if not the impossibility, of institutionalizing politics in an autocracy.81 Indeed, the inherent flaws of Deng’s reforms enabled Xi to amass the power of a totali- tarian leader without any real opposition. Peaking Xi? Despite Xi’s success in reviving totalitarian rule, signs that his neo- Stalinist agenda had run its course began to emerge toward the end of his second term. The initial pushback against him came from the United States in 2018 when Donald Trump launched a trade war against China. Although Trump was mo- tivated less by grand geopoliti cal designs than by his personal political inter- ests, the US-China trade war quickly led to a comprehensive deterioration of US-China relations that immediately escalated to a new cold war. The Covid-19 pandemic that struck China in late December 2019 marked the beginning of the unraveling of Xi’s neo-Stalinist agenda on the domestic front. Although the initial success of the Chinese government in containing the pandemic gave the party a political boost, the emergence of a more infec- tious viral variant in 2022 rendered Xi’s zero-Covid strategy ineffective. Instead of abandoning this untenable approach, Xi stuck to it, most likely because he -- 202 of 345 -- 190 c h a p t e r 6 did not want to see an explosive rise in the number of infections and deaths ahead of the Twentieth Party Congress, scheduled for the fall of 2022 (which was to grant him a third term). Nationwide lockdowns resulted in a steep de- cline in economic activities and stoked public anger. By late November 2022, a month after the conclusion of the party congress, the Chinese public had had enough. After a fire killed ten people in their apartments under lockdown in Urumqi on November 24, thousands of young students and professionals spontaneously began demonstrating in more than a dozen cities, some even shouting “Xi Jinping, step down!”82 Apparently shocked by this outburst of public anger, Xi relented and ordered an immediate end to zero-Covid, mark- ing his first humiliating retreat from a demonstrably failed policy.83 But that may have been too late, as far as the Chinese economy was con- cerned. Instead of a robust recovery that failed to materialize after the end of zero-Covid, the economy struggled on all fronts, with an imploding real estate sector, slumping exports, falling investment, and high youth unemployment.84 To be sure, most of the factors responsible for China’s economic difficulties, such as high levels of debt, the gigantic real estate bubble, and deteriorating relations with the West, had preceded the pandemic. Nevertheless, these prob- lems were exacerbated by Xi’s zero-Covid policy. Its restrictions on interna- tional travel made normal business activities almost impossible, frequently disrupted supply chains, and led to the closure of many small businesses. The persistent economic weaknesses may derail Xi’s agenda of strengthen- ing one-party rule at home and surpassing the United States as the world’s largest economy. Dwindling financial resources could force him to curtail spending on his pet projects, such as military modernization, technological self-sufficiency, and “common prosperity,” a plan to reduce socioeconomic inequality. Tighter budgets might also limit the party’s ability to distribute resources to its favored interest groups, such as SOEs and key provinces. Pro- tracted slow growth will result in stagnant standards of living and undermine the confidence of both the private sector and foreign investors in China’s eco- nomic future. The performance legitimacy that has undergirded party rule since the Tiananmen crackdown will likely evaporate. Judging by his response to China’s economic difficulties, Xi seems to have no new ideas to sustain his neo- Stalinist project, except for placing national security at the top of the party’s priorities. Instead of launching economic initiatives to rekindle growth, Xi has approved a series of measures, such as passage of a broad anti-espionage law and a campaign to catch foreign spies in 2023, succeeding only to further alienate Western investors and reinforce the -- 203 of 345 -- T o t a l i t a r i a n i s m U n de r X i J i n p i ng 191 pessimism of private entrepreneurs. Politi cally, Xi may benefit, at least in the short term, by underscoring the danger of hostile foreign forces and blaming Washington’s economic cold war for China’s problems. In the long run, how- ever, the continuation of a security-centered survival strategy will make eco- nomic stagnation more likely, forcing Xi to depend even more on repression to keep the party—and himself—in power. -- 204 of 345 -- 192 7 End of the Chinese Economic Miracle the deterior ation of the Chinese economy shortly after the country emerged from its Covid-19 lockdowns in December 2022 caught both Chinese leaders and outside observers by surprise. Weighed down by the collapse of the largest real estate bubble in history, heavily indebted local governments and SOEs, and geopoliti cal tensions, China struggled to regain the same rate of growth prior to the pandemic. But in retrospect, the end of the Chinese economic miracle in the Xi Jinping era was a foregone conclusion. The party’s failure to implement more radical market-oriented reforms in the Hu Jintao era led to a gradual erosion of overall efficiency and diminished the country’s growth prospects. As explained in chapters 3 and 4, stagnation was the logical outcome of a “trapped transition”—the progressive loss of the political incen- tives to pursue reform by a neo-authoritarian regime. When Xi Jinping suc- ceeded in reviving China’s dormant totalitarian institutions, the adoption of radical pro-market reforms to rejuvenate growth would be ideologically and politically impossible, thus spelling the end of the economic miracle. Ideologically, Xi’s brand of neo- Stalinist rule would further elevate the political supremacy of the party, resulting in the strengthening of the party- state’s direct control of the economy and the extension of its hold on the pri- vate sector. Theoretically, a promising course of reform might exist on paper, as evidenced by sensible prescriptions well-known to Chinese leaders.1 How- ever, such economic reforms would be impracticable without accompanying political reforms. By the time Xi ascended to the top, powerful interests ben- efiting from the systemic inefficiencies of China’s partially reformed economy—such as families of senior officials and their cronies in the business world, local government officials, state- owned enterprises and, most -- 205 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 193 important, the party itself—would resist these reforms that threatened their power and privileges. It is worth repeating that these political forces were themselves the inevitable consequences of the inherent limitations of Dengist neo-authoritarianism. With favorable one-off structural factors, economic de- velopment under one-party rule might score impressive early results but would eventually lose steam and stagnate, as happened in the Xi era. The Economy Xi Inherited Growth started sputtering even before Xi assumed power in late 2012. Eco- nomic output recorded its last double-digit growth of 10.2 percent in 2010. In 2012 growth had slowed to 8.1 percent.2 To be sure, sustaining double-digit growth for an economy of $8.5 trillion in 2012 would be no easy feat. Reversion to the mean—a fall in growth rates that brings the expansion of output to the historical average—is the law of economics that applies to China in the same way as it does to all economies.3 However, China’s apparent entry into a period of moderate growth, what its leaders preferred to call “the new normal,” was accompanied by several economic abnormalities that compounded the chal- lenges faced by the CCP in its attempts to sustain sufficient dynamism and turn China into a high-income economy. Perhaps the most important economic anomaly—and a persistent con- straint on the economy—was the structural imbalance that emerged in the post-Tiananmen period and remained uncorrected throughout the Hu Jintao era. Specifically, economic growth was excessively reliant on investment, a dependency that inevitably results in diminishing returns and overcapacity. If anything, this macroeconomic imbalance worsened under Hu. At the end of 2002, when Hu became party chief, investment accounted for about 38 percent of GDP. By 2012, when Xi succeeded Hu, investment had risen to 48 percent of GDP.4 Although Hu was able to muddle through despite the growing mac- roeconomic imbalance, the odds that Xi would be able to do so during the period of “the new normal” appeared to be far less favorable. He did not enjoy many of the advantages of the Hu regime, such as relatively low levels of debt, a massive expansion of exports due to China’s WTO entry, and healthy demo- graphics, just to mention a few. In addition to the worsening macroeconomic imbalances, another serious and potentially perilous obstacle confronting Xi was the rapidly rising level of debt following China’s credit-fueled stimulus in response to the 2008 global financial crisis. Total outstanding credit to the nonfinancial sector stood at -- 206 of 345 -- 194 c h a p t e r 7 192 percent of GDP at the end of 2012. By comparison, when Hu became party chief a decade earlier, the amount of debt was 142 percent of GDP. Under Xi, this ratio would grow even higher, reaching 297 percent of GDP by the end of 2022. Debt incurred by the state (mostly local governments) was 35 percent of GDP at the end of 2012 and would rise to 78 percent of GDP by 2022. At the end of 2012, the leverage of companies, mostly SOEs, was at 128 percent of GDP; ten years later it reached 158 percent of GDP.5 The housing bubble, the third economic challenge confronting Xi, was at an early stage in 2012. Residential housing had boomed under Hu. In 2003 about 2.6 billion square meters of floor space were under construction; by 2012, the figure was roughly four times that amount, at 9.86 billion square meters.6 The last major danger lurking on the horizon was the fraying of relations with China’s main trading partners in the West as a result of the sustained high trade deficits. America’s bilateral merchandise trade deficit with China bal- looned from $124 billion in 2003 to $315 billion in 2012.7 In the same period, the European Union’s bilateral merchandise trade deficit with China nearly doubled, from $74 billion to $130 billion.8 Even though bilateral trade imbal- ances do not necessarily mean that one of the parties has been harmed, per- sistently high deficit levels are often seen as evidence of unfair trade practices perpetuated by the party recording a surplus. In the case of Sino-American trade, high imbalances in China’s favor were exploited successfully by Donald Trump to win the support of blue-collar workers in the US rust belt, igniting a US-China trade war in 2018.9 By 2012, most of the favorable structural and political factors that had earlier propelled double-digit growth had either dissipated or were weakening. The pool of cheap labor from the rural areas was declining, causing wages to rise rapidly. In the manufacturing sector, the average wage in 2012 was 2.3 times higher than it had been in 2002 in real terms.10 The population was also aging. About 94 million people (7.3 percent of the population) were aged 65 or older in 2002. Ten years later, the country had 127 million people aged 65 or older (9.4 percent of the population). In 2021 over 200 million, or 14.2 percent of the population, would be aged 65 or older.11 The lack of reform during the Hu period and the shift of resources to the real estate sector and to unproductive infrastructure due to the 2009 stimulus package caused a precipitous fall in productivity.12 This summary of the Chinese economy in late 2012 reveals serious risks, such as macroeconomic imbalances, high and growing levels of debt, an -- 207 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 195 incipient housing bubble, and deteriorating ties with its major trading part- ners. Although the Chinese government put a positive spin on the slowing growth, claiming that the country had entered “the new normal” phase of de- velopment, these risks threatened to make the new normal anything but nor- mal. Economic stagnation could easily result from the chronic lack of consumption-driven demand and the overreliance on one sector, i.e., housing, as a driver of growth. The high debt levels could trigger a financial crisis, and the sustained trade imbalances could ignite trade wars. Indeed, these eco- nomic difficulties would culminate, during Xi’s third term, in a prolonged eco- nomic slump marked by high youth unemployment, a colossal real estate col- lapse, and deflation. Unkept Promises At the Third Plenum of the Eighteenth Central Committee in November 2013, Xi unveiled a sixty-point reform plan, apparently to establish his credentials as a reformer. Despite its title, “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehen- sively Deepening the Reform,” Xi’s blueprint is notable for its contradictions and incompatible objectives.13 Rhetorically, the decision seems to have made an ideological breakthrough by stating: “We must deepen economic system reform by centering on the decisive role of the market in allocating resources.” Previously, the party had allowed the market to play only a role that was sub- ordinate to that of the state. However, this ideological framing contradicts the decision’s insistence that in China’s economic system the state-owned sector is the main entity (zhuti), with economic actors of other ownership develop- ing side by side. To underscore its determination to maintain the dominance of the state-owned sector, the decision states: “We must unswervingly con- solidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector, and continuously increase its vitality, controlling force and influence. We must unwaveringly encourage, support and guide the development of the nonpublic sector, and stimulate its dynamism and creativity.” However convoluted, the ideological formulation in the decision leaves an unmistakable impression that the party was seeking to maintain an economic system based on state owner- ship, with nonstate economic entities playing a subordinate role. Substantively, the decision consists of two separate packages of “reform.” One package addresses the flaws in the economy (such as the state-owned -- 208 of 345 -- 196 c h a p t e r 7 enterprises, the fiscal system, the financial sector, and so forth) and the deliv- ery of public services. The other package seeks institutional changes in state institutions (the military, the legal system, and the bureaucracy). At first glance, the proposed package of economic reforms seems more radical than any of the previous reforms announced by the party in the post- Tiananmen era. For example, it proposes land reform that will benefit farmers, a fiscal reform that will raise local revenues and increase the provision of social services, price reform that will liberalize energy, utility, telecom, and transpor- tation markets, an opening up of the financial sector to private firms, and tak- ing rapid steps in the direction of interest and currency liberalization. Unfor- tunately, few of these reforms were implemented in subsequent years. If anything, the party reversed course and, instead of allowing the market to play a “decisive role,” brought back the state at the expense of the private sector.14 The other package seeks to strengthen the party and its control over the state. The most notable proposals were the establishment of the CCP National Security Commission, the restructuring of the military, and tighter social con- trols (cybersecurity, censorship, and neighborhood-level surveillance through “grid management”). Unlike the unfulfilled economic reform promises, these measures were fully implemented during Xi’s first term. Xi abandoned his economic reform plan but adhered to his blueprint to strengthen the party-state for three probable reasons. The first is the funda- mental incompatibility of a fully marketized economy with the supremacy of a Leninist regime, whereby any loss of control over economic activities carries an unacceptable risk of ceding political power to economic and social forces that might underwrite or become organized opposition. This is the same di- lemma that had confronted Xi’s predecessors. Like them, Xi simply could not square the circle and therefore had to forgo whatever ambitions he might have had to “comprehensively deepen” reform. The second factor is the combination of practical difficulties and political resistance from actors and groups that had benefited from the status quo. Some reforms, such as financial sector reforms, currency liberalization, strengthening of the social safety net, and restructuring of central-local fiscal relations, would be complex and challenging in terms of technical knowledge, resource requirements, and political opposition. For example, expanding local fiscal revenue by levying a property tax would encounter strong resistance from urban residents. The third explanation is that Xi, a hardcore Leninist, saw the task of shoring up the foundations of Leninist rule as far more important and urgent than injecting a new dose of dynamism into the economy. Politically, he would also -- 209 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 197 benefit from measures to strengthen party control over the state and society because these steps would centralize his authority and grant him more power. Not surprisingly, the institutional changes proposed in the decision gave Xi more direct control over national security, cybersecurity, and any major policy changes after he assumed his new roles as head of the new commissions and the “small leading groups” overseeing these domains. Supply-Side Reform After abandoning his own package of economic reforms unveiled in Novem- ber 2013, Xi opted for a set of more targeted measures at the end of 2015. Titled “supply-side reform,” this program aims to address four major flaws in the Chinese economy: excess capacity, excess inventory, high debt leverage, and shortfalls in indigenous high-tech products. Conceived by his chief economic advisor, Vice Premier Liu He, supply-side reform was launched on Novem- ber 10, 2015, and billed as an effort to increase the efficiency of the economy.15 Even though Xi appears to have invested enormous political capital in this package, including inserting supply-side reform into the CCP charter in late 2017, the reforms are more tactical than structural and do not confront the most serious economic problem: the imbalance between investment and con- sumption. Excess capacity and high debt levels, however serious, are symp- toms, not causes, of the structural flaws in an economy in which the state controls too much capital and invests it wastefully. Additionally, these reforms were implemented almost exclusively through administrative fiat, thus result- ing in discrimination against the private sector. Excess industrial capacity has been a chronic problem in China due to over- investment by local governments seeking to expand their economic fiefdom. Local officials have additional political incentives to create large industrial firms under their control because they can then generate economic activities that will help improve their chances for promotion. Consequently, as most local government officials play this game, their decisions unavoidably lead to the construction of factories that supply more than the market demands, and the brutal price competition in sectors with excess production capacity leads to financial losses. Unlike in market economies where there are hard budget constraints (firms do not have unlimited access to funds), loss-making firms owned by local governments in China, free from such constraints, can count on the local authorities to fund their losses and keep them afloat. In the post- Mao era, industries producing consumer goods have become liberalized and dominated by private and foreign firms. Excess capacity in these industries is -- 210 of 345 -- 198 c h a p t e r 7 usually eliminated by the exit of uncompetitive firms. But because SOEs main- tain a significant presence, or even dominance, in heavy industries, such as steel, nonferrous metals, cement, chemicals, and coal, SOE access to subsidies and bailouts makes it difficult to eliminate excess capacity.16 Xi’s supply-side reform package set ambitious targets for reducing excess capacity in heavy industry. In the case of crude steel, the State Council an- nounced in February 2016 that it was seeking to cut capacity by 100–150 million tons within five years (8–12 percent of total capacity).17 Subsequently, the gov- ernment painted a rosy picture of the progress of the reform, claiming it had removed more than 140 million tons of steel industry capacity between 2016 and September 2018.18 But data from the National Bureau of Statistics show more modest progress. China’s production capacity for crude steel was cut from 1.126 billion tons in 2015 to 1.085 billion tons in 2020. This means that, within five years, Xi’s reform succeeded in cutting only 41 million tons of crude steel, much less than the target set in early 2016. Like steel, cement production capac- ity was reduced only marginally as well, from 3.442 billion tons to 3.397 billion tons (i.e., only 45 million tons, or 1.3 percent), during the same period.19 After the 2008 global financial crisis, China relied heavily on an expansion of the supply of credit through the financial system to sustain growth. Conse- quently, the level of debt in the nonfinancial sector grew rapidly. However, during the initial three years of Xi’s first term, the party made no effort to slow down the borrowing. The average annual increase in credit to the nonfinancial sector was nearly 16 percent between 2013 and 2015, two percentage points more than that in 2009–2012, during which time credit growth had skyrock- eted. By the end of 2015, credit to the nonfinancial sector stood at 239 percent of GDP, creating a potential financial crisis that would be a serious threat to the Chinese economy.20 One unique feature of China’s high levels of debt further exacerbated the risks of a financial crisis: heavy borrowing by local governments (mostly through local government financing vehicles). The primary reason for the buildup of local debt was the 1994 fiscal reform that recentralized revenue without shifting expenditures from the localities to Beijing. In 1993, the year before fiscal recentralization, local governments re- ceived nearly 80 percent of total revenue. But after the reform, their share fell to about 50 percent. The share of public expenditures borne by local govern- ments remained the same, however, at around 80 percent of all public expen- ditures. This created a huge structural deficit for local governments, equivalent to 30 percent of total public revenue. The structural shortfall of revenue means that local governments lacked funds to invest in infrastructure and other big- ticket items. Aside from seeking funding from Beijing, an unreliable solution, -- 211 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 199 local governments grew increasingly dependent on revenues from land sales and borrowing to fund local infrastructure and, in the less wealthy areas, even to cover routine operational expenses.21 The magnitude of land-related revenues for local public finance can be seen in the following numbers. In 2020 land-related taxes, 2 trillion yuan, contributed roughly 20 percent of total local tax revenue. But proceeds from land sales were a whopping 8.4 trillion yuan, equivalent to 80 percent of total local tax revenue. Typically, local governments use the land under their control as collateral to borrow from the banks. This creates a huge risk because the land pledged as col- lateral is illiquid, and its value is difficult to determine. As the true value of the land critically depends on the real estate market, a deterioration of that market will impair the value of the collateral and inflict large losses on banks.22 As discussed earlier, local governments did not begin their borrowing binge until the Hu administration launched its credit-fueled stimulus package in 2008–2009. In subsequent years, the amount of debt owed by local govern- ments exploded. Official data on local debt authorized by the central govern- ment report 15.4 trillion yuan at the end of 2014. However, local governments kept far more debt off the books. Estimates by economists suggest that the amount of off-the-books debt borrowed by local governments could have been 200–250 percent of the amount on the books. What this implies is that at the end of 2014, real local debt might have been 45–53 trillion yuan, or 70–82 percent of GDP. The deleveraging campaign does not appear to have lowered the leverage, as local governments reported total debt of 18.4 trillion yuan on their books at the end of 2018. Moreover, in subsequent years, local debt continued to grow. At the end of 2021, the officially declared amount of local debt was 30 trillion yuan, implying that real local debt might have been as high as 90–105 trillion yuan, or 80–93 percent of GDP.23 Of all the outstanding nonfinancial sector debt at the end of 2015, corpora- tions, both state-owned and private, accounted for roughly two-thirds (about 108 trillion yuan), according to the Chinese central bank. Of this amount, roughly 40 percent was borrowed by local-government-owned SOEs (includ- ing many local government financing vehicles) that were typically smaller, less profitable, and more leveraged. Loans extended to SOEs in general, and to local SOEs in particu lar, are far riskier because these firms are less profitable than private firms. Perversely, due to their political influence and privileged positions in the economy, they also have greater access to credit, thus enabling them to borrow more.24 Like other so-called reforms during the Xi era, deleveraging—reducing the debt-to-asset ratios—was implemented by administrative fiat. Banks were -- 212 of 345 -- 200 c h a p t e r 7 ordered to call in loans regardless of their credit risks. Because private firms with weak political connections could not shield themselves from this cam- paign, the main burdens fell on the private sector. When their lenders de- manded early payment, many private firms that had pledged their assets as collateral were forced either to sell (mostly to SOEs) or to declare bank- ruptcy.25 Deleveraging also raised the borrowing costs for private firms due to the perception that they carried heightened credit risks.26 One piece of evi- dence suggesting that the private sector bore the brunt of the deleveraging campaign is that the outstanding amount of debt borrowed by nonfinancial SOEs actually rose by 10 trillion yuan in the first two years after the launch of the deleveraging campaign in 2016.27 The party abruptly halted the deleveraging campaign in mid-2018 after the start of the US-China trade war. Chinese leaders apparently worried that they could not risk slower growth in the middle of the worst trade conflict in the post–Cold War era. The phrase “deleveraging” suddenly disappeared from official rhe toric and was soon replaced by a new phrase—“stabilizing leverage.”28 Based on data from the Bank of International Settlements, China’s debt level was rising, instead of declining, during the deleveraging campaign. At the end of 2015, credit to the nonfinancial sector stood at 239 percent of GDP. By the time Xi ended the campaign in July 2018, it was 260 percent of GDP. If we judge the success of deleveraging by the amount of the reduction in the growth of debt, then the deleveraging campaign can be considered a modest success because the debt grew at an annual rate of 8.4 percentage points of GDP dur- ing this period, compared with 15.6 percent during 2013–2015. In the four years after the official end of the deleveraging campaign, debt growth averaged 8.5 percentage points of GDP each year.29 The singular achievement of dele- veraging was a reduction in the growth of debt, not a reduction in the leverage itself. In spite of the slower growth of debt, however, China’s high leverage continued to threaten the stability of its financial sector and deprive its leaders of policy options when the economy was confronted with prospects of stag- nant growth and deflation, as was the case in mid-2023. The Housing Bubble In 2003 the government designated the real estate sector as a “pillar industry.” In the following decade, the explosive expansion of the sector turned it into one of the main drivers of growth. In 2003 investment in the sector was only -- 213 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 201 1 trillion yuan. By 2012, the end of the Hu period, investment in the sector reached 7.18 trillion yuan.30 During the Xi period, the growth of investment in the sector cooled off. In absolute terms, however, massive resources were nev- ertheless misallocated into the overbuilt sector. Cumulatively, between 2013 and 2023, real estate investment totaled 120 trillion yuan, almost equal to Chi- na’s GDP in 2023 (table 7.1). To make things worse, the booming sector led to a rapid increase in housing prices, prompting the government to take repeated measures to cool housing. Starting in 2005, the State Council issued a series of documents to control excess investment in the real estate sector and to restrict purchases so to dampen speculative behavior. These measures, however, had at best a marginal impact on containing the surging housing prices, especially in the largest and most prosperous cities, such as Shanghai, Beijing, and Shenzhen.31 Several factors made it difficult for the government to prevent a housing bubble. First, at the national level, the housing sector contributed close to one-third of annual GDP growth by the end of the 2010s.32 Thus a drastic slowdown in the housing sector would hurt growth. Second, local govern- ments depended on the housing sector for revenue. In addition to the taxes collected from real estate transactions, the income realized through the sale of land to developers and the credit obtained from banks using land as collateral constituted the principal sources of nontax revenue for local governments. table 7.1. Investment in Real Estate, 2013–2023 Year Amount (trillion yuan) Change from Prior Year (%) 2013 8.22 18.8 2014 9.02 9.8 2015 9.09 0.7 2016 9.69 6.6 2017 10.34 6.7 2018 11.27 9.0 2019 12.36 9.6 2020 13.2 6.8 2021 13.76 4.3 2022 12.38 −10.0 2023 11.21 −9.5 Total 120.54 Source: ZGTJNJ 2024, https://www.stats.gov.cn / sj/ ndsj /. -- 214 of 345 -- 202 c h a p t e r 7 Therefore, the local governments had incentives to sustain the real estate boom as long as possible. Third, housing—in par ticular, housing in large cities—was perhaps the only profitable asset for Chinese savers. Capital con- trols made it impossible to invest abroad, while the volatile domestic stock market, dominated by the inefficient SOEs, delivered poor results. As a result, the overlapping interests of a growth-obsessed central government, revenue- hungry local authorities, aggressive real estate developers, and residents seek- ing better housing or higher investment returns fueled the housing bubble and kept it from crashing.33 In December 2016 Xi Jinping personally ordered the first serious effort to cool the housing sector when he declared that “housing is for living, not for speculation.” This mantra instantly prompted the government to adopt tough regulations. In addition to limiting the number of housing units individuals or families could purchase, the crackdown included prohibitions against selling new units within two years after the initial purchase, higher interest rates on mortgages, a ban on the issuance of mortgages to purchasers who already owned two units, and an increase in the supply of low-cost rental housing.34 Despite implementation of these measures, the bubble in the housing sec- tor grew bigger, albeit at a slower pace. The amount of investment in the real estate sector rose on average 8.4 percent per year between 2017 and 2019, 50 percent more than the annual average growth of 5.7 percent between 2014 and 2016, but nearly a third of the annual average increase in growth of 22.6 percent recorded between 2009 and 2013.35 Instead of declining, the aver- age price per square meter rose, from slightly under 7,500 yuan to 10,000 yuan, from 2016 to 2020.36 The ineffectiveness of the policies implemented after Xi’s edict forced the government to double down in 2020, despite the economic downturn attributed to the Covid-19 pandemic. In August the government rolled out an unprece- dented regulation, popularly known as the “three red lines,” to force developers to reduce their leverage. Specifically, developers could increase their debt level by 15 percent if they met three criteria: a liability-to-asset ratio of less than 70 percent (excluding prepayments made by purchasers for unfinished housing units), net debt below total equity, and cash on hand equal to or exceeding 100 percent of short-term debt. If they met only two of the three criteria, they could increase their leverage by 10 percent. If they met only one of the three, they could raise their debt level by 5 percent. If they failed on all three measures, they could not raise their debt level. The government likely intended for this -- 215 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 203 seemingly nuanced policy to achieve a soft landing in the housing bubble. How- ever, the government did not anticipate the risks of contagion precipitated by the loss of access to credit by even a small number of highly indebted real estate developers. At the time of the policy announcement, about one-quarter of Chi- na’s two hundred largest real estate firms met none of the three criteria and were facing the prospect of losing access to credit. Consequently, implementation of the policy precipitated a disorderly unwinding of China’s real estate bubble that could not have been the original intention of policymakers.37 Unlike previous attempts, the “three red lines” perhaps worked too well, judging by the implosion of the real estate sector that was to follow. In 2021 investment in the sector grew only 4.3 percent, and sales measured in floor space rose only 1.9 percent. Ominously, the amount of land purchased by de- velopers for potential projects, a leading indicator, fell 15.5 percent.38 For the heavily indebted real estate developers, enforcement of the three red lines sounded a death knell. Evergrande, one of China’s largest real estate developers that met none of the three criteria, was immediately pushed to the brink of insolvency. Saddled with nearly two trillion yuan of debt, Evergrande could not raise new debt to pay its bills. By August 2023, it filed for bankruptcy and its founder was placed under criminal investigation.39 The unavoidable conta- gion triggered by Evergrande’s default quickly plunged other large and equally indebted real estate developers into a liquidity crisis after they lost access to new financing. The deflation of the real estate bubble accelerated in 2022 when investment in the sector fell 10 percent from the previous year. Sales measured by transac- tions dropped 27 percent.40 In 2023 the real estate sector was in a meltdown. By September, two-thirds of the top fifty private real estate firms were in de- fault of their dollar-denominated bonds.41 Housing prices in major cities re- corded a consistent decline despite the government’s efforts to limit the fall in sale prices and the use of massaged data to conceal the extent of the decline in prices.42 Compared with 2022, sales of homes by floor space fell 7.5 percent in the first nine months of 2023, while investment in the real estate sector de- clined by 9.5 percent for the whole year.43 The crash of the real estate sector in 2023–2024 dragged down the economy and forced the government to relax enforcement of the three red lines. To resuscitate the real estate sector, local governments scrapped the restrictions on purchasing homes, and banking regulators lowered the amount of down payment required to obtain mortgages.44 However, the crisis in the real estate -- 216 of 345 -- 204 c h a p t e r 7 sector was so vast and deep that these modest measures did not make much of a difference. The housing sector is expected to be weak and to depress growth for years to come.45 The US-China Trade War Sino-American trade tensions were simmering even before the trade war launched by Donald Trump in 2018. After China joined the WTO in Decem- ber 2001, bilateral merchandise trade boomed. In 2001 the United States ex- ported $19 billion worth of goods to China and imported $102 billion. By the time Trump won his surprise victory in 2016, the United States was exporting $116 billion to China and importing $462 billion from China.46 During this period, a persistent high trade deficit, restricted market access in China, and violations of the intellectual property rights of US firms stoked tensions be- tween Washington and Beijing. However, the high-level exchanges between China and the United States on trade yielded no meaningful outcomes. Amer- i ca’s trade deficit with China remained stubbornly high, while charges of theft of intellectual property and of China’s failure to honor its WTO commitments grew louder. Disappointment over China’s lack of action to address these concerns eroded corporate America’s goodwill. Even more important, the combination of technological change and globalization resulted in the loss of millions of blue-collar manufacturing jobs in Ameri ca’s politically crucial rust belt, creat- ing an opening for a populist like Trump to exploit resentment among these victims of globalization. During his presidential bid in 2016, Trump adroitly seized the trade issue, accusing China of “raping” America and engaging in the “greatest theft in the history of the world.”47 After he entered the White House, Trump appointed a trade hawk, Robert Lighthizer, as his trade representative. In August 2017 Lighthizer initiated an investigation into China’s violations of Ameri ca’s intellectual property rights. In early April of the following year, he produced a report finding China in vio- lation of intellectual property rights. As a penalty, the report proposed levying 25 percent additional tariffs on $50 billion of Chinese goods imported into the United States. China reacted by threatening to impose 25 percent tariffs on $50 billion of American goods exported to China. Thus began the largest trade war in post–World War II history to that time. As Xi responded to Trump’s trade war with retaliatory tariffs on American goods, the United States and China engaged in a series of negotiations in an -- 217 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 205 attempt to resolve their disputes, albeit without much success. A ray of hope for an ending to the trade war emerged in early 2019 when it appeared that China might accept an American proposal that would force major changes in its trading practices. But the CCP Politburo Standing Committee rejected the proposal, a development that prompted an infuriated Trump to escalate the trade war.48 Subsequently, Trump extended tariffs of between 10 and 25 percent on nearly all Chinese imports to the United States. But in January 2020 the two countries signed the so-called Phase One Deal that withheld planned further tariff increases on $160 billion worth of Chinese imports, cut tariffs from 15 to 7.5 percent on $120 billion of Chinese goods, but maintained the 25 percent tariff on $250 billion worth of Chinese imports. In return, China pledged to increase its purchases of American exports and services by at least $200 billion over the next two years. Although Trump touted the deal as a “win,” China did not buy the promised extra American goods and services in 2020 and 2021.49 By the time Trump left office in January 2021, the trade war had placed additional cumulative tariffs on $550 billion of Chinese imports, while China had retaliated with cumulative punitive tariffs on $185 billion worth of Ameri- can products. After Joe Biden entered the White House, he kept Trump’s tariffs in place, both because reducing or removing them would cost him dearly in a country in which protrade policies were no longer popular and because the ongoing deterioration in US-China relations made such a con- cession difficult.50 Despite the ferocity of the trade war, its immediate economic impact was modest. China’s GDP growth was 7.3 percent in 2017; it fell to 6.4 percent in 2018 and to 6.1 percent in 2019.51 US GDP growth rose from 2.2 in 2017 to 2.9 percent in 2018, but it fell to 2.2 percent in 2019.52 Most of the costs of the trade war—higher prices of China-made consumer goods due to the addi- tional tariffs—were borne by American consumers.53 Judging by trade and investment flows, the trade war appears to have had only a minor impact on China. To be sure, China’s exports to the United States in 2018 and 2019 fell significantly as the result of higher tariffs (table 7.2). The Covid-19 pandemic, which caused disruptions, further depressed Chi- nese exports to the United States in 2020. But in 2021 and 2022, Chinese ex- ports to the United States recovered to the level prior to the trade war. The effects of “decoupling” became more pronounced starting in 2023, when Chi- nese exports to the United States fell to $427 billion, a decline of 20 percent from 2022. -- 218 of 345 -- 206 c h a p t e r 7 China’s overall foreign trade was not initially affected by the trade war. Ex- ports grew moderately between 2018 and 2020 and exploded between 2021 and 2022, likely reflecting China’s central role in the global supply chains. Overall trade in 2023 held steady if measured in RMB but declined 5 percent in dollar terms, reflecting the depreciation of the Chinese currency (table 7.3) In the immediate aftermath, foreign direct investment in China was more negatively affected by the trade war. In 2017 China recorded $181 billion in FDI. This amount fell to $135 billion in 2018 and $138 billion in 2019. It recovered close to the pre–trade-war level in 2021 ($173 billion) and 2022 ($189 billion).54 Despite the modest negative impact of the trade war on the Chinese econ- omy in the short term, the US-China trade war marked the beginning of a table 7.2. Trade in Goods with China (in billion USD) Year Imports from United States Exports to United States Surplus 2016 116 462 347 2017 130 505 375 2018 120 539 418 2019 106 449 343 2020 125 432 308 2021 151 504 352 2022 154 536 383 2023 147 427 279 Source: US Census Bureau, https://www.census.gov/ foreign - trade/ balance / c5700.html. table 7.3. Chinese Foreign Trade in Goods (in trillion USD) Year Exports Imports Balance (USD, billions) 2017 2.263 1.844 419 2018 2.487 2.136 351 2019 2.499 2.078 421 2020 2.590 2.066 524 2021 3.316 2.679 637 2022 3.544 2.707 837 2023 3.379 2.557 822 Sources: ZGTJNJ 2022, https://www.stats.gov.cn/sj / ndsj/ 2022/ indexch .htm; ZGTJNJ 2024, https://www.stats.gov.cn/sj / ndsj /2024/ indexch.htm. -- 219 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 207 “decoupling” of the Chinese economy from that of the United States and, to a lesser extent, from the economies of America’s allies. On its own, the trade war raised the costs of Chinese goods in the United States, thus incentivizing manufacturers to relocate their manufacturing facilities to other countries, particularly to facilities in Southeast Asia, to avoid the additional tariffs. How- ever, the trade war was not the sole trigger of the decoupling between the two economies. The outbreak of the Covid-19 pandemic in 2020 added another reason for the West to reduce its reliance on China. The pandemic inflicted massive disruptions on the global supply chains concentrated in China.55 For companies accustomed to counting on dependable deliveries from China, the disruptions caused by the lockdowns threatened normal operations. Russia’s invasion of Ukraine in February 2022 probably provided the most powerful incentive for Western manufacturers to accelerate relocation of their supply chains from China. After the war began, the West imposed unprece- dented economic sanctions on Russia, freezing its assets and choking its access to Western imports and financial systems. In retaliation, Russia seized the as- sets of Western companies in Russia. The geopoliti cal risks of doing business with China rose exponentially overnight, mainly because of the prospect of a war between mainland China and Taiwan, which Beijing considers a break- away province (in 1949, the defeated Chinese Nationalists withdrew to Tai- wan, then part of China). A war across the Taiwan Strait would likely be far more economically devastating if the United States were to intervene to de- fend Taiwan. As China is the world’s largest manufacturing economy and is far more integrated with the global economy than is Russia, fears of a catastrophic war involving mainland China, Taiwan, and potentially the United States im- mediately became an irresistible motivator for companies to move out of China or to source supplies from other countries. To make matters worse, US-China relations continued to spiral downward after Joe Biden entered the White House. Even though on the surface Biden’s strategy of containment did not advocate full-fledged economic decoupling, in practice the widespread perception in the business community that geopo- litical tensions between the two countries were here to stay and could escalate out of control led to a repricing of the risks of doing business with or in China. Relations between Beijing and Brussels also fell victim to Russia’s war against Ukraine. The Chinese-EU relationship had faced severe strains due to clashes over trade and human rights even before the war. Nevertheless, in the realm of security, China was eager to ensure the strategic neutrality of the EU in the Sino-American rivalry, and the EU was initially reluctant to take sides. -- 220 of 345 -- 208 c h a p t e r 7 When Vladimir Putin ordered the invasion of Ukraine, less than three weeks after he signed a joint declaration with Xi announcing a “no-limit friendship,” the EU’s relationship with China took a fateful turn. The largest and most violent war in Europe since World War II rendered the EU’s efforts to maintain strategic neutrality in the Sino-American rivalry untenable. In the meantime, Washington’s unflinching support for Ukraine in resisting Russian aggression revealed to the EU not only its dependence on American power but also the value of an alliance with the United States that no amount of trade with China could match. Consequently, the EU took initial steps to reduce its economic ties with China. Some of its member states adopted investment restrictions and export controls targeting China even though the EU leader- ship preferred a less jarring phrase, “derisking,” as label for its policy.56 Trade and investment data for 2023 may offer a glimpse into the trend of decoupling between China and the West. Although several factors, such as rising interest rates in the United States, the resultant economic weaknesses in the West, and China’s disappointing economic growth and historically high exports in 2022, likely muddy the picture in 2023, the amount of utilized FDI in 2023 was $163.2 billion, $13.9 billion less than the previous year. While overall exports held steady in 2023, Chinese exports to the United States fell far more dramatically. Between January and September 2023, China exported about $90 billion less goods to the United States than it did in the previous year, indicat- ing an acceleration of the bilateral “decoupling.”57 In all likelihood, the full negative effects of the trade war on China’s exports and inbound FDI will play out over an extended period. As Trump launches another trade war following his return to the White House in 2025, Chinese exports could suffer another devastating blow. The short- term negative impact of the US-China trade war on the Chinese economy might be moderate, as shown by trade and investment data. But the prospect of an economic “decoupling” between the United States and China has led to the most profound change in economic policy and orientation since the post-Mao era. When Deng launched reform and opening in 1979, integra- tion with the capitalist economies in the West, most critically the development of trade and investment ties with the United States, the world’s largest and technologically most advanced economy, was a strategic priority. In the four decades that followed Deng’s January 1979 historic visit to Washington, Chi- na’s impressive growth record was made possible, in large part, by its broad and dense economic ties with the West, in particu lar the United States. The free fall of Sino-American relations in the aftermath of the trade war threatened the viability of China’s development strategy that focused on -- 221 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 209 economic integration with the West. By early 2020, US-China decoupling was moving ahead at full steam, threatening not only hundreds of billions of dol- lars in bilateral merchandise trade but also Chinese access to advanced Ameri- can technologies. During the first trade war, the Trump administration simul- taneously began to impose a series of sanctions on Chinese technology companies by banning them from purchasing high-end semiconductors made in the United States or made with American technologies. Following the es- calation of the trade war in May 2019, the United States put China’s telecom giant Huawei, a global leader in 5G technology, on the so-called Entity List, thereby requiring that American firms planning to supply Huawei must first obtain a license from the Commerce Department, with the presumption that such applications would be denied.58 By spring 2020, the bottom of US-China relations fell out as Trump, in- creasingly worried about the damage of the raging Covid-19 pandemic on his reelection bid, gave the hawks in his administration carte blanche to punish China, the source of the virus. The collapsing US-China relations in general, and the decoupling between the two countries in particular, prompted Chi- nese leaders to draft a new economic strategy for a changed world. In May 2020 Xi articulated the “dual circulation” strategy, a central concept in China’s development approach for a world of great power rivalry and eco- nomic fragmentation. According to official media, the strategy of dual circula- tion was first proposed at a meeting of the Politburo Standing Committee on May 13, 2020. Shortly thereafter, Xi began to personally promote this idea in his public speeches. The Politburo formally endorsed the concept at the end of July 2020.59 The concept of dual circulation was translated into policy in Novem- ber 2020, when the Fifth Plenum of the Central Committee approved the Fourteenth Five-Year Plan and proposed the development goals for 2021–2035. The “Proposal of the CCP Central Committee on Formulating the Fourteenth Five-Year Plan for National Economic and Social Development and the Long- Term Goals for 2035” explicitly puts forth a new development strategy cen- tered on domestic demand and technological self-reliance.60 Based on authoritative statements by Xi himself as well as by his chief eco- nomic adviser, Vice Premier Liu He, the party’s new development strategy was crafted in response to America’s policy of containing China’s rise through eco- nomic decoupling and the tech war. In his speech to the Fifth Plenum, Xi warned: “In recent years, along with the changes in the global political and economic environment, the upsurge in deglobalization and the unilateralism and protectionism acts by certain countries, the traditional global circulation -- 222 of 345 -- 210 c h a p t e r 7 has been notably weakened.” He went on to urge that efforts be made “to root China’s development inside the country and rely more on the domestic market to achieve economic growth.”61 Both Xi and Liu offered upbeat assessments of the feasibility of dual circula- tion by listing China’s size advantage: a middle-income country with 1.4 billion people and a market with the largest growth potential in the world. This huge market will be able to generate sufficient domestic demand to sustain growth in the future in spite of an unfriendly external environment because consump- tion will rise and producers will increase efficiency through the adoption of modern technology and improvements in supply chains.62 As a framework document, the proposal lists key objectives. The section on generating new sources of domestic demand refers to upgrading and increas- ing household consumption and providing more social services. However, the document does not include new policies that might actually raise household income to increase or upgrade consumption. Investment would retain its role as a key driver of growth as the proposal offers a long list of major infrastruc- ture projects to be built in the coming years. In addition to reducing reliance on external demand, the proposal also calls for greater resilience and security of supply chains and technological self- sufficiency. Reflecting his awareness of China’s vulnerability to Western tech- nological sanctions, Xi set the goal of resilience of supply chains in April 2020 when he addressed the Central Finance Small Group, the party’s top economic decision-making body. He urged, “In order to ensure our industrial security and national security, we must strive to build self-reliant, controllable, secure, and dependable production and supply chains. We must seek to have at least one alternative source for critical products and supplies.” In a veiled but obvi- ous reference to a potential conflict with the United States, Xi stated that he believed that more resilient and secure supply chains centered domestically would help China increase its national security and allow it to “maintain nor- mal economic activities under extreme conditions.”63 The proposals of the Fifth Plenum add more details to Xi’s concept of eco- nomic security. Judging by the space devoted to technological self-sufficiency, it is evident that the party views this as an overriding priority. Section III of the proposals contain specific ambitious programs designed to enable China to develop indigenous capabilities and overcome the West’s technological containment. These include formulation of a comprehensive plan that would mobilize the resources of the entire nation to achieve new scientific and -- 223 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 211 technological progress, in particu lar in emerging areas such as artificial intel- ligence (AI), quantum computing, semiconductors, and life sciences. Also mentioned are new large national research projects, talent recruitment pro- grams, and incentives for innovation by domestic entities.64 Even though Xi tried to strike a balance between development and security, his speech to the plenum implies that security should override development. According to Xi, it will be wise to “overestimate difficulties [and] deepen our thinking about risks,” implying that in devising a development strategy, China must give more weight to potential security risks.65 The proposal duly reflects Xi’s broadened definition of security risks by declaring that China “must main- tain its ability to secure and control critical industries, infrastructure, strategic resources, and major scientific and technological areas.”66 On the surface, Xi’s vision of dual circulation does not entail severing ties with the global economy. But it is clear that dual circulation would consist primarily of “great domestic circulation” based on reliable domestic demand and secure sources of technology.67 In the years following issuance of this landmark document, the party implemented several measures to turn Xi’s vi- sion into reality. The bulk of efforts in 2021–2023 were on building a domestic semiconductor supply chain to overcome US-led efforts to cut off China’s ac- cess to advanced chips. In September 2023 China launched a new $40 billion state-backed fund to invest in the semiconductor industry. This was on top of the nearly $48 billion the government had raised between 2014 and 2019 for the China Integrated Circuit Industry Investment Fund (ICF), commonly known as the “Big Fund.”68 Although establishment of the Big Fund in 2014 long preceded the US-China tech war, Beijing’s additional investment in September 2023 was definitely a direct response to Ameri ca’s escalating export controls to cripple China’s semiconductor sector, in particular the package of measures the Biden administration unveiled in October 2022 that sought to block Chinese access to high-end chips and the equipment capable of producing them. Despite Xi’s repeated invocation of the dire need for greater economic se- curity, aside from increasing R&D there were few effective measures the party could undertake in the short term. Although China stepped up efforts to re- duce its reliance on the US dollar by denominating more trade in renminbi, its use of the dollar was unlikely to fall dramatically simply because there were no alternatives in the foreseeable future for China to settle trade and manage its huge foreign exchange reserves.69 Food self-sufficiency, another prized -- 224 of 345 -- 212 c h a p t e r 7 security goal Xi has emphasized repeatedly, is also unlikely to be achieved in the near term because China does not have enough arable land, and its food self-sufficiency ratio was only 66 percent as of 2020.70 But Chinese leaders are unlikely to be deterred by the challenge of building up an economic fortress. The costs of such an undertaking will be staggering. “Forced import substitution” in the case of advance technologies will make China reallocate resources to economic activities for which it lacks a compara- tive advantage. Achieving food self-sufficiency by producing more grains do- mestically at the expense of higher-value cash crops will reduce income from agriculture. Shifting supplies away from the United States and its allies will cut competition and increase costs. Chinese manufacturers that rely excessively on the domestic market will not be competitive with their global peers. Re- gardless of the culpability of the US-China decoupling and tech war, the end result of China’s response—a security-focused development strategy—will be less economic efficiency and lower growth for the long term. For the party and Xi, this seems a price worth paying if the alternative will place China at the mercy of a hostile West that sees a powerful China as an existential threat. Reversion to Statism The CCP’s schizophrenic attitude toward the private sector is well-known. On the one hand, the party’s imperative of sustaining performance legitimacy dic- tates a pragmatic approach to the private sector, the largest contributor to economic output. On the other hand, political distrust of private entrepre- neurs, lingering ideological hostility to capitalism, and entrenched regime interests to preserve a large state sector motivate the party to discriminate against the private sector regardless of the loss of efficiency.71 In practice, such discrimination manifests itself in regulatory barriers restricting the entry of private firms into strategic sectors (such as finance, energy, and telecom), fa- vorable access to credit and subsidies for SOEs, and harassment and mistreat- ment of private firms by local authorities that see them as easy prey.72 In spite of government discrimination, however, private firms thrived in the post- Tiananmen era, as evidenced by their growing share of GDP, urban employ- ment, and exports.73 Complaints that “the state advances and the private retreats” (guojin min- tui) became more frequent toward the end of the Hu Jintao era, prompted mostly by the government’s massive stimulus package implemented in 2009 to sustain growth following the global financial crisis. As the state sector was -- 225 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 213 the primary beneficiary of the package, which consisted of four trillion yuan in fiscal spending and an infusion of bank credit several times that amount, the government’s response elicited concerns that party policy toward the private sector was being reversed. Additionally, the government encouraged giant SOEs to acquire other (usually struggling) SOEs and even well-established private firms.74 In the post-Tiananmen era, the state had always maintained an extensive presence in the economy, but the pivot back to statism at the expense of the private sector became more pronounced after 2009.75 However, like the shift toward a more assertive foreign policy and a regressive domestic agenda, guo- jin mintui on the eve of Xi’s rise to power lacked an ideologically coherent program and was notable for the absence of a high-profile crackdown on iconic private firms or well-known private entrepreneurs. All this would change under Xi. Before his ascent to the top, Xi had said or done few things that revealed his views of the private sector. His three-and-one- half-year stint as party chief of Zhejiang province (November 2002 to March 2007) may bolster his image as a probusiness official, but his record in Zhejiang contains no evidence of major initiatives that supported the private sector. As an astute politician, Xi was careful to avoid close ties with wealthy private entrepreneurs. Although his extended family members had reportedly amassed large fortunes through questionable business deals, Xi and his immediate family are not known to have been implicated in corruption.76 Only after he became party chief did Xi reveal what he really thought about the relationship between the state and the private sector. His rhetoric grew more unabashedly supportive of the state sector after he quietly abandoned the reform blueprint unveiled with great fanfare in November 2013. In October 2016 he emphasized that SOEs are “an important material and political basis for socialism with Chinese characteristics and an important pillar and reliable force for the CCP’s governance of the country,” and that the party will “firmly and unwaveringly make SOEs stronger, bigger, and better.”77 In terms of policy, however, the party did not adopt one single major pol- icy package to roll back the private sector. Early on, Xi launched a campaign to force private and foreign- invested companies to establish party organizations as a means of asserting political control.78 Later, policies that favored the state sector over the private sector were rolled out in a piecemeal fashion until Xi ordered a more drastic crackdown on the private sector that began in late 2020. The first prong of Xi’s economic strategy to preserve the -- 226 of 345 -- 214 c h a p t e r 7 state sector as the “dominant entity” was the 2015 unveiling of “Made in China 2025.” Although China had proposed similar industrial policy packages with aspirational goals in the past, “Made in China 2025,” a ten-year, state-led in- dustrial strategy to establish China’s global dominance in the high-tech man- ufacturing industry and to reduce its dependence on foreign technology, was far more ambitious and controversial.79 China’s main trading partners in the West saw it as an undisguised effort by China to displace the West as the global technological leader. The plan stipulated that China would attain 70 percent self-sufficiency in high-tech industries by 2025 and would achieve a leading position in global markets by 2049, the centennial of the People’s Republic of China.80 In addition to the worrisome security implications, “Made in China 2025” also involved massive government subsidies and pro- tectionist measures that were bound to conflict with the West’s economic interests. At home, it would funnel huge resources to the state sector, which was tasked with realizing the ambitious goals. Another step the party undertook to bolster SOEs was to make them even bigger, a trend that had started under Hu. Giant SOEs directly under the con- trol of the central government acquired small and poor-performing ones, os- tensibly to increase the economies of scale. During Xi’s first term, SASAC engineered some of the largest mergers of SOEs in history, such as the com- bination of CSR Corporation and CNR Corporation, two manufacturers of locomotives and rolling stock in 2015, as well as several others. Based on data provided by SASAC, such mergers did make the centrally controlled SOEs bigger, as measured by their assets. But their efficiency actually declined, and their debt- to- asset ratio rose.81 The government’s direct intervention in the stock market in 2015 is an- other example of the revival of statism under Xi. Starting in June 2014, Chi- na’s stock markets began a bull run. Investor exuberance, fueled in part by the official media, drove the main index on the Shanghai Stock Exchange up more than 150 percent within the year. When the bubble began to burst in mid-June 2015, the top leadership viewed the slide in stock prices as a nega- tive reflection of its economic stewardship and ordered that the “national team”—mainly state-owned financial entities—pour trillions of yuan into the market to support the prices. This intervention failed miserably. In ad- dition to the waste of huge amounts of money, the government-orchestrated rescue did not stop the crash. By the time the market stabilized in March 2016, the Shanghai index was down 45 percent from its peak.82 Although this was not the first time the Chinese state had intervened to prevent stock prices -- 227 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 215 from collapsing, it had never before engineered such a broad, costly, and ultimately doomed effort. In addition to channeling resources to the state sector, the government also implemented policies that systematically hurt the private sector. An early in- dication of policies that were less friendly to private entrepreneurs was the dramatic reduction in loans to the private sector by state-owned banks. In 2013 about 57 percent of all loans flowed to nonfinancial private firms. But this trend was reversed in 2014, when only 34 percent of such loans went to nonfinancial private firms. By 2015, only a trickle of credit—19 percent—was made available to nonfinancial firms. When the government launched its “deleveraging” cam- paign in 2016, private firms were hit especially hard. In that year, their share of credit collapsed to 11 percent.83 Private firms were easy targets during the deleveraging campaign between 2016 and mid-2018 because, in spite of their efficiency, they had costly and unstable access to credit. As state-owned banks require collateral from private firms and fear responsibility if their loans to private firms go sour, private firms must primarily rely on the shadow banking system (trust companies and wealth management firms) to borrow short-term loans at higher interest rates. Consequently, when the government required that the entire financial system reduce its leverage, the supply of credit to private firms fell because the state- owned banks could call back loans to shrink their balance sheets, whereas the shadow banking system, which indirectly also relied on the formal banking system for funding, was forced to cut credit to private firms.84 The negative impact of deleveraging on the private sector can be seen in the slower growth of the number of private firms and their employment, and, more important, the relative decline of the private sector as an investor in the domestic economy. In the three years (2013–2015) prior to the deleveraging campaign, the number of private firms and their employment numbers had grown, on average, 20.6 percent and 11.9 percent, respectively. During the three years of deleveraging (2016–2018), the corresponding numbers were 18.1 percent and 10.1 percent, respectively, indicating the slower growth of the private sector.85 Investment data during this period paint an even clearer picture of the re- treat of the private sector under Xi. In 2016 and 2017, the height of the delever- aging campaign, private sector investment in fixed assets grew only 2.8 and 5.2 percent, respectively. By comparison, investment by SOEs rose 18.7 and 10.1 percent, respectively, providing evidence that the deleveraging campaign was not having a negative impact on SOEs.86 Overall, the private sector’s -- 228 of 345 -- 216 c h a p t e r 7 investment did not recover in the wake of the campaign. Official data show that private investment in fixed assets peaked at 58.9 percent of the total in 2014. In 2016, the first year of the deleveraging campaign, it fell to 56.3 percent. By 2019, the year before the pandemic, it accounted for 56.8 percent of total fixed asset investment.87 If major economic policies, such as “Made in China 2025” and the delever- aging campaign, hurt the private sector indirectly, the crackdown on the pri- vate sector that occurred in 2021 was fully motivated by political concerns. Prior to the Xi era, the party did not implement policies that would be seen as blatantly hostile to the private sector, even though the government consis- tently favored the SOEs. All this would change during Xi’s second term. Xi’s first shot signaling a major shift in the party’s policy was the abrupt suspension of the Initial Public Offering (IPO) of a private firm, the Ant Group, on November 3, 2020 (the IPO was later cancelled). The Ant Group, a fintech company affiliated with the e-commerce giant Alibaba, was on course to raise a record $37 billion by listing its shares in Hong Kong and Shanghai. But on the eve of the IPO, Xi reportedly ordered that Chinese regulators scut- tle the Ant Group’s listing.88 One factor that allegedly drove Xi to intervene personally was the discovery that families of several senior retired officials were early investors in the group and would have reaped small fortunes if the IPO had gone ahead.89 The real reason appears to be Xi’s fears that the private sector could erode the party’s control of a vital economic sector—the financial system. At a Po- litburo seminar on the digital economy on October 18, 2020, shortly before his intervention, Xi gave a speech emphasizing the need to “prevent the expansion of platform monopolies (such as Alibaba) and the disorderly expansion of capital.”90 In retrospect, cancellation of the Ant Group IPO is not an isolated incident but rather the beginning of a concerted crackdown directed by Xi to rein in “the disorderly expansion of capital.” The campaign quickly claimed most of China’s high-tech firms, in particular its e-commerce platform companies. After abandoning the IPO of the Ant Group, Alibaba was fined a record eighteen billion yuan in April 2021 for breaking antitrust regulations. Well-known tech giants, such as Tencent, Meituan, Baidu, Didi, JD.com, and others, were later ordered to pay huge fines for alleged violations of the antimonopoly law and data security regulations.91 But compared with those private firms providing after-school coaching services, these tech firms were far luckier. Xi’s crackdown on the platform economy diminished their status and precipitated a plunge in their stock -- 229 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 217 prices that destroyed $1.1 trillion in market value within two years.92 But they remained in business. By comparison, the after-school coaching industry, which had generated $100 billion in revenue annually, was completely wiped out after the govern- ment announced a nationwide ban on July 21, 2023. This crackdown, again allegedly carried out at the direction of Xi, was supposedly motivated by the government’s desire to make the education playing field more equal. Because of fierce competition for slots in high-quality middle schools and prestigious universities, Chinese parents sent their children to after-school tutoring pro- grams in hopes that they would then perform better on exams. Xi likely saw this industry as perpetuating inequality since only the well-off could afford the extra costs. However, his drastic solution—banning the entire industry as part of a program to reduce the students’ academic burdens and their families’ expenses for after-school tutoring—merely addressed the symptom of the problem but failed to deal with its root causes, that is, the inadequate supply of high-quality education and a culture obsessed with exams.93 This crackdown backfired disastrously. The draconian ban on an entire pri- vately run industry was unprecedented in the post-Mao era. Overnight it de- stroyed a large number of private businesses and made hundreds of thousands of people working in the industry jobless. Most important, the crackdown was a wake-up call to private entrepreneurs that their property rights were totally insecure under CCP rule. The crackdown failed to achieve its objective as it merely drove the industry underground, raising the costs for parents and mak- ing access to after- school coaching even more unequal than before the crackdown.94 The Covid Pandemic When the Covid-19 pandemic first surfaced in Wuhan in December 2019, the Chinese economy was already in a precarious state. The housing bubble was on the verge of its inevitable burst. Overall levels of debt were at record highs, limiting the government’s ability to use credit-fueled investment to prop up growth. Although the economy managed to expand by 6.4 percent in 2019, this was 25 percent less than growth in 2012, the year Xi ascended to the top.95 But even this moderate rate of growth would be beyond reach in the wake of the pandemic. A combination of adverse factors after the spread of the Covid-19 pandemic was responsible for the economy’s lackluster performance. The most obvious reason was the direct economic cost of the pandemic as -- 230 of 345 -- 218 c h a p t e r 7 lockdowns inflicted lasting economic damage. Ill- advised government policies—an inflexible zero-Covid policy and refusal to stimulate the econ- omy with fiscal spending—caused needless pain throughout the period of the pandemic. Unlike Western countries that provided substantial Covid relief to busi- nesses and ordinary people immediately after the pandemic struck, Beijing offered no material relief either to businesses or to individuals. At least seven million small private businesses went bust in 2020 and 2021.96 To be fair, zero- Covid— the party’s immediate response to the pandemic—was probably the correct policy in the early days of the pandemic, and it did succeed in contain- ing the virus quickly and restoring most economic activities by the middle of 2020. However, when a more contagious variant—omicron—emerged at the end of 2021, zero-Covid proved to be both ineffective and prohibitively costly. Although nearly all countries gave up zero-Covid when omicron morphed into the dominant strain, China doubled down in 2022. It enforced population- wide tests and imposed lengthy lockdowns on entire cities. In September 2022, for example, more than 300 million people in over seventy cities were under full or partial lockdown.97 Shanghai, the country’s largest city with a population of over twenty-two million under lockdown from March to May in 2022, became China’s most prominent victim of the zero-Covid policy. The primary reason for the party’s continuation of this policy even after its ineffectiveness became abundantly clear is almost certainly Xi’s own personal political interest. The strongman was seeking a norm-busting third term as CCP chief at the Twentieth Party Congress scheduled for the fall of 2022. Worried that an uncontrollable out- break of infections ahead of the congress would dent his image and mar an important political event designed to establish his open-ended rule, Xi had compelling incentives to demand that local party officials continue to enforce zero-Covid regardless of the costs. This argument is supported by the fact that Xi decided to abandon the policy suddenly at the end of November— one month after the conclusion of the Twentieth Party Congress. Although the spread of antilockdown protests likely made Xi act sooner than he had originally planned, zero-Covid was no longer critical to him after the congress duly handed him a third term and allowed him to pack the Politburo with loyalists.98 The damage caused by Xi’s zero-Covid policy is both measurable and incal- culable at the same time. Despite the party’s claim that this strategy kept China’s Covid-related fatalities among the lowest in the world, researchers estimate that -- 231 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 219 as many as 1.87 million excess deaths in China occurred among individuals thirty years and older during the first two months after the end of its zero-Covid policy.99 This is more than the total number of deaths (1.158 million) attributed to Covid-19 in the United States as of December 2023 (China has a population more than four times that of the United States).100 Due to disruptions caused by the zero-Covid lockdowns, the Chinese economy grew only 2.9 percent in 2022, marking the slowest growth in the post-Mao era and well below the offi- cial target of 5.5 percent. The invisible damage to the policy includes the loss of confidence among private entrepreneurs and foreign investors in CCP compe- tence. The party’s headstrong insistence on zero-Covid despite its ineffective- ness and mounting economic toll is a painful reminder that the narrow political interests of the Chinese regime and its personalistic ruler will always outweigh economic considerations. The one-two punch of Russia’s invasion of Ukraine and the nationwide economic disruptions attributed to Xi’s zero-Covid policy likely accelerated foreign investors’ plans to diversify their supply chains away from China so as to reduce exposure to potential geopolitical black swan events. For domestic private entrepreneurs, the party’s behavior during the pandemic reinforced a desire to seek safe havens outside of China for their assets and themselves. About twenty-five thousand “high-net-worth” Chinese reportedly emigrated in 2022 and 2023.101 After it abandoned the zero-Covid policy in December 2022, the party hoped that the economy would bounce back. But despite an initial robust recovery in early 2023, growth stalled as the real estate crisis deepened. Given its size, the burst of the real estate bubble was obviously the most important factor leading to China’s economic underperformance in 2023. In addition to registering lower than expected growth in 2023, the Chinese economy contin- ued to strug gle in 2024, weighed down by deflation, exodus of foreign firms, escalating trade tensions, and further deterioration in the collapsing real estate sector. Summary In retrospect, the end of the Chinese “economic miracle,” which coincided with the Covid pandemic, is largely due to the many policy failures that pre- ceded Xi’s rise. Topping the list is the failure to undertake genuine reforms to correct macroeconomic imbalances. Such reforms would have entailed in- creasing real household income by providing more social services and protec- tion. But because the party during the Hu era made at most modest progress -- 232 of 345 -- 220 c h a p t e r 7 in increasing social spending, the macroeconomic imbalances remained un- corrected, and thus they continued unabated into the Xi era. The party created an unprecedented credit bubble that began in 2009 and reached a dangerous magnitude by 2023, as described earlier in this chapter. Even though Xi implemented a deleveraging campaign in 2016, it achieved only modest results and had to be abandoned in mid-2018 in response to the US-China trade war. Consequently, the bubble grew so big that, when zero- Covid ended in December 2022, another major infusion of credit was not fea- sible as it would have raised the level of debt even higher and elevated the risks of a financial crisis. Similarly, the party relied too heavily on the real estate sector to drive growth during the early part of Xi’s first term, as shown by the double-digit increase of investment in real estate from 2013 to 2015.102 Even after Xi grew concerned about the excessively high housing prices and ordered measures to cool down the sector in 2016, the party was unable to prevent a further expan- sion of the housing bubble. When the government finally ordered a crack- down in the summer of 2020, not only was the timing inauspicious (in the middle of the pandemic), but the cure also turned out to be too harsh. Instead of a soft landing, the crackdown precipitated a crash. In addition to these policy mistakes, the Xi regime was less fortunate than its predecessors because most of the favorable structural factors that had earlier produced the Chinese economic miracle had either disappeared or be- come less favorable. The year that Xi ascended to the top, 2012, is likely to be remembered as China’s “Lewis Turning Point”—an exhaustion in the supply of rural surplus labor.103 Rising labor costs made China less competitive in low-end manufacturing, and Chinese society was beginning to age rapidly, increasing healthcare and pension expenditures. Because the Hu regime did not privatize the inefficient SOEs or push through meaningful reforms to im- prove the overall efficiency of the economy, productivity growth was stalling, and it would completely collapse under Xi. China’s external environment became less favorable at the end of the Hu era mostly because of the country’s increasing assertiveness in international affairs and Beijing’s resistance to addressing the concerns of its Western trad- ing partners about unfair trading practices. After Xi implemented an even more aggressive foreign policy during his first term, it became increasingly difficult for the West to sustain its decades-long policy of engagement. But it was Donald Trump’s trade war in 2018 that marked the beginning of the end of China’s economic integration with the West. As the Sino-American -- 233 of 345 -- E n d of t h e C h i n e s e E c onom ic M i r a c l e 221 relationship turned progressively adversarial, the commercial relationship un- raveled quickly. The trade war would escalate and morph into an economic cold war covering technology transfers and investments. However reluctant they were initially, after the Russian invasion of Ukraine in early 2022 America’s allies in Europe and Japan fell in line and implemented measures to restrict the flow of technology to China and to actively pursue “derisking,” or to reduce substantially their economic linkages with China. If globalization helped cre- ate the Chinese economic miracle, the reversal of globalization, which is cer- tain to accelerate during the second Trump administration, will unavoidably weaken the Chinese economy and darken its prospects. -- 234 of 345 -- 222 8 From Engagement to a New Cold War as is the case with its domestic political developments, China’s relations with the outside world, in particular the West, went through three distinct phases in the post-Mao period. Chinese power, the overall geopoliti cal envi- ronment, and the ideological values and leadership skills of the top leadership shaped Beijing’s foreign policy and its ties with the West during each phase. Despite the substantive differences in Chinese foreign policy and its relations with the West in these three phases, the underlying logic of path dependence connects all of them. The prospects of engagement and even full integration with the West were the brightest in the 1980s when the possibility of a more open and free China was the greatest. Such prospects dimmed but did not disappear completely in the post-Tiananmen era, because of both the effective- ness of China’s strategic restraint and the West’s optimistic bet on globaliza- tion. But engagement became untenable once totalitarian rule was revived under Xi Jinping, as China started asserting its power and directly challenging the US-led order. The first phase, from 1979 to June 1989, was the “golden age” of relations between China and the West. Devastated by three decades of economic mismanagement and political chaos under Maoist rule, in 1979 China was an impoverished nation that posed no real military threat to the West. Geopoliti- cally, both China and the West saw the Soviet Union as the primary security threat. Ideologically, Deng Xiaoping’s pro-market reforms gained enthusiastic support in the West because his efforts represented a decisive break with communism. Despite Deng’s avowed adherence to one-party rule, his regime presented an enticing opportunity to change China for the better and thus was worth a strategic bet. -- 235 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 223 A consummate pragmatist, Deng radically reoriented Chinese foreign policy to place it in the service of domestic economic development. By skillfully le- veraging China’s favorable geopolitical position, he cultivated friendly and eco- nomically beneficial ties with the United States and Japan, the two countries whose support would be indispensable to his “reform and opening.” Although Deng’s foreign policy would tie China’s economic destiny to the West, he had no intention of becoming part of the West-led system. He viewed integration as the sole viable tactic for ensuring the party’s survival and for restoring China to its place in the world. Steeped in geopolitical realism, Deng was convinced that only national strength could guarantee Chinese security and CCP rule. However, he believed that at the end of the Maoist era, China was not strong enough to safeguard either objective. If China succeeded in modernizing with the help of the West, in his view, the growth of Chinese power over time would improve the country’s geopolitical position. Even though he was not explicitly thinking of confronting the West, Deng’s grand strategy of building up strength with Western support and not being part of the West would sow seeds of con- flict decades later, after his grand strategy had actually achieved its objective. The crushing of the prodemocracy movement in June 1989 and the collapse of the Soviet Union in December 1991 fundamentally redefined Beijing’s rela- tions with the West and necessitated substantial adjustments to Chinese for- eign policy. During the post-Tiananmen era, the two critical factors—China’s status as a strategic partner of the West in an anti-Soviet common cause and muted ideological distaste for CCP autocratic rule—disappeared. The Tian- anmen crackdown revealed the ideological chasm between China and the West, and it would make Chinese human rights a key issue for the West. Practi- cally overnight, the end of the Cold War in 1991 downgraded China’s geopo- litical importance to the West. The West’s sanctions against China following the Tiananmen crackdown and its triumph over the Soviet Union directly gave rise to a grim view of the emerging West-led world order in Beijing. If a bipolar world order in the 1980s served Chinese interests by allowing China ample space to maneuver between two opposing camps, a unipolar world order under American dominance was decidedly not in Chinese interests. It was in the early 1990s that Deng began to explicitly and consistently express opposition to the West-led order and to voice China’s desire to change it. However, as China was too weak to challenge the post–Cold War order for most of the post-1989 era, its grand strategy was to avoid a self-defeating clash with the West, buy time, and build up strength to better protect its national interests. -- 236 of 345 -- 224 c h a p t e r 8 Despite incipient worries about growing Chinese power and constant ten- sions over its human rights record, the West adopted a policy of engagement with strategic hedging. Under this policy, economic and diplomatic engage- ment with China continued, with the implicit goal of integrating China into the post–Cold War order and becoming a stakeholder that would share the benefits of an inclusive order. At the same time, the United States would main- tain a robust military presence and security alliances along China’s periphery as insurance policies. Jiang Zemin implemented Deng’s strategy effectively. Ironically, however, the very success of the policy, especially in gaining the time and space neces- sary to amass national power, also made conflict more likely. As China’s grow- ing clout boosted its leaders’ confidence and ambitions, Deng’s dictum on strategic caution gradually lost its power of restraint. The initial, albeit subtle, break with the post-Tiananmen foreign policy of strategic caution occurred under the leadership of Hu Jintao in the wake of the 2008 global financial crisis. Convinced that China could find the right balance between strategic caution and strategic activism, Hu and his colleagues embarked on a new course to probe the soft spots in the West-led order and test its response to Chinese actions. Although the initial abandonment of strategic caution occurred in the wan- ing years of the Hu era, the rise of Xi Jinping at the end of 2012 marked a deci- sive break with China’s post-Tiananmen grand strategy. To be sure, Deng’s ultimate objectives of strategic caution—safeguarding one-party rule and re- storing China’s status as a great power—did not differ from those of Xi. But Xi misjudged Chinese strength, set overly ambitious objectives, embraced excessively risky and confrontational tactics, and underestimated the US re- solve and response. Inspired mostly by domestic political considerations, the trade war Donald Trump launched in early 2018 quickly triggered a cascade of actions and reac- tions that in short order led to a complete rupture of Sino-American relations. As the confrontation between the two countries escalated, Xi made the fateful strategic decision to align with Russia to counter American power. But Russia’s invasion of Ukraine in February 2022 drove the European nations, most of which probably would have preferred neutrality in the Sino-US conflict, into the arms of the United States. The outcome has been a full-fledged new cold war (NCW). Ideologically, China is aligned with the major autocratic regimes, such as Russia and Iran, which share its opposition to the US-led order that threatens Chinese regime -- 237 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 225 security and its vital security interests. Economically, China and the West have begun a costly and complex process of severing the trade, technological, and financial ties that had been forged during the prior four decades of engage- ment. Militarily, the United States and China have accelerated preparations for a direct conflict in the Taiwan Strait and the South China Sea. Birth of Engagement When Mao died in September 1976, the dictator bequeathed to China a rela- tively favorable external environment following the Sino-American rapproche- ment that he and Richard Nixon had engineered in 1971–1972.1 By the time of his death, China and the United States were quasi-allies in their common cause against the Soviet Union. Beijing had reclaimed Chinese membership in the United Nations and held a veto-wielding permanent seat on its Security Coun- cil. China had also restored diplomatic relations with most Western countries. Although the Cold War would not end for another decade and a half, by the mid-1970s the cold war between China and the West was effectively over. For a country isolated from the capi talist world for nearly three decades, friendly relations with the econom ically dominant West was a precondition for its re- integration into the global economy and economic modernization. After Deng became de facto paramount leader in December 1978 and launched his “reform and opening,” China’s external environment would im- prove even more dramatically. The tensions between the Soviet Union and the West escalated after the former invaded Afghanistan at the end of 1979. Because Deng embarked on a path toward capitalism, the West had additional incen- tives to cultivate ties with China. The economic potential of a market of nearly one billion people was too enticing to ignore, despite China’s low level of de- velopment. Ideologically, Deng’s “reform and opening” was worth supporting because it represented a great leap forward from Mao’s totalitarianism and could lead to more personal freedoms and even political openness. Besides these favorable factors, Deng’s positive assessment of China’s ex- ternal environment and near-total influence over foreign policy reinforced his determination to seize this historic opportunity to advance his agenda of “opening.” In January 1980 he articulated the essence of his strategy of “biding your time and building your strength,” even though he did not use these exact words in a talk to senior leaders. “Of all our tasks,” Deng said, “modernization is . . . the essential condition for solving both our domestic and our external problems. . . . The role we play in international affairs is determined by the -- 238 of 345 -- 226 c h a p t e r 8 extent of our economic growth. If our country becomes more developed and prosperous, we will be in a position to play a greater role in international af- fairs. . . . In the final analysis, the return of Taiwan . . . depends on our running our affairs at home well.”2 However effusive he might have sounded about the importance of opening, Deng did not envision China becoming part of the West-led international order. He saw this order as something China could exploit profitably, but he said noth- ing about accepting the values and rules embodied in it. Indeed, Deng’s opening was transactional and restricted primarily to economic relations. From his per- spective, China would take advantage of the economic benefits of the West-led order but would remain independent of it in all other aspects. For Deng’s “developmental diplomacy” to succeed, he needed first to dra- matically improve ties with the United States and Japan, the world’s two largest economies, which could provide China with more access to capital, technol- ogy, and markets than any other country.3 Gaining the support of the United States as part of Deng’s “reform and opening” was critical because the US stance on China could also influence the position of its allies. In the case of Japan, its geographic proximity to China made it an even more promising trading partner and investor than the United States. Therefore, Deng took per- sonal charge of these two vital diplomatic tasks in 1978, even before he effec- tively became paramount leader in December of that year. Although the visit by Richard Nixon in February 1972 initiated the US- China strategic rapprochement, disagreement over the Taiwan issue prevented the two countries from normalizing diplomatic relations. The United States was seeking a form of normalization with the People’s Republic of China with- out derecognizing the Republic of China (ROC), a position Beijing emphati- cally rejected. Washington and Beijing were essentially deadlocked over the Taiwan issue until late 1978, when President Jimmy Carter signaled that the United States could meet China’s three conditions: severing official ties with the ROC, withdrawing US troops from Taiwan, and abrogating the US-ROC mutual defense treaty. At the most critical stage in the Sino-American normal- ization talks in mid-December 1978, Deng personally participated in the ne- gotiations and made a key concession by tacitly agreeing to continued US arms sales to Taiwan despite his vocal opposition.4 On December 16 the United States and China released a joint communiqué announcing the nor- malization of diplomatic relations.5 To be sure, the United States and China did not resolve their fundamental differences over the status of Taiwan, but the “one China policy” that the -- 239 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 227 United States formulated and later modified largely struck the right balance between reassuring Beijing and deterring reunification through military means. The Taiwan issue would become more complicated and more volatile in the 1990s after pro-independence political forces gained greater influence on the island, but in the 1980s China and the United States managed their dif- ferences over Taiwan skillfully and cooperatively. When the ink on the Sino-American communiqué normalizing relations was barely dry, Deng embarked on a weeklong historic visit to the United States at the end of January 1979 to cement the Sino-American partnership. In addition to specific agreements signed during his trip, Deng succeeded in win- ning over both the American political establishment and the American public with his style of straight talk and friendly gestures (including donning a cow- boy hat during a rodeo in Houston).6 Normalization of Sino-American relations in general, and Deng’s successful visit to the United States in 1979 in particular, ushered in a golden era of rela- tions between the two countries. Prior to normalization, their commercial rela- tions were negligible, with two-way trade in 1978 totaling $1.1 billion.7 But by 1989 bilateral trade had risen to nearly $17 billion.8 The rapid expansion of trade was made possible because the United States granted China “most-favored- nation” (MFN) trade status following the “Agreement on Trade Relations be- tween the United States of America and the People’s Republic of China,” which was signed in July 1979 and became effective on February 1, 1980. (China’s MFN status was subject to annual renewal by the US president.)9 Cooperation in science and technology also blossomed after the January 31, 1979, signing of the US-China Agreement on Scientific and Technological Co- operation. Based on the agreement’s framework, the two countries reached a series of separate deals covering specific areas, such as agriculture, civilian nuclear energy, and aerospace. The United States also significantly relaxed ex- port controls and even allowed the export of defensive military technologies to China.10 Regular high-level exchanges further solidified the Sino-American partnership in the 1980s. Top American leaders paid frequent visits to China. In April 1984 President Ronald Reagan visited China after hosting Premier Zhao Ziyang three months earlier. George H. W. Bush made China a stop on his trip to East Asia in February 1989, shortly after becoming president. Fre- quent cabinet-level exchanges also took place between the two countries.11 China’s relationship with Japan experienced rapid improvement during the same period. On October 22, 1978, Deng began a weeklong visit to Japan—the first visit by a top Chinese leader since 1949.12 Just as he would do a few -- 240 of 345 -- 228 c h a p t e r 8 months later in the United States, Deng won over Japanese political elites, business leaders, and the public alike with his straight talk, friendly demeanor, and diplomatic skills. He studiously avoided or downplayed the territorial dispute over the Senkaku/Diaoyu Islands, which both Japan and China claim.13 In December 1979 Prime Minister Masayoshi Ohira of Japan visited Beijing and announced a five-year loan program, totaling 370 billion yen ($1.5 billion), to help fund the building of several major projects in China. In addi- tion, Ohira offered preferential tariff treatment on Chinese goods, a grant to build a hospital in Beijing, and other technical assistance.14 In subsequent years, Japan’s Official Development Assistance (ODA) program would chan- nel valuable resources into China’s economic development at a time when the country was desperately in need of foreign capital. Between 1979 and 2005, the amount of development assistance provided by Japan in concessional loans, grant aid, and technical assistance totaled 3.4 trillion yen (over $10 billion), more than that of any other country in the world.15 Japanese FDI in China in the 1980s reached $3.2 billion, accounting for about 15 percent of total FDI received by China, and second only to the amount of FDI from Hong Kong.16 Diplomatic ties blossomed even more than Sino-Japanese commercial rela- tions in the wake of Deng’s visit. During his December 1979 trip to Beijing, Prime Minister Ohira signed a Sino-Japanese cultural exchange agreement. In March 1980 the first meeting of a regular Sino-Japanese diplomatic dialogue was held in Tokyo. Two months later, Chinese Premier Hua Guofeng visited Japan and signed a Sino-Japanese agreement on cooperation in science and technology. Sino-Japanese relations reached a new high following the visit by Hu Yaobang, then CCP general secretary, to Japan in November 1983. One of the highlights of Hu’s visit was an agreement with Prime Minister Yasuhiro Nakasone to form the Sino- Japanese Friendship Committee for the 21st Century, an organization whose sole mission was to improve bilateral rela- tions.17 The warming of Sino-Japanese relations also led to an increase in people-to-people exchanges. During his visit to Japan in late 1983, Hu invited three thousand Japanese youths to spend a week in China the following year (the visit took place in September 1984). In March 1985 a delegation of two hundred Chinese young people, headed by future Chinese leader Hu Jintao, visited Japan at the invitation of the Japanese government.18 Reintegration into the international community was another foreign policy goal in the 1980s. During the Maoist era, self-isolation had led to the exclusion of China from nearly all key international organizations. In 1977 China was a member of only twenty-one international organizations.19 This would change immediately after Deng became paramount leader. In 1979 China would join -- 241 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 229 most of the UN-affiliated international organizations, such as UNDP, UNI- CEF, UNHCR, and WEP, and in the 1980s it would become a member of the rest, such as FO and ILO.20 China also joined a large number of international nongovernmental organizations.21 For a leadership laser-focused on economic development, membership in international economic institutions promised to deliver immense benefits. In April 1980 China became a member of the International Monetary Fund (IMF) and the World Bank. Six years later, it joined the Asian Development Bank and also applied to join the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organization. Of these interna- tional financial institutions, the World Bank was the source of the most valu- able assistance to China in the 1980s. Besides lending close to $7 billion to China during the entire decade, the World Bank’s technical expertise in eco- nomic development and reform helped Chinese technocrats craft more effec- tive policies.22 Another of Deng’s priorities was to send a large number of Chinese stu- dents abroad for higher education and advanced training. The country’s higher education system, devastated during the Cultural Revolution, was unable to produce the scientists and engineers China urgently needed for economic development. Among top Chinese leaders, Deng was the most enthusiastic advocate for broadening educational exchanges with the West.23 Western edu- cational institutions and foundations, in particu lar those in the United States, offered generous funding to Chinese students as most Chinese students could not afford the tuition and living expenses in the West. The number of Chinese students grew rapidly. At the end of the Maoist era, few Chinese students were studying abroad. But by 1988, the United States alone was hosting more than twenty-eight thousand Chinese students and scholars.24 This trickle would grow into a flood in later years as China opened its doors wider and well-to-do Chinese could afford to send their children abroad to study at their own ex- pense. Official Chinese data show that about eight million Chinese students and researchers studied in more than 160 countries between 1979 and 2021.25 The benefits to China’s economic modernization generated by this infusion of human capital are incalculable. Crafting a New Grand Strategy In the 1980s Deng accomplished most of his priority foreign policy objectives. The normalization of relations with the United States opened access to Ameri- can capital and technology as well as the US market. Washington’s embrace of -- 242 of 345 -- 230 c h a p t e r 8 Deng’s “reform and opening” encouraged its allies to adopt similar friendly policies toward Beijing. A relationship of quasi-alliance between the United States and China was also forged during this decade, resulting in frequent high-level visits and close cooperation in national security, education, science and technology, and commerce. China’s relationship with its most important Asian neighbor, Japan, reached an unprecedented level of warmth and deliv- ered rich economic benefits to Deng’s modernization program. In the rest of Asia, with the exception of Vietnam, China could boast friendly, or vastly im- proved, ties. Most remarkably, China and the Soviet Union, its primary geopo- litical adversary since the late 1960s, had reached a rapprochement. Beginning in late 1982, both Moscow and Beijing began to explore a path forward to lower tensions. The initial pace was slow, but when Mikhail Gorbachev became So- viet leader in March 1985, he immediately expressed greater openness to re- pairing Soviet-Chinese ties, and he later followed up with a series of unilateral concessions that Beijing positively received.26 The event marking full normal- ization of bilateral state relations was Gorbachev’s summit with Deng, held in Beijing on May 16, 1989. This “golden era” was cut short on June 4, 1989, when Deng ordered the PLA to crush the prodemocracy movement in Tiananmen Square. Just as the Tiananmen crackdown irrevocably altered China’s domestic political trajec- tory in the post-Mao era, it had a comparable impact on relations with the West, and it exposed the previously somewhat hidden but unbridgeable ideo- logical chasm between China’s Leninist regime and the Western democracies that would become a major source of friction in the post-Tiananmen era. Be- fore the tanks of the PLA rolled into Tiananmen Square, China’s human rights record was a troubling, but not dominant, issue for the West. Confronting the existential security threat of the Soviet Union took precedence. Additionally, largely due to the policies of liberal reformers like Hu Yaobang and Zhao Zi- yang, China’s human rights conditions were improving substantially in the 1980s, despite periodic but short-lived conservative backlashes in the ideologi- cal arena. But all this changed after June 4, 1989. Although Deng was directly respon- sible for the Tiananmen crackdown, the paramount leader himself was infuri- ated by the sanctions imposed by the United States and its allies, and his at- titude toward the West underwent a profound change. Prior to the Tiananmen crackdown, Deng consistently emphasized the West’s indispensable role in Chinese economic modernization, and he downplayed its potential ideologi- cal threat to CCP rule. But after June 4, Deng saw the West as an implacable -- 243 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 231 ideological adversary. The phrase “peaceful evolution,” party shorthand for the West’s plot to subvert the Chinese regime through economic and political engagement, never appeared in any of his speeches prior to June 1989. Indeed, it was seldom used in official publications. A search of China National Knowl- edge Infrastructure (CNKI) shows that the phrase appeared only twelve times between January 1, 1979, and April 20, 1989 (the Tiananmen protests began on April 15). But it ominously resurfaced in Deng’s speech in September 1989.27 Apparently to underscore Deng’s warning, the compilers of his Selected Works titled a conversation between Deng and a visiting foreign leader in Novem- ber 1989 “We Must Adhere to Socialism and Prevent Peaceful Evolution Towards Capitalism.”28 (The frequency of the appearance of the term “peace- ful evolution” rose dramatically after June 4. A search of this phrase on CNKI shows that it appeared 2,889 times in official journals between June 5, 1989, and December 1, 1999.) If anything, by late 1989, as the Soviet bloc was teetering on a complete meltdown, Deng had grounds to suspect that China would be the next target of the NCW. Indeed, he openly sounded the warning of an NCW shortly after the fall of the Berlin War in November 1989: “It seems that one Cold War has come to an end,” Deng warned, “but that two others have already begun: One is being waged against all countries of the South and the Third World, and the other against socialism. The Western countries . . . want to bring about the peaceful evolution of the socialist countries.”29 However, despite his dim view of the West’s intentions and the danger of “peaceful evolution,” Deng remained convinced that a major new war was un- likely and believed that China needed to gain as much time as possible to make itself stronger. To be sure, he saw the post–Cold War international order, cen- tering on American unipolarity (“hegemonism and great power politics” in Chinese official rhetoric), as fundamentally unjust, hence something that had to be changed. But he was also realistic enough to know that China lacked the power to make such a change happen, and any attempt to do so would be against Chinese interests.30 In a series of speeches to top party leaders between late 1989 and the end of 1990, Deng spelled out the core tenets of a new grand strategy for the post– Cold War era. China’s long-term strategic mission and objective would include “opposing hegemonism and power politics” and “working to establish a new international political order and a new international economic order.”31 At the same time, despite the upheaval in some socialist countries, Deng still saw the possibility of China doubling its GNP in real terms for the second time, -- 244 of 345 -- 232 c h a p t e r 8 according to plan.32 In September 1989 he coined three phrases, consisting of twelve Chinese characters that would become the guiding principle of Chi- nese foreign policy in the post-Tiananmen era. Translated as “Observe the situation coolly, hold our ground, and act calmly,” this policy was cautious, reactive, and centered on self-preservation. In December 1990 Deng added another element: “Make a contribution.”33 Deng was making it crystal clear that the goal of this risk-averse foreign policy was to gain time to build up strength, as summarized by the phrase taoguang yanhui (hiding your brightness and building up strength), which Deng invoked in April 1992. The aging leader, who had just returned from his history-bending southern tour, told his staff, “We will become a more signifi- cant political power if only we taoguang yanhui for a few years. The weight of China’s voice on the global stage will be different.”34 A consummate realist, Deng knew that a successful strategy of taoguang yanhui would nevertheless instill anxiety about Chinese power in the West. The best response Deng pre- scribed was not open confrontation but rather maintaining cooperation, ac- companied, at the same time, by vigilance. Despite the West’s suspicions or nefarious design for China, Deng urged his successors to avoid conflict. “We should keep them as friends but also have a clear understanding of what they are doing.”35 Although Deng presciently laid out the core principles of a foreign policy for the post–Cold War era two years prior to the fall of the Soviet Union, the formal dissolution of the world’s erstwhile superpower on December 25, 1991, nevertheless demoralized and worried the Chinese leadership. Ideologically, the fall of the first Communist state, which had inspired the CCP, was yet another confirmation, after the collapse of the Soviet satellites in Eastern Europe in late 1989, that communism had been a complete failure. Geopoliti- cally, China’s position drastically worsened overnight. The favorable external environment of the 1980s became history. Conflict over security issues that had largely been frozen but not resolved, such as the status and future of Tai- wan and Chinese territorial and maritime disputes with its neighbors, would become far more prominent and, like human rights issues, constitute a major source of tensions between China and the United States in the post–Cold War decades. As its capabilities grew, China’s long-term intentions would soon be- come a top concern of both the United States and its allies. Deng’s premoni- tions about the dynamic of a classical security dilemma would come true, al- beit probably later than he had expected. Growing Chinese power did raise the specter of the rise of another Communist behemoth when America’s -- 245 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 233 neocons gained power in the administration of George W. Bush in 2001, but their strategic blunder of invading Iraq in 2003 would give China fifteen more years—until Donald Trump launched the 2018 trade war that formally ended the era of engagement between China and the United States. It is not an exaggeration to say that the seeds of the NCW between China and the West that had been sown even before the Cold War was completely over. Given the ideological chasm and clashing visions of the international order, Deng had made it clear that China would never give up its autonomy as a “socialist country” in international affairs. Speaking to several leading mem- bers of the Central Committee shortly after the Tiananmen crackdown, Deng vowed: “The Western imperialists are trying to make all socialist countries abandon the socialist road, to bring them in the end under the rule of interna- tional monopoly capital. . . . We have to take a clear-cut stand against this ad- verse current. Because if we did not uphold socialism we would eventually become, at best, a dependency of other countries.”36 Deng might not have been aware of his tone at the time, but he was sounding a lot more like Chen Yun. More seriously, Deng’s pledge that China would never become part of the West- dominated international system foreshadowed not only future Chinese leaders’ resistance to full integration as encouraged by the West through engagement but also the likely clash with this order after China gains sufficient power. Biding Time and Building Strength Deng may have laid down the broad foreign policy principles for his succes- sors, but translating them into policy was still a challenge in a unipolar world. With a GDP that was about 7.5 percent that of the United States in dollar terms (1992), China was a much weaker power, and it was highly vulnerable to hos- tile American actions.37 Geopoliti cally, the “China card” was no longer valu- able.38 Ideologically, America’s view of China darkened following the Tian- anmen crackdown. Bilateral conflict over human rights became a major source of tensions in the 1990s. When Bill Clinton was running for the White House in 1992, he accused his opponent, then-president George H. W. Bush, of “cod- dling with dictators,” and he later pledged to link China’s MFN trade status to its human rights record (a policy he had to reverse in 1994).39 Most ominously for the post-Deng leadership, powerful groups in the United States, encompassing labor and human rights advocates on the left and national security hawks and the religious right at the other end of the ideological spec- trum, all viewed China as an enemy that had to be confronted before it grew too -- 246 of 345 -- 234 c h a p t e r 8 powerful.40 Influential media figures as well as some academics eloquently made the case for containing China. A common thread ran through their warnings about China: The United States and China have irreconcilable ideological dif- ferences and clashing geopolitical interests, and should China gain enough power, conflict between the two countries will become inevitable.41 Such calls for a preemptive containment strategy may seem prescient in hindsight, but they did not become American policy in the 1990s, most likely because there was no broad-based support for an offensive policy against a country whose rapid rise was hardly guaranteed. Indeed, few in Washington, or in China itself, foresaw the supercharged growth of Chinese power in the subsequent two decades that would turn Beijing into a near-peer rival. Those advocating an alternative strategy could also muster powerful counterargu- ments. Among other things, critics of a preemptive containment strategy pointed to the near certainty of an other wise avoidable dangerous clash be- tween the United States and China, the lack of support from allies in the event of such a conflict, and the weakness of Chinese power and an exaggeration of its threat to American interests in East Asia.42 The framework of such an alter- native strategy has since been given various labels, such as “conditional en- gagement” or “strategic hedging.” Its essence is a finely balanced strategy mix- ing deterrence and engagement. Specifically, instead of hard containment, Washington would place greater emphasis on economic and diplomatic en- gagement with Beijing through expansion of trade and investment and high- level exchanges. However, to hedge against potential Chinese threats to Amer- ican interests in East Asia, the United States would maintain and strengthen its alliance networks, continue forward military deployment, and impose re- strictions on transfers of advanced technologies (such as semiconductors) to China.43 The evolution of this strategy took some time and did not garner sufficient political support in Washington until bilateral relations were stabi- lized with Jiang Zemin’s 1997 state visit to the United States.44 To the post-Deng leaders, Ameri ca’s “strategic hedging” was preferable to full-fledged containment. But at the same time, they were not blind to its com- ponents that smacked of “containment.” In a foreign policy speech in 1993, Jiang Zemin laid out the dilemma China faced in dealing with the United States. On the one hand, he pointed out that “peaceful evolution” remained the long-term goal of “some Americans” who did not want to see a stronger reunified China and would continue to pressure China on human rights, trade, and Taiwan. On the other hand, the United States was the world’s most powerful country, an important export market, and a source of capital and technology for China. The best strategy was to be “both combative and conciliatory, . . . improving -- 247 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 235 relations between China and the U.S. . . . to put our relations on a more stable course.”45 Even after Sino-American relations had fully stabilized in 1998 after a rocky period, Jiang made a similar warning in a speech. He said there are people in Ameri ca whose “underlying goal is . . . to change China’s socialist system and eventually incorporate China into the Western capitalist system. This is a long and complex struggle.”46 In the face of this challenge, the best counterstrategy was “to use a two-pronged approach against their two-sided policy.” America’s “two sides” here obviously refer to engagement (one side) and containment (the other side). China’s counterstrategy in response, according to Jiang, was both to “cooperate” (one side) and “confront” (the other side) by “adhering to principles without losing flexibility.”47 To be sure, this pragmatic strategy was designed to avoid a frontal collision from a position of structural vulnerability with the world’s sole superpower in the post–Cold War era. By the 1990s, China had grown significantly depen- dent on access to the US market and American technologies, and a sudden rupture of ties with the United States could derail economic modernization.48 However difficult it might have been for Jiang and his colleagues to endure what they saw as bullying acts of “American hegemonism,” the harsh reality of a lopsided balance of power unfavorable to China counseled prudence and patience.49 In the same speech, Jiang made it clear that Beijing desired a mul- tipolar world and a new “just and equitable new international political and economic order.”50 It was a refrain that Chinese leaders would invoke repeat- edly, even at the risk of antagonizing the United States, the architect and pri- mary defender of the order that China viewed as unjust and unreasonable. Nevertheless, Jiang emphasized that China had to act with calm and avoid taking the lead to confront the United States and its allies. Repeating Deng’s dictum of taoguang yanhui, he added three additional strategic principles: shoulian fengmang (exercise restraint), baocun ziji (preserve ourselves), and xutu fazhan (develop gradually).51 In essence, Jiang was prescribing Deng’s strategy of buying time and avoiding conflict to cope with American domi- nance in the post–Cold War era. Reorienting Security Strategy In the 1980s Deng’s assessment that a great power war was unlikely led to a cut of one million PLA soldiers and the starving of the military of funding and investments. But the party’s prioritization of butter over guns created its own problems, such as corruption in the military as the PLA was allowed to operate -- 248 of 345 -- 236 c h a p t e r 8 for-profit businesses to generate off-the-books income (a practice the party ended in 1998).52 In the 1990s China also began to implement a sustained program of modernizing its outdated military. The impetus was not a sudden change in its assessment of the likelihood of a world war. In fact, during his tenure in office, Jiang Zemin consistently maintained that the external envi- ronment was favorable and a new world war was unlikely.53 Instead, the initial direct trigger for Chinese military modernization in the post–Cold War era was the awesome demonstration of America’s high-tech military during the first Gulf War of 1990–1991, when a US-led coalition routed the Iraqi army. Jiang personally attended three seminars on the Gulf War in June 1991, and thereafter he gave a series of speeches on military strategy and technology that underscored the need to increase defense “appropriately” and to develop in- digenous defense technologies.54 After intense deliberations, the Central Mili- tary Commission formulated a new defense doctrine in 1993 that emphasized “winning local wars under modern technological conditions.”55 Implementa- tion of this doctrine would drive military modernization during the following two decades. The task of building a high-tech military force gained greater urgency after the ascendance of pro-independence political forces in Taiwan in the mid- 1990s. Chinese leaders realized that they required credible military options to deter both Taiwanese independence and potential American military inter- vention. Starting in the mid-1990s, China’s military modernization program focused largely on possible Taiwan contingencies, thus unleashing the dynam- ics of an escalating security dilemma with the United States and its East Asian ally, Japan, in the subsequent two decades.56 Based on official data, defense spending began its sustained rise in 1991 (see table 8.1). In nominal terms, China’s military budget quadrupled between 1990 and 2000, or doubled after adjusting for inflation.57 Buoyed by the fast-growing economy, China accelerated investments in its military capabilities in the 2000s, with defense spending in real terms rising at an average of 12.5 percent per annum, significantly higher than the 7.8 percent per annum in the 1990s.58 By 2012, China’s defense budget would reach $157 billion, second only to America’s $684 billion.59 Whether official data truly reflect China’s defense budget is hotly debated. Highly reputable research organizations and scholars have arrived at different estimates, most of which are higher than the official Chinese data.60 What is not in dispute, however, is that within two decades, Chinese military modernization achieved a level of progress few had antici- pated. By the end of the post-Tiananmen era, the PLA had been transformed -- 249 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 237 into a technologically advanced fighting force due to imports of advanced Russian weapons systems, such as Sukhoi jetfighters, Sovremennyy-class destroyers, supersonic antiship missiles, and indigenously produced high- tech weapons. As China’s focus was on developing anti-access/area denial (A2/AD) capabilities to deter potential US intervention in a war with Taiwan, improvements in the Chinese navy and air force were especially rapid and significant.61 Accompanying military modernization was a comprehensive reorientation of China’s security and foreign policies to improve relations with its neighbors, in particular Russia and the Southeast Asian countries. As Chinese leaders reevaluated potential security threats, it became obvious that maritime threats, mainly Taiwan-related contingencies, had supplanted any danger of a land invasion from the former Soviet Union during the Cold War.62 Accordingly, China took dramatic steps to elevate ties with Russia in the immediate wake of the Cold War. The two countries reached an agreement on their eastern border in 1991 and a similar agreement on their western border three years later. In 1996 Jiang Zemin and President Boris Yeltsin announced establish- ment of a “strategic partnership.” Bilateral defense cooperation greatly ex- panded the transfer of advanced weapons to China. Although the Sino-Russian “strategic partnership” at that time had serious limits, it vastly improved Chi- na’s security situation in the north, allowing it to focus on its east and south maritime flanks.63 Beijing and Moscow would upgrade their defense coopera- tion in 2001 when, based on a Chinese initiative, they became the main table 8.1. Official Defense Budget, 1990–2000 Year Amount (billion yuan) 1990 29.0 1991 33.0 1992 37.8 1993 42.6 1994 55.1 1995 63.7 1996 72.0 1997 81.4 1998 93.5 1999 107.6 2000 120.8 Source: ZGTJNJ 2004, 293. -- 250 of 345 -- 238 c h a p t e r 8 sponsors of the Shanghai Cooperation Organization (SCO), which initially consisted of China, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan but would later grow to include also India, Iran, Pakistan, and Uzbekistan, turning it into a regional multilateral security forum.64 China made significant strides in Southeast Asia as well. In 1991 China nor- malized relations with Vietnam, which it had invaded in 1979. The two coun- tries also signed an agreement demarcating their land borders in 1999. Throughout the 1990s, Beijing launched a charm offensive to reassure the Southeast Asian nations of its benign intentions. Its activities included more frequent visits to the region by top Chinese leaders and expansion of trade and cultural exchanges. Although China’s seizure of the disputed Mischief Reef in 1995 momentarily damaged Beijing’s credibility, its subsequent restraint calmed tensions. During the Asian financial crisis of 1997–1998, China raised its standing considerably in Southeast Asia by coming to the aid of Thailand, one of the hardest-hit countries, while Washington chose to take a pass.65 Elsewhere in Asia, Chinese progress was more mixed. Relations with India warmed with exchange of visits by top leaders and a steady increase in trade, but negotiations over their long-disputed border made little progress and their geopolitical rivalries continued, albeit in a more subdued form.66 In Northeast Asia, China’s greatest gain was the rapid development of ties with South Korea, with which China had established diplomatic relations in 1992. But ties with Japan deteriorated further in the 1990s as the result of disputes over sovereignty of the Senkaku/Diaoyu Islands (an issue Chinese leaders had wisely shelved in the 1980s), history, Chinese military modernization, and Taiwan.67 Confronting the Taiwan Challenge Except for the US-China dispute over arms sales, Taiwan did not present much of a foreign policy challenge to the mainland in the 1980s. Militarily, China lacked the capabilities to reunify with the island, to which the National- ists (Kuomintang, KMT) retreated after losing the civil war to the Commu- nists in 1949. Deng’s top priority—economic modernization in a peaceful external environment—relegated reunification to the back burner. The gov- ernment of the Republic of China (Taiwan’s official name), then dominated by KMT elders, was not seeking de jure independence even as it began to liberalize the island’s political system and open the door to political forces with a strong Taiwanese identity. Above all, stable and cooperative Sino-American relations throughout the decade bolstered mutual trust and restraint. -- 251 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 239 All this would change in the post–Cold War era. To be sure, relations be- tween the mainland and Taiwan initially appeared to be headed for a break- through. In 1992 the PRC and ROC reached a critical formula, the so-called 92 Consensus, that basically papered over their differences over the definition of “one China.” The 92 Consensus allowed each side to interpret or define its own meaning of one China while ostensibly accepting the concept of “one China.”68 As China insisted on acceptance of its “one-China principle” as a precondition for dialogue across the Taiwan Strait, the 92 Consensus allowed Beijing and Taipei to explore a new modus vivendi despite the vast gulf exist- ing between them. By the early 1990s, the mainland had also become an important trading partner and investment destination for Taiwan business. Taiwan’s direct investments in China totaled $3.9 billion by 1994 and two-way trade in goods reached $16.3 billion, with Taiwan recording a large surplus of nearly $12 billion.69 In spite of their growing commercial ties, however, cross-strait relations would undergo a radical change beginning in 1995. As the democratization process accelerated on the island of Taiwan in the late 1980s, especially after establishment of Taiwan’s Democratic Progressive Party (DPP), which openly advocated independence, the political landscape experienced a dramatic trans- formation. Lee Teng-hui, the first native Taiwanese to hold the presidency of the ROC, who had assumed office after Chiang Ching-kuo died in Janu- ary 1988, initially displayed an openness to dialogue with Beijing, as evidenced by the 92 Consensus. But Lee’s mainland policy took a 180-degree turn in 1995 when he became a champion of Taiwanese sovereignty and identity—a change that not only prompted Beijing to label him a separatist but also led to a series of crises in cross-strait relations. The first crisis, now called the “Third Taiwan Strait Crisis,” began when Taiwan supporters in the United States successfully pressured the administra- tion of Bill Clinton to issue an unprecedented visa to President Lee so he could travel to the United States and deliver the alumni reunion speech at his alma mater, Cornell University. In his speech, titled “Always in My Heart,” Lee made remarks that mainland Chinese leaders saw as an open challenge to Beijing. In response, Beijing ordered the PLA to conduct a series of military exercises in the summer of 1995 that would culminate in the largest military drill in the Taiwan Strait in March 1996, around the time of the first popular presidential election held on the island that delivered to Lee a landslide victory. China’s military intimidation against Taiwan, which included firing missiles close to the island, prompted US intervention. Clinton dispatched two carrier battle -- 252 of 345 -- 240 c h a p t e r 8 groups to the waters around Taiwan. Although the crisis ended without inci- dent, this would be a powerful motivator for China to accelerate its military modernization and acquire capabilities to deal with future Taiwan-related contingencies.70 But the 1995–1996 crisis was merely the beginning of more than a decade of escalating tensions. Lee continued to contest Beijing’s claim of sovereignty over Taiwan. In July 1999 he publicly redefined the nature of cross-strait rela- tions as “special state-to-state” relations, directly challenging Beijing’s “one- China principle.” Fortunately, even though Lee’s rhetoric of “state-to-state” relations nearly touched China’s red line, he did not take any legal action, such as amending the constitution or changing the national flag, to formalize his “two-state theory.” China reacted angrily and issued threats, but it took no military actions, most likely because it did not want to derail its negotiations with the United States on WTO entry or precipitate a new confrontation with Washington right after the accidental NATO bombing of the Chinese Em- bassy in Belgrade in May of that year. Tensions with Taiwan persisted after the election of Chen Shui-bian of the DPP as president in 2000. The rise of the DPP represented a sea change in Taiwan’s political landscape, brought about by the island’s transition to democ- racy and growth of a distinct Taiwanese identity separate from that of China. Fortunately for China, US-China relations stabilized after 9/11. As a result, the Chen government did not move further than Lee had in redefining cross-strait relations—except for an unsuccessful attempt to pass a referendum on Tai- wan’s self-defense and dialogue with the mainland (Chen had to water down the language due to American pressure).71 Although cross-strait relations sta- bilized after the KMT recaptured the presidency in 2008, the island’s status and future would become a central point of contention between China and the United States. Even prior to the Xi Jinping era, as the rise of Taiwanese identity greatly dimmed prospects of peaceful reunification, Chinese leaders grew increasingly aware that only strong military capabilities could deter Tai- wan and its foreign (mainly American) supporters from “acting rashly,” as de- scribed by Jiang Zemin in summarizing the accomplishments of the PLA in the 1990s.72 With Taiwan assuming China’s foremost national security priority and driving its military modernization program, the dynamics for exacerbat- ing the US-China security dilemma ensued. The capabilities China was seek- ing to make its military options more credible would also erode Amer ica’s unstated but nevertheless clear deterrence against this very option, thus trig- gering countermeasures. If the United States did not have to seriously worry -- 253 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 241 about China’s military strength in the early 1990s, this was no longer the case by the end of the post-Tiananmen era. Embracing Globalization A novel challenge that Deng did not anticipate but that Jiang Zemin had to confront was globalization—the rapid expansion of trade and investment flows across borders unleashed by the end of the Cold War. As geopolitical barriers fell and economic reforms in China and India accelerated in the 1990s, previously closed markets opened up, and a huge pool of workers in the de- veloping countries became available for companies searching for low-cost labor.73 As noted by Jiang in a speech on foreign policy in 1998, for China, globalization represented both opportunities and challenges. Because the West possessed advantages in capital, technology, talent, finance, and nearly all other domains of globalization, it was poised to be the greatest beneficiary. According to Jiang, the developing countries, on the whole, would be disad- vantaged; China could gain from globalization by acquiring more foreign capi- tal, advanced technologies, and access to markets, even though it lacked over- all economic competitiveness and it was the West that had made the rules of globalization and controlled international financial institutions. As no country could be immune from globalization, Jiang argued, China had to adapt to its trends and actively participate in international economic cooperation and competition. The overall strategic framework Jiang laid out in his 1998 speech was to be “clearly aware of the risks that economic globalization brings, main- tain our independence and initiative, increase our level of vigilance, and be- come better able to fend off and defuse risks in order to effectively safeguard our country’s economic security.”74 This strategy to maximize the upsides of economic globalization and mitigate its risks guided China’s international economic policy during the post-Tiananmen period. On the one hand, China aggressively courted inter- national capital and technology and vigorously competed for market share in manufactured goods, leveraging the cost advantage of its immense labor force and unrivaled economies of scale. The most important step it took was to secure accession to the WTO in 2001. On the other hand, China also maintained protectionist measures and implemented an industrial policy to limit foreign competition in its domestic market and to overcome its disad- vantages in more technology-intensive or emerging sectors, such as renew- able energy.75 -- 254 of 345 -- 242 c h a p t e r 8 Judging by the colossal gains of Chinese exports, the strategy laid out by Jiang was an unqualified success. In the year before its formal accession to the WTO on December 11, 2001, China’s total merchandise exports totaled $266 billion, and it had a trade surplus of $22.5 billion. In 2012, the end of the post- Tiananmen period, China was exporting $2.04 trillion in goods and reporting a trade surplus of $230 billion.76 Paradoxically, however, the success of China’s strategy of both embracing and safeguarding against globalization at the same time would damage trade ties with its Western partners, which likely did not anticipate the surge in Chinese exports after its accession to the WTO. At the same time, Chinese protectionism and industrial policies frustrated Western partners’ efforts to gain access to its growing domestic markets and to compete with China on a level playing field. Although it would take two more decades for the West to start “decoupling” from China, the source of the breakdown was created by the successful, self-interested, but ultimately unsustainable strategy that Chinese leaders adopted in response to globalization. End of Hide- and-Bide Chinese foreign policy during the Jiang era was not without its moments of scares. In particu lar, Sino-American relations were severely tested by a series of crises, such as the Taiwan crisis of 1995–1996, the accidental NATO bomb- ing of the Chinese Embassy in Belgrade in May 1999, and the midair collision of a Chinese jetfighter and a US reconnaissance plane in April 2001. Fortu- nately, in each case restraint and diplomacy enabled both sides to defuse tensions. If there was one pivotal moment when China’s grand strategy of tao- guang yanghui was seriously imperiled, it was the election of George W. Bush in 2000, which was accompanied by entry into the US administration of na- tional security hawks who had grown increasingly alarmed by the sustained growth of Chinese power in the 1990s. Chinese GDP measured in US dollars had risen from 7.5 percent of US GDP in 1992 to nearly 12 percent in 2000.77 Although the size of the Chinese economy was still a fraction of that of the American economy and smaller than the economies of Japan, Germany, and the United Kingdom, China was obviously catching up at a rapid pace. It should have come as no surprise that the Bush administration would designate China not as a “strategic partner” but as a “strategic competitor.”78 Indeed, in the early months of the Bush administration, and particularly after the plane collision in 2001, Washington adopted a hard-line China policy, especially on the most sensitive issue of Taiwan (by allowing President Chen Shui-bian, -- 255 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 243 leader of Taiwan’s pro-independence DPP, to make an unprecedented, high- profile “transit visit” to New York). Had 9/11 not occurred, it is highly likely that Sino-American relations would have continued their downward spiral, precipitating the full-fledged confrontation that was to occur two decades later. But the terrorist attacks on September 11, 2001, changed the course of history. Bush’s global war on terror immediately refocused Ameri ca’s strategic attention from China, a traditional strategic competitor, to a nonstate terrorist network, Al-Qaeda, and the war in Afghanistan that the United States launched less than a month after 9/11. Tensions between Beijing and Washington quickly subsided in the wake of 9/11. The Bush administration committed a much worse strategic blunder in March 2003 when it invaded Iraq on false pretenses, plunging the United States into a quagmire and extending China’s strategic window of opportunity.79 When Hu Jintao took over from Jiang at the end of 2002, he inherited per- haps China’s most favorable external environment of the post–Cold War era. Nevertheless, even with a distracted hegemon, Hu faced two new challenges that had not existed under Jiang. The first challenge was to counter the “China threat theory” that was gaining credence as a result of the rise of Chinese power during the Jiang period. This would require strategic reassurances through rhetoric and action. But at the same time, efforts to ease fears of China by its Asian neighbors, the United States, and its Western allies were likely made less credible by the measures China took to protect its expanding over- seas interests, hence the second challenge. The new geopolitical reality, created in no small part by the very success of Deng’s strategy of prioritizing domestic development and avoiding conflict with the West, meant that it would become increasingly difficult to adhere to taoguang yanghui. As Hu pointed out in a 2006 foreign policy speech, “the more developmental success” that China achieved, the more likely it would “encounter challenges of external resistance and risks,” especially at a time when its overseas economic interests and emerging new opportunities demanded a more activist foreign policy.80 To assuage fears of a rising China, Hu relied mainly on a rhetorical cam- paign emphasizing China’s peaceful intentions. The “peaceful rise” narrative, energetically promoted by one of Hu’s advisers in 2003, sought to project a benign image and to dispel any fears that the growth of Chinese power would lead to conflict and war. However, judging by the lukewarm, if not skeptical, foreign reaction to the “peaceful rise” rhetoric, this initiative apparently failed. Even worse, Hu Jintao did not appear to have gained enough political support within the party for using the phrase “peaceful rise” to frame the party’s -- 256 of 345 -- 244 c h a p t e r 8 strategic reassurance efforts. Officially, the party preferred “peaceful develop- ment,” thus incorporating it in Hu’s speeches and official documents as a stan- dard declaration of strategic intentions. The campaign to promote the “peaceful rise” rhetoric quickly fizzled out.81 Hu’s record in handling the second challenge was mixed. He highlighted the new strategic dilemma in a speech on foreign policy in August 2003. Unlike Jiang, who continued to reiterate Deng’s dictum of taoguang yanghui when speaking on foreign policy, Hu highlighted the challenge of balancing taoguang yanghui and yousuo zuowei (making a contribution), a secondary guiding for- eign policy principle that Deng had added in December 1990.82 Although Hu declared that China would adhere to Deng’s caution against foreign entangle- ments, circumstances had changed and foreign policy decisions needed to be tailored to specific circumstances.83 In terms of actual Chinese policy, the subtle revision of taoguang yanghui as revealed in Hu’s speech in 2003, did not have an immediate impact. During his first term (2002–2007), Chinese foreign policy essentially followed the path laid out by Deng in 1990. This period saw marked improvement and sta- bility in Sino-American relations. In August 2003, China sponsored the “six- party talks,” including the United States, Japan, and South Korea, to seek a diplomatic solution to North Korea’s development of nuclear weapons. (The talks yielded no results.) China’s relations with most of its neighbors remained friendly. Ties with Europe warmed to such an extent that, in 2005, the European Union was mulling over lifting the arms embargo against China that it had imposed after the Tiananmen crackdown in 1989. (The idea was aban- doned in face of fierce American opposition.)84 Chinese restraint during this period was likely the result of a combination of factors. Most importantly, this was because Jiang retained enormous influ- ence through his proxies on the PSC and because Hu Jintao, in addition to his risk-averse personality, lacked foreign policy experience and political heft to “make a contribution.” Tensions with Taiwan remained high because the pro- independence DPP controlled the presidency until 2008, when the more mainland friendly KMT returned to power. An assertive foreign policy would have been ill-advised when China needed all the international goodwill it could get to isolate Taiwan. Despite waging two costly wars, in Iraq and Afghanistan, and risking a long-term quagmire, there were no signs of an im- minent American decline. Instead, the epic real estate bubble in the United States produced a booming economy. But things changed dramatically after 2008. China’s successful hosting of the Summer Olympics in Beijing in August of that year delivered a powerful -- 257 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 245 psychological boost to the Chinese leadership and symbolically marked the arrival of China as a great power on the global stage. Even more importantly, the GFC that began the spring of 2008 and culminated in the collapse of the giant American investment bank Lehman Brothers in September of that year threatened to plunge the United States and its key European allies into the worst financial crisis since the Great Depression. Chinese leaders’ confidence was further bolstered by the stellar performance of the Chinese economy after they rolled out a huge credit-fueled stimulus package at the end of 2008. It was in this context that Hu Jintao signaled the most consequential change of direction in Chinese foreign policy in the post-Tiananmen era.85 In a speech to Chinese ambassadors in July 2009, Hu unveiled a new foreign policy princi- ple of jianchi taoguang yanghui, jiji yousuo zuowei—continuing to keep a low profile and actively making a contribution. The addition of “actively” is no mere wordplay. As Hu elaborated, it was necessary to maintain a low profile and avoid conflict as China remained a developing country despite its recent progress. However, its growing external interests, rising “comprehensive na- tional power,” and international status required that it also take greater initia- tives in foreign affairs and “actively push the development of the international political and economic order in a more just and reasonable direction.” How- ever, a more active foreign policy, Hu clarified, did not mean that China would bear any global responsibilities beyond its capabilities, despite Westerners calling on Beijing to become a “responsible stakeholder,” thereby implying that China would become more active only to further its national interests.86 Although Hu’s version of foreign policy activism lacked the ambition, ag- gressiveness, and strategic coherence of the policy adopted by Xi Jinping after 2012, it marked the beginning of the end of Deng’s strategy of “keeping a low profile.” In practice, the shift was most pronounced in the expansion of Chinese external economic footprint through investment, loans, and aid, the projection of Chinese “soft power” through the establishment of Chinese lan- guage schools (the Confucius Institutes) and media outlets tasked with im- proving the country’s image, and confrontational tactics in asserting Chinese maritime claims in the South China Sea and over the Senkaku Islands. Chinese foreign aid measured in concessional and nonconcessional loans averaged $7.6 billion between 2000 and 2008, but in the last four years of Hu’s tenure (2009–2012), it averaged more than five times that, at $38.2 billion a year.87 In early 2009 China established a special $7.25 billion program to ex- pand its overseas propaganda activities. Consequently, the presence of official Chinese media organizations, such as China Central Television, Xinhua, and Global Times, gained much higher visibility outside of China.88 Beijing also -- 258 of 345 -- 246 c h a p t e r 8 began to press its maritime claims more confrontationally. After a Chinese fishing crawler collided with two Japanese Coast Guard patrol boats in the waters near the disputed Senkaku/Diaoyu Islands in September 2010, Beijing chose to escalate, instead of defusing, the tensions with Tokyo. It also over- reacted to Japan’s plan to “nationalize” the same disputed islands (to prevent an ultra-nationalist from purchasing them), triggering the worst crisis in Sino- Japanese relations in the post-Mao period.89 In the South China Sea, China began harassing US naval vessels that were conducting freedom of navigation operations in China-claimed waters, and, in both 2009 and 2010, it imposed a unilateral three-month moratorium on fishing in the disputed areas that were also claimed by Vietnam.90 Such muscle-flexing immediately alarmed some strategic analysts. In a pre- scient essay, initially published online in 2009, Li-tai Xue was the first to warn that China’s hubris would inevitably lead to confrontation with the United States.91 Indeed, China’s newfound activism actually had a perverse effect, dis- crediting Beijing’s pledge of “peaceful development” and pushing its worried neighbors into the arms of Washington.92 It did not take long for the United States to seize this opportunity and begin to reassess its approach to Beijing. In November 2011 Secretary of State Hillary Clinton announced a new strategy, “Pivot to Asia,” which would redirect American diplomatic, military, and eco- nomic resources to the region to counter China’s growing influence.93 China’s own pivot to “actively make a contribution,” starting in Hu Jintao’s second term, and America’s response shortly thereafter would mark the begin- ning of the fraying of engagement between the two countries. To be sure, the collapse of relations would have to wait until Donald Trump and his China hawks launched their trade war in early 2018. But like the neo-authoritarian political order and the Chinese economic miracle at the end of the Hu Jintao era, the writing was clearly on the wall for a foreign policy that had served the party well—perhaps a bit too well for its own good—in the post-Tiananmen era. A New Cold War Xi Jinping took huge and risky steps to exploit what he deemed to be unpre- cedented opportunities immediately after he ascended to top leader at the end of 2012. Notably, Hu Jintao at least had attempted to strike a delicate balance between strategic caution and assertiveness. He used taoguang yanhui in his foreign policy speeches to underscore the importance of strategic caution. Xi, however, did not even attempt to strike this balance. Indeed, if the invocation -- 259 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 247 of taoguang yanhui is to be used as a rhetorical marker of strategic caution, it did not appear even once in Xi’s many published speeches on foreign policy. Instead, Xi characterized his early foreign policy moves as “proactive plan- ning, striving for progress and gains” (zhudong mohua, nuli jinqu), as he put it in his speech at the party work conference on foreign policy in November 2014. The backdrop of his shift toward a more proactive foreign policy was the op- portunity created by favorable changes in the world, which he characterized as “a world in which the international system and the international order are undergoing profound adjustments and . . . the international balance of power is undergoing profound changes and moving in a direction favorable to peace and development.”94 Less than two years later, Xi was apparently pleased with this shift. Rephrasing it as “seizing opportunities and taking initiatives” (zhuazhu jiyu, zhudong zuowei), as he told the Politburo in September 2016, he cited a series of strategic initiatives, such as the Belt and Road Initiative (BRI), the Asian Infrastructure Investment Bank, and other efforts to promote “re- form of unfair and unreasonable arrangements in the global governance sys- tem.” These bold actions were justified because “as the relative international balance of power changes and global challenges rise, strengthening global governance and promoting reform of the system of global governance is an irresistible trend.”95 Although the phrase “the East is rising and the West is declining” (dongsh- eng xijiang) cannot be found in any of his published speeches, Xi appeared convinced that the balance of power had evolved in favor of those countries or forces seeking a fundamental restructuring of the West-led political and economic order. He spelled out his analysis comprehensively at a January 2016 seminar for provincial leaders and ministers. Describing “unprecedented posi- tive changes in the balance of power in the world,” Xi listed the “rise of emerg- ing markets and developing countries, the trends of multi-polarity and democ- ratization of international relations, and emerging signs of changes in the West- led global governance system, . . . the rapid rise of China’s weight in the global economy and governance, and China’s entry into a more balanced pe- riod in opening to the outside world” (which implied that China no longer needed the outside world as much as it used to). However, Xi did not allow his upbeat assessment of favorable global trends to ignore the challenges and obstacles. He cautioned that “the West’s economic, technological, political, and military superiorities have yet to change.”96 In addition to his reassessment of the changing balance of power, Xi was also motivated by his ideological antipathy toward the West and his grim view of -- 260 of 345 -- 248 c h a p t e r 8 Ameri ca’s security role in Asia, which China had consistently regarded as an instrument of containment. Perhaps the most explicit expression of Xi’s ideo- logical opposition to the West-led order can be found in his March 2013 speech in Moscow. “No country or group of countries can dominate world affairs single-handedly,” Xi told his audience. There has been “an apparent upsurge of . . . rising hegemonism, power politics and neo-interventionism are gaining some momentum. . . . [the West] cannot live in the twenty-first century while thinking in the old fashion, lingering in the age of colonial expansion or with the zero-sum mentality of the Cold War. . . . Only the people can best tell if the development path they have chosen for their country suits or not.”97 Like his predecessors, Xi accused unnamed “hostile forces at home and abroad” of attempting to bring about regime change in China. But he went beyond the boilerplate language of blaming the West for causing chaos through its interventionism. “Since the end of the Cold War,” he said in a De- cember 2015 speech, “some countries have been turned into a total mess because of the encouragement of Western values . . . some splintered, some engulfed in the flames of war, and some in persistent chaos. . . . If we use West- ern values to evaluate our development . . . the consequences are unthinkable. In the end, we either have to follow [the West] step by step or become objects of verbal abuse.”98 While neither Jiang Zemin nor Hu Jintao made public their opposition to the role played by the United States in Asian security, Xi broke the taboo in May 2014 when he spoke at a high-profile regional security forum held in Shanghai. Without naming the United States, Xi declared, “In the final analy- sis, let the people of Asia run the affairs of Asia, solve the problems of Asia and uphold the security of Asia.”99 Although he did not invoke “Asia for Asians,” the phrase used by Japan in the 1930s, the implicit meaning of this statement came too close for Washington’s comfort. Strategic Initiatives to Remake the World Order Xi’s assessment of favorable global trends, in particular the rapid gains in Chi- nese power relative to that of the United States, was not delusional thinking. The Chinese economy was growing, on average, 9 percent per year between 2009 and 2013. By comparison, US growth during the same period averaged only 1.14 percent, largely due to the lingering effects of the global financial crisis. The euro area recorded, on average, negative growth of 0.3 percent per annum, and the Japanese economy barely grew during this period.100 What likely -- 261 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 249 encouraged Xi the most was the size of the Chinese economy relative to that of the United States. When Hu told his colleagues to strike a balance between caution and activism in 2009, China’s GDP was one-third that of the United States in dollar terms. By 2012, China’s GDP had risen to $8.53 trillion, about half of America’s $16.25 trillion. Under his watch, the gap would close further: when the US-China trade war broke out in 2018, Chinese economic output would reach $13.89 trillion, or 68 percent of America’s $20.53 trillion.101 In terms of purchasing power, China reached parity with the United States in 2016, and it surpassed the United States as the world’s largest economy in 2017.102 Militarily, even after President Barack Obama withdrew all American forces from Iraq in 2011, the United States was still bogged down in Afghanistan. The two wars had cost Washington trillions of dollars. The Pentagon has reported that it had spent $1.7 trillion on military operations in the Middle East and Afghanistan in the two decades following 9/11.103 Nongovernmental analysts estimate that the Afghanistan war alone drained $2.3 trillion from American coffers between 2001 and 2022.104 The erosion of American power not only threatened the durability of the US-led order but also encouraged its geopolitical rivals, such as Russia, to ex- ploit those opportunities that a more disorderly world might offer. As for Xi, Russia’s pivot away from the West since 2007, when Vladimir Putin delivered a bellicose speech denouncing the West at the Munich Security Conference, probably presented a historic opportunity to promote the shift from a unipolar world to a multipolar would—a goal shared by Beijing and Moscow.105 Although Xi’s unveiling of the BRI in September 2013 is commonly re- garded as one of China’s most consequential steps signaling a decisive break with Deng’s dictum of taoguang yanhui, his selection of Moscow as the destina- tion for his first foreign trip after assuming the presidency in March 2013 prob- ably represented an even more important change in Chinese post-Tiananmen foreign policy. As Moscow drifted farther away from the West, the forging of a close partnership with Vladimir Putin promised to instantly strengthen Xi’s hand in dealing with the United States. Indeed, Xi’s bet on Putin yielded quick dividends: After Russia seized Crimea and instigated a proxy war in eastern Ukraine in 2014, Moscow became firmly anchored inside Beijing’s orbit, as reflected by the frequent summits, expansion of defense cooperation, and near-quadrupling of trade between 2012 and 2023.106 Immediately after his outreach to Putin, Xi launched a series of strategic initiatives at dizzying speed. The $1 trillion One-Belt, One-Road (later re- named the Belt and Road Initiative, or BRI) was launched in late 2013 to -- 262 of 345 -- 250 c h a p t e r 8 finance infrastructure such as ports, railways, highways, and power plants throughout the world. Although the intent, merits, and feasibility of this ambi- tious venture have since been hotly debated, the only uncontroversial fact about it is that the BRI represents China’s most expensive effort ever to in- crease its global influence through economic means.107 To establish a financ- ing vehicle, in November 2014 Xi announced the Silk Road Fund, which was to be launched with $40 billion from Chinese state-owned financial entities. As a direct but subtle challenge to the West-led World Bank and Interna- tional Monetary Fund, China set up the Asian Infrastructure Investment Bank in 2016, a Shanghai-based new multilateral international financial institution, with China as the largest shareholder. China also embraced the idea of a new development bank, initially proposed by India at a summit of the BRICS (Bra- zil, Russia, India, China, and South Africa) in March 2012. This bank, named the New Development Bank and headquartered in Shanghai, was formally launched in July 2014. China and the other BRICS each held a 20 percent share of the bank, which had initial authorized capital of $100 billion.108 In addition to flexing China’s financial muscle to promote a new multipolar global economic order, Xi began to test the boundaries of the American secu- rity order in East Asia. The first step he took was the announcement of the East China Sea Air Defense Identification Zone (ADIZ), in November 2013. Many countries, including the United States and Japan, have set up such zones, which require aircraft entering airspace within them to identify themselves and report their course and destination to air traffic control authorities. But China’s new ADIZ was seen as provocative because it covers the airspace over the disputed Senkaku/Diaoyu Islands.109 An even more aggressive step taken by Xi was his decision to begin building large artificial islands on the reefs controlled by China in the South China Sea in December 2013. This gray zone move was designed to simultaneously ac- complish several strategic objectives: By solidifying physical control of these areas contested by the Philippines and Vietnam, China hoped to strengthen its claims of sovereignty over most of the South China Sea without engaging in war. Since the Philippines and Vietnam are too weak to push back, China could also, theoretically at least, take additional gray zone steps, such as en- forcing its maritime regulations on ships and aircraft transiting the waters and the airspace over the South China Sea, to assert its claims. An implicit but equally important strategic goal is to test US credibility as defender of the security order in East Asia. Although the United States has maintained neutrality in the maritime disputes in the South China Sea, a -- 263 of 345 -- F r om E ng a g e m e n t t o a N e w C ol d Wa r 251 coercive move such as building large artificial islands would directly challenge the US role as provider of security in East Asia. A confrontation with China over its artificial islands could potentially escalate into a great power conflict. But acquiescing to Chinese aggression in this instance risked undermining the region’s confidence in Ameri ca’s resolve when challenged by a great power.110 On the surface, it appears that it was Xi who took the strategic initiative to build the artificial islands. In all likelihood, this option must have been weighed seriously, if not approved, by the prior top leadership because the logistics for constructing these large artificial islands, such as building special- ized ships for dredging and acquiring special materials, would have required years of planning and preparation. In this sense, Xi merely pulled the prover- bial trigger of a loaded gun. The fateful initiatives Xi took immediately after his rise—in combination with his turn toward neo-Stalinist rule domestically—fundamentally altered the nature of the relationship between China and the West, in particu lar the United States, triggering a series of reactions that would later escalate into a new cold war.111 How Engagement Ended in a New Cold War The backlash against China’s turn toward an assertive foreign policy that started in 2009 was initially muted. Under President Barack Obama, in re- sponse the United States began to implement its “pivot to Asia” policy cen- tered on two pillars: strengthening military deterrence and creating a new free trade zone—the Trans-Pacific Partnership (TPP)—that would include most of China’s neighbors but exclude China. Although the pace of reorienting the US defense posture toward East Asia was relatively slow, Washington’s leader- ship of a new free trade agreement bore fruit quickly. Trade ministers from twelve countries inked the deal in October 2015.112 Despite warnings from seasoned observers that US-China relations were on the brink of collapse, the NCW did not formally start until the arrival of Donald Trump in the White House in January 2017.113 Judging by the formal designation of China as a “revisionist power” seeking to “displace the United States in the Indo-Pacific region,” the US “National Security Strategy” released in December 2017 signaled a fundamental shift in US policy toward China.114 Although Trump is credited with ending America’s decades-long policy of engagement with China, his initial motivation was probably not geopoliti cal. A trade protectionist pandering to crucial battleground state workers who -- 264 of 345 -- 252 c h a p t e r 8 blamed China for losses of manufacturing jobs, the former real estate tycoon immediately withdrew the United States from the TPP and, one year later, launched a trade war with China. Xi’s retaliation led to Trump escalating that war and, in May 2019, imposing sanctions on Chinese tech companies—most important, Huawei, the national telecom champion. US-China relations went into a free fall after the outbreak of Covid-19 in early 2020.115 Worried about the potential damage to his reelection bid, Trump blamed—and punished—China for unleashing the deadly virus. He ordered the closure of the Chinese consulate in Houston and expelled its diplomats (China retaliated by shutting down America’s consulate in Chengdu). The victory of Joe Biden in November 2020 did not end the downward spiral. If anything, the US-China cold war entered a new and more complex phase. Unlike the erratic Trump administration, Biden’s foreign policy team crafted a more sophisticated containment strategy. As spelled out by the key players on Biden’s national security team, the new China policy rested on four pillars: building up economic capacities at home to strengthen US competitiveness, contesting Chinese power in all domains, strengthening alliances, and estab- lishing safeguards to avoid a calamitous conflict.116 To counter the United States, Xi decided to elevate China’s strategic part- nership with Russia in the belief that the overall geopoliti cal interests of Mos- cow and Beijing—fear and resentment of US power—were identical. But a few weeks after Xi and Putin announced their “no-limit friendship” in Beijing in early February 2022, Russia invaded its neighbor, Ukraine, launching the largest and bloodiest war on continental Europe since the end of World War II. Europe saw China as Russia’s accomplice and began to adopt a more hawk- ish China policy, closely aligned with that of the United States. Speaking to the delegates at the annual session of the Chinese People’s Political Consultative Conference on March 6, 2023, Xi acknowledged the ob- vious. Although he avoided the term “cold war,” he formally accused the United States of leading its allies to implement “all-round containment, en- circlement, and suppression of China.”117 He did not bother to explain what had caused this NCW. It is highly unlikely that he would have attributed his own actions as a possible cause of the hostile and dangerous Sino-US confron- tation—a great power conflict expected to last for decades and to make his dream of the “great rejuvenation of the Chinese nation” an unachievable goal. -- 265 of 345 -- 253 Conclusion this account of political and economic developments in post-Mao China explores the factors that likely have prevented the country from moving in the direction of becoming a more open, liberal, and democratic society. Instead, they have facilitated the revival of totalitarian rule in spite of more than four decades of sustained rapid economic development. In the 1980s the CCP lead- ership agreed that the Maoism that had impoverished the country, trauma- tized the party, and discredited the Communist ideology should be brought to an end. But the leadership was deeply divided about reforming the coun- try’s economic and political systems. Pragmatic Leninists represented by Deng Xiaoping and hardcore conservatives led by Chen Yun clashed over the direc- tion and scope of economic reforms. Deng aggressively pushed market- oriented reforms and integration with the capi talist West because he believed that this strategy would deliver favorable economic outcomes and ensure the survival of the party and the rise of China as a great power. In contrast, Chen and his followers resisted such reforms and sought to repair and restore the command economy as a safer strategy to salvage the party. Nevertheless, de- spite their differences over economic policy, these two groups that dominated the elite political scene in the 1980s shared an identical objective of preserving the party’s political monopoly. A third group of leaders were liberal reformers who sought both economic and political liberalization. But due to their political weakness, their success critically depended on support from Deng. When Deng needed the liberals to advance his economic agenda, this co- alition could overcome the resistance of the hard-liners and make progress in implementing market reforms. But the political reform agenda promoted by the liberals was anathema to both the pragmatic Leninists and the hardcore conservatives. Whenever the top leadership confronted the issue of political liberalization in the 1980s, Deng not only would form an ad hoc coalition with -- 266 of 345 -- 254 C onc l u s ion the hard-liners but also would take the lead in opposing liberalization. The combination of Deng’s staunch antiliberal stance and the power of the other hard-liners thus precluded any meaningful political reform. Consequently, Maoism as a set of policies and practices might have ended, but the underlying totalitarian institutions that had made it possible and potentially revivable were preserved. The crackdown on the prodemocracy protests in June 1989 resulted in a complete purge of the liberal reformers represented by Zhao Ziyang and their replacement by politically conservative technocrats. Although Deng’s “reform and opening” appeared all but dead immediately after the crackdown, para- doxically the collapse of the Soviet Union in December 1991 enabled Deng to rally a thoroughly demoralized party behind his neo-authoritarian develop- mentalism as the only feasible survival strategy in a world in which liberal capi talist democracies had won a decisive victory over communism. During the post-Tiananmen neo-authoritarian period (1992–2012), the party under the leadership of Jiang Zemin and Hu Jintao put Deng’s vision into practice, largely through experimentation and adaption. With the party solidly behind the neo-authoritarian developmental consensus, Chinese leaders were able to implement more radical economic reforms, maintain do- mestic stability through a mix of performance legitimacy, nationalism, soft repression, and co-optation, and pursue a cautious foreign policy to stabilize ties with the West—China’s most important external source of capital, de- mand, and technology. A fragile balance of power, produced mainly by acci- dental factors (the transfer of power from the revolutionary titans to relatively weak leaders in the 1990s), sustained a collective leadership. Although socio- economic modernization produced some forces that challenged party power, such as the information revolution, social unrest, and the growing civil society, the regime had no difficulty containing these emerging threats. But the post-Tiananmen order began to crack even before the rise of Xi Jinping. During the second half of Hu Jintao’s rule (2007–2012), the economy started losing momentum. The lack of deeper reform during Hu’s first term (2003–2007) resulted in a less dynamic economy. Only a massive injection of credit into the economy, which in turn inflated a colossal real estate bubble, kept the economy on track. At the same time, a succession struggle began to intensify, triggering a new round of elite conflicts that ended with the most sordid scandal in post-Mao history and installed an unknown princeling who was thought to be a “safe” choice to take over from Hu Jintao. On the foreign policy front, Chinese leaders, bolstered by the rapid change in the relative -- 267 of 345 -- C onc l u s ion 255 balance of power between China and the West due to the global financial crisis and America’s “forever wars” in the Middle East and Afghanistan, more aggres- sively pursued China’s global interests. The waning of neo-authoritarian developmentalism toward the end of the Hu Jintao era should not have made the return of totalitarian rule inevitable. The regime conceivably could have muddled through in the same way as Hu had during his decade in power. But the combination of accidental and insti- tutional factors would produce a great leap backward few had seen coming. Specifically, the choice of Xi Jinping as Hu Jintao’s successor was an acci- dent—a disastrous mistake made by those who had selected him almost cer- tainly in full ignorance of his ambition and ruthlessness. Until he became the party chief of Shanghai in March 2007, Xi had been a plausible but not inevi- table successor to Hu. His eventual selection as the party’s future leader in November 2007 was the outcome of a power struggle between two unrelated factions. But once he gained the top position in November 2012, there were few obstacles preventing him from amassing power and reinstituting totalitarian- ism. The rules on collective leadership that Deng had established were too weak to stop Xi. Furthermore, Xi’s weaponization of anticorruption prosecu- tion gave him terrifying leverage over any rivals daring to challenge his power. Meanwhile, well-preserved totalitarian institutions, in particu lar the Leninist party-state and the regime’s total control of the means of violence, enabled him to reimpose tight organizational discipline on the party and to reestablish the rule of fear over society. In all likelihood, Xi might not have anticipated the ease with which he could, almost single-handedly, dismantle the post- Tiananmen order and restore personalistic rule. In retrospect, he probably underappreciates how much he owes his rise and subsequent success to Deng Xiaoping and his policies. Limitations of Deng Xiaoping and Dengism Our examination of party politics in the 1980s and the long-term consequences of Deng Xiaoping’s policies raises questions both about Deng’s political lead- ership and about the limitations of Deng’s neo-authoritarian developmental- ism. To be sure, it is unreasonable to expect Deng, a veteran of the Chinese revolution emotionally committed to the preservation of the CCP, to have acted like a liberal democrat. Additionally, Deng’s personal contribution to Chinese economic modernization is beyond dispute because of his outsized -- 268 of 345 -- 256 C onc l u s ion role in launching “reform and opening” in 1979. But in retrospect, Deng was also a flawed leader with a distorted vision of modernization. His shortcom- ings as a political leader severely limited what he could achieve during the 1980s and, even more important, created conditions for a reversal of many of the policies he had crafted to achieve economic modernization. Ideologically, Deng’s visceral hostility to liberal democracy unavoidably undercut his effectiveness in pushing through his economic reform agenda and led to the purge of those liberal leaders who had been indispensable to the success of his reforms. After he dismissed Hu Yaobang in January 1987, Deng was unable to restore the momentum of his economic reforms. His decision to order the military to crush the prodemocracy protests in June 1989 and his purge of Zhao Ziyang, the liberal party chief who had been instrumental in launching Deng’s economic reform agenda, not only tarnished his own per- sonal legacy but also deprived him of the only remaining partner at the top of the regime who could have helped advance his “reform and opening.” In fact, Deng’s modernization project was all but dead in the immediate aftermath of the Tiananmen crackdown in June 1989. But he managed to breathe new life into it after the fall of the Soviet Union in December 1991 so shocked and de- moralized the hard-liners that they reluctantly rallied behind his neo- authoritarian survival strategy. Deng’s neo-authoritarian developmentalism—unreserved embrace of capi- talism and globalization as a means of economic modernization under one- party rule—initially achieved spectacular results in the post-Tiananmen era. But over time, the flaws in this strategy became visible. The logic of the partial reform trap reduced the incentives for the post-Deng leadership to adopt more politically difficult economic reforms, while the hybrid economy bred vora- cious crony capitalism and fueled rising social tensions. The pervasive corruption and the stalled reforms created favorable condi- tions for the return of a strongman leader who could capitalize on both popular dissatisfaction and the festering rot within the regime to reestablish political dominance. Had Deng erected solid institutional and political guardrails in the 1980s to prevent the future return of a Mao-like figure, Xi Jinping likely would have encountered greater obstacles in his attempts to restore totalitarianism. The truth is that the steps Deng took in the 1980s were only partial and, in the end, ineffective in enforcing the party’s own rules against lifetime tenure, the concentration of power in one man, and the revival of a personality cult. Technically, the rules on term limits, collective leadership, and a personality cult that Deng had stipulated in the early 1980s were vague and unenforceable. Due to his antipathy toward democracy, he did not allow any political forces -- 269 of 345 -- C onc l u s ion 257 to exist outside the party, thus making the party (specifically its top leaders) the sole enforcer of its rules. When power was evenly distributed among the top leaders and their factions, as it had been between 1992 and 2012, these rules could be enforced. But when this fragile balance of power disappeared after the rise of Xi in late 2012, the edifice of collective leadership collapsed like a house of cards. Given the systematic reversal of Deng’s foreign and domestic policies under Xi’s rule, it is tempting to conclude that Xi’s regime represents a fundamental break with Deng’s regime. This assessment is true when it comes to the differ- ences in tactics and the key strategic assumptions (such as the main source of threats to the party’s survival and the balance of geopolitical power). Xi, a dogmatic Leninist, is the opposite of Deng, who was a pragmatic Leninist. But if we look at what these two leaders have in common, perhaps we will find that the discontinuities are superficial and the continuities between the two are fundamental. Both are hardcore Leninists who regard preservation of the party’s monopoly of power as the overriding objective of their rule. They achieved this objective regardless of the costs: Deng would order a brutal sup- pression of the peaceful protests and would purge the leaders who did the most to help him launch his “reform and opening,” while Xi would resort to totalitarian practices to neutralize all threats, real or imagined, to party rule. Both have a strong ideological antipathy to liberal democracy; both believe that only hard power can protect China from Western domination; both see the liberal West as an existential threat to one-party rule; and both regard the US-led international order as illegitimate and unjust. The answer to why Xi would adopt policies and tactics that Deng almost certainly would not have approved must be sought in their respective calculations of Chinese power and the costs of a given course of action. Deng had a far more realistic and astute assessment of Chinese power and a better understanding of the costs of his policies. In contrast, Xi has demonstrated a tendency to overestimate Chi- nese power and to underestimate the costs of his policies. An Inevitable New Cold War? The NCW between China and the United States that began toward the end of the 2010s and escalated after Russia’s invasion of Ukraine in 2022 has plunged the world into another dark era of great power confrontation and has resur- rected the specter of war between nuclear-armed adversaries. Future historians will undoubtedly debate the causes of the NCW. Our account of China’s political and economic developments in the post-Mao era reaches a more -- 270 of 345 -- 258 C onc l u s ion nuanced conclusion regarding whether the NCW was inevitable. On the one hand, the odds of integrating China into a West-led international order were evidently poor because Chinese leaders themselves consistently viewed this order as illegitimate and unjust. The nature of the one-party regime also meant that it would be nearly impossible to fully integrate a CCP-ruled China into the West-dominated international order due to the ideological incompatibility be- tween autocracy and democracy. Finally, the enormous power China had ac- quired in the post-Mao era thoroughly disrupted the military balance, com- merce, and international governance. Even if China were a democracy, it would likely pursue self-interested policies that conflict with those of the West on many issues, as we have seen in the cases of India, Brazil, and South Africa. Although the rise of China as a superpower would almost certainly result in unprecedented geopolitical and economic disruptions, it would be an exag- geration to say that China’s arrival as the world’s new superpower would trig- ger a NCW. Human agency— specifically individual leaders and their policies—also played a critical role in starting the NCW. Most crucially, Xi Jinping’s aggressive foreign policy made the West’s engagement with China untenable. Had a diff erent Chinese leader succeeded Hu Jintao, the country’s foreign policy might have continued to be assertive, but it unlikely would have been as reckless, risky, and confrontational as the foreign policy adopted by Xi during his first term. On the side of the West, the rise of America’s far-right populist leader Donald Trump and the trade war he launched also helped set off a new cold war. Had Hillary Clinton won the US presidential election in 2016, Washington would almost certainly have adopted a tougher China pol- icy, but a precipitous descent into an NCW would have been much less likely as her administration would most probably have pursued a more incremental policy of strategic competition, leaving room for de-escalation and compro- mise. Furthermore, Trump’s escalation of confrontation with China in 2020 after the outbreak of the Covid-19 pandemic created a new political reality and virtually eliminated any possibility of building a new foundation for US-China relations to reverse the course of a new cold war. The End of the China Dream Immediately after he became CCP chief in November 2012, Xi Jinping revived the decade-old party slogan “the great rejuvenation of the Chinese nation” and relabeled it as the “China dream.” Although he has frequently invoked the “China dream” in his speeches, he has never precisely defined its meaning.1 -- 271 of 345 -- C onc l u s ion 259 Judging by his post-2012 policies to realize his vision, it is reasonable to con- clude that Xi’s dream is to turn a CCP-led China into a global superpower on an equal footing with the United States. His record in fulfilling this dream after more than a decade in power, however, shows that he is failing more than he is succeeding. Despite his political ruthlessness and his success in amassing power and making himself the most powerful ruler since Mao Zedong, Xi’s policies have put his “China dream” into serious long-term jeopardy. At home, he has all but ensured a destabilizing succession struggle after he departs from the political scene. His personalistic rule has made policymaking both over- centralized and prone to costly errors (as revealed most prominently in the case of his zero-Covid policy in 2022). The revival of the permanent purge is terrorizing the party and most likely traumatizing and alienating those elites who do not have any direct personal connections to Xi or to his faction. Simi- larly, his crackdown on the private sector has estranged and disillusioned China’s private entrepreneurs, the group the party had previously courted. Eco nomically, stagnation looms on the horizon. With the bursting of the real estate bubble, the record-high debt burden, and the demographic catastrophe for which the CCP’s “one-child policy” is largely responsible, in the foresee- able future the Chinese economy will be struggling to regain its former dynamism. The decoupling of trade and investment from the West, a process initiated by the United States but later reinforced by Xi’s agenda of securitizing the Chinese economy, will significantly hurt China’s economic development as the country loses access to Western markets, capital, and advanced technol- ogy. Geopolitically, the NCW has sparked an open-ended and dangerous con- frontation between China and the United States, endangering not only China’s national security but also the CCP’s own survival. Few should lament that Xi’s version of a “China dream” will not be fulfilled. The tragedy brought about by the return to totalitarian rule and the outbreak of the new cold war under his rule is that the real China dream—an econom- ically prosperous and politi cally liberal and open China—will be beyond the reach of its people for at least another generation. -- 272 of 345 -- -- 273 of 345 -- 261 ac k now l e d g m e n t s the broken China Dream is a brief account of political and economic devel- opments in post-Mao China. It is also a compressed intellectual journey of its author. China opened its door to the outside world when I was a college stu- dent in Shanghai. The US-China engagement that began with the normaliza- tion of relations in 1979 made it possible for me to come to the United States and study political science. My first book, From Reform to Revolution: The De- mise of Communism in China and the Soviet Union (1994), was an optimistic assessment of Deng Xiaoping’s reform. Its key theoretical assumption, based on the modernization theory, was that capitalist economic development could undermine the power of the Chinese Communist Party and create favorable conditions for a potential democratic transition. But as I gained greater intel- lectual maturity and a deeper understanding of the predatory nature of autoc- racy, I came to realize that Deng’s neo-authoritarian developmentalism would be a dead end. This intellectual awakening inspired my second book, China’s Trapped Transition: The Limits of Developmental Autocracy (2006). Published ahead of its time, this book laid out the logic of a “trapped transition,” arguing that the CCP would lose incentives to pursue fundamental economic reforms and preside over a stagnating economy in the foreseeable future. My third book, China’s Crony Capitalism: The Dynamics of Regime Decay (2016), details the pathologies of neo-authoritarian rule in the post-Tiananmen era. The Bro- ken China Dream thus represents a synthesis of my research on post-Mao China over the last three decades. I am deeply indebted to many colleagues in writing this book. Bridget Flannery-McCoy and Eric Crahan at Princeton University Press first planted the idea for this book in 2020 and provided invaluable advice and encourage- ment. A grant from the Smith Richardson Foundation enabled me to take a sabbatical to write the first draft in 2022–2023. I am especially grateful to the support of Marin Strmecki and Allan Song of the foundation for their enthu- siasm for the project. I want to thank Hilary Appel for giving me a book -- 274 of 345 -- 262 A c k no w l e d g m e n t s subvention grant from the Keck Center for International and Strategic Studies at Claremont McKenna College. Nancy Hearst proofread and polished the manuscript with unrivaled editing skills. Andy Walder, Guoguang Wu, and Patricia Thornton read the drafts of the book and offered helpful guidance. I also benefited from the constructive com- ments of two anonymous readers. Celine Wang, my able and diligent research assistant, deserves the credit for checking and standardizing the notes. This book is dedicated to Larry Diamond, a dear friend and generous men- tor who has been a source of intellectual inspiration for more than three decades. -- 275 of 345 -- 263 no t e s Introduction 1. Agnes Chang et al., “What Happened to Hu Jintao,” New York Times, October 27, 2022, https://www.nytimes.com/interactive/2022/10/27/world/asia/hu-jintao-congress-videos .html. 2. Zhong Yuhao, “中纪委公布十八大以来被查的中央委员、中央候补委员人数” [The Central Commission for Discipline Inspection announces the number of Central Committee members and alternate members who have been investigated since the Eighteenth National Party Congress], The Paper, October 17, 2022, https://m.thepaper.cn/newsDetail_forward _20332452. 3. 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Robert Goodin (New York: Oxford University Press, 2013), 593–615. 10. Guillermo O’Donnell and Philippe C. Schmitter, Transitions from Authoritarian Rule: Tentative Conclusions About Uncertain Democracies (Baltimore: Johns Hopkins University Press, 1986); Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press, 1991); Stephan Haggard and Robert R. Kaufman, Dictators and Democrats: Masses, Elites, and Regime Change (Princeton, NJ: Princeton University Press, 2016), 142–72. 11. Adam Przeworski and Fernando Limongi, “Modernization: Theories and Facts,” World Politics 49, no. 2 (1997): 155–83. 12. 邓小平 [Deng Xiaoping], “坚持四项基本原则” [Maintain the four cardinal principles], in 邓小平文选第二卷 [Selected works of Deng Xiaoping, vol. 2] (Beijing: People’s Press, 1994), 164–65. 13. Wu Guoguang, 趙紫陽與政治改革 [Zhao Ziyang and political reform] (Hong Kong: Taipingyang shiji yanjiusuo, 1997). 14. Bruce J. 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Yuhua Wang and Carl Minzner, “The Rise of the Chinese Security State,” China Quarterly, no. 222 (2015): 339–59; Minxin Pei, The Sentinel State: Surveillance and the Survival of Dictatorship in China (Cambridge, MA: Harvard University Press, 2024). 18. Carl Friedrich and Zbigniew Brzezinski, “The General Characteristics of Totalitarian Dictatorship,” in Comparative Government: A Reader, ed. Jean Blondel (London: Macmillan Education, 1969), 187–99; Juan J. Linz, Totalitarian and Authoritarian Regimes (Boulder, CO: Lynne Rienner, 2000). 19. Ivo Banac, ed., Eastern Europe in Revolution (Ithaca, NY: Cornell University Press, 1992); Archie Brown, The Rise and Fall of Communism (New York: Ecco, 2011). 20. Vladislav M. Zubok, Collapse: The Fall of the Soviet Union (New Haven, CT: Yale Uni- versity Press, 2021); Michael A. McFaul, Russia’s Unfinished Revolution: Political Change from Gorbachev to Putin (Ithaca, NY: Cornell University Press, 2002). 21. Martin K. Dimitrov, ed. Why Communism Did Not Collapse: Understanding Authoritarian Regime Resilience in Asia and Europe (New York: Cambridge University Press, 2013). 22. Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” Economic Policy 9, no. 18 (1994): 101–45. 23. Yingyi Qian and Chenggang Xu, “The M-Form Hierarchy and China’s Economic Re- form,” European Economic Review 37, no. 2–3 (1993): 541–48; Xueguang Zhou, The Logic of Gov- ernance in China: An Organizational Approach (New York: Cambridge University Press, 2022). 24. Xin Yuan and Yuan Gao, “Demographic Transition and Economic Miracles in China: An Analysis Based on Demographic Perspective,” International Journal of Economic Policy Studies 14, no. 1 (2020): 25–45. 25. Ezra F. Vogel, The Four Little Dragons: The Spread of Industrialization in East Asia (Cam- bridge, MA: Harvard University Press, 1991). 26. Andrew G. Walder, “Bending the Arc of Chinese History: The Cultural Revolution’s Paradoxical Legacy,” China Quarterly, no. 227 (2016): 613–31. 27. Steven Levitsky and Lucan Way, Revolution and Dictatorship: The Violent Origins of Du- rable Authoritarianism (Princeton, NJ: Princeton University Press, 2022). 28. Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy (New York: Penguin, 2008); Carl J. Friedrich and Zbigniew K. Brzezinski, Totalitarian Dictator- ship and Autocracy (Cambridge, MA: Harvard University Press, 1956). 29. Timothy Brook and B. Michael Frolic, eds., Civil Society in China (London: Routledge, 2015). 30. Mancur Olson, “Dictatorship, Democracy, and Development,” American Political Science Review 87, no. 3 (1993): 567–76; Daron Acemoglu et al., “Institutions as the Fundamental Cause of Long-Run Growth,” in Handbook of Economic Growth: Volume 1A, ed. Steven N. Durlauf and Philippe Aghion (Elsevier, 2005), 385–472. 31. Joel S. Hellman, “Winners Take All: The Politics of Partial Reform in Post-Communist Transitions,” World Politics 50, no. 2 (1998): 203–34; Victor Shih, “Partial Reform Equilibrium, Chinese Style: Political Incentives and Reform Stagnation in Chinese Financial Policies,” Com- parative Political Studies 40, no. 10 (2007): 1238–62. -- 277 of 345 -- No t e s t o C h a p t e r 1 265 32. Minxin Pei, China’s Crony Capitalism: The Dynamics of Regime Decay (Cambridge, MA: Harvard University Press, 2016); Andrew Wedeman, “The Dynamics and Trajectory of Corrup- tion in Contemporary China,” China Review 22, no. 2 (2022): 21–48. 33. “Neo-authoritarianism” here refers to a unique variety of autocracy that seeks to acceler- ate economic development under authoritarian rule. Historically, South Korea, Taiwan, Singa- pore, and Chile under Pinochet are classical examples of this type of regime. Deng Xiaoping’s vision of economic modernization is, in essence, neo-authoritarian. “Neo- Stalinism” can be defined as a form of totalitarianism that adopts the institutional and political practices charac- teristic of Stalinist Soviet Union, such as the dominance of an individual dictator, a cult of personality, the use of purges to terrorize the party, conformity to an official ideology, and strict social control. This form of totalitarianism differs from Maoist mass totalitarianism in the dicta- tor’s preferred instrument of terror. Neo-Stalinist regimes rely on the coercive apparatus of the state to maintain the rule of fear while Maoist regimes prefer the mobilization of the masses to carry out terror campaigns. Chapter 1. The Decisive Decade 1. Andres Onate, “Hua Kuo-Feng and the Arrest of the Gang of Four,” China Quarterly, no. 75 (1978): 540–65. 2. 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Guangdong Provincial Planning Commission, “省计委关于下放外商直接投资项目审 批权限意见的通知 ([1992]36号)” [Notice on the decentralization of approval authority for foreign direct investment projects (1992) no. 36], 广东省人民政府 [Guangdong Province People’s Government], May 16, 1992, http://www.gd.gov.cn/zwgk/gongbao/1992/5/content / post _ 3356383.html. 48. “指导外商投资方向暂行规定” [Interim regulations to guide the direction of foreign investment], June 20, 1995, 法律法规库 [Laws and regulations library], https:// www.flfgk .com / detail / 961475ca38c91a2de22a3bdf277d2db1.html. 49. Chunlai Chen, “The Liberalisation of FDI Policies and the Impacts of FDI on China’s Economic Development,” in China’s 40 Years of Reform and Development 1978–2018, ed. Ross Garnaut, Ligang Song, and Cai Fang (Canberra: ANU Press, 2018), 598. -- 299 of 345 -- No t e s t o C h a p t e r 5 287 50. Nicholas R. Lardy, China in the World Economy (Washington, DC: Institute for Interna- tional Economics, 1994), 63–71. 51. Calculated from ZGTJNJ 1995, 114. 52. Yi Huang, Liugang Sheng, Gewei Wang, “How Did Rising Labor Costs Erode China’s Global Advantage?,” Journal of Economic Behavior & Organization, no. 183 (2021): 632–53. 53. Min Ye, Diasporas and Foreign Direct Investment in China and India (New York: Cam- bridge University Press, 2014). 54. Calculated from data in ZGTJNJ 1998 (Beijing: Zhongguo tongji chubanshe, 1999), 639; ZGTJNJ 1999, 2000, 2001, e-book, https://www.stats .gov.cn /sj /ndsj /; ZGTJNJ 2003, 672; ZGTJNJ 2005, 2007, e-book, https:// www.stats.gov.cn / sj / ndsj /. 55. Geng Xiao, “People’s Republic of China’s Round-Tripping FDI: Scale, Causes and Impli- cations,” ADB Institute Discussion Paper, no. 7 ( July 2004), https://www.adb.org/sites/default / files / publication / 156758 / adbi-dp7.pdf. 56. Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (New York: Cambridge University Press, 2003). 57. ZGTJNJ 1998, 142; ZGTJNJ 2013, e-book. 58. 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Robert Lighthizer, No Trade Is Free: Changing Course, Taking on China, and Helping Amer- i ca’s Workers (New York: Broadside Books, 2023); John Mearsheimer, “The Inevitable Rivalry: America, China, and the Tragedy of Great-Power Politics,” Foreign Affairs 100, no. 6 (November– December 2021): 48–58. -- 300 of 345 -- 288 No t e s t o C h a p t e r 5 70. Henry Gao, Damian Raess, and Ka Zeng, eds., China and the WTO: A Twenty-Year As- sessment (New York: Cambridge University Press, 2023). 71. ZGTJNJ 2012, e-book. 72. ZGTJNJ 2012, e-book. 73. Loren Brandt et al., “WTO Accession and Performance of Chinese Manufacturing Firms,” American Economic Review 107, no. 9 (2017): 2784–20; Zhiming Zhang, Xin Zhang, and Riming Cui, “Research on the Effects of WTO Accession on China’s Economic Growth: Path Analysis and Empirical Study,” Journal of Chinese Economic and Foreign Trade Studies 6, no. 2 (2013): 70–84. 74. 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David Bloom and Jeffrey Williamson, “Demographic Transitions and Economic Miracles in Emerging Asia,” World Bank Economic Review 12, no. 3 (1998): 419–55; Andrew Mason and Tomoko Kinugasa, “East Asian Economic Development: Two Demographic Dividends,” Jour- nal of Asian Economics 19, no. 5–6 (2008): 389–99. 80. Cai Fang, Ross Garnaut, and Ligang Song, “How Reform Captured China’s Demo- graphic Dividend,” in Garnaut et al., China’s 40 Years of Reform and Development: 1978–2018, 8–10. 81. Mason and Kinugasa, “East Asian Economic Development.” 82. ZGTJNJ 1990 (Beijing: Zhongguo tongji chubanshe, 1991), 90. 83. ZGTJNJ 1995, 61. 84. Fang Cai and Dewen Wang, “China’s Demographic Transition: Implications for Growth,” in The China Boom and Its Discontents, ed. Ross Garnaut and Ligang Song (Canberra: Asia Pa- cific Press, 2005), 34–52; Haifeng Zhang, Hongliang Zhang, and Junsen Zhang, “Demographic Age Structure and Economic Development: Evidence from Chinese Provinces,” Journal of Com- parative Economics 43, no. 1 (2015): 170–85. 85. National Bureau of Statistics, 2013 年全国农民工监测调查报告 [2013 National migrant workers monitoring survey report], 中央政府门户网站 [Central government portal], May 12, 2014, https:// www.gov.cn / xinwen / 2014- 05 / 12 / content _ 2677889.htm. 86. Xiaodong Zhu, “Understanding China’s Growth: Past, Present, and Future,” Journal of Economic Perspectives 26, no. 4 (2012): 103–24. 87. Fang Cai, “How Has the Chinese Economy Capitalised on the Demographic Dividend During the Reform Period?” in Garnaut et al., China’s 40 Years of Reform and Development: 1978–2018, 235–55; Fang, Garnaut, and Song, “How Reform Captured China’s Demographic Dividend,” 8–10. 88. Fang Cai, “Haste Makes Waste: Policy Options Facing China After Reaching the Lewis Turning Point,” China and World Economy 23, no. 1 (2015): 1–20. 89. ZGTJNJ 2013, e-book. 90. World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press, 1993). 91. Alwyn Young, “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics 110, no. 3 (1995): 641–80; Paul Krugman, “The Myth of Asia’s Miracle,” Foreign Affairs 73, no. 6 (1994): 62–78. -- 301 of 345 -- No t e s t o C h a p t e r 5 289 92. Loren Brandt and Xiaodong Zhu, “Accounting for China’s Growth,” IZA Discussion Paper, no. 4764 (2010), https://www.iza.org/publications/dp/4764/accounting-for-chinas-growth. 93. Barry Bosworth and Susan Collins, “Accounting for Growth: Comparing China and India,” Journal of Economic Perspectives 22, no. 1 (2008): 45–66; Dwight H. Perkins and Thomas G. 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Edward Gleaser et al., “A Real Estate Boom with Chinese Characteristics,” Journal of Economic Perspectives 31, no. 1 (2017): 93–116; Zhenya Liu and Shixuan Wang, “Decoding Chi- nese Stock Market Returns: Three- State Hidden Semi-Markov Model,” Pacific-Basin Finance Journal, no. 44 (2017): 127–49. 101. “温家宝: 中国具备继续保持经济平稳较快发展的条件” [Wen Jiabao: China has the conditions to continue to maintain stable and rapid economic development], 中央政府门户网 站 [Central government portal], March 16, 2007, https:// www.gov.cn / wszb / zhibo20070316b / content _ 552718.htm. 102. Wen Jiabao, “2013年国务院政府工作报告” [2013 government work report], 中央政府 门户网站 [Central government portal], March 19, 2013, https:// www.gov.cn / test / 2013- 03 / 19 / content _ 2357136.htm. 103. ZGTJNJ 2021, e-book. 104. Nicholas Lardy, Sustaining China’s Economic Growth After the Global Financial Crisis (Washington, DC: Peterson Institute for International Economics, 2012), 47. 105. ZGTJNJ 2013, e-book. 106. Tian Zhu, Catching Up to America: Culture, Institutions, and the Rise of China (New York: Cambridge University Press, 2021), 102; Dominik Peschel and Wenyu Liu, “The Long-Term Growth Prospects of the People’s Republic of China,” Asian Development Bank Institute, East Asia Working Paper, no. 54 (2022): 27. 107. Loren Brandt et al., “China’s Productivity Slowdown and Future Growth Potential,” World Bank, Policy Research Paper no. 9298 (2020): 15–16. 108. Guo-liang Yang, Hirofumi Fukuyama, and Yao-yao Song, “Estimating Capacity Utiliza- tion of Chinese Manufacturing Industries,” Socio-Economic Planning Sciences, no. 67 (2019): 94–110; Qing Yang et al., “The Drivers of Coal Overcapacity in China: An Empirical Study Based on the Quantitative Decomposition,” Resources, Conservation and Recycling, no. 141 (2019): 123–32. 109. Brandt et al., “China’s Productivity Slowdown,” 12–13; Lardy, Markets Over Mao, 34, 97. 110. 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Lardy, Sustaining China’s Economic Growth After the Global Financial Crisis, 5; Yan Liang, “China and the Global Financial Crisis: Assessing the Impacts and Policy Response,” China and World Economy 18, no. 3 (2010): 56–72; Shaun Breslin, “Paradigm(s) Shifting? Responding to the Global Financial Crisis,” in The Consequences of the Global Financial Crisis The Rhetoric of Reform and Regulation, ed. Wyn Grant and Graham K. Wilson (New York: Oxford University Press, 2012), 226–46. 119. Bank of International Settlements, “Credit to the Non-Financial Sector,” https://www .bis.org / statistics/ totcredit.htm. 120. Borst, “China’s Credit Boom.” 121. Sally Chen and Joong Shik Kang, “Credit Booms—Is China Diff erent?,” International Monetary Fund, Working Paper 18/2 (2018): 5–6. 122. Brandt et al., “China’s Productivity Slowdown,”17. 123. ZGTJNJ, vari ous years, e-book. 124. Yasheng Huang, Capitalism with Chinese Characteristics: Entrepreneurship and the State (New York: Cambridge University Press, 2008). 125. World Bank and Development Research Center of the State Council of China, China 2030: Building a Modern, Harmonious, and Creative Society (Washington, DC: World Bank, 2013). Chapter 6. Revival of Totalitarianism Under Xi Jinping 1. Guillermo O’Donnell and Philippe C. Schmitter, Transitions from Authoritarian Rule: Ten- tative Conclusions About Uncertain Democracies (Baltimore: Johns Hopkins University Press, 1986), 1–14; Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press, 1991), 121–40. 2. 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Ling Li, “Politics of Anticorruption in China: Paradigm Change of the Party’s Disciplin- ary Regime 2012–2017,” Journal of Contemporary China 28, no. 115 (2019): 47–63; Andrew Wede- man, “Xi Jinping’s Tiger Hunt: Anti-Corruption Campaign or Factional Purge?,” Modern China Studies 24, no. 2 (2017): 35–94. 16. “2022年，至少32名中管干部落马” [At least thirty-two cadres will be dismissed in 2022], 中国新闻周刊 [China news weekly], January 23, 2023, https://www.inewsweek .cn/politics / 2023- 01- 03 / 17329.shtml. 17. “2023伏虎收官” [Tigers captured in 2023], 财新 [Caixin], December 31, 2023, https:// china.caixin.com/2023-12-31/102151756.html; “2024公布被处分中管干部增至60人,” [The published number of punished centrally supervised cadres rose to 60 in 2024], 财新 [Caixin], December 16, 2024, https:// china.caixin.com / 2024-12-16 / 102268377.html. 18. “中共中央, 中共中央决定给予周永康开除党籍处分 移送司法机关” [Central Committee of the Communist Party of China decides to expel Zhou Yongkang from the party and transfer him to the judicial authorities], 中央政府门户网站 [Central government portal], December 6, 2014, https://www.gov.cn/govweb/xinwen/2014-12/06/content_2787500.htm; “周永康一审 被判处无期徒刑” [Zhou Yongkang is sentenced to life imprisonment in the first instance], Xin- huashe, June 11, 2015, http://www.xinhuanet.com/politics/2015-06/11/c_1115590304.htm. 19. “十八大以来已有45名军老虎落马” [Since the Eighteenth Party Congress, 45 military tigers have been dismissed], 北京青年报 [Beijing youth daily], November 14, 2015, https://news .qingdaonews.com / zonghe / 2015-11 / 14 / content _ 11354144.htm. 20. 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Keith Bradsher, “China’s Leader, with Rare Bluntness, Blames U.S. Containment for Troubles,” New York Times, March 7, 2023. https://www.nytimes.com/2023/03/07/world/asia / china-us-xi- jinping .html. Conclusion 1. 中共中央文献研究室, “习近平关于实现中华民族伟大复兴的中国梦论述摘编” [Xi Jin- ping’s selected speeches on realizing the great rejuvenation of the Chinese nation] (Beijing: Zhonggong zhongyang wenxian chubanshe, 2013). -- 320 of 345 -- -- 321 of 345 -- 309 Figures and tables are indicated by f and t following page numbers. administrative reforms under Deng, 5, 21–25 Afghanistan: Soviet invasion of (1979), 225; US war in (2001), 243, 249, 254 after-school coaching industry, 216–17 age limits of officials. See mandatory retirements agricultural reforms: agricultural tax abolished by Hu, 106; as attractive starting point for economic reform, 49; big-bang approach to, 50; bottom-up peasant initiatives and, 47, 49; decollec- tivization, 14, 16, 36, 37, 46, 49, 51, 72, 153; Deng vs. Chen on, 25; Deng’s support as critical to, 50; food self-sufficiency as Xi’s goal, 211–12; increase in productivity, 46, 47; land reform for farmers (2013), 196; privatization, 98, 135; Zhao and, 18. See also rural population of China Ant Group’s Initial Public Offering, 216 anti-American demonstrations (1999), 91–92 anti–bourgeois liberalization campaign, 25, 37–40 anti-espionage law (2023), 190 anticorruption campaigns, 99–100, 168–69; disciplinary code and procedures for, 173; Wang as CDIC head leading investiga- tions, 169; Xi using to purge political rivals, 1, 2, 11, 13, 86–88, 112, 120, 122, 128, 165, 167, 169–73, 179–80, 187, 255, 259 antiriot forces, 92–93; Taishi village incident (2005) and, 117–18 artificial intelligence (AI), 211 Asian Infrastructure Investment Bank, 247, 250 authoritarianism: difficulty of institutional- izing politics, 189; East Asia’s economic growth and, 48; no third-party enforce- ment in, 25; transition from totalitarian- ism to, 30. See also neo- authoritarian developmentalism baby formula case (2008), 115 balance of power: ceasing to exist, allowing Xi’s restoration of totalitarianism, 188; in post-Tiananmen era, 87–88, 98–99, 168–69. See also world order banking. See fiscal reform; specific names of banks bankruptcy of SOEs. See state-owned enterprises Bao Tong, 30 Belt and Road Initiative (BRI), 247, 249–50 Biden, Joe: blocking Chinese access to high-end chips, 211; containment policy instituted by, 207, 252; tariffs and, 205 Big Fund (China Integrated Circuit Industry Investment Fund), 211 Bo Xilai, 123, 126–28, 170 Bo Yibo, 78 bourgeois liberalization, 5, 20, 25, 35–40. See also liberalism (1980s) bribery. See corruption BRICS summit (2012), 250 Brus, Włodzimierz, 48 Bush, George H. W., 227, 233 Bush, George W., 233, 242–43 cadre management system, 21–22, 32; Trial Regulations on the Selection and Appointment of Party and Government Leading Cadres (1995), 85. See also mandatory retirements I n de x -- 322 of 345 -- 310 i n de x capitalism’s growth in China: Deng’s policies and, 45, 74, 225; Jiang’s “advanced social productive forces” and, 96; neo- authoritarian developmentalism and, 77, 101, 231. See also crony capitalism; neo- authoritarian developmentalism; West, economic engagement with Carter, Jimmy, 226 Case of Fake Medicines in Jinjiang scandal (1985), 63 CCP. See Chinese Communist Party “The CCP Center’s Resolution on Several Questions on Establishing Institutions of a Socialist Market Economy” (Third Plenum), 84 “The CCP Decision on Further Strengthen- ing and Improving Public Security Work” (2003), 112 censorship, 6, 7, 35, 43, 102, 107, 122, 180, 196. See also Great Firewall of China; press freedom, Xi’s repression of Central Advisory Committee, 63 Central Committee: Third Plenum (2013), 84, 195; Fifth Plenum (2020), 209–10; annual written self-evaluations required by Xi, 175; Deng’s choices for, 80; naming Xi as “core leader,” 174; patronage’s role in selection of members, 85; resolutions’ lack of enforceability, 28; Xi’s purges targeting members, 171–72. See also specific documents by name Central Discipline Inspection Commission (CDIC), 169–71, 173, 175 Central Leading Small Group on Compre- hensively Deepening Reform, 174 Central Leading Small Group on Cyberse- curity and Informatization, 179–80, 197 Central Military Commission: Jiang retaining chairmanship after retirement, 88, 102–3; new defense doctrine (1993), 236 Central Political and Legal Affairs Commission, 92 Central Political-Legal Committee, abolition of, 32 century of humiliation, 8 Chen Liangyu, 123, 124, 126, 168 Chen Quanguo, 183–84 Chen Shui-bian, 240, 242–43 Chen Xitong, 86, 168 Chen Yixin, 172 Chen Yun: agricultural reform, neutral stance on, 49; background of, 18; as CDIC chief, 169; command economy favored by, 19, 21, 25; Deng outmaneuver- ing, 24, 27; as Deng’s co-leader, 2–3; disapproval of and attack on liberals, 34, 39; economic policy disagreement with Deng, 16, 25–27, 63, 72, 253; foreign trade and, 59; as hard-line leader, 2, 6, 9, 19, 233; poor health and inactive in early 1990s, 78, 79–80; private sector’s rise opposed by, 63; purged by Mao, 2, 17; SEZs opposed by, 27 China dream, 8, 168, 224, 225, 258–59 China Integrated Circuit Industry Investment Fund (ICF), 211 China-US trade war. See US-China trade war Chinese Communist Party (CCP): Thirteenth Party Congress (1987), 31, 38, 39, 43; Fourteenth Party Congress (1992), 80, 83; Fifteenth Party Congress (1997), 87; Seventeenth Party Congress (2007), 88, 109, 124; Eighteenth Party Congress (2012), 164; Nineteenth Party Congress (2017), 174, 176; Twentieth Party Congress (2022), 1, 177, 190, 218; capi talist threat, containment of, 13; centennial celebration (2021), 175; “democracy in the party” encouraged by Deng, 23; Deng’s institutional reforms of, 21–25; institutional features of, 6, 22; institutionalization of, 84–88, 187; leadership of, 5; more homogeneous in post-Tiananmen era, 74, 85, 97–98; popular support (see regime legitimacy and performance legitimacy); Regula- tions on Chinese Communist Party Discipline and Sanctions (1997), 85; resistant to political liberalization, 5; Soviet collapse, effect of, 81–82; Trial Regulations on the Selection and Appointment of Party and Government Leading Cadres (1995), 85 Chinese constitution, 24, 63, 177 Chinese Embassy in Belgrade, NATO bombing of (1999), 91, 240, 242 Chinese-Foreign Contractual Joint Ventures Law (1988), 55 -- 323 of 345 -- i n de x 311 Chinese-Foreign Equity Joint Ventures Law (1979), 54–55 Chinese People’s Political Consultative Conference (2023), 252 civil society: accountability enforced by, 25, 99; Deng and, 188; effect of not having, 9, 165; Hu and, 113–19, 122; rise as threat to post-Tiananmen order, 130, 254; Xi’s repression of, 173, 177–78, 181 Clinton, Bill, 113, 147, 150, 233, 239 Clinton, Hillary, 246, 258 coastal cities, 40, 47, 58, 145, 153 Cold War: China not a threat in, 9, 222, 225; Deng vs. Chen on, 26; international order after end of, 231; Soviet Union as security threat in, 222 collective leadership: Deng instituting, 2–3, 16, 21, 22, 23, 42, 188; Hu era and, 86, 102; Jiang era and, 97; of post-Tiananmen order, 83, 122; sustained from 1979–2012, 10, 254; vagueness and unenforceability of rules, 256; Xi’s end of, 2, 175, 255 collective protests. See social unrest collectively owned firms, 37, 52, 66, 143–45 command economy favored by hard-liners, 19, 21, 25, 50, 57, 70, 72, 253 communes, dismantling of, 51 “Communiqué on the Current State of the Ideological Sphere” (2013). See Document No. 9 communism: Deng’s break from and orthodox ideology’s loss of appeal, 90, 96, 222; private sector banned by, 9; Xi restoring orthodox ideology, 128, 167, 168, 188. See also Chinese Communist Party; Soviet Union, collapse of; Stalinism Communist Youth League (CYL), 123–26, 128 confiscation of private property. See land seizure conflict resolution, lack of peaceful channels to address, 111 conservatives: technocrats dominating party in post-Tiananmen era, 97; ultra-conservatives sidelined, 97–98. See also hard-liners of 1980s control of information. See censorship; press freedom, Xi’s repression of; social media, crackdown on corruption: bank credit for private firms and, 138; collusive, 120, 128; dual- track pricing and, 71; economic costs of, 122–23; in Hu era, 101, 119–23, 133; in effectiveness of party’s fight against, 122; likely to impact regime’s support, 100, 130; neo- authoritarianism and, 75, 99–100, 122; number of bribery cases, 119, 120f; number of officials prosecuted, 120, 121f; post-Tiananmen order and, 12, 85, 98; punishment of, 84, 86–87; regime decay under Hu due to, 101, 102, 120. See also anticorruption campaigns; crony capitalism Corruption Perception Index, 119 Covid-19 pandemic: economic disruption of, 207, 217–19; housing market crash during, 162; law professor criticizing party handling of, 181; Trump blaming China for, 252; US-China trade war and, 205; Xi’s neo-Stalinist agenda and, 189; “zero-Covid policy,” 189–90, 218–19, 259 criterion of truth, 18, 37 crony capitalism, 11, 12, 102, 119–23, 128, 256 cult of personality: alienation of socialism and, 33; Deng prohibiting, 2; Stalinist, 265n33; Xi restoring, 1, 167, 175–76, 256 Cultural Revolution: agricultural mechani- zation campaign in, 51; China’s education system devastated by, 229; discrediting Maoism, 9; Mao’s purges, 17; reforms of 1980s leaders as reaction to, 42; removing many possible contenders for Mao’s successor, 17; survivors changing party politics after, 2, 16–17; younger cohort toppling old guard, 86 culture fever of liberal wave of 1980s, 33, 43 cybersecurity measures, 178–80, 190–91, 196, 197 Cyberspace Administration, 113 debt load. See end of China’s economic miracle; global financial crisis; local government debt markets, 138–39 “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehen- sively Deepening the Reform” (Xi reform platform 2013), 195–96 -- 324 of 345 -- 312 i n de x “Decision on Strengthening Comprehen- sive Management of Public Security” (1991), 92 Democracy Wall Movement, 34, 94 Demo cratic Progressive Party (DPP, Taiwan), 239–40, 244 democratization: authoritarian ruling elites’ choices and, 4, 114; Deng’s antipathy to, 22, 28, 257; elections for provincial governors and court officials, 31; factors preventing China from moving toward, 3, 4, 9, 21, 253; Hu Yaobang’s interest in, 38; liberals and prodemocracy movement, 76; neo-authoritarianism incompatible with, 99; of post-Soviet Russia and post-Soviet states, 7; reform as catalyst for, 7–8; rights defense movement and, 114–19; of Taiwan, 239; wealth not deciding factor for, 4, 114; Xi’s opposition to, 177, 257; Zhao’s proposal of accountable system of governance, 29–32. See also liberalism (1980s); prodemocracy movement demographic dividend, 152–55, 158, 163, 193, 259 Deng Liqun, 31, 34, 35, 39 Deng Xiaoping: background of, 17–18; Central Military Commission chairman- ship, retaining after retirement, 88; Chen as co-leader with, 2–3; choice of leaders to protect legacy, 79–80, 83; compared to Xi, 224, 257; death of (1997), 83; economic reform agenda of, 19, 25–27; “emancipating the mind” speeches (1991), 76; four modernizations and, 53–54, 225; golden period (1992–2012) built on vision of, 75, 82, 227; Hu chosen as Jiang Zemin’s successor by, 80, 87, 88, 125; institutional reforms of, 21–25; Jiang Zemin as successor, 74–75; joining international organizations and UN- affiliated agencies, 228–29; landmark speech at Politburo (1980), 21; legal reforms of, 27–28, 222; liberal leanings initially, 16, 20, 33–34, 36–38; Mao’s purge of, 2, 17; neo- authoritarianism as economic strategy of 1990s, 12, 75, 77, 226, 265n33; one-party system, commit- ment to maintaining, 19, 20, 22, 25, 29, 34, 36, 37, 188, 224, 253, 256–57; political reforms tied to economic initiatives, 27–32; as pragmatic Leninist, 129, 253, 257; purges of liberal reformers, 5–6, 9, 12, 15, 16, 20, 33, 36–38, 41, 42, 75, 79; return to position of power after Mao’s death, 17; Selected Works, 231; self- interests diluting effectiveness of reforms, 42, 189; siding with hard-liners on one-party rule, 19, 20–21, 253–54; southern tour (1992) as beginning of neo-authoritarianism, 76–77, 83, 232; Soviet Union’s collapse and, 7, 77, 78, 80, 131, 232; on The Sun and the Man (movie), 35; as survivor of Cultural Revolution, 2, 9, 17; terror, use of, 44; Tiananmen Square protests crushed by, 3, 16, 20, 41, 44, 230, 256; travel abroad and to US, 53, 227; TVEs’ rapid growth as surprise to, 51–52; “We Must Adhere to Socialism and Prevent Peaceful Evolution Towards Capitalism,” 231. See also “Four Cardinal Principles”; reform and opening devaluation of Chinese currency (1994), 149 Diaoyu Islands. See Senkaku/Diaoyu Islands dispute dissidents: forced into exile, 94; in peripheral regions, 183–86; subversive activities of, 178; Xi’s crackdown on, 180. See also social unrest; Tiananmen Square protests Document No. 9 (Central Committee 2013), 168, 177–78 domestic security, 92–93, 98; Hu’s strengthening of, 112–13; regime security as paramount concern of Xi, 167–68, 190; Xi’s total control over, 172. See also repression dual circulation strategy, 209–11 dual-track pricing system, 46, 47, 51, 60, 70–71, 73 East Asian authoritarian model: demo- graphic dividend and, 152; economic dynamism and, 8–9, 48, 80; loss of manufacturing companies, 146; repressive tactics of, 93 East Asian financial crisis (1997), 141, 238 East China Sea Air Defense Identification Zone (ADIZ), 250 Eastern Europe’s economic reform, 46–48, 60. See also former Soviet bloc -- 325 of 345 -- i n de x 313 economic growth of China, 3, 132–63; “big bang” and, 50, 70; coupled with one-party rule as Deng’s strategy (see neo- authoritarian developmentalism); debt increase after global financial crisis, 161, 193–94, 198; demographic dividend, 152–55, 158, 163, 193; Deng vs. Chen on rate of, 25, 26; disconnect from democ- racy, 4; drivers of growth (consumption, investment, trade), 158–60, 160t; dual-track economy and, 46, 70–71; economic achievements, 133–35, 134t; hard-liners constraining in 1980s, 45–47, 49–50, 75; high savings and investment rates, 155–57; incremental capital output ratio and, 159; inevitable loss of momentum, 101, 102, 163, 193, 220; inflation of 1988 and, 37, 40, 75; infrastruc- ture investment, 132, 136, 137, 157, 159, 210; investment-dependent, 103, 133, 159, 193, 210; learning-by-doing and avoiding costly mistakes, 46, 47, 58; liberating productivity, 47; local governments’ increased autonomy and, 47; losing momentum, 14, 157–63; origins of experimentalism, 46–49; path depen- dence and, 13, 45, 132–33, 222; post- Tiananmen measures of hard-liners constraining, 76; rapid rise (1978–1989), 71–73, 133; real estate sector as domestic driver of, 102, 158, 194, 200–201, 201t; reform and Chinese miracle, 135–42, 242; stalled by fall of liberals in mid-1980s, 37, 39–40; sustainability of, 155, 157, 162, 242; total dependency ratio and, 153–54; virtuous cycle and, 156. See also end of China’s economic miracle; foreign direct investment; foreign trade; private sector and privatization; state-owned enter- prises; West, economic engagement with; World Trade Organization economic stagnation, 11, 13, 45, 76, 192. See also stagnation in Hu Jintao era education: educational attainment, improvement in, 3, 96; international education exchange programs, 229; spending issues, 104, 105f, 107–8, 109f. See also universities elites: co-optation of, 95–97, 128; corrup- tion opportunities and, 121; degeneration creating opportunity for ruthless personalistic ruler, 129; Hu’s socialist harmonious society providing stability, 109, 123; loss of security of political elites, 2, 11; in post-Tiananmen era, 83–88, 99, 167; power struggles and, 128, 254 end of China’s economic miracle, 14, 192–221; after- school coaching industry banned (2023), 216–17; aging population and, 194, 220; Ant Group IPO’s cancellation, 216; Covid-19 pandemic coinciding with, 217–19; debt level of private sector and deleveraging campaign, 199–200, 215–16, 220, 259; decoupling of US and China’s economies, 205, 207, 208, 242, 259; EU’s derisking policy restricting trade and investment in China, 207–8, 221, 224, 252; excess industrial capacity, 197–98; FDI exit, 219; inevitable loss of momentum, 220; infrastructure investment and, 210; investment-dependent growth, 210; labor costs increasing, 194, 220; macroeconomic imbalances and, 197; “the new normal,” 193, 195; platform economy, crackdown on, 216–17; private sector, Xi’s policies on, 212–17, 259; problems Xi inherited upon coming to power, 193–95; productivity drop, 194; real estate market crash and, 162, 170, 195, 203–4, 219, 259; resistance to economic reform from interests benefiting from inefficiency, 192–93, 196; reversion to the mean and, 193; self- sufficiency as goal for Xi, 190, 209–10; sixty-point reform plan presented by Xi (2013), 195–96, 213; SOEs, Xi’s policies on, 212–17; statism, revival of, 212–14; stimulus package in response to 2008 global financial crisis, debt increase due to, 193–94, 199, 259; stock market interven- tion, 214–15; supply-side reform, 197–200; US-China trade war’s effect on, 208–9, 220–21; Xi’s economic problems, 190–91, 195, 259; Xi’s totalitarianism incompatible with pro-market reforms, 192, 196. See also US-China trade war entrepreneurship: illegal fund-raising charges against private entrepreneur, 118; micro service businesses, 63; rural, 52. See also private sector and privatization; township and village enterprises -- 326 of 345 -- 314 i n de x environmental issues, 102, 103–4, 107, 107f, 110, 133; corruption in development of natural resources, 122; rights defense movement and, 115, 130 equity markets, 138–39 ethnic minorities, oppression of, 2, 38, 110, 112, 130, 179, 183. See also Uighurs European Union (EU): Hu achieving friendly relations with, 244; trade deficit with China, 194; Ukraine-Russia war’s effect on Chinese-EU relations, 207–8, 221, 224, 252 Evergrande (real estate developer), 203 export-processing zones (EPZs), 56 Falungong spiritual group, 94–95, 98, 112, 187 feudalism of CCP under Mao, 21 fiscal contracting, 136 fiscal reform, 137–39, 141, 146, 162–63, 198 food safety, 115–16 forced evictions, 100, 110, 111 Foreign-Capital Enterprises Law (1986), 55 foreign direct investment (FDI): after decoupling from the West, 208; amounts (1993–2012), 144f, 145; benefits of, 147; compared to China’s internal rates of investment, 156; Deng’s welcoming and inflow of (1980s), 4, 26, 45, 46, 53, 72; drop in 1987, 39; exit from China during Xi regime, 219; favorable tax treatment for, 57, 146; Japanese FDI in China, 228; key to rapid economic growth, 46, 147; know-how transfer resulting from, 148; legislation to attract, 54–56; post-WTO accession, 150–51; pro cessing trade and, 148; restrictions on, 55; SEZs created to attract, 57, 145; specialized industrial areas and, 147; spillover effects, 147; Taiwanese FDI in China, 147, 239; US-China trade war and, 206; WTO entry stimulating, 101, 103 foreign policy: aggressiveness of, 2, 4, 131; Belt and Road Initiative as economic means to gain global influence, 250; Deng prioritizing Western economic partnership, 13, 26–27, 223; Deng vs. Chen on, 26–27; Hu conforming to Deng and later changing direction, 244–45; Hu Yaobang’s liberal hand in, 38; Mao’s isolationism and, 53, 58, 228; propaganda activities overseas, 245; soft power, use of, 245; of Xi, 131, 165, 187, 247. See also new cold war; West, economic engage- ment with foreign trade: China as market for Western goods and services, 147; contribution to GDP growth, 160t; Deng’s reforms, 58–60; dismantling monopolies of FTOs, 58–59; exchange reserves from, 134; exports and trade surpluses, 103, 134; in foreign merchandise, 4; Foreign Trade Law (1994), 148–49; fraying relation- ships due to trade deficits, 194–95, 204; golden age of US-China relations, 227; manufactured goods, expansion of, 60; Mao’s isolationist policies and, 53; overall trade not affected by US-China trade war, 206, 206t; piecemeal reforms of, 47; pro cessing trade, 148; promotion of, 46; rapid growth, 59t, 59–60, 133, 134t, 149, 149t; Russia as trading partner, 249; tariff rates, 60, 148; tax incentives, 59, 60. See also US-China trade war; World Trade Organization Foreign Trade Law (1994), 148 foreign trade organizations (FTOs), 58–59 former Soviet bloc: economic decline in transition period, 62; economic reform of, 46–48; price reform of, 70; state- owned enterprises (SOEs) in, 60, 62, 67; totalitarianism rejected in, 7 foundational institutions of totalitarianism, 12, 13, 23, 43, 73, 94, 165, 187, 254 “Four Cardinal Principles” (Deng), 5, 34, 81, 90, 188 Fu Zhenghua, 172 Fuyao Industrial Glass Group, 52, 143 Gang of Four, 3, 16 General Agreement on Tariffs and Trade (GATT), 149–50, 229. See also World Trade Organization geti jingji (individually operated busi- nesses), 63–64 global financial crisis (2008), 159; China’s stimulus package as response to, 102, 158, 160–62, 163, 193, 199, 212, 245, 254; consequences to debt level, 161, 193–94, 198; Hu breaking with post-Tiananmen policy of strategic caution after, 224; -- 327 of 345 -- i n de x 315 opportunity created by, 165, 254; US and Europe facing economic consequences of, 245, 248 globalization, 3–5, 145–48; Asian power- house economies and, 9; China’s ability to capitalize on, 132, 152, 163; China’s foreign trade and, 58, 206; China’s integration into, 16, 46, 72, 82, 98, 131, 135, 150; China’s loss of linkages, 221, 225, 259; economic disruption of Covid-19 pandemic, 207; Jiang’s success based on, 241; post-Tiananmen order and, 241; SEZs setting example for China’s future integration into, 58; Xi maintaining ties to global economy, 211. See also World Trade Organization Golden Shield project, 93, 112, 182 Gorbachev, Mikhail, 7, 41–42, 82, 230 governance, party rules to set boundaries on, 111. See also mandatory retirements; term limits gradualism, 7, 45, 48, 50, 67, 70 Great Firewall of China, 93, 112 Great Leap Forward, communes’ role in, 51 “Guidelines on Political Life in the Party” (Central Committee 1980), 84 “Guiding Principles for Inner-Party Political Life” (Deng 1980), 23–24, 175 Gulf War (1990–1991), 236 Guo Boxiong, 170, 171 hard-liners of 1980s: balance of power favoring, 6, 16, 43, 188; in charge of party’s ideology and propaganda, 34; commu- nist system, advocating return to, 12, 74; deaths ending opposition to neo- authoritarianism, 83; Deng’s alignment with, 34, 39–40, 43, 233, 253–54; Deng’s post-Tiananmen dealings with, 75–76; elevation at Thirteenth Party Congress (1987), 39; marginalized after Soviet collapse, 79, 81–83, 256; one-party rule, preservation of, 19, 20–21, 253–54; only Li Peng left in top leadership of early 1990s, 78, 80; opposed to reform and opening, 15–16, 25–27, 39, 45–47, 49–50, 81, 253; private sector’s rise opposed by, 63; strengthened by fall of Hu Yaobang, 37–39, 43; Zhao Ziyang as target of, 39–40, 42. See also Chen Yun; command economy favored by hard-liners; Deng Xiaoping healthcare: corruption in purchase and sale of medicine, 122; spending issues, 104, 104f, 108, 108f, 109f hepatitis-B positive population, discrimina- tion against, 115 historical nihilism, 167, 178 Hong Kong: anti-extradition movement, 186; autonomy of, 184; Chinese entrepreneurs in, 146; Deng’s agreement with UK for return of, 184; as economic success of globalization, 9; FDI flowing from, 147, 228; National Security Law and, 2, 184–85; “one country, two systems” governance, 2, 184–86; prodemocracy activists in, 185; repres- sion in, 179, 183; “round-tripping practice” and, 147 household responsibility system, 50. See also agricultural reforms: decollectivization housing. See real estate sector Hu Chunhua, 1, 177 Hu Jintao, 14, 101–31; agricultural tax abolished by, 106; balance of power and, 168–69; Bo seeking to become successor to, 126–27; “China threat theory,” need to counter, 243; choice of successor to, 88, 123, 126; Communist Youth League faction and, 123–25; compared to Xi, 165, 167, 173, 178, 245; “core leader” moniker and, 103, 174; corruption and, 101, 119–23; debt to GDP ratio and, 194; Deng’s choice to succeed Jiang, 80, 87, 88, 125; economic downturn and, 158–59, 163, 254; education spending issues and, 104, 105f, 107–8; environmental protection and, 102, 103–4, 107, 107f; foreign policy of, 244–45; global financial crisis and, 224; healthcare spending issues and, 104, 104f; inequality issues and, 101–2, 104, 108–9; Jiang’s influence and, 102–3, 105, 108–9; as Li Keqiang’s patron, 125–26; marginal policy changes and, 103; migrant tax and mistreatment addressed by, 106–7, 114; neo- authoritarianism of, 254; “peaceful rise” narrative of, 243–44; popular reforms initiated by Hu, 106; public health infrastructure, creation of, 105; purge of rival by, 84, 123, 124, 126; -- 328 of 345 -- 316 i n de x Hu Jintao (continued) removed from stage at twentieth CCP Congress, 1, 2; repression tactics, 178, 180; retirement of, 88; rights defense movement and, 114–19; rulemaking for party administration enacted by, 85; SARS crisis and, 105–6; “Scientific Outlook of Development” agenda, 105; selective repression and, 113; socialist harmonious society and, 105–9, 164; SOEs, failure to reform, 109, 220; stability and collective leadership of, 86, 102, 164; taoguan yanghui and, 243–47; visit to Japan, 228; as weakest Chinese leader in post-Mao era, 125–26; weaknesses of neo-authoritarianism and, 86, 98, 101; WTO entry and, 101, 103, 109; Xi dismantling power network of, 169, 177. See also stagnation in Hu Jintao era Hu Qiaomu, 34, 35, 49 Hu Qili, 124 Hu Yaobang: agricultural reform supported by, 49–50; attacks by Hu Qiaomu and Deng Liqun on, 34; background of, 18, 37; Communist Youth League and, 125; death of (1989), 40; debate on alienation under socialism and, 35; Deng’s dismissal of (1987), 16, 20, 33, 36–38, 42, 86, 98, 188, 256; Deng’s reform initiatives weakened by fall of, 39, 46; Deng’s relationship with, 27, 30; hard-liners strengthened by fall of, 36, 37–39, 43; Hua’s ouster by Deng and, 18, 37; human rights in 1980s and, 230; as liberal reformer, 5, 15–16, 19, 21, 32; as party chief, 3; visit to Japan, 228 Hua Guofeng: agricultural reform opposed by, 49; Democracy Wall movement weakening rule of, 34; as Mao’s successor, 17; ouster of, 3, 15, 17, 18, 37; visit to Japan, 228 Huawei, 209, 252 Human Development Index rating of Hu’s socialist harmonious society, 108, 109f human rights, as key issue for West, 28, 147, 207, 223–24, 232, 234 human rights activists, 114–19, 130, 179, 180–81 Huntington, Samuel, 43 hybrid economy, 45; phase 1 (1979–1983), 45–46; phase 2 (1984–1989), 46 ideological indoctrination, 1, 128; Docu- ment No. 9 (“Communiqué on the Current State of the Ideological Sphere” 2013), 168, 177–78; Stalinist official ideology, 265n33; Xi reviving, 166, 167. See also patriotic education campaign incremental capital output ratio (ICOR), 159 India-China relations, 238 Indonesia, 81, 141 inefficiency: capital-intensive heavy industry and, 58; China’s response to US-China trade war resulting in, 212; Deng frustrated by, 29; dual- track transition and, 73; interests benefiting from, 192–93, 196; of partial reform economy, 130; of SOEs, 46, 61–62, 67, 102, 140, 162, 163, 214; of Soviet regime prior to fall, 82; supply-side reform to counter, 197–200 inequality issues: Hu’s attempts to address, 102, 104, 108–9; income inequality, 104, 107, 107f, 133; likely to impact regime’s support, 100, 101; socioeconomic inequality, 101, 190; Xi’s ban on after- school coaching industry to address, 216–17 inner- party democracy, 23–24, 30, 42, 165, 175, 189 institutional reforms (1980s), 21–25; benefits of, 21–22; decision-making power kept by party elders, 24–25; failure to create third-party enforcement, 24–25, 42; loopholes and flaws in, 24, 189; vagueness and insistence on maintaining party’s power, 22–23 insurance industry reform, 137–38, 146 intellectual property rights and theft, 55, 146, 152, 204 intelligentsia, 20, 21; co-optation to ensure support of, 95, 97; conservative intelligentsia’s debate of neo- authoritarianism, 81; Deng cracking down periodically on, 36; Hu Yaobang favored by, 38; in liberal wave of 1980s, 30, 32, 33, 35–36 International Monetary Fund, 162, 229, 250 international NGOs, 179, 182, 229 internet: libel as criminal offense, 179; pervasive access to, 115; rights defense -- 329 of 345 -- i n de x 317 movement using, 115; state control of, 187; surveillance, 93, 113; Xi’s new laws on use of, 179. See also social media Iraq invasion by US (2003), 233, 243, 249, 254 Japan: Chinese trade and investment with, 8, 53; Deng improving economic ties with, 226, 227–28, 230; dispute with China over Senkaku/Diaoyu Islands, 228, 238, 245–46, 250; FDI flow to China, 228; Hu Yaobang’s policy on, 38; loss of competitiveness in manufacturing sector, 146; North Korea nuclear development and, 244; restricting flow of technology to China, 221; security dilemma with, 236 Jiang Zemin, 14; balance of power and, 168–69; blamed for stagnation under Hu, 102–3; Central Military Commission chairmanship, retaining after retirement, 88, 102–3; choice as leader, 75; compared to Xi, 167, 178; “core leader” moniker and, 103, 174; Deng’s choice of Hu Jintao to succeed, 80, 87, 88; Deng’s dissatisfaction with, 78; first party chief with college education, 83; globalization and, 241–42; Hu and Wen countering influence of, 104; inability to control hard-liners, 75; influence after retirement, 102–3, 105, 108–9, 123, 126, 244; modernization of military by, 236; neo-authoritarianism of, 83, 128, 224, 254; patriotic education campaign and, 89; PSC expanded with close associates by, 102, 244, 280n1; purge of rival by, 84, 98; repression tactics, 93, 178, 180; rulemaking for party administra- tion enacted by, 84–85; ruling the country according to law slogan of, 115; Russia, strategic partnership with, 237; Russian partnership with Yeltsin, 237; selective repression and, 95–96, 113; Shanghai Gang and, 123; sharing power with Li Peng, Qiao Shi, and Zhu Rongji, 87; stability and collective leadership of, 86; supporting and implementing Deng’s agenda, 78, 80, 84, 101, 235; Taiwan and, 240; “Three Represents” theory of, 96, 145, 235; US relations stabilized with China, 234–35, 248; WTO accession and, 150; Xi dismantling power network of, 169, 171; Xi’s selection as Hu’s successor, 124 joint ventures: amendments to laws on (1990s), 146; foreign investor law (1979), 54–55; private sector’s right to enter into, 64; Shanghai-Volkswagen, 26–27 Khrushchev, Nikita, 32 Kornai, Janos, 48 Kuomintang (KMT), 238, 240 labor disputes and labor rights, 110; employment discrimination, 115; repression of labor organizers, 181; slave labor, 116; worker unrest (late 1990s) from bankrupt SOEs, 98 labor force: advantage of China, 8, 58, 132, 135, 145–47; declining pool of cheap labor, 194, 220; demographic dividend and, 152–55, 158; employment in private sector vs. SOEs and collectively owned firms, 143–44, 144t; pro cessing trade and, 148; wage increases, 194; youth unemployment, 195 land-based fiscal system, 137, 199 land reform (Xi’s sixty-point plan 2013), 196 land seizure, 100, 110, 111, 118 Lardy, Nicholas, 158 law enforcement: coercive apparatus investment for, 92; funding from economic boom of 1990s, 94; People’s Armed Police (PAP), 93; police force size, 93; urban mobile antiriot forces, 92 lawyers and legal profession: advocating for the voiceless, 116–17; high- profile sensitive cases, 106–7, 117–19; illegal fund-raising charges against private entrepreneur and, 118; law professor fired for posting critical online article, 181; public interest litigation, 115–16; rebuilding and training of, 28, 99; repression of human rights lawyers, 180–81; rights defense movement and, 114–19, 180–81; Sanlu poisonous baby formula case (2008), 115; Shaanbei oilfield litigation (2003) and, 118; slave labor case (2007), 116; Taishi village incident (2005) and, 117–18 leadership succession: degeneration creating opportunity for ruthless personalistic ruler, 129; Hu as Jiang Zemin’s successor, 80, 87, 88, 125; Jiang -- 330 of 345 -- 318 i n de x leadership succession (continued) Zemin as successor of Deng, 74–75; law of negative selection, 129; same procedures in place from 1979 through 2012, 187, 189; Xi Jinping chosen as successor to Hu, 88, 109, 123, 126, 168, 176, 254–55; Xi preventing designation of potential successor, 177, 259 Lee Teng- hui, 91, 239–40 leftism and new left, 142; Xi’s ultra- leftism, 166 legal reform and modernization, 84, 99; for foreign investment, 28; opening of legal arena to human rights and rule of law challenges, 118–19 legitimacy. See regime legitimacy and performance legitimacy Lenin, Vladimir, 45, 167 Leninist party-state, 7, 8, 12; Chen Yun favoring orthodoxy of, 19; Deng favoring but with diff erent economic strategy, 19, 257; as pillar of totalitarianism, 187, 255; reducing power of, 42; SEZs and, 57; weaking control of economy, 129; Xi shoring up, 196–97, 255, 257 Lewis Turning Point, 154, 220 Li Keqiang, 109, 124–26, 129, 177 Li Peng, 39, 40, 41, 75–76, 78, 80, 87, 135 Li Ruihuan, 87 Li Xiannian, 49 Li Zhanshu, 1, 177 liangjian (get- tough-on-dissent approach), 178–83 liberalism (1980s), 2, 5, 14–44, 253; accountable system of governance proposed, 29–32; agricultural reforms, 25, 50; bourgeois liberalization, 5, 20, 25, 35–40; cadre management system and, 21–22; civil society’s enforcement of accountability, 25; constant economic and political turmoil, 15; culture fever and, 33, 43; “democracy in the party” encouraged by Deng, 23; Deng’s institutional reforms, 21–25; enlighten- ment movement of liberal wave of 1980s, 33; first phase (1979–1986), 15–16; intelligentsia’s support for, 20; lack of political significance, 2–3, 9, 20, 253; legacy of reform from, 135; political support for, 20; purge and decisive defeat by Deng, 9, 12, 15, 16, 98, 256; rule of law and, 21; second phase (1987–1988), 16. See also Hu Yaobang; prodemocracy movement; Zhao Ziyang liberalism nonexistent after 1980s, 164, 177 lifetime tenure, end of. See mandatory retirements Lin Biao, 86, 171 Ling Jihua, 126, 170 Liu He, 197, 209–10 Liu Shaoqi, 18, 86 local government: debt load of, 137, 194, 198; FDI projects allowed by, 146; financing vehicles (LGFVs), 162, 198; fiscal reform (Xi’s sixty-point plan 2013) and, 196; land-based fiscal system and, 137, 199; local protectionism and, 136; SASAC’s role in, 140; surplus revenues retained by, 136; tax system and, 136 low profile dictum of Deng. See taoguan yanghui Lu Wei, 180 Luo Gan, 112 macroeconomic management, 71, 84, 158; global financial crisis and, 161; imbal- ances and, 158, 163, 193–94, 197, 219–20 “Made in China 2025” as part of high-tech self-sufficiency program, 214, 216 Malaysia, 56, 81 mandatory retirements: accelerating elite circulation, 85–86; appointment of retired officials to local congresses and advisory bodies, 86; Deng instituting, 2, 16, 21–22, 23, 42, 188; exemption of most senior leaders, 24, 42; Veteran Cadres Bureau to provide services to retired officials, 86; Xi ignoring for himself and his followers, 177 manufacturing: China as world’s largest producer, 3; excess industrial capacity, 197–98; foreign trade of manufactured goods, growth of, 60; labor force in, 135, 144; pro cessing trade and, 148; relocating to Southeast Asia, 207 Mao Zedong and Maoist era, 5; absence of age and term limits blocking careers of younger officials, 86; accelerated economic development of Deng as response to, 79; Bo using Maoist symbols -- 331 of 345 -- i n de x 319 in campaign to be Hu’s successor, 127; campaign against Deng, 37; demographic dividend and, 152; Deng advocating reaffirmance of positive aspects of, 34; Deng and liberals trying to repair damage inflicted by, 19, 43, 225, 253; as deviation from Marxism, 33; discrediting as guiding political doctrine, 9, 18, 23; economic mismanagement of, 45, 47, 253; exposure of Chinese people’s trauma and suffering under, 32; Hua’s reliance on, 18; isolationism of, 53, 58, 228; lawlessness of, 28; neo-authoritarianism differentiated from, 265n33; Nixon’s opening of China and, 225; paternalism and, 21; personalistic rule of, 23, 83; Selected Letters, 176; Selected Works, 176; social elites and, 95; widow of Mao, in Gang of Four, 3, 16; Xi’s endorsement of, 167, 254. See also Cultural Revolution market economy: banking reform and, 138; Deng’s pro-market reforms, 222, 253; economic reforms of 1980s creating foundations of, 98; full embrace, not possible due to one-party rule, 45; Hu’s failure to implement, 192; legitimatized by CCP Center’s Resolution (1993), 84; sixty-point reform plan presented by Xi (2013), 195; trapped transition of neo- authoritarian regime, 192; WTO accession and, 151; Xi’s totalitarianism incompatible with pro-market reforms, 192, 196. See also foreign trade; private sector and privatization; special economic zones Marx, Karl, 33 Marxism-Leninism, 5 Marxist students advocating for labor rights, 181 mass incidents. See social unrest mass surveillance, 13, 93, 112–13, 182–83 media: off-limits for foreign investment, 55; in patriotic education campaign, 89–90; state control of, 187. See also censorship meritocracy, 85 Mexico’s Institutional Revolutionary Party (PRI), 6 migrant tax and mistreatment based on “Procedures for Detaining and the Repatriation of Vagrants and Beggars in Cities,” 106–7, 114 military and security forces: antiriot forces, 92–93; control of, 6, 8, 13, 43; defense budget, 237t; Deng and Chen’s support from, 19–20; Deng cutting size of military, 235; Russian weapons systems acquired by China, 237; Xi seizing control of, 171; Xi’s spending on, 190, 196, 237t. See also People’s Liberation Army Ministry of Agriculture, 66 Ministry of Education’s “Ten Professional Principles,” 182 Ministry of Foreign Economic Relations and Trade (MOFERT), 59 Ministry of Public Security (MPS), 93 Mischief Reef seizure by China (1995), 238 modernization of China, 3, 8, 53–54, 137, 139, 151, 225, 229, 255–56 most-favored-nation (MFN) trade status, 147, 227, 233 Nakasone, Yasuhiro, 228 National Bureau of Statistics, 107, 153, 198 National Meeting on Publicity and Theoretical Work (2013), 178 National People’s Congress (NPC): constitutional revision (1982), 24; Deng’s restoration of function of, 27, 28–29; party violating laws passed by, 99 national security, 190–91, 197; as prime goal of Xi’s policies, 211; self-reliance policy and, 210 National Security Commission, 179, 196 National Supervisory Commission, 173 nationalism, 6, 7, 75, 91–92, 98, 129, 168 NATO bombing of Chinese Embassy in Belgrade (1999), 91, 240, 242 neo- authoritarian developmentalism (1992–2012), 12, 14, 74–100; conservative intelligentsia’s debate of, 81; corruption fueled by, 75, 99–100, 122; defined, 80, 256; Deng’s southern tour (1992) as beginning of, 76–77, 83, 232; emergence under Deng’s leadership, 19, 33, 78–81, 226; end marked by economic downturn, 163; hard- liner opposition fading after Soviet collapse enabling, 79, 81–83, 256; incompatible with democratization and rule of law, 99; inherent flaws of, 12, -- 332 of 345 -- 320 i n de x neo- authoritarian developmentalism (1992–2012) (continued) 98–100, 101, 103, 128–31, 133, 189, 193, 223, 255–57; institutionalization of party and balance of power, 84–88, 98–99, 168–69; leadership choices of Deng for, 80; liberalism’s fade after Tiananmen crackdown enabling, 81; meaning of “neo- authoritarianism,” 265n33; pillars of, 10–11, 75, 83–97; in place until Xi’s rise, 82, 83; political strength from military and party bureaucracy, 19–20; in post- Tiananmen era, 12, 74; return of totalitarianism from, 8, 10–13, 101, 129, 165, 186–89, 255; Soviet Union’s fall giving impetus to, 74, 75, 80, 81–82, 223, 254; trapped transition of, 192, 255. See also post-Tiananmen order neo-Stalinism under Xi, 12, 165, 168, 186, 265n33; altering US-China relations, 251; elevation of party’s political supremacy and, 192; at end of second term, 189; surveillance as pillar of, 182 networked authoritarianism, 113 New Citizens Movement, 119, 180 new cold war (NCW), 4, 224, 246–52; Biden’s containment policy, 207, 252; China’s alignment with Russia and Iran, 224; Deng warning of, 231; escalation likely, 14; inevitability of, 257–58; strategic initiatives to remake world order, 248–51; Trump’s first term triggering, 251, 258; US-China trade war creating, 189; Xi blaming economic problems on, 191; Xi elevating strategic partnership with Russia, 252 New Development Bank (Shanghai), 250 New Era, Xi’s rule as, 175 Nixon, Richard, 225, 226 North Korean nuclear development, China seeking diplomatic solution to, 244 Obama, Barack: “Pivot to Asia” policy, 246, 251; trade tensions with China and, 152 Occupy Central (civil disobedience movement), 185 Official Development Assistance program ( Japan), 228 Ohira, Masayoshi, 227–28 Olympics (Beijing 2008), 102, 244 one-child policy, 100, 110, 154, 259 one China policy, 226–27, 239, 240 orthodox ideology. See communism “Outline on the Implementation of Patriotic Education” (Central Propa- ganda Department 1994), 89–91 partial reform equilibrium/trap, 11, 100, 129–30, 133, 192, 256 paternalism of CCP under Mao, 21 path dependence: China’s relations with outside world and, 222; economic development and, 13, 45, 132–33; probability of certain developments and, 12; widest range of options in 1980s, 12, 222 patriotic education campaign, 89–91 People’s Armed Police (PAP), 93 People’s Bank of China (PBOC), 137–38 People’s Daily editorial on Tiananmen protests, 41 People’s Liberation Army (PLA): Deng’s reduction in size of, 235; Deng’s support from, 20; military exercises in Taiwan Strait, 239; modernization of, 235–37; in Tiananmen Square, 43; Xi’s purges of high-ranking members, 171 per capita income growth, 3, 50, 71, 79, 152–55 perestroika, 7, 82 personal freedoms, expansion of, 94 personalistic rule, 1, 10, 23, 129, 187, 219, 255, 259 Politburo: annual written self-evaluations required by Xi, 175; dual circulation strategy endorsed by (2020), 209; Hu Chunhua not on list to be appointed to, 1; power to expel Central Committee members, 169; Xi’s dominance of, 176; Zhao’s reform proposals and, 31. See also specific documents by name Politburo Standing Committee (PSC), 102, 175; appointed by Deng, 77–78 political reforms: Deng’s promotion of, 27–29, 36; Zhao’s attempt at comprehen- sive reform, 29–32 population growth: demographic dividend and, 152–55, 158, 163, 193; one-child policy and, 100, 110, 154; total dependency ratio and, 153–54 post-Mao China: maintenance of founda- tional institutions of totalitarianism, 12, -- 333 of 345 -- i n de x 321 13, 23, 43, 73, 94, 165, 187, 254; path dependence and probability of certain developments, 12; power struggle after Mao’s death, 16–17; three eras constitut- ing, 12 post-Tiananmen order (1992–2012), 74–100; absence of third-party enforce- ment in, 88; balance of power, 87–88, 98–99, 168–69; beginning of the end of, 123–28, 164, 256; crackdowns on overt challenges to party authority, 93–94, 178; dissidents forced into exile, 94; globalization and, 241; Li Keqiang and, 129; likelihood of enduring, 101, 163; nationalism, 91–92; patriotic education campaign, 89–91; pillars of, 83–97, 232; private sector and, 212; relations with West and, 222; rule-based politics of, 84–86; selective repression, 92–95; US as strategic partner, 223; Xi breaking from, 129, 224; Zhu as most influential economic policymaker in, 87. See also Hu Jintao; Jiang Zemin; neo-authoritarian developmentalism pragmatic Leninism, 129, 253, 257 “The PRC Interim Regulations on Private Businesses” (State Council), 64 press freedom, Xi’s repression of, 173, 177–78 private sector and privatization, 60–66; of agricultural sector, 135; ascendance of, 132, 142–45; collective enterprises (“wearing red hats”) to disguise, 66; compared to return on capital from SOEs, 159; constitutional provisions and, 63–64; contribution to industrial output, 61, 61t, 64, 65t, 144; Covid-19 pandemic and business closure, 218; debt level and deleveraging campaign, 199–200, 215–16, 220, 259; Deng’s development of, 16, 25, 37; efficiency of, 45, 143, 215; emigration in 2022–2023, 219; foreign trade and, 149; as largest contributor to economic output, 44, 135, 143–44, 163; legal recognition of nonstate entities, 145; party membership of entrepreneurs, 96–97; peasants’ liberation as first step in creating, 50–51; pioneers of, from outside of state sector, 66; political power maintained separately from, 13; post-Tiananmen era reforms and, 196–97; rapid growth of, 14, 46, 60; of real estate sector, 141; SEZs and, 57–58; shadow banking system for loans to, 215; state’s direct control over, 192; stimulus package as response to global financial crisis (2008) discriminating against, 212–13; TVEs as part of, 52, 76; Xi’s policies and, 212–17, 259 “Procedures for Detaining and the Repatriation of Vagrants and Beggars in Cities” (State Council 1982), 106–7, 114 prodemocracy movement: hard-liners targeting, 39–42, 76; liberals advocating for, 29–33; repressive tactics used against, 93–94; separation of powers, Deng’s rejection of proposal of, 30–32, 88. See also Hu Yaobang; liberalism (1980s); Tiananmen Square protests (1989); Zhao Ziyang “Proposal of the CCP Central Committee on Formulating the Fourteenth Five-Year Plan for National Economic and Social Development and the Long-Term Goals for 2035” (Fifth Plenum 2020), 209–11 public interest litigation, 115–16 purchasing power parity, 3, 79, 133, 249 purges: Deng’s purge of liberal reformers, 5–6, 9, 12, 15, 16, 20, 33, 36–38, 41–42, 75, 79; feature of totalitarianism, 188; Hu’s use of, 84; Jiang’s use of, 84; Mao’s purge of Deng, 2, 17; Mao’s use of, 83, 86; rare during post-Tiananmen era, 84, 98; Stalinist, 265n33; Xi’s use of, 1, 2, 11, 13, 86–88, 112, 120, 122, 128, 165, 167, 169–73, 179–80, 187, 255, 259 Putin, Vladimir, 208, 249 Qiao Shi, 87 Reagan, Ronald, 227 real estate sector: corruption and, 121–22; crash during Xi’s tenure, 162, 170, 195, 203–4, 219, 259; as domestic driver of growth, 102, 158, 194, 200–201, 201t, 220; housing bubble, 157–59, 162, 163, 190, 192, 194–95, 200–204, 201t, 254; privatization of, 141; state-owned housing, 141; “three red lines” regulation, 202–3 -- 334 of 345 -- 322 i n de x reform and opening (1978–1989), 53–60; China dream and, 8; conservative backlash against openness, 15, 16, 25–27, 39, 76; Deng’s mistakes in pursuit of, 42; economic reform and, 15, 230; as great leap forward from Mao’s totalitarianism, 225; Jiang as Deng’s successor and, 75; modernization of China due to, 256; ongoing commitment to, 147; party backing Deng to open the door, 45; perpetuation of CCP’s rule and, 5, 21, 188; purge of liberals and, 75; slow progress of, 36–37; Soviet collapse galvanizing, 3, 12, 74, 75, 80, 81–83, 223, 254, 256; totalitarian- ism’s foundational institutions untouched by, 23, 43, 165, 187; US and Japan’s role in, 223, 226, 230; US trade and investment as priority in, 208; West, engagement with, 225; widest range of options in, 12; Zhao Ziyang and, 3. See also taoguan yanghui; West, economic engagement with regime legitimacy and performance legitimacy, 3, 11, 18; co-optation of students and social elites, 95–97; likelihood of disappearing under Xi’s economic difficulties, 190; linked to economic development, 6, 38, 44, 47, 75, 82, 98, 188, 190; partial reform equilib- rium and, 100, 129–30, 133; personal freedoms, expansion translating into, 94; private sector and, 212 Regulations on Chinese Communist Party Discipline and Sanctions (1997), 85 Regulations on Strengthening and Maintaining the Party Center’s Centralized and Unified Leadership (2017), 174–75 religious groups, 9, 93, 112, 130; Falungong spiritual group, 94–95, 98, 112 repression: of academics, 181; of foreign NGOs, 182; of human rights lawyers, 180–81; of labor rights organizers and protestors, 141, 181; selective and soft- authoritarian repression of Jiang and Hu, 92–95, 98, 113, 115, 187; Xi’s use of, 165, 177–83, 187, 191. See also domestic security Republic of China. See Taiwan “Resolution on Several Questions on the Construction of a Socialist Market Economic System” (CCP reform package 1993), 135 retirement rules. See mandatory retirements rights defense movement, 114–19; public interest litigation, 115–16; repression of human rights lawyers, 180 River Elegy, 33 rule of law: Deng’s lack of interest in, 22, 28; effect of not having, 165; Hong Kong and, 186; liberals of 1980s seeking to institute, 21; neo- authoritarianism without, 99, 102; property rights based on, 11; third- party enforceability and, 10 rural population of China, 8, 49; entrepre- neurs from, 66; neglect of, 105; as party members, 95–96; rise out of poverty, 135; urbanization of surplus labor, 134, 153–54, 194; village committees, election of, 99 Russia: post-Cold War relations with China, 237; sanctions on, 207; world order post-9/11, 249; Xi’s alignment with and “no-limit friendship declaration,” 208, 224, 249, 252. See also Ukraine, Russian invasion of Sanlu poisonous baby formula case (2008), 115 SARS crisis, 105–6 scar literature, 32–33 security. See domestic security; military and security forces selective repression, 92–95 Senkaku/Diaoyu Islands dispute, 228, 238, 245–46, 250 separation of powers, Deng’s rejection of proposal of, 30–32, 88 “Several Policy Provisions on Nonagricul- tural Individually Operated Economic Activities in Urban Areas” (State Council), 63 “Several Provisions on Expanding Manage- ment Autonomy of State-owned Industrial Enterprises” (State Council), 67 Shaanbei oilfield litigation (2003), 118 Shanghai area: Covid-19 pandemic and, 218; housing bubble and, 201; as SEZ, 146; specialized industrial areas near, 147 Shanghai Cooperation Organization (SCO), 238 -- 335 of 345 -- i n de x 323 Shanghai Gang’s rivalry with Youth League faction, 123–26, 128 Shanghai Stock Exchange, 214 Shanghai-Volkswagen joint venture, 26–27 Sharp Eyes project, 183 Shenzhen: housing bubble and, 201; SEZ, 56, 57 Šik, Ota, 48 Silk Road Fund, 250 Singapore: demographic dividend and, 152; as economic success of globalization, 9; as neo-authoritarian model, 80, 81, 140, 265n33; People’s Action Party (PAP), 6 Sino-Japanese Friendship Committee for the 21st Century, 228 Skynet project, 112, 182, 183 slave labor, 116 social control, 1, 42, 79, 82, 92, 187, 196, 265n33 social inequality. See inequality issues social media, crackdown on, 2, 113, 179, 187; registration of users with real names, 180 social unrest: causes of, 110–11, 141; in Hu era, 110–13, 128; in Jiang era, 114; late 1990s, 100; neo- authoritarian develop- mentalism giving rise to, 101, 254; party tactics to quell, 111; rightful resistance based on rules of governance, 111. See also domestic security socialism: alienation of, 33; with Chinese characteristics, 91, 167, 177, 178, 213; limited socialist welfare state causing higher savings rates, 156–57; need to uphold path of, 5, 231 soft- authoritarian repression, 92–95, 98, 113, 115, 187 Song Ping, 80 South China Sea: China’s construction of artificial islands in, 250; disputed claims in, 245, 246 South Korea: China’s relations with, 238; demographic dividend and, 152; East Asian financial crisis and, 141; as economic success of globalization, 9; export-processing zones (EPZs) and, 56; as neo-authoritarian regime, 80, 81, 265n33; North Korea nuclear develop- ment and, 244 Southeast Asia: China’s security policies and, 237, 238; manufacturing relocating to, 207 Soviet Union: Afghanistan invasion by (1979), 225; Deng’s rapprochement with, 230; thaw of Khrushchev era, 32. See also Cold War; former Soviet bloc; Russia Soviet Union, collapse of: bankruptcy of orthodox communism revealed by, 79; Chinese patriotic education campaign instituted in reaction to, 90; Deng’s analy sis of, 7, 77, 78, 80, 131, 232; failure to reform economy as factor, 82; neo- authoritarian developmentalism galvanized by, 3, 12, 74, 75, 80, 81–83, 223, 254, 256; Xi learning from, 166, 167 special economic zones (SEZs), 26, 27, 37, 47, 56–58, 145–46 stagnation in Hu Jintao era, 14, 101–31, 192, 254; macroeconomic imbalance and, 193; weaknesses of neo-authoritarianism and, 86, 98, 101, 128, 133. See also Hu Jintao Stalinism, 2, 12, 167, 168. See also neo- Stalinism under Xi standards of living, 3, 71–72, 75, 116, 190; party’s legitimacy gaining from increase, 44, 47 State Administration for Industry and Commerce (SAIC) survey on collective firms, 66 State Asset Supervision and Administration Commission (SASAC), 140, 214 State Council: conservatives’ takeover (1987–1988), 16; dual-track pricing allowed for SOEs, 70–71; erosion of conservatives’ control of economic policy of (early 1990s), 76; financial system overhaul (1993), 137; loss of power to “leading small groups,” 174; private sector, regulation of, 63–64; SOEs, expansion of autonomy of, 67; wholly-owned foreign firms, regulation of, 55; Zhao’s reform proposals and, 32 state-owned enterprises (SOEs): Commu- nist regime’s effective use of, 6; contract responsibility system, 32, 68–69; corruption and, 121; critical flaws of, 67; debt load, increase in, 194, 199–200; decline in share of industrial output, 61, 61t, 64, 65t; Deng’s experimentation with, 37, 39; discriminatory policies favoring, 13, 62, 76, 102, 138, 139, 190, 212; domestic stock market dominated by, 202; -- 336 of 345 -- 324 i n de x state-owned enterprises (SOEs) (continued) dual- track pricing allowed for, 70–71; employment in private sector vs., 143–44, 144t; excess industrial capacity and, 197–98; expanded autonomy of, 67–68; in former Soviet bloc, 60, 62, 67; giant SOEs, creation by mergers, 214; global financial crisis, effect of, 162; “grasp the big and let go of the small” strategy, 69, 140–41; Hu’s failure to reform, 109, 220; industrial, 121, 144; inefficiency of, 46, 61–62, 67, 102, 140, 162, 163, 214; investment issues and lower returns of, 159; labor disputes with, 110; mass bankruptcy of (late 1990s), 69, 98, 110, 139, 141, 142–43; modern enterprise system and, 139; privatization of, 133, 140–41; reform attempts (1980s), 46, 49, 54, 61–62, 66–70, 72, 84; reform attempts (1990s), 84, 139, 141–42; SASAC’s role to oversee, 140, 214; self-sufficiency in high- tech manufacturing tasked to, 214; sixty-point reform plan presented by Xi (2013) and, 195–96, 213; soft budget constraints, 67, 69; stimulus package as response to global financial crisis (2008) favoring, 212–13; underpriced asset sales by, 142–43 stock market intervention, 214–15 strongman rule, 8, 10–13, 42, 99. See also Mao Zedong and Maoist era; totalitari- anism; Xi Jinping The Sun and the Man (movie), 35 Sun Zhengcai, 170, 176 Sun Zhigang, 106, 114 Supreme People’s Court, 175, 179 Supreme People’s Procuratorate (SPP), 120, 175, 179 surveillance: advanced technology for, 93, 112–13, 129, 182, 196; Hu era investment in, 130; of internet, 93, 113; mass, 13, 93, 112–13, 182–83; routine surveillance of dissidents, 180; of Uighurs, 184; of universities, 93, 181–82 Taishi village incident (2005), 117–18 Taiwan: Chinese entrepreneurs in, 146; Chinese military budget and, 236; democratization of, 239; Deng on return of, 226; as economic success of globalization, 9; export-processing zones (EPZs) and, 56; FDI flowing from, 147, 239; as neo-authoritarian regime, 80, 81, 265n33; 92 Consensus, 239; Third Taiwan Strait Crisis (1995–1996), 239, 242; trade with China, 239; US-China conflict over, 207, 226–27, 238–41; US support for, 91, 226, 238–40, 242–43. See also one China policy taoguan yanghui (Deng’s dictum of hiding your brightness and building up strength), 82, 128, 165, 224, 225, 232, 235, 242; Belt and Road Initiative as decisive break with, 249; Hu vs. Xi and, 246–47; Hu’s shift away from, 243–44, 245; Jiang subscribing to, 244 taxation: agricultural tax abolished by Hu, 106; FDI, favorable tax treatment for, 57, 146; foreign trade incentives, 59, 60; local government tax system, 136; value-added tax, 136, 149 technology and high tech, 13; artificial intelligence (AI) and emerging areas, 211; forced import substitution, 212; Foreign-Capital Enterprises Law (1986) and creation of technology industry, 55; military technology exported from US to China, 227; sanctions banning China from purchasing US high-end semicon- ductors, 209, 234, 259; self-sufficiency as goal, 190, 209–10, 214; semiconductor industry, China’s funding of develop- ment, 211; Shanghai’s Pudong area as manufacturing hub for, 146; Shenzhen’s growth as high-tech center, 57; for surveillance, 93, 112–13, 129, 182 Temasek (Singapore agency), 140 “Ten Professional Principles” (Ministry of Education) to institutionalize ideological repression in universities, 182 term limits: abrogated by Xi, 2, 177, 256; accelerating elite circulation, 85–86; in Chinese constitution amendment (1982), 24; Deng instituting, 2, 10, 22, 23, 42, 188–89, 256; exemption of most senior leaders, 24, 42; vagueness and unenforce- ability of rules, 256 terror and mass terror, 6; former Soviet states abandoning practice of, 7; foundational institutions of -- 337 of 345 -- i n de x 325 totalitarianism enabling ready use of, 94; slight decline in 1980s, 44 Thailand: China’s assistance to, in financial crisis (1997), 238; demographic dividend and, 152; East Asian financial crisis and, 141; as neo-authoritarian regime, 81 third-party enforcement, effect of absence of, 10, 24–25, 42, 88 Tiananmen Square protests (1989): avoidability of massacre, 41; crackdown’s repercussions, 6, 12, 13, 15, 43, 48, 74, 75, 79, 97, 223, 230, 233; crisis precipitated by, 40–41; Deng crushing, 3, 16, 20, 41, 44, 230, 256; leaders forced into exile, 94; liberal approach disregarded in handling, 21; miniature Statue of Liberty erected by students, 92; People’s Daily editorial on, 41; rising out of 1980s wave of liberalism, 34, 36–40; sanctions imposed on China for crackdown, 135 Tibet policy, 38, 80, 98, 130, 183–84 total factor productivity (TFP), 155, 160 totalitarianism: demise of, as most important factor in rise of democracy, 4, 8; democratization losing out to, 6, 9, 253; Deng’s reforms preserving core institutions of, 23, 43, 165, 187, 254; Deng’s removal of liberals enabling, 188; easy restoration of, 8, 10–13, 101, 129, 165, 186–89, 255; economic prosperity and, 4, 8, 222; features of classic regime reinstituted by Xi, 188; former Soviet states abandoning essential practices of, 7; in effec tiveness of piecemeal reform, 6–7, 10; Leninist party-state as pillar of, 187; party’s entrenchment in Chinese society and state as enabling factor, 187; state violence possible without any legal constraints, 187; unique characteristics of Communist regimes, 6; Xi’s leap backward, 4, 11–12, 255; Xi’s revival of, 1, 2, 14, 95, 164–91 township and village enterprises (TVEs), 37; communes’ dismantling and, 51; dual-track pricing and, 71; employment growth of, 64; establishment and growth of, 51–52, 52f, 61, 76; as part of private sector, 52, 66, 76, 143; rural surplus labor and, 153; transformation into private firms, 143 trade war. See US-China trade war Trans-Pacific Partnership (TPP), 251, 252 Trial Regulations on the Selection and Appointment of Party and Government Leading Cadres (1995), 85 Trump, Donald: blaming China for Covid-19 pandemic, 252, 258; closing Chinese consulate in Houston, 252; new cold war started by, 251, 258; TPP withdrawal by, 252; trade war with China, 150, 152, 189, 194, 204–5, 208, 220, 224, 233 Tsing hua University: law professor fired for criticizing party, 181; students and party membership, 95–96 Uighurs, 2, 183–84 Ukraine, Russian invasion of, 207–8, 219, 221, 224, 252 Umbrella Movement (student sit-ins in Hong Kong), 185 United Nations, Chinese membership in, 225 United States: blue-collar jobs’ losses, 204; China becoming strategic competitor to, 242; Chinese view of American hegemonism, 231, 235, 248; conflict avoidance of China with, 82, 232, 235; containment policy toward China, 207, 234, 248, 252; Deng’s trade policy and, 53, 208, 226–28; economic growth based on 2000s real estate market, 244; global financial crisis (2008), effect of, 165; global war on terror, 243; Hu stabilizing relations with, 244; normalization of relations with China (1978), 226; “Pivot to Asia” policy to counter Chinese influence in region, 246; post-Cold War integration of China into global economy, 98, 135, 145, 147, 150, 223–24; preferential treatment of Hong Kong terminated by, 186; sanctions on China, 184, 252; strategic hedging as policy toward China, 234; Taiwan’s independence supported by, 91, 225–27; trade deficit with China, 194, 204; Xi blaming economic problems on, 191; Xi’s opposition to US role in Asian security, 248; Yinhe incident (1993) and, 91 universities: administrative responsibility system instituted by Zhao, 32; covert surveillance and student informants in, -- 338 of 345 -- 326 i n de x universities (continued) 93, 181–82; party membership of students, 95–96; patriotic education campaign and, 90–91; “Ten Professional Principles” (Ministry of Education) to institutional- ize ideological repression in, 182 urbanization, 3, 134, 153 US-China Agreement on Scientific and Technological Co-operation (1979), 227 US-China trade war, 204–12; Biden and, 205; China vs. US in size of economy, 249; China’s exports to US, drop in 2023, 205, 206t; decoupling of the two economies, 205, 207, 208, 242, 259; deleveraging campaign abandoned due to, 200, 220; food self-sufficiency as Chinese goal, 211–12; foreign direct investment and, 206; Huawei added to Entity List, 209; negotiation attempts during Trump administration, 204–5; sanctions banning China from purchas- ing US high-end semiconductors, 209; semiconductors and high-end chips, sanctions against China obtaining, 209–11; tariffs, 204–5; Trump and, 150, 152, 189, 194, 204, 208, 224, 233, 251, 252; Xi’s response to Trump initiating, 209–11, 252 value-added tax (VAT), 136, 149 Veteran Cadres Bureau (CCP), 86 Vietnam: Chinese relations with, 238; economic prosperity coupled with totalitarianism, 8; South China Sea disputed claims and, 246, 250 village committees, election of, 99 Wan Li, 20, 49 Wang Lijun, 127, 128 Wang Qishan, 169 Wang Xiaohong, 172 Wang Yang, 177 wealth: growth of private wealth, 130; not deciding factor for transition to democracy, 4, 114 Wei Jingsheng, 34, 94 Weibo (microblogging website), 179 Wen Jiabao, 102, 104–5, 109, 127, 157 West, economic engagement with: China’s loss of linkages, 221, 225, 259; Chun’s opposition to, 26–27; Deng’s policy to encourage, 26–27, 45, 208, 222, 223, 253; fraying relationships due to trade deficits, 194–95, 204; golden age (1979–1989), 222, 225; Hong Kong, crackdown damaging international commerce in, 186; limited by China’s insecurity, 130; post-Cold War access to Western markets, 98, 145, 147, 223–24, 254; soft- authoritarian repression reducing tensions for, 94; US-China trade war’s effect on, 208–9, 220–21. See also European Union; United States Western threats: imperialism as attempt to subjugate China, 91; regime change and democ ratization advocated by, 7, 178, 231, 248, 257. See also new cold war World Bank, 27; Belt and Road Initiative as competition to, 250; China joining, 229; on high savings and investment rates of East Asia, 155; “Issues and Choices for Long-Term Development,” 48 world order: China’s desire for multipolar, 235, 249–50; Deng and Xi sharing view of US- led order, 257; post-Cold War, 231; strategic initiatives to remake, 248–51; Xi’s dream of Chinese superpower equal to US, 259; Xi’s goal to adjust balance of power in, 247. See also Cold War; West, economic engagement with World Trade Organization (WTO): China’s entry into, 101–3, 132, 148–52, 241; China’s failure to honor commitments, 204; China’s reluctance to derail entry negotiations, 240; windfall generated by China’s entry into, 109, 150–51, 158, 193, 204 Xi Jinping: anticorruption campaign against political rivals, 11, 87, 120, 122, 128, 165, 169–73; background of, 124, 166, 213; benefiting from Deng’s political legacy, 188–89; Bo as rival for leadership role, 127–28; break with post-Tiananmen grand strategy, 129, 224; as CCP general secretary, 1, 2; China dream of, 258–59; chosen as successor to Hu, 88, 109, 123, 126, 168, 176, 254–55; compared to Deng, 224, 257; compared to Hu, 165, 167, 173, 178, 245; compared to Jiang, 167, 178; “core leader” moniker and, 103, 174, 175; debt to -- 339 of 345 -- i n de x 327 GDP ratio and, 161–62, 193–94, 259; designation of potential successor prevented by, 177; disciplinary code and procedures instituted by, 173; doctorate degree of, 85; Document No. 9 and, 168, 177–78; ease of return to totalitarianism, 8, 10, 12–13, 101, 129, 165, 186–89, 255; economic problems of, 190–91; “Education and Rectification of the Nation’s Political-Legal Ranks” campaign (2021), 172; foreign policy of, 131, 165, 187, 247; global ambitions of, 14; Guangdong talk (2012), 166–67; ideological hostility of, 14, 43, 177, 212, 247–48, 257; Jiang and, 124; as lifelong ruler, 2, 177; misjudgments of, 224, 257; orthodox ideological indoctrination movement launched by, 128, 166–67; peripheral regions, crack- down on, 183–86; pillars of political order for, 167; political manifesto (2013, published 2019), 166–67; promoted to PSC at Seventeenth Party Congress, 109, 124; regime protection as highest priority for, 219; repressive tactics of, 118, 179, 257; as ruthless strongman, 1, 2, 88, 99, 123, 256; Selected Letters of Xi Jinping, 176; Selected Readings of Xi Jinping’s Works, 176; Shanghai Gang and, 124; “Some Questions on Maintaining and Develop- ing Socialism with Chinese Characteris- tics” (2013), 177; taoguan yanghui discarded by, 246–47; as totalitarian ruler, 1, 2, 14, 95, 164–91, 256; unaffiliated with factions and poised to assume control, 126, 128; Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era, 176. See also end of China’s economic miracle; neo-Stalinism under Xi Xi Zhongxun, 20, 56 Xiamen smuggling scandal, 100 Xiang Nan, 63 Xinjiang province, 183–84; ethnic riot (2009), 130. See also Uighurs Xu Caihou, 170–71 Xu Zhiyong, 119, 180 Yang Jisheng, 19, 78 Yang Shangkun, 56 Yao Yilin, 39, 40, 75–76 Yeltsin, Boris, 237 Yinhe incident (1993), 91 Youth League. See Communist Youth League Yu Zhengsheng, 114 Zhao Ziyang: agricultural reform and, 49, 50; background of, 18; balanced economy and, 158; on CCP’s strength as para- mount, 19; Central Political and Legal Affairs Commission abolished by, 92; “Central Research Small Group on Political System Reform” formed by, 30; on Chen vs. Deng on policy of opening, 24–25, 27; Chen’s support for some reforms of, 26; on decision-making power kept by party elders, 24–25; on Deng and Hu rift, 38; Deng working with directly, 27; Deng’s purge of, 41, 75, 79, 86, 98, 188, 254, 256; Deng’s relationship with, 37, 39–40; on dual-track economy of private and state-owned segments, 73; hard-liners turning on, 39–40, 42; Hua’s ouster and, 18; human rights in 1980s and, 230; inflation blamed on, 37, 40; keynote speaker at Thirteenth Party Congress (1987), 39; legacy of reform from, 42–43, 135, 145; as liberal reformer, 3, 5, 19, 27, 39, 73; “May 13 speech against conservatives,” 39; on neo-authoritarianism of Deng, 81; “Overall Design for Political System Reform” presented by, 30, 31, 42; political reform attempts of, 29–32, 43; on private sector growth, 61, 62; replacing Hu Yaobang, 16, 36, 39, 40, 42; saving liberal party members from Deng’s punishment, 25; separation of powers proposed by, 30–32, 88; on SOEs reform failure, 69–70; Tiananmen protests and, 40–41; visit to US, 227 Zhou Yongkang, 112, 170 Zhu Rongji, 76, 80, 87, 135, 136, 138, 150 -- 340 of 345 -- -- 341 of 345 -- a no t e on t h e t y pe This book has been composed in Arno, an Old-style serif typeface in the classic Venetian tradition, designed by Robert Slimbach at Adobe. -- 342 of 345 -- -- 343 of 345 -- -- 344 of 345 -- -- 345 of 345 --