China Politics: Reflections from a One Party State

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The original text confused the alignment:  President Hu came from the Youth League and his successor will have the backing of the princelings.   It has been corrected here.

The controversy surrounding demise of Bo Xilai in China has sparked much debate about Chinese politics. There seems to be a misunderstanding about the way a one party state works.

I grew up in Chicago. The Democratic Party has run Chicago for almost as long as the Communist Party has controlled China. The Democratic Party took control of Chicago in 1955. The Communist Revolution was 1949. From 1955-1976 Richard Daley was the mayor of Chicago. After an interregnum period, his son became mayor in 1989 and ruled until last year.

The political battle in Chicago takes place within the Democratic Party. As in other organizations, there are forces of movement and forces of order. The winner of the Democratic primary becomes the mayor.

Perhaps because they call themselves Communists, many observers, think the party is homogeneous, but it is not. There are forces of movement and forces of order. A FT columnist recently wrote about the possible threat to the post-Mao consensus. That consensus was not so much on substance as process.

There are two main factions for which the procedural consensus applied. First are the "princelings". These are the children of the revolutionary leaders. Mr Bo was one of the princelings. He was the son of a revolutionary hero (one of the eight so-called Immortals). This second generation seem to believe that they "naturally" deserve to be among China's leadership.

The second faction tend to be of humbler origins and work their way through the Communist Party Youth League. Premier Wen Jiabo comes from this faction. The procedural compromise is that the next premier is from the princeling faction. President Hu is supported by Youth League faction. The procedural compromise is that the next president is supported by the princelinng faction.

The Youth League tends to be more reform minded and that reform includes some aspect of politics, without of course undermining the Communist Party's control. The princelings tend to be more concerned about the downside of the economic development and tend to harken back to the pre-1978 reform period.

What captures the imagination with Mr Bo is that it took place during the transition to what China calls the "next generation". The demotion of Bo is a victory for the forces of movement and reform in China as Bo represented a rear-guard action against the modernization of China.

China joined the WTO a little more than 10 year ago. The past decade has been relatively easy for China, especially compared with what the next decade likely holds. The new challenges are not just cyclical, relating to the slowing economy, local government debt (and SPVs), strength of the banking sector and the real estate sectors, but also more structural issues, like a work force set to peak in the next couple of years, rising wages (real and nominal) changing the competitive landscape and an economy well beyond the point of diminishing returns for fixed asset investment.

These new challenges make the forces of movement and reform in China more vulnerable. Like in Chicago, it is not always clear whether the forces of movement or order are "winning" and often there are pyrrhic victories that are quickly reversed. Investors need to continue to monitor the political developments in China and appreciate that all Communists are not the same in China just like all Democrats aren't the same in Chicago.