The Economist Magazine just ran an article, entitled, “Atomised: Beijing no longer commands instant obedience from China’s local authorities” (h/t to the Teaching Comparative Government and Politics Blog). The article makes the important point that despite China’s apparent centralization, what Beijing mandates is not necessarily what happens throughout China:
A good career in the party still depends on following, or at least appearing to follow, the centre’s orders. But local leaders calculate that as long as their areas achieve rapid economic growth with minimal unrest, then they have considerable leeway to do as they will. The party no longer really frets about the ideological purity of its leaders. And since the days of Mao each new generation of leaders in Beijing has been increasingly less able to command instant obedience across the country.
At the same time, however, the Economists sees China’s center as secure and China is “not heading towards a break-up:”
To be sure, China is not heading towards a break-up, anarchy or the warlordism of the pre-communist era. The armed forces and the police remain under the party centre’s grip. At the provincial leadership level, too, the authority of the centre is secure. Many residents of regions with large numbers of ethnic minorities, especially Tibet and Xinjiang, resent being controlled by Beijing, but their leaders are party loyalists. Provincial leaders, in fact, display far more ideological harmony than was the case in the 1980s or early 1990s. At that time, some were conspicuously conservative or reformist. Ye Xuanping, a popular native leader of Guangdong Province next to Hong Kong, was often reported to be building the region into a personal power base. Worried central leaders moved him to a sinecure in Beijing in 1991.
Naturally, China’s local governments are concerned about the economic prosperity of their particular region, and they often ignore Beijing edicts that might conflict with their own local economic goals. “The problem today is more a profusion of township, county and prefectural leaderships whose efforts to propel growth in their regions produce impressive statistics, but often at a heavy social, environmental or macroeconomic cost.” The article cites China’s attempts to curb its rising housing costs as an example of this:
In the last two years the government has been worrying that the economy might overheat and has been trying to curb investment in industries whose capacity has been growing too quickly. But local officials have often simply ignored these measures. As Zhang Baoqing, a former deputy minister of education, put it to an official newspaper last year, China’s biggest problem is that orders issued in Zhongnanhai, the party headquarters in Beijing, sometimes never leave the compound.
In March last year, amid growing public complaints about fast-rising house prices, the government issued directives aimed at cooling the market. Shanghai, the main target of these measures, dutifully tightened controls. But house prices in other big cities have climbed rapidly’Beijing’s by more than 17% in the first two months of this year compared with the same period a year ago. Beijing’s city government is not entirely to blame. Demand is growing as the city prepares to host the Olympic Games in 2008. Interest rates are low. China is reluctant to raise them sharply for fear of putting further pressure on the yuan to appreciate. That could hurt exports and push up unemployment.
But local governments control land supply and have a vested interest in keeping prices high. In 1994 the central government changed the way it shared tax revenues with the provinces, leaving the centre with a much bigger portion. But sub-provincial governments still shoulder the main burden of the provision of health care and schooling (which they do only patchily). Land-related transactions have become a crucial source of local governments’ revenue. They are further helped by their ability to persuade state-owned banks’ill-equipped to make sound lending decisions’to grant loans.
In the late 1990s, when China began to privatise urban housing, the central government ordered that the bulk of new housing projects should be low-cost and restricted to middle- and lower-income families. Developers of such housing were to be given big tax benefits. But local governments saw little to be gained. In Beijing only one-tenth of new housing space belongs to this category. Regulations announced this week require local governments to boost the supply of cheap housing. There will not be an enthusiastic response.
Protection of intellectual property rights (IPR) and the environment also both provide good examples of local officials ignoring the center:
Officials in Beijing frequently order clampdowns on the makers of pirated goods. Offending factories are sometimes closed. But local officials who condone such operations as a way of boosting their local economies are seldom punished. Nor are officials who turn a blind eye to polluting industries, unless they cause big accidents or trigger unrest. Transgressions are so widespread that it would be destabilising to launch a crackdown. But just to make sure that career-damaging information does not reach Beijing, local governments often arrest petitioners who travel to the capital to raise complaints.
Beijing is “comforted by the knowledge that direct political challenges to their authority by local governments are extremely rare.” In other words, “China’s local leaders know where to draw the line.”
An awareness of the dichotomy between Beijing’s words and China’s actions can be of critical importance for doing business in China. Just yesterday, we consulted with a company trying to decide whether to pursue a trademark enforcement action in China. The first questions I asked were to determine where the offending company is located and where is it making its sales. I then said that if we can bring the action in a place like Beijing, Shanghai or Shenzhen, our chances are going to be better than if we need to pursue the case in a more remote region. Why? Because exactly as this article says, Beijing would like to see intellectual property rights enforced, but local officials, including local judges, oftentimes are going to favor their own local industries.
I am always saying the same thing about China’s environmental enforcement. Indeed, earlier today, in The Inconvenient Truth — Al Gore Is Unfair Or He Does Not Know China, I attacked Al Gore for his comparing United States gas emission standards with those in China as though the standards are what matter, not the enforcement. In that post, I essentially, but unknowingly, summarized this Economist article:
I am a big believer in Beijing’s efforts to clean up China’s environment, but it is absurd to equate China’s efforts with the reality on the ground. The reality is that for all of China’s great environmental laws and standards, the pedal hits the metal in the enforcement, and we all know that China has a long way to go on that. The same is true of other laws as well, including IP rights, land use rights, etc.
In a January post entitled, “The Decentralization Of China For SMEs, we talked about how China’s decentralization directly affects business:
I particularly like the Asianist’s comment that “China is much more decentralized than people assume.” In a recent article, Spiegel Online (part of the big German news magazine, Der Spiegel), put it even more bluntly: “Provincial officials and managers customarily ignore edicts issued by the planners in Beijing.”
Even Spiegel Online (though correct on the result) is wrong to think local officials consistently ignore Beijing. The reality is that Beijing has quite intentionally and quite clearly given local governments authority over approval of the vast majority of business projects in their respective locales. Since local authorities have this power, their actions are actually consistent with central government policy.
I am convinced one of the primary reasons so many believe Beijing controls all foreign business in China is because so much is written about its control. James McGregor’s excellent book, One Billion Customers, is a classic example of this. Most of the examples in the book involve Beijing governmental interference, yet that is because most of the examples involve huge projects that have the potential to invade the government’s turf, like setting up a nationwide television station, a nationwide cell phone service, and a nationwide press service. It just is not a story to write about how a Pizza Hut opened in Xiamen or a Carrefour opened in Qingdao without any influence one way or the other by Beijing. Additionally, so much of the press on China comes from Chinese mega-cities like Beijing, Shanghai, and Hong Kong, which have an incentive to propagate their own importance.
Decentralization in China is a fact and the smart foreign business starts local and then radiates outward only when necessary. In our representation of SMEs in China, we rarely deal with Beijing at all.
In a February post, “Chinese Government Not An IPR Monolith,” we discussed how China’s lack of centralization was hindering China’s enforcing intellectual property rights (IPR):
Though Beijing has for the most part come to realize enforcement of intellectual property rights makes sense for China, it is indeed less clear that the provinces have that same conviction. Mr. Sittig correctly notes that “there are still large segments of the [Chinese] population who will not benefit from IPR protection just yet,” and as long as that remains the case, the threat of uneven IPR enforcement is a very real one.
Bottom Line: Beijing often says one thing and the provinces do another. This means that if you are doing business outside Beijing, you must be mindful of the need to win over the locals as well as the center.
