Review of “Factions and Finance in China: Elite Conflict and Inflation,” by Victor Shih

What is the nature of Reform-Era China? That is, how has the People’s Republic been run during the ages of Deng, Jiang, and Hu? For that matter, what ideologies and factions are represented in this mural to the Paramount Leaders?

This is the question raised in Vincent Shi’s “Factions and Finance in China: Elite Conflict and Inflation.” Shi’s book is part of my introduction to the present era in Chinese history, along with Prime Minister/General Secretary Zhao’s autobiographical Prisoner of the State, McGregor’s The Party, Huang’s Capitalism with Chinese Characteristics, and even Dikotter’s Mao’s Great Famine. Unlike the Revolutionary-era histories which center around the victories of Deng Xiaoping and his classmate, Chiang Ching-kuo, the Reform-era histories all revolve around the Tiananmen Massacre, Zhao’s dismissal as General Secretary of the Chinese Communist Party, and the nature of his house-arrest.

Perhaps even Reform-era history centers around one paragraph of Zhao’s address to the protestors:

Students, we came too late. We are sorry. You talk about us, criticize us, it is all necessary. The reason that I came here is not to ask you to forgive us. All I want to say is that students are getting very weak, it is the 7th day since you went on hunger strike, you can’t continue like this. As the time goes on, it will damage your body in an irreparable way, it could be very dangerous to your life. Now the most important thing is to end this strike. I know, your hunger strike is to hope that the Party and the government will give you a satisfying answer. I feel that our communication is open. Some of the problem can only be solved by certain procedures. For example, you have mentioned about the nature of the incident, the question of responsibility, I feel that those problems can be resolved eventually, we can reach a mutual agreement in the end. However, you should also know that the situation is very complicated, it is going to be a long process. You can’t continue the hunger strike for the 7th day, and still insist for a satisfying answer before ending the hunger strike.

Who is being talked about? Who is being criticized? What is being forgiven?

After reading Dikotter, Huang, and McGregor, my understanding of the Reform era was as follows:

Various people supported Mao Zedong and the Communist Party as a reaction to the Karzai-level corruption of the KMT. China’s Confucian traditions lead to supporters of Chairman Mao placing an unusual degree of trust in his policies. After witnessing (and engaging) in the autogenocides of 1957-1961 and 1966-1969, elite support of Mao’s policies (as opposed to his figurative leadership collapsed. Following Mao’s death, Deng Xiaoping cleverly used Soviet-style conservatives, Mao-style radicalists, and western-style Liberals, allowing him to form the leadership couterie that eventually took power in 1992. the two most powerful factions in the Communist Party were centered around the Communist Youth League, which focused on leashing the creative energies of the rural population, and the Shanghai Clique, who aspired to imitate Japan’s economic strategy. While the CYL-Shanghai split was serious, this split is analogous to a split between militant factions of the Business Roundtable and the Chamber of Commerce..

Shih’s book largely agrees with the narrative, but challenges it on two main points.

  • The Reform consensus became the dominant ideology of the Communist Party by 1982, not 1992, and
  • The factional split is deeper, but more stable, than merely between the Youth League and the Shanghai Clique

Shih argues in both cases that Chinese Communist politics is forever split into generalists factions and technocratic factions. Generalist factions have widespread support throughout the country, but lack domain expertise in any specific area of governance. Technocratic factions have narrow support within groups of assorted ministries and departments, but are linchpins to success in these areas. Examples of weak technocratic factions would be Education or Environmental Protection. The strong technocratic faction that is the focus of Shi’s work is the Finance faction.

With regard to economic policies, the Finance faction plays the same role now that the Gold faction used to in American politics. Because China has no independent banking system, the Finance faction clamps down on local lending in order to burnish high-profile projects, such as the Three Gorges Dam. Supporters of sound money, stable finances, and a strong central government, the Finance faction gains power during times of economic insecurity and loses power during times of economic growth. Likewise, the various generalist factions use the State-Party banking system to finance loans to followers, which allows rapid growth of the cash-starved Chinese business system at the price of high inflation.

There are many generalists factions and many technocratic factions at any one time. During the reign of a generalist faction, it will force the State-Party banks to lend generously so that it can use its political leadership to benefit its supporters. Weaker factions use this permissive environment to do the same. This leads to both growth but also inflation: Zhao Ziyang publicly stated that inflation at 70%/yr (that’s seventy percent a year) was acceptable as a baseline. Eventually, however, the dangers of high inflation become obvious, but the dominant faction is in a bind: if it alone withholds funds from supporters, other generalist factions will increase in strength while they free-ride. Thus, the dominant generalist faction delegates power to the Party-State banks, who withhold power from all generalist factions. The dominant generalist faction, however, recognizes the Finance faction can never acquire enough supporters to maintain its rule, and thus feels safe with this delegation.

The Communist Party and China benefit from this dynamic (as it serves to moderate inflationary cycles) and the bureaucratization of the modern Party-State (which allows for more technocratic factions that can be bought off without threat to the hegemony of the dominant generalist faction).

Shih’s book helps me reinterpret what I formerly read. Zhao’s action as a rural confiscator of grain in Mao’s Great Famine may have partially been the work of a frightened and naive official, but they were also the work of a man firmly in a generalist faction competing against other generalist factions. The Shanghai Clique, which is castigated for slow-growth in Capitalism with Chinese Characteristics, is perhaps simply playing out the favorite scenario of gold standardists everywhere. The Party-State, which is supportive of and supported by both the generalist and technocratic factions, looks as strong as ever.

So to answer questions:

What is the nature of Reform-Era China?

A stable equilibrium between inflationary generalist factions and deflationary technocratic factions.

That is, how has the People’s Republic been run during the ages of Deng, Jiang, and Hu?

As a pro-growth economy, without private banks, whose debates about monetary stability resembles America’s debates about the Cross of Gold from a century ago.

For that matter, what ideologies and factions are represented in this mural to the Great Helmsmen?

Mao’s ideology was revolutionary, Deng’s, Jiang’s, and Hu’s were reform.

For that matter, Mao, Deng, and Hu are definitely generalist. Shih classifies Jiang as a generalist circumscribed by the technocratic Zhu Rongji, while others would classify him as a technocrat himself. In any case, the 3-1 split seems representative of the relative power of the generalist v. technocratic factions.

Who did Zhao say was being talked about? Who is being criticized? What is being forgiven?

The dominant generalist faction, which allowed inflation and corruption to increase a a price of rapid economic growth.

Factions and Finance in China occasionally reads like a dissertation, but is a brilliant addition to my collection of Reform-era histories of China. Highly recommended!

Leave a Reply

Your email address will not be published. Required fields are marked *