How China Works: Where the real power lies

(This is the first of a series in which we will examine aspects of China to illustrate systemic differences from other economies investors would do well to bear in mind.)

China’s Communist Party has just lifted a corner of the curtain on the degree of corruption that affects the country and its economy. In doing so, Wu Yuliang, Vice Chairman of the Party’s Disciplinary Commission, has drawn attention, albeit unwittingly, to the two-track justice system that operates in the People’s Republic and that needs to be understood by anybody doing business there or investing in Mainland entities.

This system is based on the primacy of the Party, which is all too often treated as a sleeping partner by observers of the PRC. But to overrate the state and to underrate the Party is to misunderstand China. For instance Wen Jiabao has been much in the limelight in recent days with his tour of Europe and his soothing words about buying bonds in order to help prop up China’s biggest trading partner. European writers frequently treated him as if he were the ultimate political boss, the equivalent of senior state figures in their countries.

But the Party’s Politburo outranks the State Council, which Wen heads. Hu Jintao is State President, but his real power lies in his position as Secretary of the Party. The same will be the case when Xi Jinping takes over both jobs from him. The key posts for which leaders of China’s “Fifth Generation” are currently jockeying are not those in charge of central government ministries but those at the head of Politburo commissions dealing with such matters as internal security, ideology and propaganda. In business, every Chinese company of any size has a Communist cell with the right to veto major decisions, and the Party’s weight is greatly enhanced by having its own judicial system.

This is where Wu Yuliang’s disclosures provide a salutary reminder of where primary power lies in China. He told reporters that 140,000 Party members were sanctioned for corruption last year by the Party’s Disciplinary Commission but that only 5,300 of the cases had been tried in civilian courts. In other words, rooting out bad apples among Party members is a job for the Party and nobody else.

In the Disciplinary Commission, the Communist Party has at its disposal an extremely powerful organization that generally operates below the radar but is no less feared for that. The Commission can detain any of the 80 million Party members at will and hold them for six months without charge. They simply disappear. Their families and business associates are not told where they are. At best there is a terse announcement that they are being “investigated for disciplinary offences”. Thus Liu Zhijun, the railways minister ousted in February, first lost his position with the Party cell in his ministry when charged with corruption connected to the high-speed railway expansion. His sacking from his State Council post only came later, and he is still in the hands of the Commission.

The Party, as throughout its history, jealously guards its authority. Though a broad anti-corruption crusade has been declared (of which more in a later posting), Wu has made it plain that help would not be welcomed from China’s growing band of online trackers of official misdemeanours, known as “human flesh searchers”. They have had some success with low-level miscreants but Wu has said they have had a negative effect on the campaign. It is the Party, and it alone, that will guide citizens in the “right way”.