The elephant in the room

Woody Allen is better known for making comedies than thrillers but Match Point is an exception to the rule, starring Scarlett Johansson as Nola Rice, and Jonathan Rhys Meyers as Chris Wilton.

As you’ve probably guessed, they begin an affair. But it soon transpires that Rice isn’t content to remain a mere mistress and she demands that Wilton divorces his wife. As a penniless former tennis coach who relies on his wife’s family to support his lavish lifestyle, this puts him in something of a quandary. Divorce is out of the question. But as Rice shows signs of becoming emotionally unhinged, it becomes clear that she’s on the verge of revealing their affair. So Wilton draws up an elaborate plan to kill her and make it look like a burglar did it.

WiC watched Match Point this week and saw parallels aplenty with a set of events in China, where one of the country’s most powerful bureaucrats has also been implicated in a crime of passion. Money, lust and a mistress all featured prominently. And in a similar vein to the film, the bureaucrat even hatched a desperate plan to kill his lover when she became uncooperative and started to threaten his finances.

But his downfall is more than just another tale of a flawed official. China watchers are now assessing its broader consequences, particularly the signals it could be sending about the direction of economic policymaking.

Who is the official and why does his case matter?

His name is Liu Tienan and two weeks ago he was detained by the authorities. According to the state-run Global Times, Liu was involved in corruption and “was plotting to kill his mistress”.

The mistress in question, surnamed Xu in media reports, met Liu when he was posted to Japan. As his career (and their relationship flourished), he started to use her as a conduit for an illegal moneymaking scheme. This saw her move to Canada and set up a company. It was then fraudulently lent around $200 million by Chinese banks on Liu’s say-so.

Liu’s wife and son were also made shareholders in the Canadian company, as was a business associate from Wenzhou. But it seems that the mistress began to panic about the arrangement, probably because she was the one signing the incriminating documents. “She felt it was too risky and was unable to continue doing the job, leading her to quit,” a source told the 21CN Business Herald. The newspapers then allege that she started getting death threats and began to fear for her life.

What happened next is murky, but it seems she began posting details of Liu’s transgressions on her Sina Weibo account. This was then stumbled on by the deputy managing editor of Caijing Magazine, Luo Changping. He was particularly intrigued by the case, having already established quite a pedigree in exposing official misdeeds (in fact, he’s even published a book chronicling the graft that brought down 120 government bureaucrats). He got in touch with Xu and began verifying her version of events. On December 6 he posted allegations about Liu’s activities on his own widely read Sina Weibo account.

Liu’s case soon became widely discussed, not least because of the organisation he worked for. He was a deputy director at the NDRC (the National Development and Reform Commission), the economic planning body that Caijing describes as a “super-ministry”. Amid all the bureaucracies in China, few can rival the NDRC for influence – thanks to the control it exercises over the economy and its unique departmental status reporting direct to the State Council. So an accusation of this magnitude – against one of the highest-ranking officials – represented a severe blow to its prestige.

The NDRC wasn’t able to quell the allegations and the Party’s discipline inspectors went to work. On May 14 Xinhua reported that Liu had been dismissed. He will now face punishment for what investigators term “serious disciplinary violations”.

Local media thinks that only a fraction of Liu’s ilicit activity may have been exposed. For instance, China News Week says he was perfectly positioned to take bribes from Chinese firms wanting to invest abroad (the NDRC has to approve these transactions). And there’s also been speculation about his role running the National Energy Administration (a body that’s part of the NDRC). Xinmin Evening News points out how Liu “remarkably speeded up” approvals for energy-related investments in the first quarter of this year. The newspaper infers that Liu knew ‘the game was up’ and the accelerated approval process was a matter of paying back his cronies while he still could.

Part of a broader campaign?

There’s also suspicion that Liu’s purge was not an isolated event but part of a bigger challenge to the NDRC’s authority. Why? This wasn’t the only recent setback for the Commission. In another blow to its prestige Premier Li Keqiang rejected its draft urbanisation plan last week, Reuters has reported.

The plan envisages spending Rmb40 trillion on moving 400 million more Chinese into towns and cities in the coming decade. It also had the support of the China Development Bank (see WiC189 for more on this organisation). But sources contacted by Reuters said that Li felt changes were needed that put more “emphasis on economic reforms”.

Li’s veto got huge publicity across the Chinese internet, suggesting the powerful agency had suffered another loss of face. That led to further debate about whether senior figures in the government want to clip the NDRC’s wings as a means to weaken its clout.

Further evidence that the spring has somewhat gone out of the agency’s step?

Take the fact, Beijing Business Today observes, that the NDRC has approved just 37 projects this year. That may sound a lot by European or American standards, but not the NDRC’s. For example, on April 19 last year – i.e. in a single day – it green-lighted more than that (signing off 40 projects). And as of May 20, the NDRC hadn’t approved a single project for 20 days, which looks like suspended animation by the agency’s normally frenetic standards.

WiC has also been chronicling how the NDRC has been losing turf wars with other bureaucracies. A local government agency bested its opposition to a new factory to be built by Chery and Jaguar Land Rover (see WiC171). And in another case, the Ministry of Industry and Information Technology – seemingly pushing a more reform-based agenda – overturned two years of NDRC opposition by giving licences to large but previously illegal privately-owned steel firms such as Sha Steel (see WiC192).

The NDRC has stayed studiously quiet about both reverses.

The Ministry of State Capitalism?

The NDRC has many nicknames in the Chinese media but ‘The Ministry of State Capitalism’ is one of the most appropriate. That’s because of the manner in which it has marshalled its influence to prioritise the growth of state-owned firms. This is a trend which has alarmed the Party’s more laissez-faire faction, esespecially in favouring the largest SOEs over entrepreneurs. The practice became so prevalent that it even gained a name: ‘the state advances as the private sector recedes’, or guojinmintui (first touched on by WiC in issue 30).

The NDRC’s roots offer a ready explanation for its preference for state capitalism. It started out in 1952 as the State Planning Commission and was only renamed the National Development and Reform Commission ten years ago. So its corporate DNA is based on the planned economy. Of course, ideologically it has moved on from the Maoist policies of the 1950s and over the past decade it has favoured the creation of national champions: huge, profitable and efficient state firms that can compete with Fortune 500 firms in international markets. Its version of state capitalism has also overturned the orthodoxy – long held by many in the West – that any industry operated by the state ends up loss-making.

The NDRC has also enjoyed considerable power in pushing this agenda, particularly during the administration of Hu Jintao and Wen Jiabao. It has 28 functional departments covering almost every aspect of the economy (arguably only military and foreign affairs fall outside scope). Of its senior executives, five enjoy ministerial status and four sit on the Party’s influential Central Committee.

At its broadest the NDRC is a planner, designating strategic industries and ensuring preferable policies (such as cheap financing) to support their growth. It has a regulatory function too (it might order coal mines to close, or fine drinks companies for forming cartels).

When it was created in 2003 the NDRC also received veto power on investments in 80 different types of project ranging from the forestry industry to foreign investment. Generally these tend to be larger projects (it only gets involved in hydropower approvals if the projects will deliver more than 250,000 kilowatts of power, for instance). But anything cross-provincial or cross-border also falls within its remit.

At the micro level the NDRC also gets involved in setting prices, particularly when inflation looks like becoming a political problem. Thus back in 2011 it visited private sector noodle makers like Tingyi and told them to shelve plans to increase their prices. It is this aspect of NDRC power that resonates most with the public, while its project approvals give it the most visibility with the business community.

All agree that the NDRC’s influence increased substantially in 2008 in the wake of the global financial crisis. With Beijing’s launch of a huge Rmb4 trillion ($652 billion) stimulus package – focused particularly on infrastructure spending and strategic industries – the NDRC’s authority enjoyed a quantum leap. It directed the bulk of the approvals on the infrastructure campaign and it channelled the financing to state firms, ensuring they would enjoy the greatest benefits of the stimulus. The four years after Lehman’s failure became a golden age for state capitalism.

It looks now like that this might have been the high-watermark of the NDRC’s power. There have also been signs of an emboldened reform faction fighting back against the state capitalism ethos. The counter-offensive began late last year with articles in the state media talking about the anniversary of Deng Xiaoping’s southern tour and its ‘reforms’. The mood solidified when Li Keqiang endorsed a World Bank report telling China that it needed to continue with market reforms or face the dangerous stagnation of the ‘middle-income trap’. (This week the IMF added its voice too, also urging reform.)

In fact, the World Bank document set out the battle lines with the state capitalists more directly than most. It made clear that favouring big SOEs was not the best policy as private businesses were better at innovation and creating jobs. Meanwhile this coincided with a growing recognition that many of the larger state firms have helped to foster China’s corruption problems – given their scale and opacity have allowed the well-connected to profit.

So is reform at the NDRC next on the agenda?

According to the Hong Kong Economic Times, a number of senior Party figures have written to Li Keqiang suggesting that the word ‘reform’ be taken out of the NDRC’s name because of its apparent preference for state-led economic development.

Academics have weighed in too, making clear that the NDRC’s current size and reach are problems.

Professor Lu Feng of the National Development Research Institute of Peking University told China News Week: “To really make a change, the NDRC has to be transparent and have its powers cut.”

Zhou Hanhua at the Chinese Academy of Social Sciences said that meant separating the NDRC’s functions – for instance, splitting the supervisory departments from those involved in giving project approvals.

“The NDRC is the most important organ of the reform process,” said Zhou. “Why? Because the way its functions are configured is particularly inappropriate.”

Xu Hongcai was another critic of the NDRC’s current role. The secretary of the China International Economic Exchange Centre said its approval process led only to distortions and bribery. But its regulatory role – he told the Southern Metropolis Daily – also meant that it was acting as both “judge and athlete”. Xu urged instead that the government step back and become “the night watchman of the market economy – defending only the rules of fair competition”.

Others were more outspoken still. “In order to push for economic innovation in China, the first thing to do is disband the NDRC,” commented Xu Xiaonian, a professor of economics at China Europe International Business School. Xu made the remark at the Lingnan Forum in March, a powwow attended by entrepreneurs, economists as well as government officials. According to the Securities Times it sparked the event’s longest and loudest bout of audience applause.

There are parallels here with another key reform: the break-up of the Ministry of Railways. That happened earlier this year, dismantling one of the other great fiefdoms within China’s bureaucracy (and another vast entity that emerged from the Mao era). Under the new rules, the railways ministry has seen its role as a rail operator split from its regulatory activities (see WiC184).

Like the NDRC, the rail ministry’s former boss Liu Zhijun (now being tried for corruption) was also a major proponent of state capitalism. And in another telling transition, Chen Yuan recently retired from the China Development Bank (see WiC189). This is another significant move as CDB was arguably one of the NDRC’s chief ideological partners, especially in funding the state capitalism drive.

So with the departure of Liu Tienan this month (and the stink surrounding his case), the NDRC suddenly seems to be under pressure. Almost lost in the small print was that it has just been stripped of the right to approve investments in another 26 business areas too (including of controversial paraxylene plants, see World of Weibo).

Could the reform process move further in dismantling NDRC power? If a larger overhaul is to happen, it looks likely to be announced in October as part of a more general plan to be unveiled at the Communist Party’s third plenary session (for more on rumours about this, see WiC194).

In the meantime a few voices at the NDRC have tried to strike back at the rumours of its eroding influence. Li Tie, director of the body’s City and Town Development Centre, told Caijing that the Reuters story about the snubbing of its urbanisation plan by Premier Li was baseless. Li Tie even denied that it had been vetoed, saying the plan was still under discussion.

That may well be the case. But when it come to figuring out policy change in China, all too often it’s the version of events that’s leaked that is really worth heeding…

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