HIGH-PROFILE CORRUPTION cases and a long-expected turnover of leadership have drawn extra attention to the Chinese Communist Party (CCP) in the past year. Ordinarily, however, party officials prefer to work quietly behind the scenes. Invisibility may seem like a tough act for a party that numbers eighty million and counts one in twelve Chinese adults as a member. But as one university professor in Beijing told reporter Richard McGregor, “The Party is like God. He is everywhere. You just can’t see him.”

McGregor, an Australian who spent nine years in China as a correspondent for the Financial Times, has written a fascinating book about the CCP’s inner operations and extensive influence over Chinese society. In The Party: The Secret World of China’s Communist Rulers, first published in Britain in 2010, McGregor notes that the party has remade itself several times since it took power in 1949. In the years of reform since the death of Mao Zedong in 1976, the party has made a “conscious retreat from the private lives of Chinese citizens”:

One by one, all sorts of things that once needed the Party’s permission—where you lived, worked and studied; how much you were paid; where you went to the doctor; . . .  where you shopped and what you could buy; and when and where you traveled and with whom—have become the subject of personal choice for urban Chinese citizens. All you need is the cash to pay for it. The rules that long restricted the movement of rural residents are also, slowly, being unwound.

The impersonal coercion of the market may have replaced much of the CCP’s direct control over individuals, but the party still dominates major institutions. Party committees stand behind government ministries, the courts, police and army, religious and nongovernmental organizations, professional associations, the major media, state corporations and even nominally private ones.

McGregor focuses most of all on how the CCP has updated its methods since 1989, when the Tiananmen Square democracy movement challenged the party’s monopoly on power. The fall of the Eastern Bloc dictatorships in the following two years—and especially of the Russian party—provided chilling lessons about how power could slip from the CCP’s grasp. Studies conducted by Chinese party intellectuals found that the Russian party fell apart before the Soviet Union broke up. The Russian party lost power, said these studies, because it was too rigid, didn’t understand the economy, failed to raise people’s living standards, and pursued reforms too late and too quickly—without building the strength of the party in the process.¹ China’s party could survive, they concluded, but only by adapting and renewing itself.

Securing the state
Even as the party loosened some controls over citizens’ lives, the CCP resolved to tighten controls over its own members in the wake of the 1989 movement. The party shakeup actually began while the leadership was deciding to crack down on the protests.

The split inside the party extended into the army, as “commanders and soldiers refused to obey when they were ordered to clear the protesters out of Beijing with military force” on June 4. In the following months, the party tightened its control over the People’s Liberation Army (PLA)—a force that was already formally under the command of the party, not of the state.

Each part of the PLA, at headquarters, in operational units, research institutes, universities and factories, has always had a political department and Party committees. . . . After 4 June, the Party determined that its penetration of the military should go even deeper. As a result, the . . . PLA, which has about 2.3 million men and women on its books, now has an astounding 90,000 different party cells operating inside it, about one for every 25 people enrolled in the forces.

According to McGregor, party educators in the army units find it hard to instill political loyalty among the troops with discussions of Marxism—discussions that have become more and more absurd as the profit system piles up riches for the country’s elite, especially within the party itself. The problem extends outside the army:

Party members are “losing belief,” the [organization] department’s own secret documents complain. “Some individual party members and even cadres in leadership positions no longer have a clear head and doubt the inevitability of the ultimate triumph of socialism and communism.” Many individuals have begun to believe in “ghosts and deities instead of Marx and Lenin.”

Party educators in the army have come to rely more and more on an appeal to simple nationalism. Soldiers instilled with nationalist ideology, however, may still be reluctant to repress internal revolts, so the party retrained and bulked up the national police—who specialize in domestic repression—to 800,000 members.

The party’s drive to bolster its control over the state has extended beyond the army and police. Much of the party’s apparatus is structured to shadow each level of government, from central ministries down to governments at each lower level—provincial and municipal, county, township, and village. Only at the village level are government officials elected by popular vote, but as on every other level, the power of the local party secretary trumps that of the nominal government head. Bo Xilai, at the center of a widely covered political crisis, was formerly kingpin of the mega-municipality of Chongqing and was its party secretary, not its mayor.

The turn to the market since 1978 has opened opportunities at all levels to tap into local profits. Officials can thus build their own bases of power and patronage. The process puts them into an intense and chaotic competition with each other for workers and markets, while the whole movement exerts a centrifugal pull against the party center in Beijing.

Besides being driven by the lure of profits, officials also know that party promotions depend on their success in achieving local economic growth. The hyped-up internal competition helps account for some of the economy’s dynamism, McGregor notes, but it also encourages investments in productive capacities that go beyond what internal or external markets can absorb.

Local officials may act like despots in their own sphere of influence, but the party center has several tools to assert control over them—chief among them its control over appointments, promotion, and education:

Under the Politburo sits a vast and largely secret party system which controls the entire public sector. . . The party staffs government ministries and agencies through an elaborate and opaque appointments system; instructs them on policy through behind-the-scenes committees; and guides their political posture and public statements through the propaganda network. The officials working in public institutions are trained, and re-trained, at regular intervals, through the party’s extensive nationwide network of 2,800 schools, before they are eligible for promotion.

Through its control over appointments, the party center can break up a local power base by reassigning an official to new job in a distant locale:

The party’s most effective tool in elevating competence over cronyism during the last decade has been a practical and resolutely old-fashioned one. The [organization] department stress-tests promising officials by rotating them through jobs in diverse parts of the country and in different administrative units, before hauling them back to Beijing into the big league if they pass muster.

Things may work this way sometimes, but here McGregor is painting an idealized picture of Chinese-style meritocracy. Elsewhere, he acknowledges that a lower official—especially a “princeling” offspring of powerful parents, such as Bo Xilai or the new party chief, Xi Jinping—may have patrons high up in the organization department who can arrange a series of appointments that virtually guarantee an upward career path.² Conversely, the power of reassignment allows high officials to banish competent but troublesome subordinates to dead-end jobs in obscure places—a practice that McGregor himself documents for a number of cases. What’s more, he notes, positions in the organization department itself can be bought and sold.

Readers may be reminded of familiar traits of Western capitalism, including the importance of family connections and the tight link between politics and business. The Chinese case, however, is special because the fusion of political and economic power is deliberate and institutionalized. In fact, the most important post-1989 adaptation of the CCP was to find new ways to use its political power to direct the economy without micromanaging it.

Recapturing the commanding heights
Central economic planning in the days of Mao meant that Beijing set production targets and the national division of labor through detailed five-year plans. Individual enterprises were not expected to turn a profit; the aim was to produce a surplus on a national scale that could be reinvested in the next round under a new national plan. The party has continued to produce five-year plans, but details became more sketchy after 1978 as market mechanisms were introduced into different parts of the economy, beginning with agriculture. Farmers, for example, were still required to meet production quotas for staple grains—which then got resold at controlled prices to consumers—but farm families became economic units that could make money by producing for the market once the quotas were met.

In the 1980s, the state gradually allowed foreign capital into special zones in coastal areas, generally in joint ventures with Chinese managers. Even more important in the early years, officials and private individuals at the township and village levels were allowed to launch profit-making ventures, and managers in state-owned enterprises (SOEs) began to receive pay incentives according to the profitability of their operations.

Over time, the reforms loosened the party’s central control over the economy. For example, even though the central state still owned the banks, McGregor writes, local officials appointed bank branch managers who returned the favor by lending money for the officials’ pet projects.

An increasing number of loans went bad as poorly planned township and village projects went sour. At the same time, any exposure of the state’s major enterprises, such as steel plants or coal mines, to world market pressures threatened to drive these enterprises under—since their techniques were backward compared to what foreign private capital could achieve. After rapid GDP growth in the first half of the 1980s, the economy slowed down and inflation cut into workers’ buying power, setting the stage for workers’ participation in the democracy movement of 1989.

Following the 1989 crisis, the party came up with several ideas to restore both steady growth and central control over the economy. One faction favored a retreat from market reforms and profit incentives, going so far as to propose direct party ownership of state property. The victorious faction, headed by Deng Xiaoping, is often characterized as “privatizers,” but McGregor’s account shows that the truth is more subtle than that. In the early 1990s, Deng did initiate a vast expansion of foreign investment in the coastal areas. Nevertheless, a great deal of the party’s effort over the decade was devoted to recapturing and upgrading the “commanding heights” of the economy. The campaign complemented the drive to assert central political control over the party.

Deng’s formula, boiled down, was simple. The Party would still pursue free-market reforms, but in tandem with recalibrating and tightening political authority in Beijing. Equally, the party might not own state assets directly, but it would maintain the right to hire and fire the executives who managed them. For the economy to prosper, the huge state firms that communist commissars had once directly managed would have to be turned upside down and the role of party operatives inside them reined in. Instead of simply producing goods to plan and providing cradle-to-grave employment . . . the state had to make money to survive.

Many foreigners, McGregor writes, noticed the changes going on in the 1990s, “mistakenly equating the state sector overhaul with Western-style privatization.” Prime Minister Zhu Rongji, who took control of economic policy in the mid-1990s, “protested that China was corporatizing its large state assets, which is just another way of ‘realizing state ownership.’” At the 1997 party congress, Zhu’s slogan for SOEs was,

“Grasp the big, let go of the small.” The party and the state would retain control of the large companies in what were deemed strategic sectors, such as energy, steel, transport, power, telecommunications and the like. In a formula that was rolled out for scores of state companies, a small number of their shares were listed overseas, while the government kept about 70 to 80 percent of the equity in its own hands. Many foreigners often mistook the sales of minority stakes to be privatization.

Streamlining and upgrading the SOEs involved a major overturn of personnel. In the ten years from 1993, fifty million state workers lost their jobs, and another eighteen million were shifted into jobs that carried much-reduced benefits. At the level of management, a “conservative political class whose entire lives had been built around old-style state ownership [was] swept aside.”

Zhu’s other major project was to recentralize control of the banks, and the Asian economic crisis of 1997 gave him an opening. Nearly half of Chinese bank loans had gone bad by the late 1990s, and the center imposed new conditions as it rushed to save the banking system.

The party apparatus in Beijing . . . shunted aside local bigwigs by placing the power to hire and fire senior executives in banks and other state enterprises with the center, no matter where they were in the country. Any regional bank offices which refused to sign up to the Politburo’s program were threatened with closure. . . . The local banks and regional regulatory authorities were outwardly undisturbed. Backstage, however, the Politburo had created an entire parallel policy universe, “a powerful yet mostly invisible party body for monitoring financial executives.”

The central government’s bailout of the banks cost $620 billion over several years following 1997—more than five times the proportion of GDP compared to George W. Bush’s TARP bailout of $700 billion in 2008. Over the six years to 2003, the big state banks cut the number of branches in half and laid off more than 400,000 employees. The centralization of control allowed the party to force Chinese banks to provide the financing for the $586 billion stimulus in November 2008—at a moment when the US government was failing to induce American banks to issue new loans.

Zhu’s emergency measures of the late 1990s also completed the organization department’s power over appointments, so that officials could now be moved from a party position in one part of the country to a government position someplace else, and then to a corporate position in a third location. Top party officials could thus transfer corporate executives at will—even to rival companies. In 2004, the organization department shuffled leadership of the three big state-owned telecommunications companies. McGregor writes:

It was the equivalent of the CEO of AT&T being moved without notice to head its domestic US competitor, Verizon, with the Verizon chief being appointed to run Sprint. . . . Power was increasingly accruing to the companies’ CEOs in a strategic industry with important national security implications. “The view was that we have to keep these ones in the box; we are better off running these companies with politicians and not entrepreneurs,” said an advisor to the companies. “The idea was to break emerging centers of power.”

Two of the companies were publicly listed, and foreign members of the corporate boards were furious that a shadowy body of the CCP, and not the boards themselves, would hire and fire the companies’ executives. From about this time, the Western press began running occasional reports of foreign investors complaining that they weren’t being treated as genuine partners in their joint ventures with the Chinese.

With some justification, elite conventional wisdom in the West concluded that China-based corporations were likely to act as stalking horses for state interests. This gave Western governments an excuse to practice their own varieties of national protectionism when Chinese companies ventured outside the mainland. In 2005, for example, the US Congress cited national security grounds when it blocked the bid by China’s offshore oil company to purchase the California-based Unocal.

State control of the economy is not uniform from place to place. Private ownership and foreign investment are high in the boom areas of southern China and the Yangtze River delta. Guangzhou and Shenzhen in the southern province of Guangdong are often cited as free-market “models” for development that may spread to other places. McGregor, however, points out that state-led development allowed Shanghai to outpace the growth rates posted in other boom areas from 1992 to 2002. Perhaps because of Shanghai’s unusually close connection between government and business, the city was notorious for the self-enrichment of its officials, even in a country where corruption is rampant.

Corruption and party factions
If we define corruption simply as the use of political power for private gain, CCP officials must be the world champions. The now-disgraced Bo Xilai is not exceptional in this regard. While he drew a party salary of $20,000, his family traded on his position to amass shareholdings “worth well over $100 million” in Chinese companies.³ Bloomberg News reported last June that the extended family of Xi Jinping, China’s incoming president, holds assets in excess of $300 million, and Financial Times sources put the family’s net worth at over $1 billion. Although Xi and his immediate family do not officially share in these holdings, Chinese censors blocked access to Bloomberg’s sites on the mainland—and even blocked searches of Xi’s name.⁴

“Corruption thrives,” says McGregor, “in sectors with heavy state involvement and considerable room for administrative discretion: customs, taxation, the sale of land, infrastructure development, procurement and any other sector dependent on government regulation.” Local officials, who are deeply involved with the sale of land and infrastructure development, are the most frequent targets of popular anger—especially because ordinary Chinese can see their arrogance and conspicuous consumption from close up. Land sales, writes McGregor, provoke 60 percent of major protests.

The central government has responded to this groundswell, says McGregor, by allowing local media and China’s legion of micro-bloggers to expose local corruption. At the same time, the party has limited the exposures from reaching too high up, in part by conducting its own investigations of corruption before cases reach the courts, a process that produces confessions but not many reportable details.

Higher officials don’t want to be exposed themselves, of course, but they also want to prevent the investigations from breaking their connections to their own middle-level clients. McGregor quotes a popular novel:

We can’t push the anti-corruption campaign indefinitely. For who else can the regime depend on for support but the great masses of middle-level cadres? If they are not given some advantages, why should they dedicate themselves to the regime? They give their unwavering support to the regime because they get benefits from the system. Corruption makes our political system more stable.

Elsewhere, McGregor recounts how unpopular an official can become if he doesn’t enrich himself—and thus has no benefits to share with subordinates.

These points help explain the formation of factions inside the party—as vertically structured patron-client rackets. Some can be centered around a particular locale, as Jiang Zemin headed up the “Shanghai gang” before he became president in 1992. Factions can also find bases within different sectors of the economy:

Li Peng, the Premier who declared martial law in 1989, was a longtime czar of the energy sector, in which two of his children rose to hold powerful jobs. Zhu Rongji held sway in the finance sector, which allowed him great influence in choosing the heads of large Chinese banks and also helped his son become the highly paid head of China’s largest investment bank. And Jiang Zemin reigned over the technology sector, ushering numerous loyalists into important jobs, and allowing his son to become a key wheeler dealer within the sector in Shanghai.

McGregor shows how the party’s top body, the Standing Committee of the Politburo, is composed of the topmost members of the most powerful factions—held together in uneasy compromise. Having been a protégé of Deng’s, Hu Jintao came into office in 2002 without his own firm base of support, a quality that apparently made his candidacy attractive to his peers. Hu thus needed to establish his power after he was on the job, McGregor notes, and spent the better part of his first term pushing aside elements of the “Shanghai gang,” which Jiang had brought to Beijing to run the country. Hu’s success seems to have been short-lived, however. Associates of Jiang dominate the standing committee created last fall.⁵

When top officials fight over divergent policy options, the party’s factions may become the tools for struggle, but what holds together a faction most of the time, it seems, is the self-interested loyalty of a criminal gang, not any kind of principled political agreement. What binds the upper reaches of the various factions to each other, however, is a set of common class interests. These common interests have motivated the drive to rebuild the cohesion of the party.

Party and class
McGregor is clear about the competitive forces that have been pulling the CCP apart—but not so clear about why top officials have been hell-bent on stitching the party back together. Naturally, the country’s top rulers don’t want to give up their old ways of ruling, for fear that they would be cast aside under a new system. McGregor seems to take this as the sole reason for the drive to recentralize power. He is prone to describe this autocratic form of rule as “Leninism,” although his real model for comparison is the Soviet Union under Stalin. This historical sleight-of-hand might be merely annoying, except that McGregor is thereby providing a flawed framework for understanding the current regime.⁶ He means to characterize China as “still communist,” in contrast to other governing models:

Is it a benevolent, Singapore-style autocracy? A capitalist development state, as many described Japan? Neo-Confucianism mixed with market economics? A slow-motion version of post-Soviet Russia, in which the elite grabbed productive public assets for private gain? Robber-baron socialism? Or is it something different altogether, an entirely new model. . .?

McGregor is correct to point out the continuity between the Mao era and today, but he is wrong to dismiss the characterization of China’s system as a “capitalist development state.” Mao’s system was, above all else, an invention to develop a relatively backward society to the point where it could stand up to advanced capitalism. The fusion of economic and political power allowed the party elite to concentrate China’s meager surplus. The party-state, as the sole capitalist, could guarantee a high level of reinvestment, and as the sole political power, could keep the workforce disciplined and cheap.

Then, as now, the party elite has searched for means of accelerated development. State controls continue to be the political means to play this game of economic catch-up. At one point, McGregor does call attention to the similarity between the party-state and a single business—and connects this to the party’s fear of foreign rivals:

Deng, and Jiang after him, grasped . . . that the party had much in common with entrepreneurs, who disliked democratic politics and independent unions as much as they did. The Party’s authoritarian powers not only kept workers in line. They also bestowed on top policy-makers a flexibility that politicians in democratic countries could only dream about. Even by the standards of a capitalist economy, the party could be unusually pro-business, as long as the state got a cut along the way.

The Party’s distrust of the private sector was never about money nor the flagrant contradiction between individual wealth and the official Marxist and Maoist pantheons. . . . The real issue for the party was the threat that the foreign and local private sector might become a political rival.

In the post-Mao era, the party’s innovations for driving up growth have been to authorize competition for profit among private and state enterprises, to gain access to foreign advanced technique without becoming subordinate to foreign capital, and to sustain the freedom of the center to intervene in business to protect the elite’s collective interests.

Some of McGregor’s most interesting material involves discussions of the conflicts that arise as Chinese executives and companies try to serve the “two masters” of profit and party loyalty. Some of the conflicts yield pathological results, even from the point of view of the elite, but many of McGregor’s examples illustrate the functionality of the “two-loyalty” system. We’ve seen one already: The state overruled the profit interests of China’s banks in order to finance a stimulus package that helped China get through the world crisis of 2008–09.

In another case, two of China’s oil giants, PetroChina and Sinopec, “had long bristled at tight controls on domestic oil prices” and lost money selling gasoline as world prices shot up in 2005.

In a high-stakes game of bluff, several large refineries were suddenly mothballed for what the companies called “scheduled maintenance.” The companies’ actions . . . created serious shortages of fuel in southern China . . . and also in the Yangtse delta around Shanghai. [Prime Minister] Wen Jiabao . . . personally stepped in to negotiate an end to the dispute.

The ax fell on Sinopec’s CEO two years later when he was detained on corruption charges. His replacement was a party loyalist who established CCP cells in Sinopec and its joint ventures.

McGregor recognizes the common thread in these cases when he discusses the pressures on Xiao Yaqing, the CEO of the metals conglomerate, Chinalco,

one of the fifty-odd core companies which the state regarded as essential for its national security and economic development. Next to the hotline connecting Xiao to the party elite was . . . a screen displaying the [company’s] stock price. . . .  Executives like Xiao juggled a difficult brief. They had to manage the company’s, and what the Party deemed to be the country’s, interests at the same time.

Here McGregor captures a key feature of a capitalist developmental state: The state actively intervenes to assert the interest of the whole over the interest of the part. He speaks of the interest of the whole country because he operates without a firm concept of a ruling class—a class that lives by exploiting workers and uses this position to dominate politics. Putting the question of party power into class terms brings the key relationships into sharper focus. The party center steps in to defend the collective interest of the capitalist class when it conflicts with the interests of particular capital units. When party leaders see no such conflict, the particular capital units are free to choose the best ways to make profit.

Party discipline is thus a precondition for collectivizing the ruling class and allowing it to treat individual capitals as components of the country’s total capital. The people at the top of the party, of course, can sometimes be mistaken about the collective interest of their class, and internal rivalries may skew their decisions, but they know that the party is their tool for asserting that collective interest, as they understand it.

The Chinese Communist Party does rule the country, and McGregor’s book is an indispensible guide to how it has steered through conflict to achieve this. The key to understanding why it rules, however, is to realize that the party is the means for China’s capitalist class to rule—the means to organize itself and build its power in a world dominated by powers that are more advanced.

1. David Shambaugh, China’s Communist Party: Atrophy and Adaptation (University of California Press, 2009), 77–78. Emphasis in original.
2. Ian Johnson, “Elite and deft, Xi aimed high early in China,” New York Times, September 29, 2012.
3. “The Family Fortunes of Beijing’s New Few,” Financial Times, July 10, 2012.
4. Jamil Anderlini, “China Censors Block Xi Web Searches,” Financial Times, June 29, 2012.
5. Jonathan Ansfield, “How Crash Cover-Up Altered China’s Succession,” New York Times, December 4, 2012.
6. It’s certainly annoying when McGregor seeks to prove that Lenin invented the scheme for a party that dictates policy from the top down by penetrating all levels of the state. His trump card is a letter that Lenin wrote about party centralism fifteen years before the revolution of 1917, when the task was to connect the leadership of the Russian party to its branches when state repression drove the party underground. The letter has nothing to do with party control of the state.