China has long organised its internal security on other than a provincial basis not only for sound organisational reasons, but also to avoid provincial fiefdoms.
In the 90’s, China began the process of re-organising its taxation approach – removing key cities’ and provinces’ ability to raise taxes and retain unequal shares. Now China has a national tax structure, and its effectiveness is growing and provincial fund raising has had to shift to selling assets – land rights – to fund their operating costs and capital projects.
It has been our belief that the end of substantial provincial power has been planned for a long time. In a confidential briefing about ten years ago we were told that the Pearl, Yangtze, and Bohai regions were experiments that would be spread to 15 total regions, with three more on the Eastern side (around the North Eastern Provinces, Shandong and Xiamen) and the balance nine being spread around Central and Western China.
At the recent meetings of the Third Plenum, December Work Conference and the two new Reform and National Security Commissions under President Xi’s leadership, it was decided to put all taxation under central and regional bodies, as well as all discipline and corruption work. These are aspects of the development of separation of powers and accountability, which will limit and contain the power of Provincial bodies.
We have seen a growing problem of provincial debts and shadow banking, which, partially anticipated by the Party, would seem to be vehicles to press change. By showing the real risk of these two phenomena the Party is able to push deep reform onto resistant forces who try to retain their power and influence. We shall write more on Shadow Banking and the worries that it is producing.
At the same time we expect changes to the way that Provinces can sell land rights and keep large sums of money; as well as invest in, benefit from, and direct enterprises within their areas, and beyond.
The news that China will establish 12 new Free Trade Zones along the lines of the new Shanghai one, tends to confirm that this is the era of regions and the demise of the provinces.
We can expect many services of the new Welfare State to be delivered locally by new regionally controlled mechanisms. This again will see the influence of local Provinces minimised.
We can expect Provinces to be shorn of their broad fund-raising abilities, focusing them on delivery of services, with, perhaps, some local taxes to add to regional grants for those services.
As the process unfolds and is forced through by the Party’s new Reform Commission, led by the President, we can expect a transition period of about 1-2 years. During this time there will be the problems for foreigners of knowing who in authority to talk to.
The shadow banking “crisis” also provides the means by which the centre can create a private sector in finance to fill the vacuum that will be left by banning all the recent entrepreneurial and disallowed lending that has gone on, leaving nationally licensed private sector lending administered through regional operations, which will have a close relationship, if not actually based in, the new Free Trade Zones. This again will bypass the Provinces, both in actual operations and licensing powers.
The defeat of Bo Xilai in the context of abuse of local power is another driving force for accepted change.
As we have said a New China is in the process of unfolding based on a managed market economy, characterised by strategic shareholdings and powerful regulators to ensure the market economy fits into medium and long-term macro plans. The Continent of China will change its operational format for the market economy away from Provinces towards Regions.
Its borders will have key roles in unfolding China’s key foreign policy aims of strong and deep relations with its 14 neighbours, aimed to maintain security and stability. We have not seen where the regions of Inner Mongolia, Xinjiang and Tibet fit into this new structure, but we would expect it to be very similar in outline, and major cities like Beijing and Shanghai to have the same features – i.e. the reach of national control of these areas into those cities.
Against this background we shall see how the urbanisation and hukou features are integrated. We might expect housing and health to come under more central and regional direction, with many hospitals being privatised, although the larger ones will stay under state control but perhaps national and regional rather than provincial.
Another new feature of the New China that is emerging… Does this mean that business stops working the Provinces to access local business? No, we think that many features of commercial activity will still be organised locally for ACCESS, but their ownership and investment, and influencing roles, will wane.