The Fifth Session of the Eleventh National People’s Congress (NPC) is particularly significant given the impending anointment of China's next generation of senior leaders at this fall's 18th National Congress. Meanwhile, delegates are also debating a range of politically sensitive issues, including ways to manage regional tensions and security concerns, mounting social unrest, and widening economic disparities. The political demise of Bo Xilai has also injected an element of uncertainty into the proceedings.

Carnegie experts Douglas Paal, Michael Swaine, and Yukon Huang discussed the major issues addressed in the NPC and their implications for future policies.

The Saga of Bo Xilai 

The downfall of Bo Xilai is perhaps the most serious crisis faced by the Communist Party since 1989, Paal contended.

  • A Comeback in Chongqing: Although his appointment to Party Secretary of Chongqing in 2007 was initially regarded as a demotion, Bo parlayed his position into an asset, Paal noted. Bo’s sweeping anti-crime campaign, affordable housing projects, and hukou experiments proved popular, and he promoted a Maoist revival that played on nostalgia for a simpler era.

  • Undone by his Deputy: No one could have predicted that Wang Lijun, Bo’s police chief and deputy, would flee to the U.S. consulate in Chengdu, Paal said. Whatever information Wang disclosed to the consulate remains closely guarded, but it may have contributed to Bo’s downfall.

  • Tensions Beneath the Surface: While Bo Xilai maintained his flamboyant air in NPC press conferences, central leaders moved quickly to contain the crisis, Paal explained. As the NPC concluded, Premier Wen Jiabao stated that Bo should “learn from his experience in Chongqing”, an unusually public reprimand. Soon after, Bo was removed from his position in Chongqing, and an internal document laying out the details of Wang’s flight was circulated among party officials.

  • A Tentative Victory: The forces of the status quo appear to have won a tactical victory against Bo, Paal observed. But the fact that party leaders have not revealed the specific accusations against Bo suggests that a permanent resolution has yet to be reached. 

  • Potential Disruption: The Bo Xilai affair could challenge the Communist Party’s attempt to institutionalize its leadership succession, Paal concluded. While Xi Jinping and Li Keqiang will almost certainly lead the next administration, the selection process for other seats on the nine-member Politburo Standing Committee could be thrown into disarray. A new party secretary in Chongqing will have to contend with Bo’s personal networks in what could be a messy battle.

Grading China’s Economic Reforms 

Premier Wen’s candid remark that the economic system is “unbalanced, unsustainable, and uncoordinated” provides a useful lens to view the most pressing issues facing China’s reform, Huang asserted.

  • Headline Indicators: The market has largely misinterpreted vital adjustments in China’s growth, trade balance, and exchange rate as proof of an economic downturn, Huang stated. The new target of 7.5 percent annual growth is a recognition that China must transition to a more sustainable developmental model. China’s deficit may decline to 1 percent of GDP in 2012, compared to 9 percent in 2008, but the net effect will be to reduce otherwise problematic trade imbalances. And with foreign reserves stabilizing, China has the opportunity to make its exchange rates flexible.

  • Incomplete Reforms: China’s fiscal and financial systems create disparities between urban and rural areas, Huang said. Relying on large state-owned banks for public financing naturally privileges wealthier, more creditworthy areas, promoting efficient growth but exacerbating inequality. Similarly, rising social unrest can be traced to state controls over land and labor. China’s migrant population, estimated at 180 to 250 million, makes up the majority of the labor force in many megacities, but still lacks basic rights due to the country’s restrictive hukou system.

  • Private Sector versus State-owned Giants:  The debate regarding the private and state-owned sectors has grown more contentious over the past decade. State-owned enterprises are profitable, occupy monopoly positions, and pose barriers to entry to the private sector, Huang explained.

  • The Way Forward:  To correct imbalances between consumption and investment, China will have to promote rapid urbanization, giving migrants hukou rights and thus a greater measure of social and financial security, Huang said. A more sustainable economy will also require advances in green technology through a more dynamic private sector. But the most challenging task will be coordinating simultaneous reforms: China cannot reform its exchange rate without reforming its budget and financial system, but the task of breaking through three different policy silos at once will be formidable, Huang concluded.

Shifting Trends in Defense Spending and Maritime Security 

This year’s NPC saw several important developments in China’s long-term defense budgeting and its approach to maritime security, Swaine noted.

  • A “Modest” Increase: China’s announcement that it would increase its official defense budget by 11.2 percent took many by surprise, Swaine stated. But he explained that, historically, China’s official defense spending has tracked closely with overall GDP, making up anywhere from 1.2 to under 2 percent of national output. This year was no exception, as China maintained a basic proportionality in the resources it allocated to the military.

  • An Improved Understanding: The U.S. Department of Defense has estimated China’s real military spending to be roughly 1.5 times its official budget, a contrast to past estimates that were as high as four times that of China’s official figures. The narrowing gap between the two figures—the official budget and foreign estimates—suggests that specialists are now able to assess China’s real military spending with a greater degree of accuracy, Swaine said.

  • Possible Trade-offs: Rising personnel costs, technologically-intensive capabilities, and China’s own expanding interests will place greater demands on China’s defense budget in the coming decades, Swaine said. Given the array of domestic challenges China faces, Beijing may at some point be forced to choose between social welfare and military spending.

  • China’s Maritime Claims: People’s Liberation Army (PLA) delegates to the NPC, including a former commander of the Nanjing Military Region, have proposed that China adopt a maritime basic law. The law would fill perceived gaps in international law, such as the rights of foreign militaries to operate in Exclusive Economic Zones—a key issue of contention between the United States and China. Such a law could also enable the PLA to more effectively defend Chinese territorial interests in the South China Seas, Swaine explained.

  • Reining in the “Nine Dragons”:  Other NPC delegates called for greater control and coordination of maritime activity, openly criticizing the central government for failing to restrain the “nine dragons”—the administrative entities who manage maritime disputes—from pursuing their own autonomous, and sometimes divergent goals, Swaine said. Such measures could include establishing a specialized maritime agency and forming a coast guard, enabling China to take a more integrated approach to disputes at sea.