In China, a Single Party Divided

By Marc Chandler

NEW YORK ( BBH FX Strategy) -- The controversy surrounding the demise of prominent Chinese official Bo Xilai has sparked much debate and speculation about Chinese politics. In that debate, there seems to be a misunderstanding about the way a one-party state works.

I grew up in Chicago. The Democratic Party has run Chicago for almost as long as the Communist Party has controlled China. The Democratic Party took control of Chicago in 1955. The Communist Revolution was 1949. From 1955-1976 Richard Daley was the mayor of Chicago. After an interregnum period, his son became mayor in 1989 and ruled until last year.

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The political battles in Chicago take place within the Democratic Party. As in other organizations, there are forces of movement and forces of order. The winner of the Democratic primary becomes the mayor.

In China, perhaps because they call themselves Communists, many observers think the party is homogeneous, but it is not. There are forces of movement and forces of order. A Financial Times columnist recently wrote about the possible threat to the post-Mao consensus. That consensus was not so much on substance as process.

A House Divided

There are two main factions for which the procedural consensus applied. First are the "princelings." These are the children of the revolutionary leaders. Bo was one of the princelings. He was the son of a revolutionary hero (one of the eight so-called Immortals). This second generation seems to believe that they "naturally" deserve to be among the leadership.

The second faction tend to be of humbler origins and work their way through the Communist Party Youth League. Premier Wen Jiabo comes from this faction. The procedural compromise is that the next premier is from the princeling faction. Likewise, President Hu Jintao is supported by the princeling faction. The procedural compromise is that the next president will be supported by the Youth League faction.

The Youth League tends to be more reform-minded and that reform includes some aspect of politics, without of course undermining the Communist Party's control. The princelings tend to be more concerned about the downside of the economic development and tend to harken back to the pre-1978 reform period.

What captures the imagination with Bo is that his sacking took place during the transition to what China calls the "next generation." The demotion of Bo is a victory for the forces of movement and reform in China as Bo represented a rear-guard action against the modernization of China.

China joined the World Trade Organization a little more than 10 years ago. The past decade has been relatively easy for China, especially compared with what the next decade likely holds. The new challenges are not just cyclical, relating to the slowing economy, local government debt (and SPVs), strength of the banking sector and the real estate sectors, but also more structural issues, like the work force set to peak in the next couple of years, rising wages (real and nominal) changing the competitive landscape and an economy well into the point of diminishing returns for fixed asset investment.

These new challenges make the forces of movement and reform in China more vulnerable. Like in Chicago, it is not always clear whether the forces of movement or order are "winning" and often there are pyrrhic victories that are quickly reversed. Investors need to continue to monitor the political developments in China and appreciate that all Communists are not the same in China just like Democrats aren't the same in Chicago.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.