China's Power Struggle: Central Government VS. The Provinces

The top decision-making body in China's central government is the State Council.  For years, the Council has tried to reduce overproduction in key industries like steel, aluminum, cement and sheet glass to avoid excess supply and to cut pollution by smoke-belching factories.  But opposition from the provinces and major cities has kept these reforms from gaining a foothold.  An added problem emerged 2 years ago - a slowing economy has been unable to absorb the excess supply, leading to wasteful stockpiling and loss of profit.  Since China is a one party Communist dictatorship, we must ask why doesn't the State Council simply enforce its will by calling in the military?

The answer lies in partial economic reforms brought in by Deng Xiaoping, Chairman of the Communist Party in the 1980's.  While political power was still held by the Communist Party, the government's central planning control of the economy was transferred to the 23 provinces and major cities.  Now, local officials ran industries, collected taxes and created their own economic policies.  So why don't they recognize the dangers of overproduction and pollution?  Primarily because any reduction would decrease taxes and increase unemployment - and no official wants to face local mobs of angry people.

Meanwhile, Premier Li Keqiang and the State Council have now formulated an even more ambitious plan.  They want to remake China's economy to become less dependent on heavy industrial production that wastes capital, generates excess supply and pollutes.  Their solution is to become more focused on consumer spending and service industries.  So the impasse continues.

What all of these players forget is that no economy can escape the law of supply and demand.  China right now is a great example of what happens when demand drops and supply keeps chugging along.  What they should do is take a market-based approach:  increase competition, free the power of the entrepreneurs and let the consumer market dictate production.  The half-measures brought in by Deng Xiaoping were a great start in dismantling central planning, but they won't complete the job.  It's ironic that China's state-owned companies, unleashed into the world in the 1990's have been successful in competing with local companies in North America, Africa, Europe etc.  The mother country would be wise to learn from their example!