

The Wens aren’t alone. Bloomberg previously uncovered hundreds of millions of dollars in assets belonging to the family of incoming Communist Party General Secretary Xi Jinping. The Financial Times documented the financial success of the families of seven top Chinese leaders. The family wealth of the top-Party cadre is both a major impediment to economic reform and fuel for any spark of social unrest.

The economic impediment stems from China’s re-embrace of state-led development. It is slowly being recognized that China started to move away from market-led development well before the financial crisis struck. In fact, the shift back to the state began in late 2002, when the current government of Hu Jintao and economic boss Wen Jiabao (and apparently their families) took over.

For example, China’s economy was balanced between investment and consumption in 2001. That balance has progressively tilted in favor of investment every year since then, a trend that is ultimately unsustainable.

Why has it persisted? Consumption is driven primarily by people; investment is driven primarily by companies. In China, companies are ultimately responsible to the Communist Party—which blocks competition, controls credit, and owns all land. State-owned firms in particular are directly run by Party officials. The system is rigged in favor of Party-backed firms, which has enriched the cadre and their families.

This situation would be volatile under the best of circumstances, most prominently if the Chinese economy were as vibrant as it was in 2004. But for corruption and nepotism to be so prominent in a period of economic weakness creates a witch’s brew of potential instability.

The protests leading to the 1989 Tiananmen crackdown began not with a call for democracy but in reaction to growing inflation combined with the perception of rampant corruption. The calls for democracy ensued from a belief that the Party was unable or unwilling to enforce needed rules upon its own cadre. And this occurred when Deng Xiaoping, a revolution-era leader, was clearly in charge and the gap between rich and poor in China was far smaller.

Unlike Hu and his predecessor Jiang Zemin, the incoming leadership was not picked by Deng. An attempt now to genuinely curtail corruption and nepotism would be extremely difficult. Previously, Deng could be used to break deadlocks, even after his death through those he personally anointed. The new group will have to painstakingly negotiate change with the natural tendency to compromise, delay, and muddle through. In an environment of cadre wealth and a weaker economy, this may not be enough to mollify popular sentiment.

The Party will select its new leadership November 8. Early next year, a new government will be formed. The new regime, headed by Xi Jinping, is supposed to be in charge for 10 years.

There has been intense speculation over whether the new regime will re-embrace economic reform and move back toward the market. The wealth accumulated at the top of the Party indicates that any such move will be angrily opposed. This is worrisome enough. It is also possible that, over the course of the next decade, the Party could be unable to respond effectively to rising social unrest.