In their new book Holding China Together (Cambridge, 2004), Barry Naughton and Dali Yang assemble a formidable team of specialists to peer into the black box of Chinese politics. Herewith a review and the implications for China’s future.

“Municipal officials in Guangdong Province were informed that (to save farmland lost to burial plots) the proportion of cadavers cremated would be designated a Key Performance Indicator and tied to compensation.” –Holding China Together, page 24.

William Greider called China a “black box” in which one can find ample proof for just about any expectation. To see the truth in this look no further than the recent China literature, divided into two opposing and indeed contradictory camps.

On the one side are books like William Overholt’s The Rise of China or Ross Terrill’s The New Chinese Empire. In such books China is a coming political and economic superpower – indeed, the main threat to US global dominance and perhaps even US security.

On the other side is Gordan Chang’s The Coming Collapse of China. And academic works such as The Chinese Economy in Crisis and China Deconstructs. In this alternate universe, the “China threat” comes not from the country’s rising military power, but from the likelihood of an Indonesia-style meltdown or unmanageable political disintegration.

In a new book, Holding China Together, Barry Naughton and Dali Yang open the lid on the black box of Chinese politics. The result is sometimes dull – an endless barrage of statistics and detail. But, in contrast to the hysteria of China forecasts made via anecdote, this book reveals the hidden mechanisms by which Chinese politics actually works.

What quickly emerges is that the horror stories from the “China disintegrates” camp are not wholly without merit. The end of communist central control often creates a vacuum in which destructive forces thrive. Witness the political collapse of the former Yugoslavia; or the economic collapse of Russia.

No less in China. Economic liberalization caused the Chinese government to lose control of the country’s economy. The central government’s tax take fell from 40 percent of national output in the 1980s to 11 percent by 1995. Not due to tax cuts – even in famously tax-averse America, the tax share of GDP is 23 percent – but because the central government was losing its grip. Finance Minister Liu Zhongli sounded the alarm: “when the government does not have money, its words no longer count.”

Just as in Russia, declining central control revealed citizens’ capacity for greed. Corruption is always hidden and hard to document. But a clever reading of Chinese statistics reveals some shocking examples. In Shanxi Province, “energy fund” fees of some 280 million yuan were levied on coal exports. But official records reveal only 15 million yuan was actually collected. An astonishing 95 percent of the revenues went missing thanks to official corruption.

Facing dysfunction on that scale, how did China survive? The answer, the scholars in the book contend, is that the Communist Party maintained its integrity and control. Not through charismatic leadership or high-profile official doctrine – which is why trying to read the tea leaves of China’s leadership struggles provides so little insight. But rather, through a robust personnel management system, operating everywhere and always behind the scenes.

This may seem unglamorous. But it is also effective. Although the Communist Party, Chinese government, and People’s Congresses are officially separate, in practice, the Communists retained control over almost all government hiring and promotion.

This gave the Party a powerful tool to counter the threat of disintegration. When economic liberalization threatened to undermine central control, the Party created an elaborate transfer system to prevent any provinces from getting out of line. Scholar Zhiyue Bo documents sixty-nine cases of transfers of top-level provincial leaders between 1990 and 2002 – roughly the equivalent of the US president stepping in to swap the governor of Illinois for the governor of Michigan. Odd, but an effective means of nipping in the bud any single province’s growing political clout.

The Party also created an elaborate set of performance indicators and rewards. For instance, local Party leaders were evaluated on whether they had increased grain output, added infrastructure, and kept down population growth. Township governments were evaluated on increases in industrial profits, increasing sales of pigs, building more Party organizations, and maintaining public order, among other factors.

And the rewards for good performance were substantial. Susan Whiting finds that in Songjiang County, the Party leaders of the best-run town had salaries that were 66 percent higher than the worst-performing towns. Near Shanghai, she unearths the case of a village Party secretary who presided over an output decline and had his income docked from 6,000 yuan to 2,950.

Holding China Together documents another means of central control, also understated but also crucial. That is, institutional change. Fubing Su records the repeated failure of efforts by Beijing officials to shut down small coal mines to reduce excess coal production. Local officials, protecting their local mines, would go so far as to dynamite the mines shut when Beijing’s inspectors arrived and then dig them out again as soon as the inspectors departed. Beijing finally solved the problem by reclassifying revenue from large national mines as local revenue, giving local officials the incentive to protect the large mines instead of the small ones.

As the details add up, it becomes clear that those worrying about a disintegrating China can relax. The mechanisms of government are unspectacular but they work, a story told again and again across provinces and industries. Even in the chaos of the mid-1990s, there was little real cause for alarm regarding China’s political unity.

But Holding China Together is less reassuring on another question: the country’s economic stability. Dali Yang documents a sophisticated remaking of the central bank in his chapter on economic governance. And he and Yanzhong Huang examine cross-province data and show that as China’s bureaucracy becomes more sophisticated, it is able to take a more nuanced route to achieving the center’s goals – in this case, population control.

But what emerges again and again in the book is that China’s economy is spectacularly politicized. Economic problems often result from local Party officials disobeying the center; and these problems are solved by political means – new performance targets, for example, or altering political institutions.

To be sure, the Party has not slipped up yet. China sailed through the Asian financial crisis unscathed. But when the economy hits a true rough patch, are inherently clumsy political responses – Susan Whiting dubs them “high-powered incentives” – going to make the country’s economic problems better or worse? China is holding together. Whether it will stay on course remains to be seen.

This article was originally published on, before I sold the site to Roubini Global Economics.