As one of the four major ancient civilizations of the world, China has a long self-governing history, supported by a complex, well-established political and governance system. Understanding this system, from its historical development and core principles to key benefits and risks, is crucial as China continues to shape the global investing landscape.
Comments are edited excerpts from part one of our three-part continuing education series China: A Deeper Look. Learn how to earn CE credits now.
In its nearly 5,000-year history, China underwent many regime and dynasty changes, up until the founding of the Republic of China in 1912, which marked the beginning of its modern age.
Soon after, the Chinese Communist Party (CCP) was created by a group of highly educated intellectuals with the intention of building a strong, peaceful, and independent China after years of constant foreign invasions and civil wars under weak, corrupt governments.
By 1949, the CCP accomplished its goals of fighting feudalism and imperialism, establishing the People’s Republic of China (PRC) in October of that year.
Despite its mistakes—including severe political infights in the early 1930s, which led to the Long March; the Great Leap Forward from 1958 to 1960, which resulted in nationwide famine and deaths; and the Cultural Revolution, which drove the country to the ground politically and economically—the CCP has shown it can evolve as needed.
China’s centralized and multilevel governance system has been shaped by the need to serve a large and diverse population, which totals over 1.4 billion people and is the largest in the world. The country is divided into five main levels of governing bodies, as seen in the chart below.
China’s political and governance system is defined by four main characteristics: it is authoritarian; meritocracy-driven and elite-ruled; upwardly mobile; and pragmatic and success-driven.
The first governance characteristic, authoritarian, developed due to China’s population, vast and diverse landscape, limited resources, natural hardships, and times of war. In China, this way of governing is looked at as the most effective way to maximize collective interests, manage individual demand, politically and economically, and allocate needed resources.
The second governance characteristic is meritocracy driven. As a result of China’s focus on meritocracy and its long-standing bottom-up education and talent selection process—which originated from “Ke Ju Zhi Du,” an examination system created during the Sui Dynasty around 580 A.D.—China’s political and governance system is also elite ruled, with the most driven and qualified people (or the intellectual elite) chosen to become leaders. The modern-day equivalent of the education and selection process is called “Gao Kao,” which means college entrance exam.
Upward mobility is the third governance characteristic. Because no one group has maintained power for long in China, given the many dynasty changes throughout its history, upward mobility has been used to hone talent and govern the country. It’s still the case today with civil and college entrance exams.
There’s also the inherent paradox between an authoritarian, socialistic, top-down governance system and a bottom-up, market-driven, capitalistic economy.
China’s fourth governance characteristic—its tendency to be pragmatic and success-driven—is rooted in the country’s dominant Confucian ideology. Government leaders, past and present, tend to strive for better outcomes and employ a pragmatic approach to achieve them.
Governance Structure and Policymaking Process
Like its population, China’s governance structure is large, diverse, and well-established. It’s also a dual system composed of CCP and government tracks.
While the CCP leads all levels of government, though not always directly, its authority comes with full responsibility and unlimited liability. This track is organized and governed by CCP bylaws and membership totaled 96.7 million people as of 2021.
China’s government is accountable to a constitution and a series of laws and regulations, and in the government track, the National People’s Congress is the highest-ranked legislative authority. There are three key entities reporting to the National People’s Congress: administrative, judicial, and supervisory. The administrative entity carries out the majority of governing responsibilities and ultimately answers to the CCP Central Committee.
China’s policymaking process is enforced by every level, branch, and unit of the CCP and government tracks, though there are different hierarchies and levels of importance for different policies. Overall, policies tend to be enacted based on bottom-up needs and enforced via a top-down structure.
Policies tend to be enacted based on bottom-up needs and enforced via a top-down structure.
Many principles inform China’s governance system, but the primary mission of the CCP is representing the fundamental interest of the Chinese people. Even the founding members were ordinary Chinese people, and today, most are still part of the country’s working class.
The CCP is also committed to ensuring prosperity and stability for different population groups within China, but it’s important to note that this mission of serving the people was an inevitable outcome of China’s historical development from feudalism to socialism and highlights the different priorities and interests of Chinese people compared to Western societies.
The five pillars of Confucianism—the doctrine of mean, social order, collectivism, success, and individual virtue—are also important principles guiding China’s governance system. The Chinese people appreciate collective goals, which they believe will help the country flourish. And if the country flourishes, so do individuals and families.
Democratic centralism is a key principle as well. Incorporating both democracy and centralism into the decision-making process allows China’s governance system to reflect the voices of a broad spectrum of social groups and reduce costs of governing.
Incorporating both democracy and centralism into the decision-making process allows China’s governance system to reflect the voices of a broad spectrum of social groups and reduce costs of governing.
Benefits and Risks
The benefits of China’s political and governance system include efficient execution of top-down policies; effective pooling of resources to support its strategic goals, such as economic growth and development and technological advancement; comprehensive consideration and care for the country, people, and all stakeholders on a sustainable basis; and overall policy continuity.
But China’s governance system also has several inherent risks and structural challenges.
It lacks formal checks and balances, and CCP leaders have a strong and long-lasting influence over China’s political and economic development. It’s also complex and hierarchical, which tends to result in bureaucracy and inefficiency.
There’s also the inherent paradox between an authoritarian, socialistic, top-down governance system and a bottom-up, market-driven, capitalistic economy. While China has successfully managed this relationship over the last 40 years, this task may become increasingly challenging without meaningful political reforms as economic growth slows down.
Lastly, China’s system is materially different from Western systems, which has led to misunderstandings. This has both impacted global investors’ sentiment about the investment case for China and been a root cause of the geopolitical tension between China and the United States.
Understanding China Series
Part 1 | Politics and Governance
Part 2 | Economic System
Part 3 | Society and Foreign Policy
Vivian Lin Thurston, CFA, partner, is a portfolio manager on William Blair’s global equity team.
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