本文发表在 rolia.net 枫下论坛Now comes the hard part
Apr 8th 2000

China looks set to change as much in the next five years as in the past extraordinary 20, says Dominic Ziegler
“IF YOU think,” says a high administration official in Washington, DC, “what will be required for economic success in the globalisation that is exploding around us—technically dynamic, information-rich, highly entrepreneurial—then the winners in that environment will be those able to provide at least the following...” He counts on his fingers. “Free access to global information and markets. Protection of physical and intellectual property. People able to speak and associate freely. A government that has sufficient legitimacy to feel comfortable joining the global economy. An educated population. And a rules-based polity...This is a set of qualities that does not conform to a highly authoritarian system.” That, put simply, is the case for political change in China.
In the past few years, two uncertainties about China have cleared themselves up. The first is that China’s central government has committed itself wholeheartedly, irrevocably and (to all but the dimmest apparatchiks) unambiguously to creating a market economy at home, tied to the world at large. This is not because China’s septuagenarian leaders, all former central planners, have become born-again liberals (although a surprising number of liberals are moving up through the ranks). Rather, the remnant Maoists have long been banished to the wings, from where they shout ineffectually from time to time. Meanwhile, the remaining dominant factions—whether their leaders are gung-ho reformers, cautious conservatives or nationalists who see economic success as the basis of future power projection—all agree on one thing: the Communist Party is history unless it can deliver growth. And for each of the past seven years now, China’s stellar economic growth has been slowing, risking unmanageable dissatisfaction amongst the people.
So Zhu Rongji, the prime minister, by temperament and training an engineer, not a free-marketeer, and popular neither with his peers in the Politburo nor with minions, has had his reforming way all the same. New sources of growth, he insists, have to be found by drastically (and painfully) shrinking the state. The 15th Communist Party Congress in the autumn of 1997 was a watershed. It marked the start of this new phase with the suggestion that tens of thousands of small and medium-sized state enterprises would be cast loose upon private waters, to float or sink. In the spring of 1999, guarantees that acknowledged the private sector for the first time were written into the state constitution.
Growth from heaven
The first two decades of reform have in essence been catch-up growth, gains that came from disbanding the agricultural communes and from allowing capital and particularly labour to be poured into low-end manufacturing and processing, a lot of it for export. The government did not really have to do anything to foster such growth, other than to keep out of the way. Double-digit growth rates were the norm, and fast growth created new jobs for workers made redundant by inefficient state-owned enterprises, migrants from the countryside to urban areas, and young people looking for their first job.






Now those high growth rates are gone, possibly for good. Growth is not only lower these days, but its “labour intensity”, according to Yukon Huang, head of the World Bank’s mission in China, has also slowed. What growth China is achieving is creating fewer jobs.
“We have run out of easy things to reform,” explains a senior Chinese official. Laying the foundations for the next phase of growth will be very much harder. The productivity of the land—and remember that two-thirds of China’s 1.3 billion people still live in the countryside—has almost reached its natural limits, given China’s severe shortage of water. Higher productivity in agriculture will come at the price of even more people leaving the land for urban areas—perhaps 8m-10m a year, for whom jobs will need to be found. Another 6m jobs need to be created in the cities just to allow for the modest natural increase in the urban population each year. Then there are the 4m-7m a year being thrown out of work by shrinking state-owned enterprises. That is a minimum of 18m urban jobs that the economy must create every year for the next few years. But from where? The woes of China’s industrial sector are well known, and the service sector has been so stunted by the country’s socialist legacy that it is only half the size expected for a country at that stage of development.
The possibility is there for a prolonged industrial slump and a restive population. For China’s leaders, that prospect tilts the balance of risk and reward in favour of serious structural change and market reforms—short-term pain that should, touch wood, lay the foundations for long-term growth and, they think, for the party’s long-term survival. Hence the radical commitment to a private sector that breaks free from a predatory state, to cleaning up the state sector over the next few years, and to membership of the World Trade Organisation.
After years of procrastination, China has at last shown itself to be serious about doing what is necessary to join the WTO. After NATO’s bombing of the Chinese embassy in Belgrade last summer, relations with the United States deteriorated sharply, and Zhu Rongji’s future was in doubt. Despite these tensions, China signed a trade deal with the United States in November to pave the way for WTO accession, possibly later this year. Membership will prove as momentous a step as Deng Xiaoping’s “opening to the world” in late 1978.
This helps resolve a second uncertainty, which is whether China can bring about a smooth and successful change to an open economy under a political system that remains highly authoritarian, indeed Leninist. The answer, as the American official suggests, is that it cannot. This survey will argue that in the next three to five years, China’s closer integration with the world economic order will increase the pressure on it to become much more open, liberal and receptive. That, in turn, will force profound changes on both its political system and its society.
Until now, China’s Communist leaders have been able to scorn predictions of political change, and to repress demands for it. They have two decades of growing prosperity to point to, certainly the swiftest, most extensive rise out of poverty any nation has seen. All the same, says a senior official in the Chinese government (one of the liberals), “Given globalisation, in all its meanings, the mainland Chinese are no longer satisfied to look back at the change in the past 20 years. They want to be like Chinese in Hong Kong or the US, or they want to be like Japan...Politicians are not given much time these days.” Not even authoritarian ones like China’s, with strong powers of coercion—although admittedly these are not as strong as they were.
Out into the unknown
Lazy editorial writers in the liberal West assume that a free-market economy can be introduced, as one exasperated Chinese economist puts it, with the wave of a central planner’s wand. And democracy, too, he might have added. This is not to say that free markets and accountable government in China are out of the question. Cultural impediments to them are not as serious as political ones. The country’s vast size, its poverty, and its legacy of a command economy surely need to be taken into account in guessing how swiftly and how smoothly free markets and democracy can be introduced—and how the interests of the central government and the varied periphery can be reconciled.
China’s sheer size requires an active effort to comprehend. The country’s 1.3 billion people make up one-fifth of the world’s population, but they live on only one-fifteenth of the world’s land. In fact, because a large part of China is inaccessible and inhospitable, the density in the main population centres is much higher than those figures suggest. Two-thirds of mainland Chinese live in the fertile eastern fifth of the country.
Mao Zedong once said that China was like “another United Nations”. At present it has 31 provinces, if you include the four municipalities with province-level status and the five “autonomous regions”, which (especially in the case of Xinjiang and Tibet) are anything but autonomous. In addition, there are the two “special administrative regions”, Hong Kong and Macau. Thanks to their closely policed territorial borders with the “motherland”, they really are special and autonomous.
Think, for a moment, of the provinces as if they were separate countries. By land area, the biggest is Xinjiang, three times the size of Spain, although with less than half of Spain’s population. China’s largest city, Shanghai, has five times the population of Singapore. The most populous province, inland Sichuan, has over 110m people, about as many as Japan. Guangdong, Hubei, Anhui, Hunan, Hebei, Jiangsu, Shandong and Henan each have between 59m and 93m people, that is, populations very roughly the size of Egypt, France or Mexico. The Guangxi Autonomous Region, with 46m people, is more populous than Poland, yet how many people would be able to pinpoint it unhesitatingly on a map? And this paragraph has mentioned fewer than half of China’s provinces.


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Or look at China’s GDP per head. The national average (excluding Hong Kong and Macau) was $735 at 1998 prices, which makes China somewhat poorer than Indonesia. That average, though, conceals great regional inequalities. The poorest province, Guizhou, has a GDP per head of $280, on a par with Bangladesh or Yemen. Sichuan, with a figure of $525, is level with Pakistan. Meanwhile, Shanghai’s residents, at $3,400, are up there with Turkey or South Africa. Now bring in Hong Kong, which at $22,990 has a higher per-head income than Britain, its former master. The dozing commuter on the Star Ferry is likely to be 90 times wealthier than the vegetable-seller in Guizhou.
Town and country
Regional inequalities, then, are a serious matter, and Beijing’s leadership is at last beginning to wake up to them. Equally serious is the wealth gap between city and countryside. In cities, 90% of households have washing machines and colour televisions. On farms, the most widely owned consumer durable, found in 70% of all households, is the sewing machine. Least remarked upon, but equally serious, are huge differences in wealth within the same locality, along with dire cases of poverty, even on the “prosperous” eastern seaboard.
Bearing in mind China’s sheer scale, variety and relative poverty, it is hard to see how a monolithic leadership in Beijing can prevail in the longer term, now that the Chinese people are no longer in thrall to Maoism. (And remember that even under Mao Zedong, during the Cultural Revolution, anarchy rather than central rule held sway for ten years.) Indeed, far from being monolithic, China’s political system, both in the regions and at the centre, is one of sharp elbows and centrifugal forces. Yet at the same time China has refused to break up into a warring mess of baronries, as many western experts had predicted.
Until now, the centre—that is, perhaps no more than 200 unelected, often elderly, men—have by and large kept control of the reform process and of the country as a whole. In simple terms, they have done so by devolving responsibility for economic growth to the local level, whilst enforcing party discipline by keeping control of the hiring and firing of local and provincial officials. Crucially, they have attempted to recentralise the collection of tax revenues and, more successfully, the rationing of credit to the state sector. With implications that have gone largely uncommented on in the West, a de-facto federal system may evolve in China that could possibly form the template for future political and institutional change. It could even help solve what is currently the biggest threat to the region’s security: the question of Taiwan.
Predicting that political change will come is the easy bit; predicting how it will come about is harder. And the outcome will not necessarily be happy. Integration with the world economic order will also mean more opportunities for friction, aggravating the sores of China’s formerly centralised economy. The opportunities for corruption that will arise from state assets being stripped by officials and managers of state enterprises are also a cause for pessimism.
China’s history is full of shimmering metaphors, parallels and examples that usually help to throw light on current events. But this time, history offers no guide to what happens next.

Private salvation?
Socialist China has the world’s brashest capitalist economy
UNTIL not long ago, the most famous exports of Zhongshan district in Guangdong province were its people: the first settlers of San Francisco in the mid-19th century, coolies to Hawaiian and Cuban sugar plantations and, more recently, those who fled Mao-made famine and political upheaval to make their fortunes in Hong Kong. The flat land of the Pearl River Delta, abundantly fertile all year round, is among the world’s most intensely farmed. Yet even during benign times, the land produced more people than it could feed.
Now, many of the paddy fields in Zhongshan and surrounding districts have been turned into factories where poor migrants from inland provinces flock to work. Most of them are young women, modern indentured workers who sell their labour to factory owners on terms that do the girls few favours: six months’ salary withheld, and forfeited if they leave before the year is out. For them, it is worth it. When they return to their villages after a few years, they have money, some experience of the outside world, and a better chance to choose a good husband. As for the factory owners, who come from coarse, Cantonese peasant stock, they are rich beyond their ancestors’ wildest dreams.







Some 2,000 kilometres (1,250 miles) to the north, central-government officials will inform you in purest Mandarin that the private sector is from now on to be “an important part of the socialist market economy, consistent with Marxist-Leninist-Mao-Zedong Thought”. They would not know a double-entry ledger if it stared them in the face. Meanwhile, in the Zhongshan village of Guizhen, Mr Wu, the local party secretary, apologises for his poor command of Mandarin, the official language. It is clear that his career depends not on fawning over his party seniors, but on providing whatever municipal help is required to the raw capitalists who have turned Guizhen village into a boom town. If the state sector ever had a presence here, it has now vanished. Zhongshan and the neighbouring districts of Panyu and Shunde are dominated by private enterprise. Even the few remaining “collectives” and “township and village enterprises”, Mao-era creations that somehow survived in the reform era, are throwing off their disguises and admitting to being privately run.
In Guangdong, people do not hide their light under a bushel. “Guizhen: Lighting Capital of China”, proclaims the sign beside the highway into the village (more of a town), which two decades ago was an unpaved track. Factory after factory, every one of them advertising light fittings, lines the road. In town, hundreds of shopfronts display their variations on a theme: street lights, chandeliers, bedside lights, halogen lights, lights of any sort, from the modern to the eternally tasteless. Guizhen has 60,000 registered inhabitants, says the party secretary, Mr Wu, frantically talking on his cellphone, and though there are officially 1,000 lighting factories, “there are also 600 or so underground ones...they all count.”
One resident in every 40 men, women and children, then, is a factory owner, and that does not take into account the wholesalers and shop owners. On top of that there are some 40,000 migrant workers. It is an intensely competitive industry. The Guizhen factories on average change their designs every fortnight. The specialist designers of light fittings have to come up with three new ideas a day. In return, they are paid 600,000 yuan ($72,000) a year, many times the salary of China’s prime minister.
Since the first factory opened in 1986, little-known Guizhen has captured 46% of China’s total domestic lighting market. One in every two light fittings you see in China has been trucked out past that bragging highway sign.
The petty capitalist road
Historians will point out that Guizhen and similar places have picked up the thread—brutally severed by Mao—of a kin-based petty capitalism in China that goes back hundreds of years. In Beijing, old street names still recall the cluster of like businesses for which each alley was famous: Silk-Brocade Hat Alley, Dry-Noodle Street, and so forth. In southern Guangdong, the model is amplified by an earthy appreciation of money (but not always its conspicuous consumption) not matched in the north, and by a fierce sense that someone else’s gain is your loss. As a Zhongshan official puts it: “Once one person in the village starts to earn money, then everyone piles in. And don’t expect brothers to co-operate. They’ll compete. Even fathers will with sons.”
Such natural clustering has also been helpful in dealing with the legacy of socialist planning. “In the planned period,” says another Zhongshan official, “production and sales were all regulated. It became much more complex after reform...People didn’t know what the demand was, nor where it was coming from. So gathering together was a good way for small enterprises of adjusting costs and production to demand. Also, customers at least knew where to go to find the market.” Intense specialisation chased out less competitive manufacturers of other goods from the local market. Guizhen used to have plants making clothes and shoes, but these have shut down. Other townships specialise in such things now—for instance, nearby Nanhai in textiles, and Panyu in sneakers. “But the point is,” says the official, taking from his pocket a disposable cigarette lighter, no doubt made somewhere nearby, “with just one small product you can reach a big market.”
The question the astounded visitor asks himself is this: now that the government has blessed the private economy, will what is happening in Zhongshan become a model for the rest of China? There is ever less reason why not, though some places will always have a better temperament for business than others. Aside from Guangdong province, the city of Wenzhou, south of Shanghai, shielded from the socialist hinterland by a ring of mountains, is famous for its hustling private entrepreneurs. Early on in the reform period, Wenzhou established itself as the world’s undisputed capital for...buttons. It now also produces more sophisticated things, such as electronics, but as with Guizhen, production always springs up in local, highly competitive clusters.
Other regions are already copying this “coastal model”, and many will succeed. Labour comes cheap in China, and as for capital, it doesn’t take much. The “Wenzhou model” could, with luck, spread throughout China, providing an engine for local economies. Too much emphasis is usually laid—by Chinese policymakers as well as by foreign businessmen and media—on China’s strength as an export machine. China is so big that its economic potential might more usefully be compared with continental America’s (driven by domestic demand) rather than Japan’s (driven by exports).
So just how well has the private sector done since its first, tentative and often disguised reappearance? Splendidly, by all accounts; but measuring its size is tricky. In the absence of hard data, estimates have depended largely on analysts’ views about China’s prospects at any particular moment. At the height of the euphoria about China in the early 1990s, some observers—including The Economist—thought the private sector might already account for as much as 75% of the economy. That was far too optimistic, and the mood may have swung too violently in the opposite direction: some people now put the private sector at only 25% of total output. More considered work by the China Economic Quarterly (CEQ), an independent publication, puts the private sector somewhere between those two extremes, at a little over half of the economy. If true, that would still be a considerable accomplishment for a form of ownership that two decades ago did not exist.
Farming has been privatised almost completely (except for land ownership, though land is let out by the state on ever longer leases). Although agriculture is no longer the dominant part of national output, about half of China’s 700m workers are engaged in farm-related activities. That helps to explain why fully three-quarters of China’s workers are in private employment.
The contribution of the private sector to industry and construction is harder to calculate, in part because many businesses classified as collectives in the official data are really private firms in disguise. CEQ guesses that the private sector contributes about 50% of industrial production. A large chunk of the private output comes from investment by overseas Chinese businessmen and multinationals.
At first blush, the service sector appears to be predominantly private. Urban China is now crammed with boutiques, private restaurants and all-night hairdressers. Beijing and other big cities have whole districts given over to private computer-hardware and software businesses. One statistical problem is that a lot of this private activity takes place in the black market and therefore goes unmeasured. More seriously, despite this bustling and highly visible aspect of private enterprise, large swathes of the service sector are off-limits to private firms. The state has a near-monopoly in telecoms, banking and distribution. According to CEQ, private firms have only 37% of the service economy.
The private sector’s future potential is even harder to guess. Certainly, the continued strength of the state sector is a huge constraint. Until recently, most economists and policymakers had hoped that it would sink under its own losses, and that the private sector would simply take its place. One day China would wake up to find the state sector gone, entirely replaced by vibrant private enterprise.
This is clearly not going to happen. True, the state sector has shrunk dramatically, and continues to do so, to judge by the number of urban workers it is laying off. Yet state enterprises still command a disproportionate share of lending by the big four state banks (around three-quarters of the total), making it hard for private firms to get a look-in.
Moreover, the state still monopolises swathes of the economy. And where private firms are not kept out by the state, competition is dulled by local protectionism. For instance, last year the city of Wuhan, which produces cars in a venture with France’s Citroën, slapped duties of nearly 100% on Shanghai-produced Volkswagens. Shanghai had started the war by taxing cars not made locally. Local protectionism finds another outlet in local courts, which are unwilling to rule against local companies in commercial cases, or to enforce judgments where wrongdoing has been too blatant to ignore.
The inadequacies of the law in general, as well as all the other institutions that referee a market economy, are less immediately obvious, but they impose perhaps the biggest constraints on private-sector growth in China. The law and other commercial rules, or at least their very partial enforcement, clearly favour the state. And the current bankruptcy law is weakly written and poorly enforced, putting creditors at a disadvantage.
But just assume for a moment that the entrepreneurial sector operates in a private paradise, with no state sector to get in its way. How adequately does the present legal system protect property rights, support contracts and ensure the quality of corporate governance that protects owners from being ripped off by their managers (as the state is currently being ripped off by its managers)? It is a fair bet that, whereas small, family-run private enterprises can proliferate in China, their growth into more complex organisations will be held back by the disastrous legal inheritance of socialism.
In Guizhen, the party secretary, in his atrocious Mandarin, confirms that the problem with the local lighting companies is their technical and managerial backwardness. If Guizhen is to win world markets, the firms will have to find economies of scale through mergers and better management. Yet how many of Guizhen’s factory owners trust others sufficiently to pool resources with them? Primers for westerners doing business in China invariably emphasise the importance of guanxi (relationships). Yet guanxi merely implies that in the absence of law and defendable property rights (see article), people do business with those they know and trust. Personal relationships matter in a low-trust society, and you can’t get much more low-trust than a place where fathers doubt their sons.
Tangled web

GUANXI—relationships or connections. Ah, now there’s a mystical concept. Very Chinese. If you don’t have the patience to learn about guanxi, old boy, you might as well pack your bags and go home.
But thinking about guanxi as some kind of spiritual ectoplasm is not particularly helpful. Shuhe Li and Shaomin Li, two economists at the City University of Hong Kong, have looked at it in economic terms instead. What follows is based on their ideas.
In advanced economies, companies do business within a rules-based system. This means that business is generally conducted in a publicly verifiable manner (ie, using contracts), under laws that are widely known and consistently enforced. Although it may not be apparent to those operating in a rules-based system that has grown up over decades or even centuries, such a system carries large fixed costs. That is, the establishment of the legislation and the judiciary, the drafting and interpretation of laws, and the implementation of contracts all involve high sunk costs. On the other hand, the incremental cost of enforcing an additional contract is loose change. Once such a system is in place, people take it for granted.
China’s is not a rules-based economy, at least not yet; it is still an economy based on relationships. Business transactions are made on the strength not of contracts but of personal agreements. Transactions are purely private. They are neither verifiable nor enforceable in the public sphere.
How, then, do you avoid being ripped off in such a system? You thoroughly check a person’s background, his status and his assets. If he cheats, you know how to seize his assets, blackmail him or, if you have to, kidnap him. This sort of governance (a kind of heavily armed tit-for-tat) can be highly effective in forcing two parties to keep to an agreement, say Messrs Li.
A rules-based system needs a high and costly level of public order. A relations-based system needs only minimal public order. All you need to know is that you are unlikely to be mugged on the way to the bank, and that the bank manager is unlikely to run away with your money. On the other hand, the marginal costs of finding, screening and monitoring a potential partner are extremely high. For instance, the relationships have to be managed personally: you cannot afford to delegate the task. A telling difference with the West is that executives in China tend to answer their own phones.
Family first
Given this high marginal cost of cultivating new relationships, it makes sense to do business first with close family, then with the extended family, then neighbours from your home town, then former classmates, and only then, reluctantly, with strangers. This is how market reforms spread in China during the 1980s and 1990s. Instead of incurring the high fixed costs involved in setting up a rules-based system, the country took the cheaper route of relations-based development. That led to an explosion of markets, and to a rapid division of labour. That, in essence, is what the “Chinese miracle” is all about.
The trouble is that in the absence of a rules-based economy, those splintered local markets cannot merge into regional, national or even international ones. Moreover, they create immense economic distortions through corruption and the misallocation of resources. By trying to push through tough economic and legal reforms, the Chinese government is attempting to switch from relations-based to rules-based governance. It is trying to break the cosy links between banks and their state customers. It is cracking down on the many smuggling rackets that are simply a form of relations-based trading. It is trying to disengage itself from its over-close relations with business. And it is attempting to produce laws for the market economy, not the socialist one.
Beware, foreigner, beware. The closest scrutiny is needed just at the point where guanxi appears to become redundant. As markets expand and the economy becomes more complex, the average cost of relations-based governance rises whereas the cost of rules-based governance falls. Yet the transition from the first form of governance to the second is not as smooth as outsiders like to believe. They see the introduction of new rules that protect investment. Insiders see a state of flux created by changing relations among market participants. Outsiders see an opportunity to invest. Insiders see an opportunity to loot. This may help explain, say Messrs Li, why you are finding it so tough to do business in China right now.

The honeycomb of corruption
A little reform in the state sector has proved a dangerous thing
“AT LEAST under Mao there was no corruption,” sighed this correspondent’s Beijing neighbour as he griped about the local police. Not because man lived in prelapsarian bliss, but because Mao’s egalitarian state enforced poverty on all, so there was little wealth to steal. Even if someone managed to get hold of public assets, he would find it well-nigh impossible to turn them into cash. During the Cultural Revolution, it was often for possession of things like cigarettes and liquor that Red Guards persecuted “corrupt” high party officials.
Today, a puritanical drive against official corruption recalls those earlier days. Central leaders rail against the cancer of corruption and promise to excise it. Their indignation is echoed in the official media. An audit of embezzlement in the first half of 1999 which the central government published last August showed that some 20 billion yuan ($2.4 billion) had been diverted from the state into personal bank accounts. Another 1 billion yuan had been bilked from the pension funds of the state railways, post and telecommunications. About 6 billion yuan of pension funds from the state coal bureau had been misused. And so it goes on. Moreover, this is merely what the central government says it knows about, which is less than it should. The party’s official mouthpiece, the People’s Daily, says that 120 billion yuan of state funds were misused (on a wider definition) in the first half of last year—equivalent to one-fifth of the central government’s tax revenues.
Leaders promise to crack down on corrupt officials, but they face an impossible task. Very occasionally, a high official is executed to set an example. Coinciding with the annual meeting of the National People’s Congress in early March, a former deputy governor of Jiangxi province, Hu Changqing, was tried for taking $650,000 in bribes, and shot for his crimes. He was the most senior official to be executed in half a century of Communist rule.
“No matter what unit or person is involved in the case, we must investigate to the end. Our hand will not falter,” said China’s top judge at the time. Fine words, but are they true? The central leadership often publicises the misdeeds of low-ranking officials, who are described as “morally corrupt”, as though they were suffering from a personality disorder, when the real problem is systemic rot. Yet corruption in high places is more difficult to tackle: if too much attention is drawn to it, the political system itself might be called into question.
The help-yourself economy
Take the giant smuggling racket in the coastal province of Fujian discovered last year, involving hundreds of government officials and goods worth perhaps $15 billion. Mr Zhu, the prime minister, is rumoured to have offered President Jiang Zemin his resignation last summer, furious that the case was not being pursued with sufficient zeal. News of the racket began to be aired in the foreign media. High officials in Beijing with Fujian connections were implicated. Yet when unsanctioned reports of the racket began to appear on the websites of some of the more adventurous mainland newspapers early this year, they were quickly slapped down.
The racket has the makings of China’s biggest-ever corruption case. Some 400 investigators were dispatched to find out what was going on. Since then, silence. No doubt scores of local officials will be tried, and perhaps some of them executed. But because some high officials also had their snouts in the trough, this case needs to be handled with extreme delicacy. Business China, a sister publication of The Economist, forecasts that the party will eventually trundle out an official explanation, but in a way “least harmful to its interests”.
Deng Xiaoping once said it is inevitable that when you open the window, the flies come in. X.L. Ding, an economist writing in the excellent China Journal, published in Australia, prefers to take his analogies from bees. In pre-reform urban China, he says, the economy resembled a giant honeycomb of small, bounded cells of inward-looking activity. This structure had three main features. The first was state ownership, which kept things simple. The second was the supervision of state firms by the local government of wherever they were operating. In effect, local governments served as the guardians of national property. The third was that, in a command economy, there were few transactions between firms, and those few took the form of material allocations, rather than monetary exchange.
All this changed with reforms that have brought great complexity to the state sector’s relations, both internal and with the outside world. Once the boundaries between formerly separate cells of economic activity get blurred, the government’s chain of control over its vast stock of national assets becomes paralysed. The result, says Mr Ding, is that “managers of Chinese state firms essentially have ended up capturing a sizeable portion of the widely scattered public property.”
That makes it hard to argue that 20 years of Chinese market-oriented “reforms” to the state sector have really succeeded. They started in the 1980s with the introduction of the “contract-responsibility” system that allowed enterprises to sell their goods for profit in the open market once they had fulfilled their quota under the plan. It was the cue for quantities of state goods to leave the factory by the back door, with the proceeds kept by the managers. For much of the 1990s, modern “scientific” management was praised, and managers were given more autonomy to generate profits. They were not, however, penalised for racking up losses, which remained the state’s responsibility. Unscrupulous managers have been able to milk their companies’ assets through shell companies and subsidiaries.
New milking opportunities presented themselves with the Communist Party’s endorsement in 1997 of a “shareholding system” that would allow small and medium-sized state firms to be turned into companies with mixed public and (sometimes majority) private ownership. Small state firms were soon being privatised at a frantic pace. Managers would often bully workers into buying shares, forming nominal “collectives” to disguise what was going on. When the central government tried to slow down the process, outside observers said China’s leaders were backtracking on reform. More likely they realised, horror-struck, how easily state assets were being pilfered.
Reforms have not been as disastrous as in Russia, where the theft of state assets is an honoured pursuit; on the other hand, Russia launched a full-blown programme of privatisation, which China is wary of copying. So Chinese officials and managers have had to use more imaginative alchemy to turn state assets into private property. But whatever the method, says Mr Ding, what has been done to transform national assets into private wealth in China is little different from what Ferdinand Marcos did in the Philippines, or what ex-President Suharto’s cronies did in Indonesia. That should be a warning to China’s Communist rulers.
To be fair, it is not just because of corruption that China’s shrinking state sector, now making up less than half of the economy and falling, contributes a disproportionately large and rising share of the country’s problems. Even where there is no overt corruption, state ownership involves a wasteful allocation of resources. The reforms have left the state industrial sector with a mess of renegade government agencies and unco-ordinated, or unenforced, regulations. Edward Steinfeld*, of the Massachusetts Institute of Technology, describes it as “something of a Dodge City atmosphere. There are few rules, few responsibilities, strong preying on the weak, and a tremendous amount of waste.”
It would be nice to wave that magic wand, privatise everything overnight, and decree a market economy into existence. But would the change of ownership help? Or might it make matters worse in an economy with few rules? As Mr Steinfeld argues, there is little point in worrying too much about who owns an economic unit before the institution of ownership itself has been firmly established.
*“Forging Reform in China: the Fate of State-owned Industry”. Cambridge University Press, 1998.
Whatever it is, we can’t afford it
China’s government finances are shaky
FROM the government’s point of view, the cost of state-owned enterprises is unsustainable. That lesson was learnt after the economic boom of the early 1990s, an indiscriminate lunge for economic growth urged on China by an ancient Deng Xiaoping to put the trauma of the 1989 Tiananmen crackdown behind it. Investment soared, but much was wasted. Paddy fields were smothered with concrete and declared “economic zones”. Luxury buildings went up for which there were no customers. State enterprises produced larger quantities of goods that no one wanted. The banks printed money, making inflation soar to a peak of 28% in 1994. But government finances remained in a parlous state.
Much of the government’s economic policy since has been designed to avoid a recurrence of the inflation nightmare. Like Germany, which has never forgotten the hyperinflation it suffered after the first world war, China too has collective memories of runaway prices, in its case in the late 1940s. Indeed, the casual handling of inflation by the Kuomintang, the nationalist opponents of the Communists in the civil war, helped bring the Communists to power in 1949. Half a century on, it can be argued that Zhu Rongji and his economic team tamed inflation rather too brutally. For the past two years prices have been falling, though the worst now seems over.






Yet China’s inflation was a bigger threat to future prosperity than its deflation, and two institutional changes have put the government in a sounder position to prevent its reappearance. The first is an overhaul of the tax system in 1994, which for the first time gave the central government first grab of the revenues collected in the provinces. In many ways, a government measures its authority by its ability to tax and spend. Yet the government in Beijing seemed incapable of collecting an adequate amount, with annual revenue equivalent to a mere 11% of GDP (compared with, say, 31% for America). The figure has now crept up to just over 13%, a slow step in the right direction.
The second move will perhaps prove the more important: a restructuring of the banking system that prevents state enterprises getting easy money. China’s central bank, the People’s Bank of China, was organised along the same lines as other central-government agencies, which meant that nearly every level of government across China had its own central-bank branch. This was usually answerable to the local party barons, so it often became the piggy bank for their pet projects.
That has now changed, because the central bank has been reshaped into nine regional branches. The rearrangement cuts across local party lines, and allows the People’s Bank better to monitor the branches of the four state banks, which also faced pressure to supply credit to inefficient local state enterprises. One Beijing executive of a state bank tells the story of a meeting he had with his counterpart at a provincial branch, along with the provincial governor. He found the two of them sitting next to each other and opposite him.
Squeezing the banks
The central government is now taking the legacy of socialism—1.2 trillion yuan of bad loans—off the state banks’ books. In return, the banks are under intense moral and financial pressure to behave more commercially. In January, the governor of the People’s Bank, Dai Xianglong, an ally of Zhu Rongji, told the state banks that they had had their last dinner. That means the state enterprises have had theirs too.
The loans are being put into “asset-management companies” that are supposed to restructure, repackage and sell the loans over a period of ten years. The government hopes it can recover almost one-third of the loans that have gone sour. That seems wishful thinking, particularly since no proper market exists for selling these assets. One day there will have to be a reckoning.
Nicholas Lardy of the Brookings Institution in Washington, DC, does a back-of-the-envelope balance sheet of the Chinese government’s finances. On the liability side, there is the government’s outstanding debt, equal to 20% of GDP if treasury debt is taken into account, as well as the debt forced on the four state banks to finance the government’s non-commercial lending by “policy” banks. Next, there are the state banks’ non-performing loans. The government has acknowledged 1.2 trillion yuan of them, equivalent to 15% of GDP. Mr Lardy reckons the real figure, including bad loans elsewhere inthe system, may be about double that. Then comes a huge future bill for urban workers’ pensions, the responsibility for which is being shifted from state enterprises to government—say 50% of GDP. In all, the government’s liabilities are around 100% of GDP.
What of the asset side of the balance sheet? Some economists think there is much that can be privatised, but caution is in order. For a start, there are still intense ideological objections to selling control of the country’s “strategic assets” in telecoms, energy and transport. And what are they worth anyway? PetroChina is seeking to float a minority stake on the New York Stock Exchange, but fund managers initially were not keen on the idea. After all, a big chunk of the money raised is meant to go on paying pensioners, whereas western institutions like to see their money being put to more productive purposes. True, the $3 billion listing of China Telecom caused much fanfare in Hong Kong over two years ago, and its shares have since soared. But that, for once, is a company in a growing, forward-looking business, without a pensions legacy, and with a near-monopoly. The notion of selling China’s under-invested railroads and urban-transport networks, says one western economist, is a “pipedream”. That leaves China’s annual tax revenues (13% of GDP, of which nearly one-fifth goes on paying interest on government debt) as the main asset.
If the government can prevent the state banks from making any new bad loans, says Mr Lardy, and if tax revenues continue to rise by 0.6 percentage points of GDP a year, as they have recently been doing, then the central government may well get out of its fix. Government debt will peak at 60-70% of GDP, a high but still manageable level. But should bad loans increase or tax revenues fail to go on rising, the debt ratio will spiral out of control.

Country cousins
Discrimination against rural migrants is China’s apartheid
STATE enterprises, the 1997 Party Congress decreed, had to sharpen themselves up for the market, and that meant “optimising” their workforce (ie, sacking large chunks of it). The state banks reinforced the message by starting to cut credit. As so often in China, these official moves lagged behind what was already happening in the real world. As early as 1995, the phrase xia gang—literally, those who “leave their post”—had became common parlance. The term covers people who are sent home on nominal pay, though not yet officially sacked. Similar euphemisms are used for other categories of people whose jobs have evaporated. There are those “waiting for work” (though they may have to wait a long time); “early retirees”; and those “absent from their posts”. In a socialist country, unemployment is not allowed to speak its name. That is why China’s official unemployment rate, at 3.1% of the urban workforce, is absurdly low.
The heartlands of the new unemployment are the north-eastern provinces of former Manchuria, where most of the old heavy industry is concentrated. The almost feudal dependence of the urban proletariat on its state-enterprise employer is hard for westerners to comprehend. The enterprise pays your salary, provides your flat, sends your children to a company-run school, puts you in a company hospital when you are ill, pays your pension and buries you. Or at least it did, until fairly recently.
But now the old relationships have changed dramatically, according to a study of unemployment in north-eastern Liaoning province by Antoine Kernen and Jean-Louis Rocca (published in China Perspectives, the fine house journal of the French Centre for Research on Contemporary China). In 1995 Liaoning had an urban working population of about 12m. The authors calculate that in the West about 329,000 of these would be classed as unemployed, including young people looking for their first jobs. By the end of 1996 that unemployment total had risen to 800,000; by the end of 1997 to 1.8m; and by the end of 1998 to 2.2m, or 18% of the labour force. It is no doubt very much higher today, if only because 400,000 people were officially scheduled to be laid off in 1999 and this year. So much for the socialist paradise.
In the north-east, strikes, sit-ins, petitions and even factory occupations have multiplied. Yet so far the unmanageable social unrest predicted has not materialised. That may be because, despite the lack of jobs, this urban proletariat is better off than it appears at first sight. Almost all of these “new poor”, for a start, keep their state housing. And where state enterprises are walking away from their welfare role, municipal governments are stepping in. Messrs Kernen and Rocca show how all the old mass organisations of Communist control—the trade unions, the All-China Women’s Federation, the residents’ committees, and so forth—have been transformed into providers of social services, and even of charity. Municipal governments have a new mission: to organise retraining and to find jobs for the locals.
Even unemployed state workers are tied to one place: by their housing, their welfare arrangements and the hope of a new job. Villagers in the countryside, however, are on the move.
Chinese farmers have had a raw deal for much of the recent past. Soon after the revolution, Mao and his colleagues smashed the landlords and gave their land to the peasants. Yet they quickly appropriated any surpluses the peasants managed to produce in order to build up heavy industry. This culminated in the disaster of the Great Leap Forward (1958-61), which caused a famine killing 30m-odd Chinese. Forced communisation continued apace, and output and incomes stagnated or fell. Relief came with the disbandment of the communes, beginning in the late 1970s.



Migrants tasting bitterness



This was followed by a period of liberation and, by previous standards, enrichment. Farmers who stayed on the land were able to grow for profit. Others sought work in the local township and village enterprises, quasi-collectives that thrived in an unregulated environment; or they made their way to the coast to work in the processing plants of foreign joint ventures, or in factories like those at Guizhen. Increasingly, too, rural migrants are doing the urban classes’ dirty work in the big cities. In Beijing the construction workers are from Shandong province. The nannies are from Anhui or Hunan. The rubbish collectors are from Henan. And the prostitutes, well, they are from everywhere.
You can tell the migrants who have newly arrived in the cities not just from their dress and from their rather dazed look, but also from their size. Throughout their lives they have taken in many fewer calories than the townies. And now that they have come to town, they are badly treated everywhere. Under national legislation, overtime should be paid at a rate of 50% above that for normal hours, and be limited to 36 hours a week. But the migrant girls in Guangdong factories are generally worked for 12 hours a day, seven days a week, without bonuses for overtime.
Pun Ngai from the University of Hong Kong worked for a year on the production line of an electronics factory in Shenzhen with owners in Hong Kong in order to learn about the dagongmei, literally, “little-sisters-doing-labour”, or young working women from the countryside. Her absorbing study, published in the China Journal, describes how the factory regime sets out to turn the young women into modern “working girls”. Often the girls themselves share the same desire. But the process is rough. In a typical incident, Ms Pun one day accidentally caused a product to be scratched. The (male) line manager turned not on her, but on the latest newcomer, an 18-year-old fresh from the countryside. “What the hell are you doing...Such a big scratch here. You know you’re not ploughing a furrow, don’t you? These products are very expensive, you couldn’t pay for this even if you worked in the fields for a year.” Turning to Ms Pun, he explained: “These village girls are always like that, difficult to teach.”
These, though, are the better-off. Their employment is legitimate, and they return home rich by village standards. The migrants to the cities, such as the Henan rubbish collectors in Beijing, live life on the fringe of urban society. They do the menial jobs—as janitors, street-sweepers and so on—that the laid-off workers from state enterprises refuse to take.
Rough justice
More than any other class in China, rural migrants suffer the disdain of city-dwellers and the arbitrary justice of the authorities. One example is a village on the outskirts of Beijing where some 50,000 migrants, many of them from the famously entrepreneurial city of Wenzhou in Zhejiang province, settled over the years to produce much of the capital’s clothing. In 1996 a quasi-military operation of nearly 5,000 armed police and soldiers emptied the village and razed the buildings.
Before last October’s celebrations of the 50th anniversary of the People’s Republic, 300,000 migrants—including beggars, prostitutes, drivers of three-wheeled carts, children and the mentally ill—were expelled from Beijing. Many were kept in “welfare” centres more akin to detention camps. These are at the heart of the authorities’ “custody and repatriation” policies, which sanction arbitrary detention that bypasses the judicial process. Human Rights in China, an organisation based in New York, estimates that local policemen use “custody and repatriation” to lock up several million rural migrants each year. They also often impose arbitrary fines. Even if a migrant’s papers are in order, when a policeman heaves in sight the wisest thing to do is to pedal the other way.
Nobody knows exactly how many economic migrants there are, but the number is huge: estimates range from 80m to 130m.Their presence in cities is a measure of how Maoist controls over people’s movements have loosened. But migrants still lack many privileges conferred on urban residents by their hukou, or household registration. Without a hukou, for instance, you cannot get access to schooling, health care or housing. That is why migrants rarely bring their families with them when they seek work in the cities.
Treatment of the migrant poor in China today carries echoes of England’s “deserving poor” in the 18th and early 19th century, rendered landless by the acts of enclosure and harshly treated by the authorities. Jeffrey Wasserstrom of the University of Indiana sees historical parallels closer to home for China: the late-19th-century influx of rural migrants into the foreign-dominated treaty ports, particularly Shanghai, there to work in satanic mills.
Certainly, the discrimination against the country-born is China’s form of apartheid. It is an offence against human rights on a much bigger scale than the treatment of the tiny handful of dissidents dogged enough to speak up against the state.

The return of the “four olds”
WANG WANJUN, with his closely cropped hair, his blue peasant’s jacket and his quiet dignity, is a rural migrant, even though he has got no further than his provincial capital. Nine years ago he left his village in south-western Guizhou province, a beautiful but desperately poor place, for the city of Guiyang. The capital remains a backwater where rural folk sell baskets of coal at the door. Mr Wang and his wife opened a stall at the Red Side vegetable market, and found a single room to live in. They led a tolerable, if not a comfortable life.
Two years ago, Mr Wang was caught sprinkling water over his vegetables outside the market to make them look fresher, in violation of municipal rules, and was duly fined. So off he went to the police station to pay up, leaving his five-year-old son playing in the street. That was the last he saw of him.
Others, though, saw the boy being carried away by a stranger, almost certainly a member of a kidnapping gang. The son is probably in coastal Fujian province or Guangdong now, bought by a rich couple desperate for a boy but unable to have one. Mr Wang, sitting on the bed fingering a photograph of his son, due to turn seven the following day, has searched high and low for him. He pleaded with the Guiyang police for help, but they said they had no money. He even made the long journey to Beijing to lay his plea before the central authorities. They sent a generous 300,000 yuan to the Guangdong police and instructed them to search for missing children. Thanks to their efforts, some 40-odd children were found, for whom 1,000 bereft parents came forward; but Mr Wang’s boy is still missing. “My wife would not get out of bed for two weeks when he disappeared, and would not eat. But I told her he’s smart, and he’s old enough to remember us. I know we’ll find him.”
Mr Wang’s family is a victim of China’s new capitalism, which comes with a pretty raw face. Along with child kidnapping, many “old” Chinese practices have made a comeback in recent years. Young brides are sold to old farmers by their families, or are kidnapped in the same way as children. Prostitution is on the increase. The number of heroin addicts is rising sharply, particularly in south-western China, near the Golden Triangle. Concubinage has returned, and so have disputes, sometimes violent, between village clans.
Even piracy is back. In January, 13 members of a gang of mainland pirates convicted of the murder of 23 crew members of a Hong Kong-registered bulk carrier were executed in southern Guangdong province. They did not put on the show of contrition the Communist authorities expected of them. On the truck taking them to the execution ground, drunk on rice wine, they sang the “ole, ole, ole” of Ricky Martin’s World Cup theme song, and mockingly thanked the Communist Party for giving them a “fair chance”.
To the many Chinese brought up to believe in the Communist creed that put service to the people above all else, the past 20 years of reform are cause for soul-searching. Half a century ago, Mao Zedong had set out to mould a new Chinese identity against a backdrop of economic backwardness, foreign exploitation and civil strife. The new identity was to be free of the “four olds”—habits, ideas, customs and beliefs—which were thought to lie at the heart of China’s debilitation, and which Mao’s Red Guards had sought to destroy. The national interest was meant to replace narrow, selfish concerns.
Now the four olds have made a comeback. Even religion and superstition have returned, with fundamentalist underground churches and a proliferation of cults. Look how the Falun Gong sect refuses to be cowed by attempts to stamp out its particular mix of qiqong (breathing exercises) and millenarianism. And note that across the way from Mao’s birthplace in Shaoshan, in a restaurant that thrives on serving his favourite dishes, there is now a shrine to the Great Helmsman. Fake flowers are strung around his neck, and incense and offerings of fruit lie at his feet. The staunch atheist and revolutionary has been reduced to just another god in the Chinese pantheon.
Wealth and power
Those elusive goals
THE Chinese Communists may have come to power with revolutionary fervour, but their agenda was little different from that of the beaten Nationalists before them, or from that of the rather milder reformers of the Qing dynasty in the late 19th century. The agenda, simply put, was to restore to China its rightful prosperity and power (fuqiang in Chinese). Half a century on, China’s Communist leaders still keep fuqiang at the very top of their agenda, says Lucien Bianco, an eminent sinologist based in Paris, for the simple reason that they have yet to attain it. So what have they achieved?
Start with fu (wealth or development). When the Communists came to power, there were half a billion Chinese, and perhaps half of those ran a real risk of going hungry. Today the population is 1.3 billion, but only perhaps 50m are so poor that they cannot always eat as much as they want. Since 1979 about 210m people, nearly the population of America, have been lifted out of absolute poverty.
It is not a popular thing to point out in liberal company, but without the sharp fall in the Chinese birth rate since the 1970s, achieved by using state coercion, it would have been next to impossible to reduce poverty so dramatically, so quickly. At 1.3% a year, China’s rate of population growth is now entirely manageable. Indeed the government is beginning to worry about an ageing population, and is relaxing its one-child policy. For the first time in its history, China does not face the twin curses of rampant population growth and famine.
Equally striking is the “miracle” that has taken place since 1979: economic growth rates that averaged nearly 8% a year (give or take a bit of statistical exaggeration), which means that economic output has quadrupled. Exports have been climbing by 15% and imports by 13% a year for the past two decades, a faster rate of growth than Japan managed during its golden period in 1953-73.
But this achievement needs to be put into perspective. By 1955 Japan was already the world’s ninth-biggest exporter. China did not become the tenth-biggest until 1992. Before the Communists, China reached its highest share of world trade in 1928, with 2.3% of the global total. It did not regain that peak until 1993, and even today, at 3.4%, its share is no bigger than that of the Netherlands.





Measured in terms of its total GDP, China is now a medium-sized or large economic power, the seventh-biggest in the world. The trouble comes when you divide its output by its population. Measured by GDP per head, China tumbles down the rankings to about number 150. For all its might, it is still a desperately poor country.
And where are its world-class firms? Last year only six Chinese companies, all of them state-owned, made it to the list of the world’s top 500 companies published by Fortune magazine every year. They won admission not because of their performance, which is execrable, but simply because they employ a lot of people. For example, Sinopec, an oil giant, has 1.2m workers. According to the Chinese government’s own figures, the average assets and sales of the country’s top 500 companies are 0.9% and 1.7% respectively of those of the average Fortune 500 company. In 1998 China’s top 100 firms had overseas investments of a mere $2.6 billion.






China-boosters will dismiss these comparisons. Other transitional economies, most conspicuously Russia, have fared far worse. China has delivered economic growth. It has not debased the currency, which is backed by hard-currency reserves. Most notable of all, things have not fallen apart; the centre has held. China is still able to govern.
Yes, but...Bear in mind that China’s growth has been so furious because the economy was so backward to begin with. And why was that? Because of catastrophic past blunders committed by the same party that rules today. Moreover, this survey has argued that the catch-up gains are coming to an end, and that the Chinese state has yet to withdraw from the economy. Much of state-owned industry is on the verge of collapse, and the rest faces stiff competition as WTO membership approaches. The banks are weak. Economic growth has slowed sharply in recent years, even if there are now tentative signs of a cyclical rebound. The hard part is yet to come.
“China’s economy”, says Yukon Huang, head of the World Bank’s mission in China, “is still a transition economy. That means the centralised command system is going to clash ever more frequently with global norms. The greater the clashes, the more glaring the Chinese anomalies and the greater the potential for corruption...It puts strains not only on the economic system, but on the political one.”
The strains can only get worse. As Mr Huang explains: “At the point of intersection with the world economy, China will have to have the same standards as elsewhere. Ultimately, it will have to have governance structures, pay systems and rules of conduct that are pretty consistent with world counterparts.” That means separating four deeply entwined strands of China’s political economy: the party, the government, the enterprises and the banks. Will attempts to separate these four strands prove successful, even if the party remains in control, or will they lead to political and economic chaos? Mr Huang thinks the answer is far from clear, but bets on success. “Yet if they can’t do it, then China will not integrate into the world economy, nor even live up to its WTO commitments. These are strains that won’t go away. Rather, they are strains that will redefine China.”
China’s power prospects
So much for China’s prosperity, its fu. What about its qiang? As a power, China cannot remotely be described as satisfied. The debate in the West about “containment” versus “engagement” is simply a debate about how to respond to that fact.
To discover the roots of China’s dissatisfaction, put yourself into the shoes of a Chinese defence planner. Invasions of China have always come by land, and today China is surrounded by 14 states, with some borders still disputed. Russia is wracked by domestic troubles, but that might change. Japan, the Chinese claim, is bent on regional domination. America, with its vast military presence in the Pacific, contained China for much of the Communists’ early rule, and might do so again. Nor has China got a military ally in the world—bar tinpot Myanmar.
China’s People’s Liberation Army (PLA), with 2.5m people, may be the world’s largest single army, but those of the country’s seven biggest neighbours combined outnumber it two-to-one, and most of those armies are more modern. Solomon Karmel of the London School of Economics, in a new book*, shows how woefully inadequate the PLA is as a fighting body. It is bloated but inward-looking. It lacks a centralised command. It is underfunded and distracted by the desire to make money. Its technologies are backward. Its officer class is riven wi更多精彩文章及讨论，请光临枫下论坛 rolia.net