CHINA

From Davos to Dalian

Inaugural Annual Meeting of the New Champions 2007
Dalian, People's Republic of China, 6-8 September 2007 

Broken China

BusinessWeek, July 18, 2007

Edited by Andy Ross

China has averaged annual growth of 9.5% for three decades. But probe even a little into the Chinese economic miracle, and glaring administrative failures abound. China has skimped on investments needed to provide basic, affordable health care and the regulatory machinery that can enforce environmental, safety and corporate governance regulations nationwide.

Local Communist Party officials enjoy wide latitude over social and economic affairs. They also have huge professional and financial incentives to spur GDP growth, which they often do by ignoring regulations or lavishing companies with perks. Even if Beijing has the best intentions of fixing problems such as undrinkable water and unbreathable air, it is often thwarted by hundreds of thousands of party officials with vested interests in the current system.

China's $1.2 trillion in foreign reserves and soaring trade surplus are evidence of an overreliance on exports, weak domestic consumption and a primitive financial system. A dearth of social services makes a widening income gap between urban and rural areas politically explosive. But China lacks the will to overhaul a political structure that gives party officials down to even the smallest villages huge influence over many facets of economic life.

The roots of China's ersatz capitalism go back to the 1980s and '90s. Late paramount leader Deng Xiaoping gave a green light for legions of cadres to discard their Mao suits and rush into business, often by setting themselves up as middlemen or grabbing stakes in communal assets.

These communist capitalists have evolved into a powerful and wealthy elite with an enormous stake in the status quo. Truly private capital markets would strip officials of their power to reward cronies with bank loans and stock market listings. Copyright enforcement might do wonders for China's software industry, but it's blocked at the local level by cadres more interested in safeguarding the jobs and profits that flow from knock-offs.

The central government still struggles to impose its will on local officials nationwide. China's State Environmental Protection Agency employs about 60,000 employees across the country. But they report to provincial and local governments, which tend to favor economic development over green considerations.

Oversight of food production in China is similarly troubled. The State Food & Drug Administration employs 1,700 people, but 80% of China's food producers have fewer than 10 employees and often lack any real understanding of safety standards.

The misplaced economic priorities explain the decrepit state of social services. Top leaders have been pledging to provide basic public health-care and retirement plans since the 1980s. It would cost Beijing around $40 billion to set up a national health-care system. But responsibility is fragmented among too many competing ministries in Beijing, and at the local level, cadres still are judged on GDP growth.

Meddling by party officials is hobbling China's stock markets, too. The booming Shanghai Stock Exchange boasts first-rate facilities, and shares have nearly tripled since 2005. But despite some improvements in oversight, trading remains volatile, weakly regulated and driven by rampant speculation.

Again, it comes down to the cozy relationship between government and industry. About 95% of the stocks on the Shanghai bourse are state enterprises, and last year no private companies were permitted to list there. But 14 state enterprises did. By floating 10% to 30% of their shares, state companies can ease their dependence on bank loans without ceding any real control, while insiders make windfalls on the stock offering.

Beijing is in charge of the Chinese drive to become a power in science and technology. China boasts superbly equipped labs in life sciences, nanotechnology, optics and more, churns out more than 60,000 master's and doctoral degrees in science and technology each year, and has made big strides in military technology and manned spaceflight. Chinese scientists publish an impressive number of papers but most of the work is unimpressive.

The country has come a long way in just three decades. Its growth record is unparalleled in history, and it took the U.S. and Europe centuries before they developed modern financial systems and methods for ensuring food safety, providing pensions and protecting the environment. But to build the financial, legal and administrative systems required to become a modern industrial society, China must get the party out of business.
 

China and Japan

By Rowan Callick
The American, July/August 2007

Edited by Andy Ross

Japan is still in second place among the world's economic powers. An export-led upturn in 2002 has segued into a broad-based economic expansion driven by surging domestic demand, with GDP growth comfortably above U.S. levels.

Economic reform has already taken on a life of its own, with Japanese firms reviewing their jobs-for-life employment structure, cutting costs, and repaying trillions of yen of debt. Business confidence is back, and Japanese firms have begun shifting up the value chain.

Foreign managers are increasingly common in Japan. The inefficient service sectors are slowly opening up to competition. Best-practice international accounting standards have been widely adopted. Japan's largest multinational companies are not the rare islands of success they once were. Now other firms in the broader domestic economy are competing and operating productively.

Japan's recent economic reforms have been triggered by the prospect of international competition and concomitant worry about national survival. But in this case the competition came not from the West, but from one of Japan's closest neighbors and oldest rivals.

In the 1990s, China emerged as a top contender not only for economic power but also for diplomatic and strategic influence. In 1998, when President Clinton visited China, he described Communist Party leader and President Jiang Zemin as "a man of extraordinary intellect," praised "the intelligence, the ingenuity, the enterprise of the Chinese people," and predicted for the Middle Kingdom a future with "even greater promise" than its "glorious past."

Watching Japan's chief ally join the growing line of suitors in Beijing was a shock for Tokyo leaders. For the first time since the Japanese defeat of the Mongols eight centuries ago, Japanese realists had to admit that the country faced genuine competition within Asia.

Japan had lapsed into stagnation, failing to attract foreign investors and maintaining myriad obstacles to businesses that wanted in. Japan continues to lag behind China in attracting outside investment, largely because it simply doesn't need the capital, but also because China has chosen to make attracting foreign investment a key growth strategy.

China still has a long way to go. In 2006, China's GDP was $2.5 trillion, just over half of Japan's $4.9 trillion. More important, since Japan's population of 127 million is roughly one-tenth that of China's, the income of the average Japanese, at $35,000, was 18 times that of the average Chinese. China holds much-vaunted international reserves valued at $1.2 trillion, but Japan's reserves are $890 billion, far from insignificant.

But leaders of both countries recognize that they need each other too much to let nationalist sentiment get out of hand. China's assembly factories provide crucial profits for Japan's major corporations, and Chinese goods are among the products enticing Japanese consumers to start buying again. In turn, the manufacture of sophisticated Japanese components is helping drag Chinese industry up the value chain. Each country is the other’s biggest source of imports. As of spring 2007, China has become Japan's biggest trading partner.

By spurring needed economic and political reforms, the Japanese rivalry with China has been a positive force, but Japanese nationalism has a troubling history. The unwillingness of Japanese leaders to consign World War II to history continues to explain why Japan has yet to box its weight diplomatically, despite its economic might. Japan thinks the United States has moved too close to China.

There is no doubt that Japan is on the rise. To what extent will Japan allow its cultural and political rivalry with China to trump common economic interests?
 

China and the Environment

By Elizabeth C. Economy
Foreign Affairs, September/October 2007

Edited by Andy Ross

China's rapid development has become an environmental disaster. Record growth requires the gargantuan consumption of resources, but in China energy use has been especially unclean and inefficient, with dire consequences for the country's air, land, and water.

The coal that has powered China's economic growth is also choking its people. Coal provides about 70 percent of China's energy needs: the country consumed some 2.4 billion tons in 2006 — more than the United States, Japan, and the United Kingdom combined. The country is home to 16 of the world's 20 most polluted cities. As much as 90 percent of China's sulfur dioxide emissions and 50 percent of its particulate emissions are the result of coal use.

The transportation boom poses a growing challenge to China's air quality. Chinese developers are laying more than 52,700 miles of new highways throughout the country. Some 14,000 new cars hit China's roads each day. By 2020, China is expected to have 130 million cars, and by 2050 it is expected to have even more cars than the United States.

China's land has also suffered from unfettered development and environmental neglect. Centuries of deforestation, along with the overgrazing of grasslands and overcultivation of cropland, have left much of China's north and northwest seriously degraded. China's ground water, which provides 70 percent of the country's total drinking water, is under threat from a variety of sources, such as polluted surface water, hazardous waste sites, and pesticides and fertilizers.

China is already attracting international attention for its rapidly growing contribution to climate change. According to a 2007 report from the Netherlands Environmental Assessment Agency, it has already surpassed the United States as the world's largest contributor of carbon dioxide to the atmosphere.

China's close economic partners in the developing world face additional environmental burdens from China's economic activities. Chinese multinationals, which are exploiting natural resources in Africa, Latin America, and Southeast Asia in order to fuel China's continued economic rise, are devastating these regions' habitats in the process.

In the view of China's leaders, however, damage to the environment itself is a secondary problem. Of greater concern to them are its indirect effects: the threat it poses to the continuation of the Chinese economic miracle and to public health, social stability, and the country's international reputation. Taken together, these challenges could undermine the authority of the Communist Party.

China's environmental problems stem as much from its corrupt and undemocratic political system as from Beijing's continued focus on economic growth. Local officials and business leaders routinely ignore environmental laws and regulations, abscond with environmental protection funds, and silence those who challenge them.

Much of the burden and the opportunity for China to revolutionize the way it reconciles environmental protection and economic development rests with the Chinese government itself. To continue on its extraordinary trajectory, China needs leaders with the vision to introduce a new set of economic and political initiatives that will transform the way the country does business.
 

The China Model

By Rowan Callick
The American, November/December 2007

Edited by Andy Ross

The China Model has two components: economic freedom plus political repression. The Communist Party of China, or CPC, ensures steadily improving living standards for all, and, in return, the Chinese people let the CPC rule as an authoritarian regime.

The economic portion of the model works like this: let in foreign capital, technology, and management skills. Engage with global markets. Do everything you can to lift living standards. Give your middle class an ownership stake in the newly emerging economy. Communism didn't do that.

The regime has succeeded in one of its prime goals, to generate sufficient surplus value to finance the modernization of the economy. China holds $1.3 trillion worth of foreign reserves.

However, the People's Bank of China remains a tool of government rather than an autonomous institution, as most Western central banks now are. A large range of core industries are, by policy, fully or majority-owned by the government. Nontariff barriers to trade are declining, but they remain legion, especially in the services sector.

Still, more and more foreigners are successfully doing business in China. This steady but cautious opening of the economy to foreigners and entrepreneurs has ensured that as global liquidity has soared, much of it has found its way to China.

Many of China's global partners require transparent governance, independent courts, enforceable property rights, and free information. None of these is present in China today, or will be unless the party surrenders a degree of political authority it has so far regarded as inconceivable.

No one, however, is anticipating such a shift anytime soon. In the 1990s, a presumption grew that the crowds of well-connected young Chinese returning with their Ivy League MBAs would not acquiesce to the continued unaccountable rule of the cadres. But many of them instead joined the party with alacrity.

Indeed, the big attractions of China to capital from overseas has been that the political setting is stable, that there will be no populist campaign to nationalize foreign assets, that the labor force is both flexible and disciplined, and that policy changes are rational and are signaled well ahead.

The CPC is replacing old-style communist values with nationalism and a form of Confucianism, in a manner that echoes the Asian values espoused by the leaders who brought Southeast Asian countries through their rapid modernization process in Singapore, Malaysia, Thailand, and elsewhere. But in its public rhetoric, the party is stressing continuity and is assiduously ensuring that its own version of history remains correct.

It is true that the Chinese people are free to consume whatever they can afford. They have also gained the freedom to travel where they want, at home and abroad. They can now work for whom they want, where they want. They can buy their own home, and live where they choose. A Chinese woman can marry the man she loves. The Chinese can study at any institution that will have them.

But Chinese citizens can't form a political party, or any other organized group, without official permission. They can't choose their leaders. Even the ordinary CPC members have no say in their hierarchy. Phone calls, text messages, and emails are likely to be screened, and many Internet sites are blocked or filtered. Bloggers must give their real names and identity card numbers to their Internet service providers. All books published in China must bear a license code from a state-owned publishing house. All films must be vetted by the State Administration for Radio, Film, and Television.

Chinese people do not expect to obtain justice from the courts, which are run by the party, the judges answerable to the local top cadres. Ordinary people have grown accustomed to widespread corruption. They are meant to report to the neighborhood police whenever someone new comes to stay with them. A file is kept on Chinese citizens, which follows their work and home moves, but they cannot see it. There are only two legal churches that the Chinese can join, the Catholic and the Protestant organizations

In the 1980s, wishful thinking on the part of some Western observers, combined with a form of historical determinism that was, in its way, a tribute to the thinking of Hegel and Marx, had China inevitably becoming more free and democratic as it became more of a market economy.

Now, such views have faded. Premier Wen Jiabao said during the last annual session of China's version of a parliament, the National People’s Congress, that the country would remain at the present "primary stage of socialism," during which it would require continued guidance by the party, for at least another 100 years.

This story of cultural heroism has acquired a glossy appeal because of the success of China's modernization drive. The nation’s gross domestic product has grown at an average annual rate of more than 10 percent since 1990. Developing nations believe that, as an ideal, the China Model has replaced the American Model.

This is no longer the communist program that Mao Zedong tried to export with little success. It is the program that gives business room to grow and make profits, while ensuring it walks hand in hand with big, implacable government.

Like most other East Asian states, China's route to development placed economic reforms before democratization. But the China Model differs markedly from most of the region in that it has resisted taking any serious steps down that road to democracy. There were also some token village elections, but they have remained dominated by the CPC and its cadres.

China offers a seductive model that is being eagerly taken up by the leaders of countries that have not yet settled into democratic structures. The China Model is also fascinating to Russia. In the early 1980s, there was some vestigial discussion about separating party and state, but the idea was abandoned as both impractical and undesirable. The party rules today through four pillars — the army, the legal apparatus including the courts and police, the administration, and the state corporations that dominate the strategic sectors of the economy.

It is almost certain that China will push on with its present structure, but with the prospect of broadening democratic competitiveness for posts within the party, and institutionalizing consultations with more diverse groups in Chinese society. The China Daily recently hosted on its website a reader discussion on the theme: "China is a role model to all developing nations. After centuries of oppression and domination by Western nations, most developing nations are trying to pull themselves up from poverty. They look at China’s rapid progress as an example. China also gives aid and technical help to these nations."

The United States, Japan, and other countries have been urging China to become more transparent about the rapid development of its military capacity. But China's capacity to project adventurist military power far beyond its borders is limited today both by its resources and by its reluctance to leave its heartland short of the muscle the party may need to quell domestic disturbances.