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Mainstream, Vol XLVIII, No 48, November 20, 2010

China: Some Challenges and Issues

Wednesday 24 November 2010, by Gilbert Etienne

Let us first reject the latest fad,“The Beijing Consensus†, created in 2004 by J.C. Ramo (Foreign Policy Centre, London, May 2004), a kind of opposition to “the Washington Consensus†which favoured the neo-liberal theses in the 1990s. Though not promoted by the Chinese, the new consensus refers to the development model of China for developing countries.

In fact, the achievements of China since 1978 do not constitute “a model†or a recipe that is transferrable. They are due to the combination of particular factors:

1) China was lucky to benefit from the last outstanding leader of the 20th century, Deng Xiaoping, a man with a vision, who had a sharp understanding of Chinese aspirations and with a solid practical mind. He was assisted by a number of highly qualified men. Without him, there would have been changes in China after Mao Zedong’s death (1976), because nearly everybody was fed up with Maoism, but a new revolution covering most aspects of public and private life would not have happened.

2) The expansion has been helped by Hong Kong which delocalised its industries on the mainland and proceeded to provide massive investments including the supply of cadres. Later on, many Taiwanese enterprises stepped in. The Chinese diaspora of South-East Asia, in particular Singapore, became no less active in China. Since 1980, FDI (foreign direct private investments) from Hong Kong, Taiwan and the diaspora oscillate between more than half and two-thirds of the total disbursed per year.

3) China benefits from the very dynamic area of East Asia (South-East and Far East). After Japan, South Korea, Taiwan, the South-East Asian countries have been growing fast. The Chinese diaspora of South-East Asia (29 million people) with its powerful industrial, trade and financial networks has played a major role.

4) One should also not forget the impact of a rich past.
The combination of the first three factors is missing in the other emerging countries, including India.

China Number Two or Number One

CHINA is number two in the world with her GDP (foreign exchange parity) ahead of Japan in 2010, and is number one for merchandise exports. This enormous expansion is too well known to deserve detailed comments. Chinese people and Chinese goods are found everywhere in Asia, Africa, Latin America as well as in Western countries, in big cities and in local bazaars. The Chinese are importing large amounts of raw materials, while the range of their exports keeps on rising: electronic and electric goods, office equipments, cars, garments, furniture, toys… The Chinese have become world number one for exports of apples. Their imagination keeps on growing. They sell small statues of Shiva and Vishnu to pious Hindus, statues of Roman Catholic saints to devout Brazilians. More recently they have become number one for the exports of sex toys!

One must, however, not talk of China as the workshop of the world. In fact she is the assembly workshop. Many manufactured exports rely on assembled imported components, supplied mostly from Taiwan, Japan, South Korea and South-East Asia.

This whole economic expansion has involved considerable social progress so that now only about 10 per cent of the population suffer from acute poverty. At the same time, China has shifted from a totalitarian system to an authori-tarian one. Individual freedom has made enormous progress compared to Mao’s days when even private life suffered from the Party‘s interferences and abuses.

Today there are public debates on a number of key issues: development policies, growing inequalities, corruption (see below), abuses of the judiciary… Yet there are limits to these. There are cases of censure, controls of internet, repression of too critical intellectuals.1 While there are open discussions within the Party, the leadership rejects the Western democratic multi-party model.

To sum up, the system is no more so rigid. It has been relatively stable with the exception of the Tiananmen crisis in 1989. The succession of Deng Xiaoping, who died in 1997, took place smoothly as well as the change of leadership in 2003. A new President and a new Prime Minister should be selected in 2012.

Issues and Challenges

THE remarkable economic and social progress achieved so far has been accompanied by a number of shortcomings. A part of these was unavoidable, but they tend to increase, creating a number of challenges.

The environment has been severely damaged, leading to considerable losses of various types: soil degradation, air and water pollution, excessive use of local resources. Total losses for the economy amounted to 14 per cent of the GDP in 2005, according to a report by the Academy of Social Sciences. It should be more today. The Five Year Plan (2006-2010) allocates $ 86 billion to environment protection and improvement, but some Chinese experts think that the funds should be doubled.

When Deng Xiaoping started his new revolution he declared: †It is glorious to be rich†, opening the way to activities in all directions: from village to provincial authorities taking all kinds of initiatives, from State owned enterprises to individuals… Even Army units for a time were allowed to open businesses!

This move led to decentralisation. Gradually, from villages to provinces occurred a growing neglect of central laws and regulations which resulted in “blind investments†; these were deplored in Peking. Investment rules are often bypassed by plenty of factories of dubious value, highly polluting, consuming too much energy.

There are plenty of land grabbings, farmers being poorly compensated when their land is taken away to build a factory. Illegal local taxes are also common. There are often accidents in small coal mines, involving cases of death. (See below)
Local authorities take protectionist measures to favour their industries, while taxing goods coming from another province or even from another town.

Migrant rural workers coming to cities do not always enjoy the standard minimum wages and they may work ten or more hours a day.

The economy of leakage (see appendix)– misallocation of public funds, non-recovery of government revenue, corruption—involves huge amounts of money and abuses in all fields: the economy, education, health, even armed forces.
The defects referring to local authorities and corruption have been publicly denounced by the highest authorities for at least the past twenty years. “The fight against corruption has become vital for the very existence of the State and the Party,†declared President Jiang Zemin in 1997. Following similar statements over the years, corruption was one of the main issues on the agenda of the People’s Congress (Parliament) in 2010.

The violation of Central rules by local authorities is being criticised since at least 1987. Ten years later, officials in Peking condemned “duplicate construction of factories and wasteful management†. In 2006, the Minister of Education declared on TV: †The decisions of the Central Government do not always come out of our offices.†One is tempted to remember the dictum of the old days: “The sky is high and the emperor far away.â€

It is a fact that the huge size of China – as of India—creates difficulties of governance unknown in smaller countries. Yet, even while admitting this handicap, one must recognise that not much progress has been achieved in spite of large scale arrests, sentences involving many years in prison or execution, massive audit controls. For instance, between 2002 and 2006, 30,000 officials have been prosecuted. In 2008, a Chinese scholar, after reviewing 500 cases of reported corruption, concluded: †One does not perceive any decrease of corruption in spite of frequent campaigns to eradicate it.†(China Daily, January 12, 2008)

One may add that the scale of the economy of leakage seems rather similar in India (see my article in Mainstream, August 28, 2009) with one big difference. The concerted efforts of the Chinese to curb corruption through severe punishment do not bring better results than the lack or the rarity of similar moves in India! In both countries all these losses do not prevent development, but very large funds “disappear†instead of being used through proper investments to combat poverty, to spend more on environment, health, education …

The wastage of energy is another lasting weakness. The Five Year Plan (2006-10) aimed at a reduction of 20 per cent of energy consumption. After four years, only 14.4 per cent was achieved. According to the Minister of Environment, †the Chinese use seven times more energy than Japan for the production of the same amount of goods and three times more than India†. (Der Spiegel, March 7, 2005) As mentioned above, a part of the wastage lies with local authorities which should “scrap backward production capacity†. (China Daily, May 19, 2010)

Following the world crisis in 2008 when growth fell to eight per cent, as against 13 per cent in 2007, a stimulus package of $ 585 billion has been launched with emphasis on infrastructure work. It warranted large bank loans that were advanced. Production did pick up again in 2009 and 2010, but there are signs of surplus production and a bubble in real estate, which could affect the economy, since construction accounts for 15 per cent of the GDP.

While the stimulus package helped the economy to rebound, it has boosted energy consuming industries: steel, pig iron, aluminium, cement… so that many obsolete and environment damaging factories have been growing, leading to a sharp rise in power consumption. By mid- 2010, many such factories have been ordered to be closed.

Finally, let us illustrate the complexity of the issues with the case of coal. The output has risen from 1.4 billion tonnes in 2002 to 2.97 billion tonnes in 2009 by widening the state owned large mines and expansion of the small to medium private mines. To save money, the owners, often with the connivance of local authorities, neglect safety measures. As a result, the average death toll per year of miners reached 6300 in the period 2002-05. Under the implementation of stricter government rules, the death toll fell to 2630 in 2009. In spite of this achievement, with 45 per cent of the world’s coal output, China has 70 per cent of the total accidents. Besides, 6000 private mines are to be closed because of “outdated technology, lack of safety awareness and poor management†declared the Vice-Minister of Safety at the end of 2008.

The judicial system and laws had to start from almost a scratch in 1980. A lot of work has been done, in particular with the help of American advisers. Yet, as one can read in the media, there are frequent complaints about questionable trials, abuses of the police including torture, lack of respect of intellectual property rights. Piracy, counterfeit goods are widespread, affecting both Chinese and foreign enterprises. One hears also of many complaints about adulterated food, seeds, chemical fertilisers, pesticides…

Definite progress has been achieved in recent years, with cases of trials conducted in a fair manner, but much remains to be done and again the sheer size of the country complicates the picture.

The shortage of qualified cadres in all ranges of activities remains a serious issue. In 1980, there was a small core of engineers and other senior officers trained in the Soviet Union between 1950 and 1960 before the latter’s break-up. Since then, very few Chinese were trained abroad. As for local universities, they were badly shaken between 1957 and 1961, when a number of professors trained in Western countries before 1949 were purged because of their “bourgeois†background. Then came the nightmare of the Cultural Revolution when a number of universities were closed between 1966 and 1976 or imparted very poor education.

Confucius used to say: †What you ignore, you should know that you ignore it†so that you can learn. In the 1950s, the Communist leaders had no experience of how to run a country, develop the economy, operate administration on a large scale. They relied heavily on the Soviet Union’s experience. “We must therefore learn from the Soviet Union modestly and systematically (italics mine),†declared Li Fuchun, Chairman of the Planning Commission. (Eighth National Congress, Peking, Foreign Languages Press, 1956, vol II, p. 299)

In 1980, China was making a new beginning and had to learn again but, this time, from Western and Japanese capitalists. All kinds of information missions were sent abroad to enquire on new technologies, banking, legal systems, advanced education, local administration, modern military equipments… For instance, Zhao Ziyang, before becoming Prime Minister, went to Switzerland for information. He spent some time in small villages in the Alps to have a look at their administration.

Chinese universities were modernised and new centres of learning were created with foreign assistance. From Deng Xiaoping to senior and lower officers—all of them prevailed again to stress on the attitude to “learn modestly and systemati-cally†. Such an attitudes is not so common in rich or poor countries!

Today the “new China men†are reaching senior positions in all fields and many of them compare favourably with the best Western or Indian cadres. However, two handicaps have not yet been overcome. Out of 1.6 million students sent abroad since 1980, only 497,000 had returned until 2010; so a great lack of cadres remains. As in India, there are high level universities and institutes, but in both countries many universities are of a low standard. According to the McKinsey Quarterly Report, 2005, out of 1.6 million engineers with at least seven years service, only 10 per cent were fit to work with a multinational corporation. (Out of 650,000 Indians, 130,000 were fit.) There is also a lack of fully qualified general managers. As a result many enterprises rely on a large number of expatriates, including the Chinese from Hong Kong, Taiwan and the diaspora.

Another difficulty, this one temporary, is that the new cadres trained after 1980 are the first ones with such responsibilities. They cannot rely on the experience of older and more senior cadres, as it is the case in Western countries or India. It is, for instance, quite clear that Indian multinational corporations enjoy for the moment advantages, thanks to their longer experience of modern business and international relations, compared to the Chinese firms.

One way to cope with the lack of qualified cadres is—as in India—to train young cadres within the enterprise which recruits them.

Other issues raised for many years also remain. Among these is the need to stimulate local consumption. Incomes of households has fallen from 69 per cent of the GDP in 1996 to 57 per cent in 2007. As for consumption expenditures, they have fallen from 54 per cent in 1997 to 36 per cent in 2009, which is very low. It confirms the excess of investments: 45 per cent of the GDP in recent years, including wastage or excessive capacity a referred to above.

To sum up, in spite of spectacular achieve-ments, persistent and serious weaknesses remain. If these are not corrected or reduced, the result could be reduced growth. This would have a negative impact on the political scene.

Socio-political Issues

FINALLY let us come to the socio-political issues: growing income disparities and unemployment, a number of bloody clashes at the local level, especially when people react against land grabbing and other abuses in villages. Corruption creates much resentment. In the spring of 2010, strikes occurred in a number of joint ventures which led to salary increases, but more needs to be done. Unlike their parents, the new genera-tions of rural migrants moving to the cities (about 180 million) have enjoyed an easier youth; they are less ready to accept low wages and very hard working conditions.

For all these reasons, President Hu Jintao and Prime Minister Wen Jiabao want to promote “a harmonious society†. They want to make the administration more efficient, to eradicate corruption, to improve the judiciary as well as the performances of the Party, and to introduce more freedom. Yet contradictions remain. Intellectuals, advocating more democracy, can be jailed like Liu Xiaobo, the winner of the Nobel Prize for Peace in 2010. This award to Liu provoked very violent reactions from the government. At the same time, Wen Jiabao issued several statements in favour of bold reforms, mentioning that “the desire for democracy and freedom is irresistible†, while a group of retired senior officers asked for an end to media censorship. (Financial Times, October 16, 2010)

So far the Party (77 million members) has been able to overcome possible crises. Besides, it is increasingly open to the rising upper classes: private businessmen, educationists, medical doctors, scientists, bureaucrats… all benefiting from the fast growth of the economy like a number of those from the lower middle classes, in spite of rising income disparities. Another factor may prevent a full fledged democracy. The Western model has been shaken for many Chinese when looking at the financial crisis, at the widening income disparities since the 1980s, at the growth of unemployment and “working poor†… Then there are various scandals in the USA and Western Europe involving business-men and/or politicians.

When considering all these contradictory factors, forecasts are difficult in the long term. The only clear point is that the leadership is conscious of serious risks if discontent increases; hence the efforts to curb abuses and improve social justice under the direction of the Party and in the name of a harmonious society.

International Issues

THE future of China’s international relations are no less hazy because of a number of contradic-tions. The Chinese are no more the good pupils or students with low-key profile as during the days of Deng Xiaoping. They rightly feel self- confident, looking at their achievements against the poor show of Western countries and Japan at present.

The growing importance of China in the world raises several questions. So far the West managed to find accommodation with rising economies like Japan, followed by South Korea and Taiwan. The case of China is much more complex for two main reasons: the enormous size of the growing Chinese economy and its political system which, unlike Japan’s, South Korea’s and Taiwan’s, is not following the multi-party democracy of the West.

In addition come a host of factors full of ambiguity or contradictions. China has increased its close economic and financial links with many countries accompanied by political tensions or possible conflicts: between China on the one hand and, on the other, the USA, European Union, India. One notices its closer economic relations with South-East Asia and signs of friction with it among China’s partners, including litigations with Japan on the Senkaku islands and, with several South-East Asian countries, with regard to the uninhabited Paracels and Spratly Islands. At the same time, it is no coincidence that military expenditures in Asia have increased from $ 150 billion in 2000 to $ 250 billon in 2009: China $ 100 billion, Japan $ 51 billion, India $ 36.3 billion, South Korea $ 24 billion. (Data from SIPRI, Stockholm, 2010) There are concerns about sea lanes, particularly in China, and also territorial disputes between China and India.

Then come conflicts of economic nature: the increasing polemics about the yuan (RMB) and protectionist currents vis-à-vis China in the USA and Europe. Within China, in 2010, several multinationals, including Siemens, General Electric, have openly complained of discriminations against them, which the authorities are denying. The violation of intellectual property rights remains a matter of concern. Outside China, Western corporations complain of the unfair competition with Chinese firms, very often state owned, enjoying the support of their government.

What will be the outcome of all these rivalries, potential or actual conflicts of interest? It is difficult to answer, because, no less influential could be the internal political evolution of China. What will also be the consequences of the gap between Western economies growing by one or two per cent per year and China with a growth rate around eight-to-nine per cent if not more?

High calibre leadership in the major concerned countries should be able to achieve win-win solutions, because peace and economic cooperation are in the interest of all sides. But the course of history is not always smooth due to human failures.

Some Basic Data on China, 2009

(rate of exchange 6.8 yuan for $ 1)

Population 1.37 billion (estimated)

GDP: $ 4910 billion; per capita GDP $ 3600 (foreign exchange parity)

Foreign trade: imports $ 1000 billion; exports $ 1200 billion, 2009 (merchandises)

FDI (Foreign direct private investments) disbursed, 1980-2009: $ 900 billion. One should deduct 20-30 per cent because of round-trip investments, that is, funds leaving China and returning to benefit due to the advantages attached to FDI

Chinese FDI abroad: $ 211 billion, cumulated end of 2009

Foreign exchange reserves, mid-2010: $ 2650 billion:

GDP growth, 2009: 9.1 per cent; 2010, first six months: 11 per cent

Rate of investment: 45 per cent of the GDP

Some Data on India, 2009/10

Population 1.17 billion

GDP $ 1300 billion; per capita GDP $ 1100 (foreign exchange parity) estimated

Foreign trade: imports $ 250 billion; exports $ 150 billion (merchandise, first est.)

FDI disbursed, 1980-2009-10: $ 170 billion

GDP growth: 7.2 per cent

Rate of investment: around 37 per cent of the GDP

Appendix: The Economy of Leakage and Corruption

By leakage economy we mean:

1. Misallocation of public funds (non-priority expenditures, sumptuary expenditures, waste).

2. Non-recovery of government revenues.

3. Corruption connected or not with 1 and 2.

The data given below have been, for the most, published in China out of official declarations, National Audit Office’s Reports and estimates by Chinese scholars. I confine myself to rather recent information.

Our enquiries in India and Pakistan bring out weaknesses similar by their magnitude and diversity.

b = billion $, m = million $.

Expenditures in pseudo-official banquets 10 and 20 b, 1993, 1998

Similar expenditures by cadres in Peking only over 1.5 b, 2009

Illegal taxes raised by local authorities 1.4 b, 1999

Arrears of wages of migrant workers in cities 12 b, 2003

Frauds by 140 officials at the Agricultural Bank 2 b, 2008

89 cases of money laundering 4.2 b, 2007

Amounts taken by 4000 officers who ran away from China 50 b, cumulated 1996-2006

Frauds in real estate taxes 1.2 b, 2008

Losses by foreign enterprises due to counterfeit goods 30 b, 2006

Smuggling of petrol from Hong Kong 880 m, 2009

Embezzlements by officials 35 b for 2005 and 2008

Extra-conjugal affairs connected with corruption 95 per cent of cases, 2009

Misuse of funds devoted to agriculture 1 b, 2007

Bakshish by 2000 students for university admission at Wuhan 12 m, 2006

Expenditures by Wuhan students for MA papers written by others 70 m, 2009

Abuses in research institutes 80 m, 2004

Malpractices in hospitals 350 m, 2005

Embezzlements of pension funds at Shanghai 400 m, 2006

Tax evasion by a billionaire at Hangzhou 43 m, 2008

Smuggling of 7600 cobras, giant turtles and lizards at Canton 9 m, 2008

Scandals for admission to military schools 1.5 m, 2008

Capitals flights 10 to 30 b or more per year

According to the estimate of Professor Hu Angang in Peking, total yearly losses due to leakage could have represented 14 to 15 per cent of the GDP from 1999 to 2001. (China and World Economy, Beijing no. 4, 2002) These may have increased since then.

Another Chinese scholar refers in 2007 to “a grey zone†or “a grey revenue†, meaning illegal revenue or ill-defined revenue by law which could amount to $ 700 billion. (China Daily, June 3, 2010)

Petty corruption of a government servant to avoid formalities or obtain some advantage are only partly included, if any, in the above data.

FOOTNOTE

1. Under Mao there were millions of political prisoners as against a few thousand nowadays. See J.I. Domenach, Comprendre la Chine d’aujourd’hui, Paris, Perrin, 2007, p. 38.

Gilbert Etienne is Professor Emeritus, Institute of International and Development Studies, Geneva. He can be contacted at e-mail: anne.etienne@bluewin.ch

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