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A Great Leap Backward?

Zhongguo de xianjing [China’s Pitfall]

by He Qinglian
Hong Kong: Mingjing chubanshe, 410 pp., HK$107.00

1.

Most of the good news from China during the Deng Xiaoping era concerned the country’s economy. It grew at an average annual rate of 10 percent from 1981 to 1991, and 12 percent from then until 1995. Average personal income more than tripled in the 1980s, and doubled again in the first half of the 1990s.1 Some Westerners were dazzled. In November 1992, The Economist referred to “one of the biggest improvements in human welfare anywhere at any time,”2 and six months later Business Week told of “breathtaking changes…sweeping through the giant nation.”3 Foreign corporations, eager to be part of the China boom, poured investment in at record rates. China’s foreign currency holdings soared.

Yet during the same two decades, especially the 1990s, there was much bad news as well. People died from drinking phony liquor; fake fertilizers killed crops; there were growing markets for illicit drugs, for sweatshop labor, and even for the sale of young women for wives and male infants for sons. Corruption was rampant. Industrial pollution was serious and growing fast. State enterprises were failing, unpaid workers were striking, and banks were mired in bad debt. The gap between rich and poor became much wider. During 1997 and 1998 average personal income growth has fallen off sharply, and for large portions of both urban and rural poor it has reversed.4

No one during the Deng years produced a systematic account of how these two aspects of China’s economy were related. The regime and its defenders argued that so long as the economy surged forward, other problems would eventually take care of themselves. In the US, many business leaders, followed by the Clinton administration, argued that Western commercial engagement with China creates not only more wealth but progress toward democracy as well. Skeptics countered that more wealth, by itself, does not necessarily cure social problems or lead to democracy.

China’s Pitfall, the first systematic study of the social consequences of China’s economic boom, vindicates the skeptics so resoundingly as to force us to reconceive what “reform” has meant. In her book, which was published in Beijing early this year, He Qinglian, an economist trained at Fudan University in Shanghai, shows how Deng’s reforms between 1979 and 1997 did indeed lead China out of the stifling agricultural communes and urban work units of the Mao era. But what resulted, she argues, was not “civil society,” or even a market economy in the normal sense, but a strange way of life that the Chinese people had hardly imagined when they first embraced reform. She compares the Chinese people to the mythical She Gong, who felt a strong attraction to dragons in paintings, only to be terrified when confronted by a real dragon.

The first spurt of growth in the Chinese economy resulted from the release of farmers from the commune system beginning in the late 1970s. Besides growing and marketing their own crops much more efficiently than they had under state planning, farmers created “village enterprises” that were quickly successful in light industries such as foodstuffs (soy sauce, noodles, etc.) and clothing. By the late 1980s, however, the rural economy slowed and in some places even contracted. This happened because the immediate gains from freeing agriculture could not be continued, and because many village enterprises fell victim to extortion, overtaxation, and embezzlement by local officials. During the late 1980s and early 1990s a “floating population” of 120 million rural people migrated to Chinese cities in search of work.

The boom in the 1990s took place mainly in urban China. He Qinglian writes that from the outset the urban “reform” amounted to

a process in which power-holders and their hangers-on plundered public wealth. The primary target of their plunder was state property that had been accumulated from forty years of the people’s sweat, and their primary means of plunder was political power.

He Qinglian shows how this “plunder”—a process that involves only transfer, not production, of wealth—is primarily responsible for the rapid rise in average personal income in Chinese cities. Even the newly produced wealth, she demonstrates, is the result not just of new economic energy and efficiency, but of two additional factors. One is that China receives large foreign investment—in the mid-1990s this ranged between thirty and forty billion US dollars annually, or about one fifth of all investment in China. The other is that China’s state banks support state enterprises with emergency transfusions of funds (called “loans,” but unrecoverable) that are drawn from the personal savings of ordinary citizens. As of early 1997, almost half the money in personal savings accounts (two trillion yuan, or $240 billion) had been lost in this way. Because China’s press is controlled, few ordinary savers are aware of this fact. The practice also represents a subsidy of the cities by the countryside, since many savers are rural.

Notwithstanding the widespread discussion of the effects of the private “market” on China, China’s state enterprises, although they were never very efficient, still dominate the urban economy.5 Steel, cement, and all heavy industry—and all media and telecommunications—still, by law, must be state-owned.6 With few exceptions, only state enterprises receive loans from China’s banks (which themselves are exclusively state-owned) and only state enterprises can have access to foreign currency. Still the state sector’s share of the economy has steadily declined. Twenty years ago it was the only sector, and today it produces about 30 percent of the gross domestic product. But the 70 percent of “non-state” GDP includes all of agriculture and rural industry, which together are 60 percent of GDP. Contrary to the impression given in the Western press, only about 10 percent of GDP comes from urban private enterprise.

The state sector of the economy also dominates the concerns of the Chinese leadership—concerns that are, as always, essentially political. The stability of the Chinese government depends on preventing urban unrest, especially in Beijing, Shanghai, and the other major cities. Farmers can protest (and indeed have protested, in the 1990s, much more than the Western press has generally reported), but such actions do not rock the regime as do urban demonstrations or strikes.

And who are the urban citizens whom the government needs to keep content? About 85 percent, in one way or another, work for the state. Workers in state industry make up between 45 and 47 percent of the urban work force; another 18 percent or so work in government offices; between 20 and 22 percent work either in government-sponsored “urban collectives” that were founded in the late 1950s (and do labor-intensive work like pasting together cardboard boxes) or, more recently, in profitable “tertiary”—i.e., service—industries such as retail stores. These are state-affiliated companies that exist within larger state enterprises (whose profits, as we shall see, can be skimmed by private executives).

The 15 percent of the urban population that works in the private economy started to emerge in the early 1980s when “individual entrepreneurs” were allowed to set up one-person enterprises such as bicycle repair shops or sewing services. In the mid-1980s, it became legal for families to run small enterprises such as restaurants, and then to hire as many as seven non-family employees. According to China’s constitution, private enterprises with more than seven employees remain illegal today, but this provision, like the guarantee of free speech and several others, is ignored in practice. During the late 1980s and 1990s government-approved foreign enterprises (e.g., McDonald’s) and Sino-foreign “joint enterprises” (e.g., Beijing Auto and Jeep-Cherokee) could hire larger numbers of employees, and later Chinese companies could do so as well, although very few Chinese private enterprises grew to rival state enterprises in size.

Private enterprises are taxed more heavily than state enterprises. Many have failed (up to one third within the last two years, in some provinces), while others (including Jeep-Cherokee) are only barely surviving. Still, enough have succeeded to produce a good economic record for the urban private sector, which employs 3 percent of the population and produces about 10 percent of GNP. Chinese, foreign, and “joint” enterprises that employ cheap labor to make shoes, toys, and other consumer goods for export have been the most profitable.

Much of He Qinglian’s book describes how the Chinese economy got to where it is today through what Deng called “reform” and what He Qinglian calls “the marketization of power.” During the first decade of reform between 1979 and 1989, Party officials enriched themselves mainly through manipulating the public funds and supplies that were under their control. China at the time had a two-track pricing system for raw materials and industrial commodities: a controlled price for state enterprises within the planned economy, and a much higher market price that applied to all “non-state-owned” enterprises: private, joint-venture, and foreign companies, as well as the village industries. In a process popularly called guandao (“official turnaround”), officials would arrange to procure raw materials or commodities at the fixed price and then “turn around” to reap large illicit profits by selling on the private market.

Popular protests against guandao had a modest effect in the late 1980s, at least until the suppression of the 1989 Tiananmen movement. In the three years after 1989, memories of the government’s violence and a sag in the economy combined to present the regime with the specter of further unrest. During his famous “southern tour” of 1992, Deng gambled that this threat would vanish when he issued his call for everyone in the country to go into business and get rich—“even more boldly,” he said, than in the 1980s, and “even faster.”

His message led virtually every official, government office, and social group or organization in China to “jump into the sea” and try to make money. This was done in a variety of ways, and the most lucrative, He Qinglian shows, were usually exploitative or illicit.

Public funds were used for speculation in real estate or stocks, including foreign stocks. If such investments made a profit, the speculators would take it; if not, they would pass the losses on to state accounts. In “tertiary industries,” the friends or children of powerful officials would take control of the most productive section of a state enterprise (such as a clothing factory’s retail outlet) in order to run it as a semi-independent company. Profits went to the entrepreneurs; losses, if any, to the affiliated state enterprise.

In joint enterprises with foreigners or overseas Chinese, the Chinese partner could arrange for the business to use property and obtain materials and licenses at well below fair prices; in return the foreign partner would deposit foreign currency in overseas accounts, in the personal name of the Chinese partner. This maneuver had the added benefit of allowing the Chinese partner to export capital, which is illegal in China. He Qinglian calculates that in the 1980s the outflow of capital to private foreign accounts was nearly half as much as total foreign investment coming into China; after 1992, the outflow equaled the inflow.

  1. 1

    Adjusted for inflation, personal income during the 1980s rose 329 percent in cities and 355 percent in the countryside. For 1990-1995, it rose 226 percent in cities and 196 percent in the countryside. (Cheng Xiaonong, “Fanrong cong he er lai? Zhongguo jingji xianzhuang he qushi de fenxi,” Dangdai Zhongguo Yanjiu, No. 54 (1996), p. 59.)

  2. 2

    November 28, 1992, “China Survey” supplement, p. 3.

  3. 3

    May 17, 1993, p. 4.

  4. 4

    Chinese government statistics for the first quarter of 1998 show an overall annual increase of only 0.5 percent over the same quarter last year in rural areas (Shijie ribao [New York], July 15, 1998). In cities, for 1997 as a whole, about 40 percent of residents saw a clear decline in personal income. The downturn was sharpest in the smallest cities (Pinguo ribao [Hong Kong], April 1, 1998).

  5. 5

    The far-reaching implications of the crisis of China’s state enterprises are well analyzed in Edward S. Steinfeld, Forging Reform in China: The Fate of State-Owned Industry (Cambridge University Press, 1998).

  6. 6

    There are a few carefully controlled exceptions for new industry, such as aircraft, where “joint enterprises” with foreign companies are allowed.

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