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A Great Leap Backward?

He Qinglian also shows how the plunder of state resources in the 1990s was several times as frenzied as the guandao of the 1980s had been. In the 1980s a number of millionaires emerged in China; but in just one or two years after 1992, a considerable number of powerful Chinese piled up tens or even hundreds of millions. Deng had opened up vast new fields for speculation, and, writes He Qinglian, China saw “a new high tide in the carving up of state property by China’s power elite.” The net value of China’s state enterprises has been steadily declining, and it is possible that sometime during 1998 or 1999 the aggregate value of such enterprises will reach zero.

Defenders of current policies in China have argued that such costs of reform are the inevitable results of dismantling an inefficient state system, and that China really has no choice but to swallow hard and suffer the pain until reform can work. But this analysis ignores the ways in which reform itself has fed corruption. He Qinglian’s chapter “State Enterprises: The Bottlenecks of Reform” shows how the new flexibility given to managers of state enterprises has in many cases led them not toward market efficiency but instead toward sacrificing efficiency for their own selfish interests and those of the higher officials who protect them. The golden rule of the corrupt manager, in He Qinglian’s analysis, is to have a relationship of utter loyalty and trust with one’s superior. In addition to outright bribes and kickbacks, one can please this person by employing his friends or relatives, by offering him the use of cars, by providing goods that he can “try out,” and in many other ways.

Once a manager can depend on a superior’s loyalty, all else is possible. Since no one within a state enterprise can then effectively challenge a manager’s decisions about allocation of resources, the manager can act with impunity. The manager becomes, in He’s artful phrase, the “semi-owner” of an enterprise in the specific sense that he or she has all the powers of an owner while remaining free of all the responsibilities. He Qinglian argues that what China actually has is not a true market but only a kind of “simulated market” in which “the actual competition is political” and where “power determines the allocation of resources but has no need to see to their efficient use.”

Late payment, partial payment, or nonpayment of wages have become common among state workers of all kinds, including officials and teachers. In spring of 1998 the number of laid-off state workers reached at least twelve million, and another ten million seem headed for layoff by the end of the year. A small city in Guangxi reported that it could pay only 2 percent of the salaries on its payroll. For several years demonstrations, slowdowns, and strikes have been common. The response of the state has been to ban protests where possible and to support state enterprises with emergency loans from the banking system.

Since state enterprises usually cannot repay these loans, they remain on the books as acknowledged or unacknowledged bad debt. China’s banks announce only part of their bad debt publicly, so its full extent is not easy to measure. The official figure is that 20 percent of loans are “nonperforming,” but the actual figure may be between 40 percent and 60 percent. (In the spring of 1998, the state banks in Guangdong announced bad debt of 200 billion yuan, but inspectors sent from Beijing found the actual figure four times that amount.) By international standards China’s banks are bankrupt, and deeply so.7

Despite the country’s financial crisis, opportunistic officials have, during the 1990s, been able to shake loose at least 500 billion yuan—about $60 billion—to use in speculation, especially in real estate. The money has been siphoned from state funds that had been intended for the purchase of state grain, for education, and for disaster relief, and has been supplemented by funds raised through usurious loans. Since 1992 speculation in land has driven housing prices in major Chinese cities to levels that are more appropriate to a modernized society than to a developing one. By World Bank standards, the cost of a family residence should fall somewhere between three and six times the average annual household income.8 In China prices range between ten and thirty times household income. At present 70 percent of new construction, representing 100 billion yuan ($12 billion) in capital, remains empty. Because the construction was financed by overextended state banks, the government will not permit prices to fall.

The people in China’s more modern cities who enjoy rising incomes have recently been spending less of their money on consumer goods like television sets and VCRs. In addition to saving for down payments on housing, they have been spending their money on medical care, children’s schooling, and other expenses that the state once covered but now come out of family budgets. This shift in spending patterns, combined with the fact that buying power has been declining among farmers and state-sector urban workers, has created a serious oversupply in consumer goods. The value of the excessive national inventories has recently reached three trillion yuan—$360 billion—putting strong downward pressure on prices. But for the state there is no easy way out: cutting prices only puts state enterprises further in debt, while cutting production means more layoffs.

In spring of this year the Chinese government stated publicly that the yuan would never be devalued, and observers around the world have noted that China has survived the Asian currency crisis in fairly good shape. But the apparent strength of the yuan comes less from economic strength (China’s export growth has fallen off sharply) than from restrictive laws on currency trading. Since it is illegal for ordinary Chinese—unlike ordinary Indonesians or South Koreans—to convert their money into foreign currencies, they cannot create a run on the yuan. Nor can capital be exported without government permission. The stability of the Chinese currency—indeed of the regime itself, in the view of some Chinese economists—depends on these politically enforced restrictions. Yet the economic pressure to devalue the yuan increases daily, and there are signs that the Chinese government may not be able to keep its word of a few months ago.

Future Chinese generations will have to reckon with another, even larger, debt that the economic boom has both incurred and postponed, and that is the debt to the environment. He Qinglian does not address this issue in detail, but other scholars have done so.9 Air pollution in Chinese cities has been estimated to be five to ten times that of US cities, while new industries, in order to maximize profits, refuse to install pollution control equipment. In north China, where rainfall is scant, diversion of water to agriculture and industry has caused streams and small reservoirs to dry up. During the first six years of the 1990s the Yellow River, China’s second largest river, was dry for a total of 333 days. In the 1950s the water table in Beijing was sixteen feet below the surface; today it is more than 150 feet down.

China supports the world’s largest national population on only about 7 percent of the world’s arable land, but it is losing that arable land at an annual rate of 0.5 percent to erosion, construction of buildings and roads, and the encroachment of deserts. China now has two thirds of the arable land it had four decades ago, and 2.3 times as many people. Specialists estimate that China’s gross domestic product is reduced by about 15 percent annually because of losses caused by environmental damage, and this omits the effects that cannot be measured in money, such as the premature loss of life of people stricken with environmentally induced disease. Zheng Yi, an exiled Chinese writer who is completing a study of the environment in China, 10 calculates that each year China’s economic activity causes environmental damage whose reversal would cost at least eight trillion yuan, an amount that exceeds the country’s annual gross product.

Such damage has been exacerbated by this year’s floods. The Yangtze River has flooded periodically in China’s history, but the record-breaking floods of 1998 are nature’s retribution for decades of environmental devastation and neglect. Beginning with Mao Zedong’s “Great Leap Forward” of 1958- 1959, China’s richest natural forests in Sichuan and Yunnan provinces, at the headwaters of the Yangtze, were cut “more, faster, better, and cheaper.” Since 1958 those forests have shrunk by 45 to 70 percent, and, nationwide, about one third of China’s topsoil has washed into the Pacific Ocean. Small dikes and dams have fallen out of repair because of shoddy work resulting from corruption, and, in recent years, because government spending on irrigation has been dominated by construction of the huge and controversial Three Gorges Dam.

More than 300 million people have been affected in this year’s flooding, and deaths have reached into the tens of thousands (the government acknowledges just over three thousand). In earlier years the government handled floods by blowing up small dikes and dams, deliberately inundating parts of the countryside in order to protect cities. Rural people had no choice but to bear the sacrifice. But in 1998 there are signs of rebellion in the countryside. As of July 31, the Yangtze flooding had led to 130 incidents of violent uprising—attacking and occupying government offices, sacking state warehouses, and burning vehicles and buildings—in the four provinces of Anhui, Jiangxi, Hubei, and Hunan. The longer-term effects of flooding are likely to be grain shortages, another large increase in rural migration to the crowded cities, and, in the countryside, increasing incidence of armed revenge against the cities, the government, and the well-to-do. The great flood is exacerbating nearly all of China’s social tensions, even as government resources for dealing with those tensions and the economic crisis are greatly diminished.

He Qinglian argues that inequality, like corruption, increased through the 1980s and expanded dramatically after 1992. Between 1992 and 1995, when the size of China’s economy was growing at unprecedented rates, the number of what the government calls “poverty counties” was also rising. Between 1987 and 1994, average personal income fell in the provinces of Anhui, Guizhou, Ningxia, and Xinjiang. (By 1994 the disparity between rich and poor was already greater in China than in the United States. In that year the richest 20 percent of the US population owned 44.3 percent of the country’s wealth, whereas in China the richest fifth owned 50.2 percent of the wealth; the poorest fifth in the US owned 4.6 percent of the wealth, in China 4.3 percent.)11 Urban residents (not counting the 120 million rural migrants) are about one fifth of China’s population, produce about two fifths of the wealth, and consume three fifths of it. Rural people (including the migrants, and including residents of small towns) make up four fifths, produce three fifths, and consume two fifths.

  1. 7

    Modern international banks try to observe a bad debt ratio of under 3 percent, compared to China’s 20 percent (or much more). They also maintain “capital adequacy ratios” ensuring that at least 6 percent of the capital they hold is their own, so that bad debt can be covered by a safe margin. The capital adequacy ratio of China’s state banks is about 3 percent. See Peter Chan and Mark O’Neill, “Asia Woes Spur Beijing to Act,” South China Morning Post, May 14, 1998.

  2. 8

    Zhonguo gaige bao [China Reform News], February 18, 1998. He Qinglian also notes the irony that artificially high housing prices hamper the government’s policy that “commercial housing” should be a key to bringing the economy out of its current decline.

  3. 9

    See André Dua and Daniel C. Esty, Sustaining the Asia Pacific Miracle: Environmental Protection and Economic Integration (Washington, D.C.: Institute for International Economics, 1997); He Bochuan, Shan’aoshang de Zhongguo China on the Brink; and Vaclav Smil, China’s Environmental Crisis (M.E. Sharpe, 1993).

  4. 10

    Two of Zheng’s earlier books, on politically induced cannibalism during Mao’s Cultural Revolution, have been reviewed in these pages. See Liu Binyan, “An Unnatural Disaster,” April 8, 1993.

  5. 11

    He Qinglian also uses the “Gini coefficient,” a standard measure of income disparity, to place China within a world setting. A coefficient of 0.3 or less indicates substantial equality; 0.3 to 0.4 indicates acceptable normality; and 0.4 or higher is considered too large. 0.6 or higher is predictive of social unrest. In one 1994 survey, China measured 0.45; in another, 0.59.

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