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Assessing China’s Economy, Briefly

There is absolutely no doubt that China economy grew at a lightning speed in the 30 years from 1978 to 2008. The previous thirty years under Mao Zedong’ politics of intrigues, purges and even deaths of political opponents, destruction of institutions, and inexplicably bad economic judgments, the country’s future appeared bleak. The mesmerizing Chairman Mao’s words were considered dictates from heaven. But old timers complain now that in Mao’s time everybody got a piece of the tiny pie, and there was more equality among the people. The state looked after everyone.

After Mao’s death in 1976 and almost two years of power struggle, when Deng Xiaoping emerged as the supreme leader, he came with a vision. Mao purged Deng Xiaoping three times from his party posts because of his political ideas, but rehabilitated him each time for short periods for trouble shooting.

Deng dismissed the euphoric ideas of communism and utopia, and introduced his theory of “socialism with Chinese characteristics”. This basically meant to unleash the forces of production – economic liberalization – but under party control. The State-owned Enterprises (SOEs) or the public sector units, remained the backbone of the economy and it remains till today. These are meant to be the main job providers.

Interestingly, Deng once commented that he did not know whether China will remain a socialist state or become a capitalist state after 50 years.

China’s statistics are impressive, to say the least. Compared to India, it is in another league altogether. Its GDP is around $4.5 trillion. It holds a foreign exchange of $2.4 trillion, and has become the largest holder of US Treasury bonds at around $760 billion. Per capita income is supposed to be around $3,000, suggesting an improving society.

It is also predicted that the size of China’s economy will surpass that of the US in the next 10 years in numbers, something many economists passionately embrace. China has edged out Germany as the world’s biggest exporter, and is overtaking Japan as the second largest economy in the world.

There are some uncomfortable signs emanating out of China, however. Before the Tien An Men (TAM) square students protests of June 1989 when China was shaken, the important Shanghai newspaper, the Liberation Daily, ran articles warning of imminent protests and calling for greater administrative transparency. After crushing the protests, the Liberation Daily was purged top down and controlled rigidly by the Communist Party and the government. Similar actions were taken with Hong Kong based China controlled newspapers, the Wen Wei Po and Ta Kung Pao, which had also sided with the demand for transparency and liberalization.

On the eve of the 3rd Plenum of the 11th NPC (March 6 to 16, 2010), thirteen (13) top provincial level newspapers in a joint editorial, called for the abolition of HuKou (family registration) system which does not allow migrant workers to cities’ housing, health care and schooling for their children. This could ultimately result in serious problems including instability ultimately. In his report to the NPC, Premier Wen Jiabao did not agree to this demand, but central level official media were rather mild in their criticism of the joint editorial. But the Party and the Central government did their bit – one of the editors who had mooted the idea was dismissed, and the rest “disciplined”!

Following the NPC session, a senior researcher with China’s premier think tank, the Chinese Academy of Social Science (CASS), revealed the concerns of retired party and government officials. The researcher, Yu Jianrong, told a gathering of Chinese lawyers that one of them told him “You think that China’s society will not experience an upheaval. I think that it will definitely experience upheaval and that time is not too far distant”. This was not an individual opinion but representative.

Yu Jianrong also informed the lawyers’ gathering that each year since 2007 China experienced more than 90,000 mass protests, and the size of the protests were increasing. After 2005, when the protest figures reached around 85,000, the government officially stopped publishing these figures. These figures relate mainly to urban and industrial incidents and not rural. They involve retrenchment of workers, non-payment of wages and pensions, land grabbing by the real estate dealers–bureaucracy–party cadres mafia, and other related grievances.

For a country of China’s size with a population of more than 1.3 billion population, the number of protests may not look alarming. But from the view of a command state with one party rule where people do not have the choice of changing their leaders by popular franchise, such growing protests are ominous. Unfortunately, individuals or small groups, who come to Beijing to register their complaints with the relevant departments are detained by the police in the notorious “black jails”. Since these people have committed no crimes, to dissuade them from registering protests they are dumped in unmarked detention centres in difficult conditions to warn them off. Existence of these black jails have finally been acknowledged by the government.

These protests, demonstrations or strikes from work are neither political nor ideological. They stem mainly from economic deprivation and social hardships. There is also a growing grouse against the haves, mainly those in high positions because of their family backgrounds and privileged upbringing.

A survey by the Party’s mouthpiece, the People’s Daily earlier this year came out with some startling findings. More than 90 percent of the respondents think the neo-rich in China have benefitted from networking with government officials, and 42 percent have “bad impressions” of the group. The survey suggested that 69 percent of the respondents think “badly” or “very badly” of the new rich families, with only 3 percent saying they were all right with them.

Cai Jiming, Director of the Center for Political Economy at the Tsinghna University and one of China’s most respected scholars, blamed the problem on the lack of transparency in SOEs, and agreed with an investigation by the Boston Consulting Group in 2007 which suggested 70 percent of China’s fortunes were held by 0.4 percent of the population. Is state monopoly being replaced by family monopoly?

Who are these “0.4 percent” or 450,000 millionaires? The spotlight falls on the taizidang, or princelings, progenies, relatives and co-operator’s of former and current leaders. They include sons and daughters of President Hu Jintao, Premier Wen Jiabao, former premiers Li Peng and Zhu Rongji and others. Hu Jintao’s son Hu Haifeng and his subsidiary company NUCTECH was allegedly involved in corruption in Africa. More than 600 relatives of high officials have fled abroad after being charged with graft (Ref. Cary Huang, “Princeling Power”, SCMP, April 18, 2010).

Vice President Xi Jinping, who is slated to take over from Hu Jintao at the 18 Party Congress and 12th NPC, is a princeling, son of a former Vice Premier. At least six members of the current 25-member politburo of the party, the most powerful organ of China, are princelings. More are likely to come in.

The Taidizang, have an impact on China’s economic policies. They are inclined to fast development focussed on the coastal area. They are getting pitted against the tuanpai, or members of the Communist Youth League (CYL), who came up the hard way, served in difficult interior areas, and insist the rich coastal areas must contribute to the upliftment of the huge backward hinterland China.

There is a catch-22 situation here. The industries or export production factories of the coastal areas do not want to relocate to the interior. Costs of transportation and unreliability of electric power would demolish them.

Discussing the annual work report of China in March 2009, Premier Wen Jiabao said China has to “Post a high growth rate to maintain social stability”. A 10 percent growth is a must – that is, China has to run to remain in the same place.

We need to return to the issue of HuKou or the family registration system. Export oriented factories in the coastal areas desperately need cheap semiskilled and unskilled labour coming from the rural areas. Without this labour supply China’s exports will fall and impact the economy. Without registration in the urban centers they cannot settle down. If they go back to their villages they find their employment is taken over by others.

In an article in the official China Daily (Feb. 11, 2010), by Zhang Chuan Wen, and editor with the Beijing News warned “If they (migrant workers) cannot settle down and enjoy a decent life in the cities, a chasm will split China’s urban society, and before long, the social stratum may form the most dangerous time-bomb”. Chang warned that the issue of migrant workers was of great importance to China’s future.

The China Daily is an authentic mouthpiece of the Chinese government, and such an article cannot be published without the clearance of a section of very high authority. It questioned the path of China’s modernization.

At a press conference during this year’s NPC session (March, 2010) China’s Vice Minister for Agriculture Wei Chaoan admitted he could not understand the contradictions in reports about labour shortage in coastal cities and the massive under employment in rural areas. He was actually referring to the family registration system which was an impediment to labour supplies to the cities. Wei quoted the National Bureau of Statistics to say that in 2009 China had 230 million farmer turned workers of whom 145 million were seeking jobs outside their home towns. The number of redundant workers totalled 90 million last year (Global Times, China, March 11, 2010).

China did emerge from the global economic recession less scathed than many other countries. One of the reasons was that the economy was highly centralized and controlled. But there were serious job losses as exports dropped as small factories closed down. India, indeed, did better. The rise of sale in cars is just one example.

There is an issue with China’s statistics, or “numbers”, which are notorious for their misrepresentations and are now beginning to affect the central government’s planning.

Wang Shaojie, a member of the National Committee of the Chinese People’s Political Consultative Conference (CPCC) and a professor at Wuhan University, threw some light on the anomalies on statistical reports in an article in the China Daily of April 01, 2010.

Prof. Wang wrote that provincial GDP figures often exceeded the national figure calculated by the National Bureau of Statistics (NBS). GDP growth reported by the provinces and municipalities was higher than the national figure, tarnishing the nation’s credibility. There has been huge disparity of unemployment rate based on such statistics which put it at around 4.3 percent, while an independent study by the CASS said it was 9 percent, exceeding the international warning line of 7 percent. There has been double counting of data, Prof. Wang cautioned.

Similar is the case with statistics on “bad debts” with national banks. In 2006, Ernst a Young estimated China’s bad debts at $911 billion. But under pressure from Beijing they retracted.

Last year, retired service leaders questioned Hu Jintao in a letter on the disbursement of $585 billion subsidy to bolster the economy in the face of global recession. Of course, they did not receive a reply. But most of the subsidy went to government owned banks who give credit to SOEs, which are rarely even returned. This is known as “triangular debt”- government to banks, banks to SOEs because they invested in bad projects. There is little or no accountability. Everybody is happy. Black money is stashed abroad and large portions come back as FDI. This is an old practice.

There are two other questions to consider among many others. One is China’s determination to keep its currency, Renminbi (RMB) or Yuan artificially low against the US dollar. This gives them an edge in foreign trade, especially exports. Not only the US suffers, countries like India and Japan are hurt as much. Will they revalue their currency? The US has a report prepared to declare China as a “currency manipulator”. President Hu Jintao gave some indications to US President Obama, that the issue will be considered.

There have been indications from China to explore possibilities to dump the US dollar for some other currency like the Euro as the frontline currency peg. That may not work out any time soon. But they are working on regional currency options with the ASEAN plus.

The other issue impacts the globe. As the country with the largest trade surplus in the world, it is quietly following the “beggar-they-friend” policy. How long can that last?

China’s economy is export and FDI dependent. Both these elements depend upon the energy and raw materials imports that China depends on. Over 80 percent of its oil comes from t Saudi Arabia and the Gulf, Iran and Africa. It is increasingly getting dependent on Africa for minerals. Its major iron ore import is from Australia, though India also contributes to this among others.

Certainly, portions of the exporting countries depend on China’s imports, but they are not as critical as China’s dependence on these imports. FDI in China will depend on the raw materials, cheap labour, and energy (power) the Chinese government can supply them. Once any one of these elements dwindles they will go to other places.

To secure its imports through sea lanes, especially through the Indian Ocean, China has already initiated military steps. That could cause serious problems as conflict with other stake holders in the Indian Ocean region could emerge.

Finally, the foregoing is not to paint a dooms-day scenario for China. It will face some other problems in the demographic plane when its aging population surpasses the working population between 2030-2035. Japan is beginning to face the same problem now. India will have a huge working age population by then.

But China has the momentum with it. It wants to consolidate its power and position by 2030 if not earlier. It is, however, a misunderstanding to be awed and shocked by the brightly lit edifices of Shanghai and Guangdong. There is much more to China’s third world regions. The coastal China’s glitter was constructed specifically to awe foreigners, and many Indians have been hypnotised. Statistics is like a long skirt which hides the sores in the legs.

(The weiter, Mr Bhaskar Roy, an eminent China analyst with many years of experience. He can be reached at grouchohart@yahoo.com)

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