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China – Growing Anxiously

“Let China sleep,” Napoleon Bonaparte cautioned famously, “for when awakes she will shake the world.” Nearly two hundred years later his prophecy is coming true. China is indeed waking up. And though the world has not yet been shaken, it is uncomfortably close to it as is clear from the envious appreciation and the obvious apprehension so clearly evident in global reactions to the happenings in China.

Some facts are indeed indisputable. Certainly, China has been on a roll since the late eighties. The growth statistics clearly reflect this and much more. Since the turn of the century, the economy has been consistently clocking an annual growth rate of ten per cent. In the first half of the current year, it reportedly crossed 11.5 per cent thereby raising fears of overheating in the economy, strains of which are already felt by way of creeping price rise, particularly of food items, wage increases of urban workers coinciding with declining productivity, artificial exchange rate and the resultant demand, particularly from the US, for correctives and a growing unrest among the underdogs in the rural areas.

The turnaround is manifest in almost all sectors. Just a few examples will suffice. China today is the largest producer of steel, second largest producer of automobiles, second biggest importer and user of oil and has, at a whopping $1.3 trillion, one of the largest foreign exchange reserves. It accounts for 10 per cent of world trade. Cumulatively they presently place the Chinese economy as world’s fourth largest next only to that of the US, Japan and Germany. The latest reckoning is that by 2008 China would replace Germany for the third place and by 2025 it will rival the US for the top slot.

Other growth indices are no less sparkling. Ninety five per cent of its population is literate. Life expectancy, presently reckoned at 71, is likely to touch 85 by 2015 so as to be on par with the OECD countries. Ninety one per cent of the households own television. And as many as 91 out of 1000 own a personal computer.

All this has had a tremendous impact on the lifestyle of the people. The once ubiquitous dull, dreary, monotonously unisex Mao overalls have given way to flashy fabrics that could rival the best in Milan or Paris. Multi-storied supermarkets selling high-price branded products of western origin are dime a dozen in all major cities like Beijing, Shanghai, Canton etc largely patronized by the emerging new rich. You name the brand and it is available, most of which if not all, being manufactured in China either by subsidiaries of the main manufacturers or under franchise. Duplicates and look-alikes made locally on the sly too are available aplenty in the gray markets at temptingly rock-bottom prices. The demand for luxury goods seems insatiable. One estimate shows that China is the third largest consumer of luxury goods accounting for 12 per cent of the global demand.

And, finally, the strident vibrancy of the Shanghai stock market completes the scenario of a country that has moved far, far away from its communist moorings and yet professes to be building a ‘socialist market economy.’

Historically, the miracle, often compared by China watchers to America’s emergence as an economic power in the nineteenth century, has been in the making since the 11th party congress of the Chinese Communist Party in 1978 which resolved to build a ‘socialist market economy.’ Anything that tended to slow down the pursuit was ruthlessly mowed down. The one and only aim, confided Prof Zhang Hiaoshan of the Institute of Rural Development and a strong protagonist of the official policy to me in a conversation in Beijing, was “to somehow expand the pie.” He sounded as much self-righteous as self-exculpatory when he hastened to add that “having expanded the pie, we now concentrate on its equitable distribution.” Though seen sequentially logical, the process is viewed by most of the China watchers as one that bristles with uncertainties, the most ominous being the manner in which wealth distribution takes place.

How did the miracle happen in such a short span, especially after a very long span of a highly regimented, iron-cast, totally controlled regime that left no room for anything even remotely suggestive of private initiative? One theory is that the very opening up process seemed to have suddenly released the long suppressed energies of a dynamic entrepreneurial class that, aided by a determined political leadership, grabbed every growth opportunity. Seemingly convincing, this theory only partly answers the query. There are more important factors of which two seem crucial.

One, of course, was the political will to press ahead with comprehensive economic reforms regardless of consequences. It was a complete break from the past both in form and content. Two oft repeated quotes of Deng Xiaoping, who led the reform process after the death of Mao and the subsequent liquidation of the Gang of Four, sum up the paradigm shift in growth strategy. One is his well known comment that the colour of the cat did not matter so long as it caught mice. The second, less known outside but heard oftener inside China, is that “to get rich is glorious.”

It was virtually a no-holds-barred strategy with a riveting focus on growth at any cost. The role of state was considerably reduced. Hundreds of state enterprises were either closed down and labour retrenched with or without compensation. Some of the redundant workers were later re-trained and re-deployed; but majority was left to fend for themselves.

Private initiative and investment, both domestic and foreign, were given the pride of place. To help private investments, all forms of controls were either removed or curtailed to the minimum. To begin with, specific growth centres were identified and foreign investors were persuaded to set up units there. In the event, the traditionally industrialized south-east coast became the centre of growth leaving the rest of the country to lag behind or even languish. Admittedly this did create some aberrations that will be discussed in some detail later.

With controls virtually removed, foreign investments started flooding in. Since the beginning of the eighties, a whopping $500 billion had flowed in, a lion’s share of which was accounted for by overseas Chinese from Taiwan, Hong Kong and Singapore. In some way, it was the return of the proverbial natives who had earlier fled the country to save themselves from the earlier political dispensation. They were later joined by many multinationals of European and American lineage which were attracted as much by the liberal policies of the new leadership as by the huge domestic market with an emerging middle class as also by the abysmally low cost of operations largely contributed by cheap labour.

The attitude of the new leadership towards foreign investors is well reflected in an incident involving a Chennai-based Indian company, Sundaram Fasteners. During their initial discussions, the Indian representatives of the company reportedly mentioned the possibility of the Indian personnel in the proposed factory in China having difficulties with their dietary habits majority of them being vegetarians. By the time they went back for the final round of discussions couple of months later, a full-fledged state-sponsored Indian restaurant had already been in place at the site of the proposed factory.

This attention to even seemingly less important needs of prospective investors and making them available was made possible – and this is the second crucial factor – because of the managerial and organizational expertise the new leadership could mobilize and put to use. In turn, this ensured the implementation of programmes and projects of all dimensions with no over-runs of either cost or time that, in the event, came to be a model even to economies traditionally known to be enviably disciplined, Japan and Germany being the typical examples. The timely completion early this year of the 1956-km rail line connecting Qinglai in the mainland with Tibet, much of it being mountainous, in just five-and-half years typifies the true character of Chinese planning and execution of massive projects.

Two factors are often mentioned as having hastened the flow of foreign investment and technology. One is the availability of cheap labour coupled with flexible labour laws and the other, a highly sophisticated support system, particularly infrastructure. One Indian entrepreneur doing business in China summed up thus: “No licences, no clearances and no endless formalities as the case back home. Just rent a shed and begin work.”

Such a rosy generalization is a bee wit exaggerated. Admittedly, the investment and operational climate is by and large hassle-free. This has been particularly so for the multinationals. For the Indian companies however the story line is slightly different. They do approve of the investment-friendly attitude of officials at all levels, trouble-free procedures and quick clearances. As for labour relations, their experience has been far from being hunky-dory. Though labour is relatively cheap, its productivity is not something to write home about. What is more, disciplinary action against local labour is invariably frowned upon.

In a typically amusing case, the management of an Indian company was taken to task by the local labour office for having spoken to an erring employee in raised voice for an act of indiscipline. Whether this had the sanction of the higher-ups or whether this was only a local aberration, one would not know for sure. Incidentally, the working of labour offices and their local officials has been the subject of caustic comments even in the usually pro-government media. The appalling working conditions in the coal mines in which accidents involving human lives are more a rule than an exception, the widespread use of bonded labour, particularly in the hinterland, the ubiquitous sweat shops, some owned by multinationals, and the rising curve of industrial accidents are all indications of a highly corrupt and inefficient labour department.

Corruption among officials in labour offices is known. In a recent case, over a thousand children were found working as bonded labour at abysmally low wages and working conditions in a brick kiln in Shanxi province. They were rescued following media exposure. Inquiries showed that the chief and senior officers of the local labour bureau were hand in glove with the private owners of the kiln. They were all immediately arrested and after a speedy trial the chief was executed and others were given life imprisonment.

To revert, the attitude towards foreign investment is much subdued now, partly because of the swelling foreign reserves kitty but largely because of the re-focusing of growth priorities with the hitherto backward hinterlands getting the attention, perhaps for the first time. One indication of the subdued fascination for foreign investment is the changes that have been brought about in April last in corporate taxation. In a move, the government upped corporate tax for foreign companies from the earlier 15 per cent to 25 per cent even as it scaled down the tax for domestic companies from the earlier 35 per cent to 25 per cent thereby ensuring level-playing ground for all.

Coinciding with this was yet another policy decision to make use of the country’s swelling foreign exchange (as much as 30 per cent) for investments abroad. In some way, this is reminiscent of what Japan did during its prosperous days in the mid-eighties but with a difference, and a significant one at that. While Japan indulged in reckless acquisitions of a string of American companies, some of them being symbols of American capitalism, and earned the wrath of the US people and government, China, quite thoughtfully and diplomatically, decided against any such buyouts and instead preferred to buy shares of profit-making companies thereby ensuring returns much higher than what investments in US securities, the policy hitherto followed, fetched. This move seemed to have been warmly welcomed by the US which is otherwise embittered by its enormous trade deficit with China.

But do these decisions have a wider dimension? Some China watchers seem to believe that they do. According to them, this is meant to signal the western world and its leaderships that China has gained confidence in itself and its economic strength and henceforth seeks no largesse from foreign investors. Politically, this is also a message to those who have been subtly suggesting the possibility of FDI being used at some stage to leverage political reforms in China that they had better mind their business and not preach democracy as they know to the Chinese leadership.

Critics, on the other hand, feel that the new policy towards foreign investment reflects the changing priorities of the leadership with the focus on developing the hitherto backward areas. Prospective investors are offered the moon if they move away from the industrially developed south east to the west and central regions.

Which, in turn, raises the crucial question; can China sustain its growth without any possible backlash, economic, to begin with, and, later, political? In fact, this is the one question that seems to bug as much the China admirers, of whom there are many, as China critics, of whom also there are many.

The nagging doubt emerges because for all its admittedly marvelous achievements there is a darker side as well manifested as they have in the worryingly widening rural-urban and the rich-poor gap, the languishing hinterland, the widespread corruption, the creeping unemployment, particularly in the industrially backward provinces in the west, northwest and the centre regions of the country, a restive labour nursing a slew of grievances and, topping all, shortages in essential food items and the resultant rising prices.

Not that the present leadership headed by President Hu Jintao who also doubles as the general secretary of the Chinese Communist Party, and Prime Minister Wen Jiabao is unaware of the problems. In fact, as early as the last party national congress in 2002 that saw the change of guard both at the party and the government, the duo did confess that the growth-at-any-cost policy had brought about serious distortions that called for urgent remedial measures. Precisely, the theme they adopted was the creation of a “harmonious society” within a “socialist market economy.” As subsequent speeches and statements followed by policy changes showed that their avocations were more than mere rhetoric.

Two studies made by two different agencies underline the concern of the new leadership. The one by the China Academy of Social Sciences showed that in 2004 the rich 10 per cent of the population earned 2.8 times more than the national average while the poorest 10 per cent earned less than a third of the national average. The other study conducted by the UNDP much later showed that the top 20 per cent of the population accounted for 50 per cent of the consumption spending while the poorest accounted for a measly four per cent.

The published excerpts of a futuristic government-sponsored study – the 20-volume report titled “An Outline of Sustainable Development in China” prepared by a team of 184 Chinese experts and scholars over two years and eight months- made public in May last tend to vouch for the above findings. This study essentially encapsulates the China of 2050 when the country will have achieved, among other things, zero population growth, zero wastage in energy consumption and zero growth in the degeneration rate of environment.

The new growth strategy initiated by the Hu-Wen leadership is multi-faceted in the sense that it seeks to deal with the problems simultaneously. The focus, as mentioned earlier is no longer on the traditional growth centres like Shanghai and Shenzhen and their environs. Instead, the slogan is “develop the west.” Towards that end, a programme described as “a charmed offensive” that promises virtually the moon to all prospective investors, domestic and foreign, has been launched. Official sources said that as much as $nine billion had already been spent on infrastructure in the hinterland. But the star project is the billion-dollar Yangtze River delta project that includes the massive, though controversial, Three Gorges dam on the Yangtz river.

Of greater significance are the reforms being initiated at the political and social levels to contain dissent that has hitherto remained sporadic and disparate. The dissent is certainly not directed against the central leadership or official policies, per se. Often enough they are against local leaderships and issues concerning working conditions, wages and so on. According to a report in the government-owned China Daily, there had been 57,000 strikes and protests in 2006, most of which being by factory and farm workers in the provinces.

It is these presently sporadic protests and agitations that are being viewed as somewhat ominous by China watchers. They see them as the beginnings of a movement that, like its counterparts in East Europe in the late eighties, might snowball into a major political crisis of great consequence. What the China experts say can be summed up thus; For all China’s success to date, ultimately the system that the communists have created is structurally unstable. The next phase of economic and political development must solve the ambiguity by permitting economic and political pluralism. In other words, they want China to go in for a democratic process that will ultimately challenge the pre-eminence of the communist party and, hence, its power.

A sweeping solution of this kind is, to say the least, a pipedream. Nothing that one sees or hears in China is even remotely suggestive of anything closer to the remedy so facilely suggested by China watchers, especially of the western genre. That much is sure. This is not to suggest that the dissent is ignored. Far from it.

As mentioned earlier, there have been some deviations from the highly centric, hardcore policies pursued by the earlier leadership. A cross section of people, both Chinese and non-Chinese, met by this correspondent do speak of a discernible loosening of controls, political and administrative, proof of which is the increasing assertiveness of provincial governments and officials as also of party leaders. This is seen not as a surrender of authority by the centre and its leadership but a well thought-out strategy to give some space for dissent to express itself thereby releasing the pent up frustrations of a transforming society.

In fact, President Hu never misses an opportunity to highlight his commitment to build what he describes “a socialist democracy.” In a well publicised speech he recently gave to ministerial officials and provincial heads at a party-run school, he said that “the government should expand political participation channel for ordinary people, enrich the forms of participation and promote a scientific and democratic decision-making process.” This, he said, was essential to “promote social harmony (his theme at the last party congress) and an overall well-off society.”

The devolution of authority is certainly not open-ended. There are limits to the freedom and none is allowed to cross the line drawn by the central leadership. Even the protests and agitations by the rural unemployed or the restless workers over wages or working conditions seldom turn violent or irrepressible. Those who turn so are severely dealt with as had happened early this month in the relatively prosperous Quangdong province when a strike by nearly 300 migrant workers demanding payment of their salary arrears was put down ruthlessly.

The dissent is ubiquitous but is more in the undeveloped hinterland. Essentially it revolves round two issues; one, mounting unemployment or, in some cases, underemployment, and, two, widespread corruption. Though the top leadership remains unstained, it is quite common down the ladder and is the worst in the provinces. Not a day passes without the media reporting a scandal of consequence. The scope and sweep of corruption is well reflected in a report in the China Daily. According to it, in the decade ended 2006, corrupt officials, both party and government, had fled the country taking away a whopping $50 billion.

Will the twin problems prove China’s undoing? Many western critics feel that they might well be. They do reckon with the measures already taken to deal with the brewing dissent. The drive against corruption, for example, has already taken a heavy toll of the high and mighty in the party and the government. But the feeling is widespread that the pickings have been not merely selective but even partisan with the followers of the earlier leadership being the main victims. And that takes the sheen off the drive. As for the unrest among the underdogs and the poor, the re-focusing of attention on areas hitherto neglected is expected to soften dissatisfaction with the present dispensation.

But the preemptive action on the part of the leadership lies elsewhere. The panacea of political pluralism suggested by western intellectuals to fight off an upwelling upheaval, a la Tiananmen protest of 1989, is certainly far fetched. Instead something comfortably closer to what is being preached by western intellectuals but that does not pose a threat to the pre-eminence of the communist party may well be the chosen path, something that could, for want of proper definition, be loosely described as controlled liberalism /pluralism.

Strains of such a move are already surfacing, one quite obvious and the other quite subtle. The former could be perceived, as mentioned earlier, in the advocacy of greater people’s participation, the greater autonomy to provinces and the freedom given to media to report the happenings on the ground.

The latter is even more significant as it amounts to a sort of social engineering to train the more vocal sections of society to fall in line with the leaderships’ thinking. As part of it, the Communist Party has initiated a three-year course for its selected cadre members for fine-tuning their “governance capability and global vision”, equipping them to face the media and generally toning up their managerial abilities. The programme, titled National Cadre Education and Training Plan, proposes to meet the demand for 500 provincial level, 8800 departmental level and over 100,000 country county level officials every year.

There is yet another more imaginative programme that aims at training professionals who will be inducted into the decision-making process. This new “social strata” will, hopefully, replace the conventional cadre members. According to a report published in the China Daily, “more than 150 million people in the country” are part of the “new strata,” and they “control or manage a cumulative capital of one trillion yuan ($129 billion)”. The same report suggests that nearly one-third of the members of this cadre openly expressed their desire to be play a political role.

With such a massive presence of “committed cadre” members, it seems rather easy to manage governance without resort to the kind of political pluralism the western China watchers have been foreseeing. Rather it would only strengthen the process of controlled liberalism/pluralism.

Quite revealingly, President Hu Jintao’s report to the recently held (October 15 to 20) 17th National Party Congress of the Communist Party of China (CPC) seemed to have sanctified the process. Thus, while committing the party and the government to the creation of a “well-off society” through the “scientific concept of development” that “put development as its essence and people as its core,” Hu, quite significantly, also emphasized that “the Communist Party will expand intra-party democracy to develop people’s democracy by increasing transparency in party affairs and opposing and preventing arbitrary decision-making by an individual or a minority of people.”

Indeed, the “well-off society” Hu and other leaders, including his bete noir, the former supremo Jiang Zemin, eloquently favoured was not merely a theoretical improvement on the “harmonious society” they mooted at the 16th National Party Congress in 2002, but a deliberately engineered element to give governance a touch of liberalism. In other words, there is more to the new mantra than mere semantics.

There is of course the theory that the new pronouncements must be seen as part of the “sinification of Marxism” that in effect means “the integration of the fundamental tenets of Marxism with China’s national conditions.” In a broader perspective it can also be seen as complementing the other guiding principles already enshrined in the Constitution’s lexicon – Marxism-Leninism, Mao Zedong’s Thoughts, Deng Xiapong’s Theory and Jiang Zemin’s Three Represents. Incidentally, Jiang Zemin’s Three Represents is the Chinese equivalent of the “inclusive growth” theory that our leaders and growth managers have of late been mouthing at monotonously regular intervals.

According to China watchers, the inclusion of the Three Represents despite that being promoted by Jiang Zemin was a politically deft move by Hu Jintao partly to establish his liberal credentials but largely to assuage his detractors of the Shanghai genre who had been largely marginalized in the newly reconstituted Standing Committee of the Political Bureau of CPC Central Committee. And although Hu could not pack the powerful body completely with his chosen men, it was indeed clear that he had almost come into his own.

The rhetoric is also followed up by real politik measures like scrapping of restrictions on foreign investments in the matter of stock ownership, destination and business scope in what is described as an attempt to woo them to the hinterland. A far more popular decision, however, was the raising of the ceiling individual income early this year with a clear eye on the surging middle class that has of late been demonstrably restive in the wake of spiralling prices of essential items.

Nonetheless, the larger question still remains; will all this contain the upwelling dissent, particularly in the hinterland? A study report published recently in the two state-owned newspapers, China Daily and People’s Daily, shows that the “income gap between China’s rural and urban residents” continued to widen much to the embarrassment of the party and government. According to the media report, the income ratio had gone up to 3.28:1 in 2006 from 3.23:1 in 2003 despite “enormous increase in public spending in rural areas.” That, for sure, is not a comforting development.

(The writer, Mr.M.K.Das, is a columnist based at Cochin, Kerala. He is former Editor (Kerala) of The Indian Express and the New Indian Express.)

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