TV & Radio
The dark side of China's dazzling economic boom
Hype conceals often sordid reality of government corruption and cronyism
- Minxin Pei
Sunday, April 9, 2006
San Francisco Chronicle
The only thing rising faster than China is the hype about China.
China's economic boom has dazzled investors and captivated the world. But beyond the new high-rises and churning factories lie rampant corruption, rising social injustice and an elite preoccupied with its own survival.
In January, the People's Republic of China's gross domestic product exceeded that of Britain and France, making China the world's fourth-largest economy. In December, it was announced that China had replaced the United States as the world's largest exporter of technology products. Many experts predict that the Chinese economy will be second only to the United States by 2020, and possibly surpass it by 2050.
Western investors hail China's strong economic fundamentals -- a high savings rate, huge labor pool and powerful work ethic -- and willingly gloss over its imperfections. Businesspeople talk about China's being simultaneously the world's greatest manufacturer and its greatest market. Private equity firms are scouring the Middle Kingdom for acquisitions. Chinese Internet companies are fetching dot-com-era prices on the Nasdaq. Some of the world's leading financial institutions, including Bank of America, Citibank and HSBC, have bet billions on the country's financial future by acquiring minority stakes in China's state-controlled banks, many of them burdened by huge nonperforming loans. Not to be left out, every global automobile giant has built or is planning new facilities in China, despite a flooded market and plunging profit margins.
And why shouldn't they believe the hype?
The record of China's growth during the past two decades has proved pessimists wrong and optimists not optimistic enough. But before we all start learning Chinese and marveling at the accomplishments of the Chinese Communist Party, we might want to pause. Upon close examination, China's record loses some of its luster.
China's economic performance since 1979 is actually less impressive than that of its East Asian neighbors, such as Japan, South Korea and Taiwan, during comparable periods of growth, especially if adjusted for the quality of growth. Its banking system, which costs Beijing about 30 percent of annual GDP in bailouts, is saddled with nonperforming loans (ones without an expectation of repayment that have not yet been written off) and is probably the most fragile in Asia.
Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital -- all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.
To most Western observers, China's economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing's brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption and widening inequality. Dreams that the country's economic liberalization will someday lead to political reform remain distant.
After a quarter century of gradual economic reform, has China succeeded in transforming its old command economy into a genuine market economy? Not nearly as well as most people would guess. Although China was one of the earliest socialist economies to begin serious reform, recent data on the country's regulatory system, international trade, fiscal policy and legal structure place China in the bottom third of 127 countries surveyed for economic freedom, below most Eastern European countries, India and Mexico, and all of its East Asian neighbors, save Burma and Vietnam.
The Chinese state remains deeply entrenched in the economy. According to official data for 2003, state-owned companies directly accounted for 38 percent of the country's GDP and employed 85 million people (about one third of the urban workforce).
But China's tentacles are even more securely wrapped around the economy than these figures suggest. For example, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country's fixed industrial assets. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.
To many observers, Beijing's tight grip on the Chinese economy means only that its reform process is incomplete. As China continues to open itself, they predict, state control will ease and market forces will clear away inefficient industries and clean up state institutions. The strong belief in gradual but inexorable economic liberalization often has a political corollary: that market forces will eventually produce civil liberties and political pluralism.
It's a comforting thought. Yet these optimistic visions tend to ignore the neo-Leninist regime's desperate need for unfettered access to economic spoils. Few authoritarian regimes can maintain power through coercion alone. Most mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military and business interests. In other words, an authoritarian regime imperils its capacity for political control if it embraces full economic liberalization. Most authoritarian regimes know that much, and none better than Beijing.
Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives.
State enterprises are miserably unprofitable. In 2003, a boom year, their median rate of return on assets was a measly 1.5 percent. More than 35 percent of state enterprises lose money and 1 in 6 has more debts than assets. China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans.
Political savvy and business acumen do not often go together. Because of the party's fixation with high growth, government officials are rewarded for delivering, or appearing to deliver, precisely that. This incentive structure fuels a widespread misallocation of capital to "image projects" (such as new factories, luxury shopping malls, recreational facilities, and unnecessary infrastructure) that burnish local officials' records and strengthen their chances of promotion. The results of these mistakes -- gleaming office complexes, industrial parks, landscaped highways and public squares -- tend to impress Western visitors, who view them as further proof of China's economic prowess.
The Chinese economy is not merely inefficient; it has also fallen victim to crony capitalism with Chinese characteristics -- the marriage between unchecked power and ill-gotten wealth. And corruption is worst where the hand of the state is strongest. The most corrupt sectors in China, such as power generation, tobacco, banking, financial services, and infrastructure, are all state-controlled monopolies. None of that is unprecedented, of course. Tycoons in Russia, after all, have looted the state's natural resources. China, at least, boasts genuine private entrepreneurs who have built prosperous companies. But China's politically connected tycoons have cashed in on China's real estate boom; nearly half of Forbes' list of the 100 richest individuals in China in 2004 were real estate developers.
Various indicators, pieced together from official sources, suggest endemic graft within the state. The number of "large-sum cases" (those involving monetary amounts greater than $6,000) nearly doubled between 1992 and 2002, indicating that more wealth is being looted by corrupt officials. The rot appears to be spreading up the ranks, as more and more senior officials have been ensnared. The number of officials at the county level and above prosecuted by the government rose from 1,386 in 1992 to 2,925 in 2002.
An optimist might believe that these figures reveal stronger enforcement rather than metastasizing corruption, but the evidence suggests otherwise. Dishonest officials today face little risk of serious punishment. On average, 140,000 party officials and members were caught in corruption scandals each year in the 1990s, and 5.6 percent of these were criminally prosecuted. In 2004, 170,850 party officials and members were implicated, but only 4,915 (or 2.9 percent) were subject to criminal prosecution. So, party membership has its privileges.
Rapid economic growth has not yet produced China's much-anticipated political pluralism.
In part, democracy itself has been a victim of the country's economic expansion. However flawed and mismanaged, the country's rapid growth has bolstered Beijing's legitimacy and reduced pressure on its ruling elites to liberalize. Democratic transitions in developing countries are often caused by economic crises blamed on the incompetence and mismanagement of the ancien regime. China hasn't experienced that crisis yet. Meanwhile, the riches available to the ruling class tend to drown any movement for democratic reform from within the elite. Political power has become more valuable because it can be converted into wealth and privilege unimaginable in the past. At the moment, China's economic growth is having a perverse effect on democratization: It makes the ruling elite even more reluctant to part with power.
Generous government spending on law and order helps to ensure that power-sharing won't be necessary in the near future. Since the Tiananmen Square tragedy, the party has invested billions in beefing up the paramilitary police force (the People's Armed Police) that has been deployed in suppressing internal unrest. To counter the threat posed by the information revolution, and especially the Internet, the Chinese government has blended technological savvy with regulatory might.
The Chinese "Internet police," officially known as the Ministry of Public Security's Internet and Security Supervision Bureau, is reportedly more than 30,000 strong. Its Beijing branch proudly claimed that, in 2002, it participated in a multiagency exercise to see whether the government could rid the Internet of "harmful content" within 48 hours of the onset of an emergency. (During the exercise, all "harmful content" was removed in 19 hours.) The party's refined strategy of "selective repression" singles out only those who openly challenge its authority while leaving the general public alone. China is one of the few authoritarian states where homosexuality and sex-change operations are permitted, but political dissent is not.
The emerging social elite, by contrast, is co-opted and coddled. The party showers the urban intelligentsia, professionals and private entrepreneurs with economic perks, professional honors, and political access. For example, nationwide, 145,000 designated experts, or about 8 percent of senior professionals, received "special government stipends" (monthly salary supplements) in 2004; tens of thousands of former college professors have been recruited into the party and promoted to senior government positions. At least for now, the party's charm campaign is working: The social groups that are usually the forces of democratization have been politically neutralized.
China has already paid a heavy price for the flaws of its political system and the corruption it has spawned. Its new leaders, though aware of the depth of the decay, are taking only modest steps to correct it. For the moment, China's strong economic fundamentals and the boundless energy of its people have concealed and offset its poor governance, but they will carry China only so far. Someday soon, we will know whether such a flawed system can pass a stress test: a severe economic shock, political upheaval, a public health crisis or an ecological catastrophe. China may be rising, but no one really knows whether it can fly.
Minxin Pei is senior associate and director of the China program at the Carnegie Endowment for International Peace. He is the author of "China's Trapped Transition: The Limits of Developmental Autocracy." A longer version of this piece ran in Foreign Policy magazine, published by the Carnegie Endowment for International Peace. Contact us at firstname.lastname@example.org.
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♪ 太字は引用者。ただし中国ではBrokeback Mountainの上映が禁止されるなど、必ずしもLGBTが認められているわけではない。