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  Red China, Inc.: Does Communism Work After All?

Red China, Inc. Does Communism Work After All?

By Andreas Lorenz and Wieland Wagner

Part 5: A rare public debate

Zhao recently wrote a book that triggered a heated debate, unusual for a party that has traditionally preferred to settle differences of opinion on the quiet. But this time the dispute erupted on the Internet. The Communist Party employs about 30,000 censors to patrol the world of cyberspace. They block access to all kinds of Web sites the party considers to be potentially threatening. But this time the attack came equipped with politically correct arguments. In his blog, patriotic businessman Xiang Wenbo voiced his criticism of plans by the Carlyle Group, a US company, to acquire Xugong, a Chinese competitor that manufactures construction machinery. Chinese anger over what was perceived as an American invasion quickly caused a stir on the Internet. The patriotic debate even made waves at the NDRC's summer conference.

Planners from the agency's 31 provincial administrative units normally spend two days meeting in Beijing, where they sit in long rows and diligently jot down everything Ma Kai, NDRC's Beijing director, says in his elaborate presentations. But this time the delegates were more interested in discussion, leaving Ma Kai with no choice but to extend the meeting by an additional three days. The conference ended with a compromise, which Ma then presented to the State Council. Although the party intends to retain its control over strategically important state-owned enterprises, it also needs foreign investors to bring in money and technology. The Chinese gross domestic product may be growing steadily year after year, but it still amounts to only about one-sixth of US GDP.

The debate over the protection of property is closely tied to Chinese fears of foreign influence. China's communists face a dilemma. On the one hand, their economy needs modernization. On the other hand, they are painstakingly attempting to bridge the growing gap between rich and poor created by real capitalism with old Red slogans.

Given this approach, it should come as no surprise to the leadership when left-leaning members take the party at its word, ideologically speaking. In fact, last spring they almost managed to disrupt the ritual of the National People's Congress in Beijing, the rubberstamp parliament whose almost 3,000 delegates normally toe the party line on virtually every issue.

Growing unrest

A group led by Gong Xiantian, a Beijing law professor, forced the government to postpone a law designed to protect private ownership of Chinese real estate. Gong argued that because the law did not stipulate that "socialist property is inviolable," its drafters were guilty of "copying capitalist civil law like slaves." But Prime Minister Wen Jiabao had good reasons to support the reform, which would have given farmers the right to own their land. Indeed, the reform is urgently needed. With the state as the official owner, local Communist Party officials and village heads hold title to the land, which in many cases enables them to arbitrarily confiscate pastures, fields and gardens to build office buildings, residential developments, golf courses and industrial parks. A toned-down version of the law will be resubmitted to the People's Congress in March.

Party officials often offer local residents ridiculously low compensation for the expropriated property, while in turn cashing in on commissions the government pays to real estate companies in which they or their relatives often hold financial stakes. By engaging in this practice, local officials create resentment against the party. In 2005 alone, the Chinese authorities officially documented 87,000 incidents of social unrest in the People's Republic, mainly in rural areas.

Such unrest remains largely hidden from Western politicians and businesspeople. When they travel to China, they are deeply impressed by the speed and resolve with which Chinese politicians act, the effectiveness of their decisions and their openness to reform.

A new highway, a new factory, a new residential development? To the outside observer, it seems to take only days for the authorities to give the go-ahead for development, and suddenly fields are being flattened, houses razed and infrastructure installed. But appearances are only part of the truth in China. Contrary to the commonly held belief that a dictatorship must automatically have a strong center, Beijing's government is weak. The Communist Party leadership and ministers are often unable to enforce their decisions against the interests of powerful state-owned enterprises and provincial fiefs. At all levels, ranging down to the village supervisor, officials interpret documents bearing the "Red letterhead," as central directives are called, as they please.

A Chinese proverb handily sums up the fate of orders from Beijing: "A clear sunny day in the central government becomes a cloudy day in the countryside. When it rains in the provinces, people in the cities drown in the floods."

As a result, the Communist Party has been unable to improve safety in the country's coalmines, despite the fact that hardly a day goes by when miners are not buried alive or killed in explosions. And despite Prime Minister Wen's teary-eyed laments over the fates of the victims, the front of mine owners and local officials stands rigid like the first Chinese emperor's army of terra cotta soldiers.

Trouble slowing growth

Attempts on the part of the government, fearful of an overheated economy, to slow down the frenzied pace of construction in the real estate sector are also in jeopardy, as provincial officials and mayors defy the central government's directives and continue to build new residential neighborhoods and trade fair centers.

For local officials development is the only way to secure jobs in their regions -- and to produce handsome profits for themselves and their relatives, as well as for local construction companies. Despite the central government's instructions to reduce lending, banks issued loans amounting to 2.76 trillion yuan (€276 billion) within the first nine months of last year -- an increase of almost €80 billion over the same period in the previous year.

One of those who refused to obey Beijing was Chen Liangyu, 60, for many years the head of the Communist Party in Shanghai, and a member of the powerful Politburo in Beijing. Chen managed the city of 18 million as if it were a privately owned corporation. He is alleged to have generously tapped into the government pension funds -- into which Shanghai's citizens had entrusted roughly $1.2 billion -- to invest in the construction projects of friends who were property developers.

Corruption also runs rampant when it comes to building new neighborhoods, factories, airports and highways. Communist Party officials have the power to award contracts, and they utilize their power to fill their own pockets. Researchers at the State Council, the Academy of Social Sciences and the Communist Party's central university determined that of the 3,220 Chinese with assets totaling more than €10 million, 2,932 are relatives of senior party officials.

In the end, Hu and his Beijing allies decided that Shanghai's Communist Party leader was acting too independently and they removed him from his position. The power struggle shows that this major Asian power continues to employ the methods of Stalinist political commissioners to retain control over its increasingly complex economy. In a market economy, the central bank and government would cautiously curb an economic boom with the tools of the interest rate and fiscal policy. Its efforts would be supported by incorruptible watchdog organizations, including securities regulatory authorities, audit courts, trade unions, consumer organizations, citizens' groups, the judiciary and the media. But in China, this land of extremes, the determining factor is either the law of the party or the anarchy of the market -- but hardly anything in between. This explains why the Communist Party in Beijing ultimately dispatches the inquisitors of its disciplinary commission.

Chen, the former Shanghai party boss, initially disappeared from the scene, without being formally charged by a state prosecutor with any crime and without being given the opportunity to defend himself in public against any charges.

Lessons from China

Does learning from China mean learning how to win? In some respects, the country could certainly serve as a role model for developing countries. The Chinese communists rescued about 300 million people from poverty -- a number unprecedented in history -- with their reforms. The signs of affluence are everywhere, and not just in Shanghai and Shenzhen, where luxury boutiques like Gucci, Louis Vuitton or Versace attract a growing middle class. The Chinese boom even extends into the country's more backward interior, to places like Chengdu or Chongqing. The number of Chinese dollar millionaires is growing steadily, with 320,000 Chinese already worth an average of $5 million. The rich are among the Communist Party's most loyal supporters because it protects their affluence. And the army of migrant workers moving from the countryside to construction sites in the cities is also unlikely to rise up against the Communist Party. As long as life improves by a fraction each year for every Chinese citizen, the Mandarins will continue to enjoy the mandate of heaven.

And what about democracy, human rights and environmental protection? The Asian Tigers also used authoritarian means to whip their economies into shape, with similar approaches taken by South Korean and Thai generals alike. And as long as the Tigers managed to keep up their labor-intensive mass production of products like T-shirts and television sets, collectively growing their economies in the process, the system worked. But as they began producing more high-tech products and becoming more tightly woven into the global network, it became more and more difficult to simply direct their increasingly complex economies by decree from above.

The "Asian miracle," previously lauded by the World Bank, collapsed during the 1997 Asian economic crisis. As is happening in China today, in many cases state-controlled banks had stimulated the construction of factories and real estate with cheap loans. But then Western investors pulled their money out in panic, fleeing from what they perceived as "crony capitalism." The International Monetary Fund forced the Asian Tigers to bring their tangled financial structures up to Western standards, and in Indonesia the crisis led to the collapse of the Suharto regime.

In China, state-owned banks have also amassed billions in bad loans. When will the bubble burst? This is a constant topic of conversation in the exclusive hotel bars in Beijing and Shanghai where foreign businesspeople tend to gather for after-work drinks. Unlike the Tigers, the People's Republic does not have a freely convertible currency and, for this reason, is better equipped to fend off the advances of speculators. China also has huge, underdeveloped hinterlands at its disposal. Given these conditions, the economy could theoretically continue to boom for decades.

But even if China keeps on growing and avoids major crises, the Red planners face the question of their own existence. The more self-confident domestic companies like computer manufacturer Lenovo become, the less they need the party -- much in the same way that Japan's Sony Corporation shed its reliance on the MITI long ago.

Zhang Jun, a professor of economics at Fudan University in Shanghai, does not see a contradiction between the state's planning role and the fundamental superiority of the market. For Zhang, the state's role is merely a tool to help China successfully complete its historic transition into a market economy.

Translated from the German by Christopher Sultan.