SPIEGEL ONLINE

SPIEGEL ONLINE

02/27/2007 02:01 PM

Red China, Inc.

Does Communism Work After All?

By and Wieland Wagner

China is securing an ever-bigger share of the world market with the methods of a planned economy. Competitors and economists alike are astounded by the country's seemingly unstoppable march to becoming a global economic superpower. The development has left many wondering: Does communism work after all?

Boom City Shanghai: President Hu Jintao and his Communist Party are experiencing explosive success across the country.
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Boom City Shanghai: President Hu Jintao and his Communist Party are experiencing explosive success across the country.

Nine men dressed in dark tailored suits meet behind high, Red walls. Their secret meeting place in downtown Beijing is called Zhongnanhai, or "Middle and Southern Lake." Once part of the Forbidden City, Zhongnanhai was a place where emperors, concubines and eunuchs would spend their days concocting court intrigues. Some of the buildings from those feudal days are still standing today, joined by functional, gray and white structures built when the Chinese Communist Party established its headquarters here.

The nine men -- who constitute the Standing Committee of the Communist Party's Politburo, the most-powerful political body in the Middle Kingdom -- meet in the southern section of this refuge. Their discreet meeting is businesslike. The group's members were not elected by the people and they are not interested in being observed while governing. Cameras are banned and there is a conspicuous absence of jovial pats on the back or ready smiles for the evening news.

None of the members of this sombre squad is known for his charisma. President Hu Jintao, 64, the head of state and Communist Party leader, and his eight colleagues are stiff technocrats. Hu, the son of a tea merchant from Jiangsu Province, holds a degree in hydroelectric engineering. The others are trained in fields like electrical engineering, metallurgy or geology.

But the discussions and decisions made here within the ranks of China's Politburo affect the well-being of 1.3 billion Chinese -- and increasingly the rest of the world. If the Middle Kingdom were not a country, but rather a giant company -- let's call it Red China, Inc. -- then the Politburo would be its all-powerful board of directors.

And if Hu were not a communist official but rather a capitalist corporate boss, he would find himself inundated with job offers worldwide. Competitors in the capitalist West can only dream of the successes he and his fellow communist leaders cum business executives have achieved.

Hardly a day goes by on which Asia's giant, Red corporation does not report new and dazzling business figures. And the more helplessly Western heads of state -- from United States President George W. Bush to German Chancellor Angela Merkel -- attempt to reform their traditional market economies, the more enviously the capitalist world eyes China's frenzied growth, all the while asking itself: Does communism work after all?

China's speedy ascent to become a global economic superpower is troubling to many: to the industrialized nations of the West because they fear for their jobs; to politicians because the global balance of power is shifting; and, last but not least, to economists because it is so puzzling to them.

Economists' theories are based on the recognition that market forces alone drive economic growth. The state's only role is to ensure that competition functions and that no one is able to abuse his power in the marketplace to an inadmissible degree.

A Midas touch

For these economists, the fall of the Iron Curtain offered glaring proof that their hypotheses were correct. Indeed, planned economies in Soviet bloc countries were failures, creating poverty instead of affluence and leaving industrial wastelands in their wake. Yet China is flourishing. With a blend of a planned economy and unbridled capitalism that you won't find mentioned in any textbook, the country is capturing world markets and achieving double-digit growth year after year.

Hu and his Red board of directors appear to have something akin to the Midas touch. With their country, which amounts to a gigantic, low-cost factory, they have already managed to accumulate more than $1 trillion in foreign currency reserves. In theory, at least, the communist People's Republic of China, has now joined the United States, the global capitalist superpower, in deciding the fate of the world's leading currency.

In 2005, China leapfrogged over France and Great Britain to become the world's fourth-largest economy. The country's new spot in the rankings came as the result of an omission on the part of its communist bosses: Already blessed with so much growth, they had simply forgotten to include a large portion of their giant service sector in China's economic statistics.

American sinologist Roderick MacFarquhar is astonished by China's performance. "Never before," says MacFarquhar, "has so much wealth been created by so many people in such a short time span."

If China continues to grow at the same pace, it will oust Germany as the world's third-biggest economy in only two years, perhaps even dethroning the United States from its leading position one day. In 2005, China was already the US's second-largest goods supplier and Japan's largest. Not satisfied with being No. 2, Beijing's strategists are continuing their plans to shower the world with inexpensive products such as T-shirts and DVD players -- and, increasingly, with Chinese high technology.

A fast-developing tech sector

China recently surpassed Germany in the number of patents it registers. With its latest five-year plan, the country's Communist Party has set itself an ambitious goal of catapulting China to world-class heights in the fields of science and technology. According to the plan, Chinese probes will orbit the moon next year and land on it by 2010. China's space ambitions also include a bizarre aural spectacle: Its lunar orbiters will transmit 150 pop songs back to earth, including a Chinese tune titled "We Love our China."

The Communist Party's economic successes aren't its only impressive achievement. Chinese cities are safer than places like São Paulo or Bogotá, and they seem cleaner and more orderly than the slums of Nairobi or Soweto in South Africa. Beijing and Shanghai boast a lively cultural scene, and broadband Internet access is already taken for granted in the country's major cities. Mobile phone reception is even available in small villages.

Communist Party leader Hu and his Politburo colleagues aren't the only ones behind the changes that have swept across this vast country. True, they are responsible for coming up with the overriding strategies behind China's economic miracle, and for this task they take the necessary time -- hours that Western politicians waste doing the rounds on talk shows. But the Politburo also routinely solicits advice and reports on the latest global trends in science and business -- on issues running the gamut from biotechnology to health insurance -- from academics in so-called "study sessions." This being a communist land, these sessions would of course be incomplete without the requisite lectures on China's revolutionary history and Marxist theory.

Graphic: The Government System of the People's Republic China
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Graphic: The Government System of the People's Republic China

The State Council, China's cabinet -- headed by the pedantic and schoolmaster-like 64-year-old Prime Minister Wen Jiabao -- deals with the day-to-day business of government. The cabinet meets at least three times a month, as required by law, in a building located a stone's throw from the offices of the Politburo. Meetings are graced with tall beauties dressed in red outfits and white gloves, who serve cabinet members green tea from the Wuyuan district in Jiangxi Province.

Red China, Inc.'s central nervous system

In addition to Wen, this inner circle of the Chinese government includes four deputy premiers, five members of the State Council (including one general) and a secretary general. Comprised of eight men and two women, the group directs and coordinates the work of 28 ministries and commissions, including the country's central bank and its central auditing authority. It also presides over an immense number of government agencies, including China's official news agency, Xinhua, the Academy of Sciences, the customs agency, the weather bureau, an agency in charge of grain production and distribution and -- not to be overlooked -- the Administration of Government Offices, which provides high-ranking officials with living quarters, cars and vacation homes.

All the elements in the network that make up Red China, Inc. come together in Wen's State Council. The body controls daily life in China with a plethora of decrees, memorandums, plans, measures and responses. In the month of September alone, it issued a decree on the "Administration of Payment of the Automobile Sales Tax," approved "Basic Regulations for the Electricity Market" and organized "Safety Inspections of Dams that include Power Plants."

A decade and a half after the collapse of the Soviet Union, a communist country appears to be relentlessly transforming itself into an economic superpower. Its recipe for success is, at first glance, the five-year-plan -- one which dismayed Western politicians have routinely dismissed for such features as its ban on private ownership of land and its manipulation of currency exchange rates.

Having your cake and eating it too

But five-year plans are only one side of the coin in China's vast realm. The other is a wildly unfettered capitalism geared solely toward naked profit. And when it comes to turning a profit, hardly anything seems sacred anymore, not even for China's communists. The Great Hall of the People in Beijing is a case in point. If the National People's Congress doesn't happen to be in session or President Hu isn't using the magnificent building -- with its more than 300 rooms and enormous paintings depicting scenes from the revolution -- to receive foreign dignitaries, the government simply rents it out. Recently, US automaker Ford used the building to unveil its latest line of car models, and fast food giant Kentucky Fried Chicken opted for the elegance of the Great Hall to hold a meeting of its more than 2,100 Chinese restaurant managers.

Ironically enough, while economists in Europe and the United States advocate "less government" and "open markets" as a response to globalization and the Chinese challenge, the Marxist-Leninist party that rules China blatantly avails itself of every advantage of capitalism while steadfastly refusing to give up state control over the economy.

Graphic: Awakening Giant
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Graphic: Awakening Giant

ICBC, a major Chinese bank, recently conducted the biggest initial public offering in financial history, floating shares worth the equivalent of $22 billion on the Hong Kong and Shanghai stock exchanges. In a win-win situation for China's communists, the bank's value rose to more than $200 billion, and yet Beijing retains control over ICBC. The country's three largest telecommunications companies are also state-owned. Two years ago, the Communist Party simply reshuffled senior executives among the three companies.

Is China, one of the most undemocratic nations on earth, setting an example for democratic countries on how to effectively solve problems? Do China's successes fly in the face of every critic and skeptic who believes that Marxism-Leninism and capitalism are as incompatible as the devil and holy water?

" A social market economy with Chinese characteristics"

China calls this odd construct a "social market economy with Chinese characteristics" -- a term that already hints at tremendous ideological flexibility. After all, a market economy cannot be socialist at the same time. And the term "Chinese characteristics" is more than vague.

In fact, the Chinese Communist Party has shown great skill in repeatedly reinventing, making cosmetic changes to and even chiseling away at its construct of ideas. As flexible as a bamboo grove in the wind, the Communist Party is constantly replacing the content of its propaganda slogans.

All changes aside, the name "Communist Party" is kept in place, like a familiar façade, behind which the country's leaders long ago redefined their supreme political goals. Today, their objective is to build a great and strong China, a nation that can no longer be humiliated abroad and plays an important role on the international stage.

"Whatever the party calls itself, its most important job has always been to transform the country from a semi-feudal and semi-colonial state into a modern society," says economist Shi Shaomin of the state-controlled Chinese Society for Economic Reform.

Discovering the rule of law in China

The revolutionary class struggle, traditionally a communist party's bread and butter, vanished from the official rhetoric long ago. On the contrary, President Hu Jintao's speeches are peppered with talk of a "harmonious society." It doesn't seem to trouble Hu that this concept is borrowed from the feudal-era philosopher Confucius, whose teachings were ostracized under Mao.

The "Theory of the Three Representatives," the brainchild of Hu's predecessor, Jiang Zemin, now allows the party to accept private business owners as members. Instead of the class struggle, the official vocabulary is filled with words like "democracy, equality, justice, earnestness, friendship and vitality," and with phrases like the "rule of law."

This democratic-sounding verbiage conceals the concept of an elite party that uses laws and regulations -- and no longer a complicated army of class-conscious but incapable Mandarins and a tangled mass of directives and decisions -- to rule its people and country as efficiently as possible.

With more than 70 million members, the Chinese Communist Party (or "Party of Common Ownership") is the world's largest political party. It governs one-fifth of humanity and yet it remains a secretive organization comprised of countless "leadership groups," commissions, research centers, central offices -- and even a "Central Committee for Protecting Secrets."

The Communist Party and the country's bureaucracy are so tightly intertwined that party members enjoy the same privileges as government officials -- from pension rights to health care. Important functionaries even bear the title "minister." Indeed, anyone who is not a member of the party's exclusive club doesn't stand a chance of building a career in government.

In a party that insists on its sole claim to power and staunchly upholds its dogma of "democratic centralism," career changes from the private sector are generally frowned upon. Hu consistently maintains that China is and remains a "democratic dictatorship of the people."

A gold rush mentality

One would think that a market economy could hardly flourish within such an authoritarian system. But precisely the opposite is true in China, a country consumed by a kind of gold rush mentality reminiscent of the pioneer days in the United States. Although the party and central government determine the overall direction, just about anything is allowed that the 70 million party members and their fellow Chinese can concoct to stimulate China's economic miracle. After all, continued growth virtually guarantees the party a stranglehold on power. And economic growth, be it in Beijing or elsewhere in the country, is what counts in this land of myriad contradictions.

It certainly counts in Shanghai, where the party is one of 60-year-old Xu Weihu's favorite topics. He has been a member throughout his working life -- first as a simple laborer and now as head of SVA, a state-owned electronics manufacturer. With its flat-screen monitors, SVA is part of the elite in China's high-tech industry. Xu greets visitors at his company's headquarters, a castle-like building complete with Neoclassical columns, that is meant to embody the pride of achievement -- and both the company's and China's claim to the future.

Dressed in a blue suit and red tie, Xu talks like a Western business executive. But he tires of his stiff outfit within a few minutes, removing his tie and tossing his jacket onto a chair. Stripped down to his plain blue shirt, he now looks more like a normal party official -- which is exactly what he is, because he fills two positions within the company, that of CEO and the important post of party secretary.

Xu routinely tests his employees to ensure that they are firmly behind the party's key theories, including the dogma of a "harmonious society." This is extremely important, says Xu, because SVA can only contribute to industrial growth if the party maintains order within the country.

Xu has been performing this patriotic duty as head of his company since the mid-1990s, when SVA was created out of a merger of several state-owned businesses. In those days the Chinese were still producing bulky television sets for a market in which they were practically the only player.

But when China joined the World Trade Organization (WTO) in 2001, SVA suddenly found itself vying with foreign competitors. In order to arm the company against the competition, SVA entered into a partnership with Japanese electronics manufacturer NEC to produce high-quality, flat-screen TVs.

Although the Japanese provided the technology for SVA's virtually dust-free factory, where many of its 3,400 employees work clad in white, spacesuit-like clothing, this is only the beginning of a long march to global leadership. That might explain why Comrade Xu hardly mentions NEC's role in the venture, instead preferring to tout "socialism with Chinese characteristics."

But what exactly is socialist about SVA, a company whose CEO is indistinguishable from his Western counterparts when it comes to pushing for low costs and high profits? Xu chooses to ignore the question, instead focusing on what he and his party consider to be more important: that his company is Chinese.

Reclaiming lost ground

China is on the rise, intent on reclaiming a position to which it believes it is entitled. For centuries the former empire, the birthplace of printing and gunpowder, was a leading power -- both politically and economically.

China's descent from power began in the 15th century, when the country suddenly isolated itself from the rest of the world. The West forcibly put an end to that self-imposed isolation in 1842. Since then various groups have tried to revitalize China, beginning with Qing Dynasty reformers loyal to the emperor, followed by Republicans and finally the Maoists. But Deng Xiaoping, the legendary reformer who died in 1997, was the first to embrace pragmatism to bring about a Chinese rebirth. "Whether a cat is black or white makes no difference," he told his fellow Chinese. "As long as it catches mice, it is a good cat."

Deng, a short, wiry man, had had enough of the failures of Chinese communism when he announced his new policy of liberalization and reform in 1978. He had witnessed the Great Chairman Mao Zedong's 1958 plan to dispatch China on his Great Leap Forward, his declared goal having been to surpass Great Britain and eventually the United States. But the main outcome of his ludicrous mass campaign was that millions of Chinese starved to death.

In the wake of Mao's disaster, it was up to Deng to revive the economy. But instead of thanking him for his efforts, during the course of the Cultural Revolution Mao banished Deng to the eastern Chinese city of Nanchang in 1966, where he was forced to work in a tractor factory. The building is a museum today.

The workbench where Deng used rudimentary tools to file parts is on display in the museum. From his workspace, he could read Cultural Revolution slogans covering the walls, like: "Strive for strength using your own power." Sitting at his workbench in a drafty factory building, Deng must have felt that approach to communism was nothing but irony.

Tapping the energy of a billion Chinese

Although Mao eventually rehabilitated Deng, he only managed to regain his power after the dictator's death in 1976, when he began to unleash the energy and creativity of a billion Chinese.

Putting enough food on the tables of Chinese families was his first priority. Once the Communist Party allowed agricultural collectives to grow grain and vegetables and keep the profits, China's markets began thriving again.

China also abandoned the model of the Soviet Union, its former ideological counterpart. The Russians had once pointed the way for China's communists in developing heavy industry. Using the Stalinist model, Soviet advisors were sent to China to develop steel combines and factories to manufacture trucks and machinery.

But when Mao sent the Russians home in the late 1950s, the former allies became bitter ideological foes. Their paths also diverged when it came to the economy. China's communists were well ahead of the Soviets in launching economic reforms. The Chinese had one decisive advantage over the Soviets: Their agriculture had not been collectivized for as long as that of the Soviet Union. When Beijing loosened the reins on its rigid planned economy, ordinary Chinese were already capable of taking the initiative needed to produce abundant harvests.

Most importantly, Chinese reformers avoided the "shock therapy" to which Russia was subjected after the collapse of the Soviet Union, explains economist Wang Jue of the Communist Party's school in Beijing. At first the party permitted only small private businesses in villages and rural centers, providing much-needed employment for a surplus of farmers. Deng Xiaoping's motto in revitalizing his huge country was to "cross the river by feeling one stone at a time."

The birth of China's "special economic zones"

The Chinese entrepreneurial spirit was also allowed to reawaken in special economic zones in the south and along the coast. Deng deliberately set up these zones in the south because this was where many Chinese had once fled from the communists to capitalist Hong Kong or Taiwan. It was also the region to which they were now returning, patriotic investors who quickly sensed an opportunity to turn a profit. Using low-wage workers, they produced toys and cables for electronics in their factories at a fraction of the costs incurred by producers in the Asian tiger countries.

And that was only the beginning. Even though China's aging leader wasn't entirely sure of how he was going to modernize the country, Deng didn't care much about the details. A pragmatist, his goal was to make China at least as powerful as the United States.

In 1979 Deng became the highest-ranking Chinese statesman since the founding of the People's Republic to visit the United States. The world was amused by the short, good-humored communist who was even willing to don a cowboy hat on a visit to Texas. But Deng's schedule was carefully planned, including as it did visits to NASA, automaker Ford and aircraft manufacturer Boeing. The West was dumbfounded. Did China intend to adopt the US's capitalist ways? This was clearly not the case, as Deng and his Communist Party comrades demonstrated when they visited Japan, China's neighbor with its unique blend of socialism and market economy, and city-state Singapore, an equally idiosyncratic fusion of a police state and a market economy. But wherever they went, China's Red strategists carefully examined the models they witnessed to determine what would best suit their goal of keeping the Communist Party in power.

Deng had no intention of relinquishing the dictatorship of the party. He believed this was the only system capable of protecting his giant country from chaos. To keep the Communist Party in power, he reasoned, the Chinese would have to become affluent. But how could they catch up with the superior West?

One option was protectionism, of the sort practiced by Japan's MITI, the Ministry of International Trade and Industry, feared in the West. Under MITI's leadership, Japan had insulated itself against Western competition and, from its lucrative domestic market, flooded the world with cheap TVs, cars and computer chips. But this was relatively easy for the Japanese, who already looked back on almost a century of industrialization. By contrast, China in 1990 was still groaning under the weight of completely outdated state-owned businesses, including steel mills and aircraft manufacturing plants that had been built with Soviet assistance in the Stalin era.

Opening the door to foreign capitalists

The leap to modernity would have been unachievable without the West, and so the Chinese employed a proverbial approach with which they had always prevailed against superior adversaries: they played one barbarian off against the other. China opened itself up to foreign capitalists, allowing them to compete over which of them would enjoy the privilege of transferring modern technology to its state-owned enterprises.

The foreigners came in droves, lured by cheap labor, low taxes and the promise of a huge market. They raved about affable Communist Party leaders who were nothing if not accommodating when it came to feeding them projects worth millions after spending nights drinking with their future business partners. In order to gain access to the same kind of business in Europe, investors could spend endless hours negotiating with officials, unions and environmentalists.

Graphic: Rich Coasts
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Graphic: Rich Coasts

The Communist Party slipped into a new role in its history. Like some powerful gatekeeper, it teamed up foreign companies with local partners, with which they were to modernize Chinese industry. Foreign companies have amassed $318 billion in investments in China since the 1980s, including $72.4 billion in foreign investment the country managed to attract in 2005 alone.

In strategically important industries -- cars, steel mills and power plants -- the Chinese enacted laws to compel foreigners to train their future Chinese competitors and essentially render themselves redundant in the long term. A tremendous redistribution of knowledge took place. And when Western companies were unwilling to hand over their intellectual property voluntarily, the Chinese simply resorted to illegal piracy -- another example of "socialism with Chinese characteristics."

The agency foreign companies fear

Though initially limited to a handful of special economic zones, China's capitalist experiment has spread throughout the country since the 1990s. Nevertheless, Beijing's Red planners have consistently kept a watchful eye to ensure that the party does not lose control over the country's industrial revolution. The planning agency at the National Development and Reform Commission (NDRC) in Beijing has played a key role in this effort.

At 8 a.m. every workday morning, the NDRC's 890 bureaucrats stream into its gray brick building topped with a traditionally curved gable Chinese roof. Ma Kai, the head of the agency, and his key lieutenants appear at the agency's doors in black Audis. Everyone else arrives on foot or by bicycle, and casual wear is common. Before heading to the office, some employees quickly and clandestinely take flyers from street dealers who offer fake expense receipts. For only 8 yuan, they can buy fake "receipts" redeemable for 100 yuan apiece.

The agency is feared among foreign companies because it has the last word on major projects. The NDRC emerged from the Planning Commission, which was created in 1952 and once dictated harvest quantities to farmers and production volume to factories.

A delegation from a Hong Kong energy company interested in drilling for oil in northern China waits in front of the large gate to the building, which is guarded by military policemen. The businessmen have brought along thick files with which they plan to convince officials at the agency that their project will not jeopardize China's national interests.

"Swarm out," comrades

The work of Bo Xilai, 57, China's trade minister, revolves around planning and monitoring. Bo is the product of a communist family. His father, Bo Yibo, stood alongside Mao Zedong on Beijing's Tiananmen Square when Mao proclaimed the establishment of the People's Republic of China in October 1949. This makes Bo one of the "red princelings" -- a term used for the sons and daughters of well-deserved comrades who, riding on the coattails of their parents, rose to prominence as local party luminaries or heads of state-owned enterprises.

But Bo also owes his success to his own achievements. As the governor of the northeastern Liaoning Province in China's so-called rust belt with its many bankrupt state-owned enterprises, Bo attracted German automaker BMW to the region. As part of the deal, he also required BMW to help its joint venture partner, local automaker Brilliance, to turn its own mid-range sedan, the Zhonghua, into a success.

"Zou Chuqu," which loosely translates as "swarm out," has been Beijing's rallying cry since the late 1990s in its efforts to stimulate the Chinese economy to acquire brands and expertise abroad. Bo's ministry provides a catalog of guidelines to support Zou Chuqu and ensure that every Chinese executive knows exactly where the shopping trip is headed. One of these destinations is Germany, where the government wants Chinese businesses to invest in electronics and pharmaceutical factories, as well as in shipping and trading companies.

It may seem vague, but the gist of the policy is to ensure that state-owned banks are aware of the kinds of projects they are to finance with low-interest loans. Sometimes China's pace of development is even faster than its planners could have dreamed. In one high-profile example, computer manufacturer Lenovo scored a major coup when it acquired IBM's PC division in late 2004.

But the Zou Chuqu policy has also had its share of missteps. In 2005, objections in the US Congress prevented the Chinese state-owned energy conglomerate CNOOC from acquiring US oil company Unocal in a case that angered Beijing's bureaucrats. Although they approved of CNOOC's strategy, the company's zealous director's overly hasty approach generated opposition against China among the Americans.

Joining the global elite

Despite such failures, the Communist Party is sticking to its guns because the productive tension between plans and reality, between communist dogma and flourishing businesses is spurring on the Chinese economic miracle. Indeed, officials at the ministry of trade keep lists of industries they want to see joining the global elite.

China also has plans to build its own large-capacity jet, and to do so it is forcing Boeing and Airbus to produce their parts in the same factory in Xi'an. In return for agreeing to purchase new aircraft from Airbus, the Chinese convinced the European consortium to assemble its A320 model in China in the future. Airbus's savings as a result of the deal are minimal, but the know-how China will acquire in return is likely to be phenomenal.

Assembly of the A320 will begin in Tianjin in 2008. The northeastern Chinese city was awarded the contract after competing bitterly with Shanghai and Xi'an. This is the way Red China's model for success works. While the planning is up to Beijing, the provinces compete over investments.

Wang Rong, 48, is the party leader in Suzhou, an hour and a half west of Shanghai. Suzhou's former claim to fame was its location as a picturesque riverside town on the Yangtze River and the old Imperial Canal, a Chinese Venice complete with narrow canals and stone bridges. Today Suzhou is a booming industrial city with a population of about 10 million.

"I didn't get enough to eat as a child," Wang says. Thanks to Deng's reforms, he later managed to attend university in the Netherlands. With his Western experience, Wang doesn't come across as a typically pigheaded party functionary, but rather as the head of a modern service company. "The party's responsibility," he says, "is to help companies."

Graphic: An attractive place for doing business
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Graphic: An attractive place for doing business

Wang is a politician whose primary interest is to draw investments to his constituency, and his showcase project is a huge industrial park planned by experts from Singapore. The concept for the facility was dreamt up in Beijing, but local party leader Wang was responsible for bringing the park to Suzhou. Today, the corporate logos of the likes of Bosch, BenQ and Samsung line the city's multilane, straight-as-an-arrow boulevards, where cameras monitor traffic at intersections. Party leader Wang's main objective is to develop local industry.

He praises a locally made microchip, the Dragon Chip, almost as if it were his own achievement. Wang clearly relishes telling the story of its success. There was a businesswoman from the country named Qian Yuebao, he says. Her textile company, Menglan, was making more money than she knew what to do with. Wang acted quickly, applying his own, pragmatic motto: Whatever the central government doesn't forbid, we go ahead and do. Wang convinced Qian to invest in the production of a microchip developed by the Chinese Academy. Today the Dragon Chip counts among China's proudest high-tech achievements.

An army of slave-wage workers

All across China, local party officials like Wang are promoting development, constantly fighting on the side of progress -- and, in doing so, on the side of company executives.

The same phenomenon is happening in places like Guangdong and Shenzhen, the birthplaces of China's economic miracle in the 1980s. The highway to Hong Kong is lined with scores of low-cost producers of textiles, cables and electrical outlets. The whole world shops here in China's southern export region, which has become such an important supplier that the US corporation IBM moved its global parts procurement center to the southern Chinese city of Shenzhen. An army of slave-wage workers, many of them young women hardly older than children, work long hours in the region's neon-lit factories. Migrant workers sleep in crowded dormitories in apartment buildings adjoining the factories. All that distinguishes the residential buildings from the factories is the laundry hanging from the windows to dry.

The workers' patience seems limitless. Rarely do they refuse to work, and when they do it is to protest about sub-standard food or poor living conditions. And when that does happen, the factory bosses promptly contact the party, which sends in the police. Strikes have been forbidden in China since 1982, when the communists removed the right to strike from the constitution.

The southern Chinese province of Guangdong is considered to be the epitome of exploitation, and not just by Western trade unionists. For Chinese party officials, it is a temporary but unavoidable phase in the country's history -- a collective sacrifice that is required to help China develop into an economic superpower. And in the land of Confucius, what the wise authorities believe to be correct must indeed be the right approach.

If China's planners have their way, Guangdong -- this huge, dusty, malodorous factory -- will one day become an elegant laboratory for the country's budding high-tech industry. But this dream can only become a reality for some in a region where it will be up to the party to continue finding unskilled work for an estimated 14 million new migrant workers streaming into its cities year after year.

Xu Zhibiao, 52, is in charge of the future in Guangdong. The general director of the city's information industry department, Xu is literally beaming with happiness, and with good reason. Guangdong's party leader and governor recently paid him a visit in his office, where they promised him funding and experts.

Graphic: China's industry giants
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Graphic: China's industry giants

Xu occasionally travels to Silicon Valley, the California model, to shop for ideas. Xu says that many of his US counterparts envy him for his position. When the party steps in to help, its assistance comes quickly and without bureaucratic red tape. With this support Xu was able to build a state-of-the-art computer laboratory complete with talented young engineers and brand-new IBM equipment. The government uses the laboratory to help local companies develop their own software for their products. The party employs similar methods to fuel its economic miracle throughout China.

Nevertheless, the Chinese Communist Party is constantly torn between its own claims to greatness, the challenges of a globalized world and its Leninist traditions. It rules a country that is both poor and rich, a country in which very few people have adequate social insurance, a country that has devastated its environment, is plagued by deeply corrupt officials and threatened by citizens who are becoming more recalcitrant every day.

Armani suits replace Mao jackets

China is becoming increasingly difficult to control. Despite their immense power, the days are long gone when Communist Party leader Hu Jintao and his comrades -- unlike Mao in his day -- could enforce their will by decree into every last corner of the party.

To avoid open disputes, Beijing's leaders must resort to the tactics of maneuvering, fine-tuning, bargaining and scheming. Hu himself is in the process of expanding his power by placing his confidants in key positions. Those are just a handful of the efforts made to ensure that people continue to toe the party line. All party officials in high-ranking positions in the central government or in provincial administrations are required to attend training sessions at the central party school for at least one week each year. The party also operates schools throughout the country. All party officials in key administration positions are required to be ideologically rearmed once every five years.

The times are even changing at the central party school. Harvard professors occasionally teach at the school, and 300 senior party officials periodically attend refresher courses in political science and economics at elite American, French and British universities. Indeed, Armani suits replaced the Mao jacket long ago. Some officials already feel more at home at the World Economic Forum in Davos, Switzerland than in the Communist Party's neighborhood committees.

Nowadays, the party is also admitting representatives of private enterprise into its ranks, a movement put in motion by former President Jiang Zemin's "Theory of the Three Representatives." In the past, the party welcomed only the representatives of workers and farmers.

In taking these steps, the Communist Party is conforming to real conditions in China. The number of state-owned enterprises declined from 238,000 in 1998 to 150,000 in 2003. And although these companies received 65 percent of all loans -- from primarily state-owned banks -- they were only responsible for about one-fourth of total industrial production in China.

Conversely, private companies were busy adding party officials to their payrolls. In the eastern Chinese Zhejiang Province, business owners are hiring retired party officials at monthly salaries upwards of €10,000, hoping to take advantage of the former officials' ties to the party and government agencies.

The Central Institute of Socialism in Beijing is responsible for making sure that non-party members, especially the heads of privately owned companies, remain faithful to the party's ideology. In the lobby of the institute's multistory complex, which includes a hotel and lecture hall, a large mural depicts Mao alongside the representatives of all major social groups.

Balancing capitalism with communism

A fascinating experiment is underway in China. A system is practically being reinvented from scratch, and no one can predict what it will look like one day. Even the Communist Party is divided when it comes to central ideological issues. How capitalist can China become? And how much socialism or communism -- whatever the specific meaning of these concepts is today -- must the party include in its official line?

Many party intellectuals fear that their country is already drifting inexorably towards capitalism, thereby gradually losing its ability to fend off foreign companies. Zhao Ying, of Beijing's Institute for Industrial Economy, shares this view.

Zhao spent three months in seclusion at a state-owned guesthouse near the Beijing airport, analyzing the conclusions that about 2,000 experts from all industrial sectors had compiled in special reports. Zhao's own conclusion is that "major sectors of our industry, especially in production, are insecure." What he means is that Chinese industry is urgently in need of technological improvement to be able to prevail against Western competition.

When Zhao sounds the alarm, China's leaders listen. The professor was one of the strategists who, beginning in the mid-1980s, presided over the development of a Chinese auto industry with the help of foreign joint ventures. At the time, the central government established the underpinnings of a plan to merge more than 100 automakers into a small number of powerful giants, including Shanghai Automotive, Volkswagen's joint venture partner, which has plans to rank among the world's six largest automotive corporations by 2020.

At first the plan worked like clockwork, as the foreigners transferred more and more technology to the Chinese. By imposing high duties on the importation of cars and parts, Beijing forced Western auto companies to increasingly relocate their high-value production to China. In 2004 the planning authority, NDRC, pushed the domestic auto industry to develop its own brands.

Nevertheless, things are moving far too slowly for China's Red planners. The political leadership has been pushing for rapidly opening up the country since the mid-1990s, and especially after China joined the WTO in 2001. As a result, Zhao, the industrial economist, went to Europe and Japan to study industrial policies abroad. His experiences taught him that China must develop far more of its products independently, including its weapons technology. Most importantly, it must secure its economic independence by developing its own patents and its own industrial standards.

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.

Graphic: The great leap
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Graphic: The great leap

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.

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