Red China, Inc. Does Communism Work After All?

By and

Part 3: 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

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

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.


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