The Real China: Power, corruption and lies

Power, corruption and lies

To the west, China is a waking economic giant, poised to dominate the
world. But, argues Will Hutton in this extract from his new book, we
have consistently exaggerated and misunderstood the threat - and the
consequences could be grave

Monday January 8, 2007
The Guardian

http://image.guardian.co.uk/sys-images/Guardian/Pix/pictures/2007/01/08/NanjingRoad372...
Consumers on Nanjing Road, Shanghai's major shopping street
Consumers on Nanjing Road, Shanghai's major shopping street.
Photograph: Getty Images/National Geographic

The emergence of China as a $2 trillion economy from such inauspicious
beginnings only 25 years ago is such a giddy accomplishment that the
temptation to see its success as proof positive of your own prejudices
is overwhelming. And the west's broad prejudice is that China is
growing so rapidly because it has abandoned communism and embraced
capitalism. China's own claim - that it is building a very particular
economic model around what it describes as a socialist market economy -
is dismissed as hogwash, the necessary rhetoric the Communist party
must use to disguise what is actually happening. China proves
conclusively that liberalisation, privatisation, market freedoms and
the embrace of globalisation are the only route to prosperity. China is
on its way to capitalism but will not admit it.

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But the closer you get to what is happening on the ground in China, its
so-called capitalism looks nothing like any form of capitalism the west
has known and the transition from communism remains fundamentally
problematic. The alpha and omega of China's political economy is that
the Communist party remains firmly in the driving seat not just of
government, but of the economy - a control that goes into the very
marrow of how ownership rights are conceived and business strategies
devised. The western conception of the free exercise of property rights
and business autonomy that goes with it, essential to any notion of
capitalism, does not exist in China.

The truth is that China is not the socialist market economy the party
describes, nor moving towards capitalism as the western consensus
believes. Rather it is frozen in a structure that I describe as
Leninist corporatism - and which is unstable, monumentally inefficient,
dependent upon the expropriation of peasant savings on a grand scale,
colossally unequal and ultimately unsustainable. It is Leninist in that
the party still follows Lenin's dictum of being the vanguard, monopoly
political driver and controller of the economy and society. And it is
corporatist because the framework for all economic activity in China is
one of central management and coordination from which no economic
actor, however humble, can opt out.

In this environment genuine wholesale privatisation is impossible and
liberalisation has well-defined limits, as President Hu Jintao himself
brutally reminds us. The party, he says, "takes a dominant role and
coordinates all sectors. Party members and party organisations in
government departments should be brought into full play so as to
realise the party's leadership over state affairs". It may be true that
party organisations in the provinces (some with populations bigger than
Britain's) and in the chief cities are jealous of their autonomous
local political control, but all retain the discretionary power to do
what they choose and override any challenge or complaint from any
non-state actor - or, indeed, from state actors if they cross the will
of the party.

Absolute power corrupts, and the Chinese Communist party has become one
of the most corrupt organisations the world has ever witnessed. The
combination of absolute power and an ideology that palpably no longer
describes reality is a virus that is morally and psychologically
undermining the regime. And if the regime wobbles, then its capacity to
sustain the unsustainable economic structures will wobble and Leninist
corporatism will unravel. Beijing's authority could fragment and
China's provinces reassert their destructive independence as they did
in the 1910s and 20s, or a new and fiercely repressive regime could try
to hold the country together abandoning economic openness and market
reforms - and even pick some international fights (such as invading
Taiwan?) to rally the country to its side. It is because this prospect
is so real that the task of peacefully moving to a sustainable
capitalism, and building the necessary institutions to do it, is so
vital for both China and the world.

Ever since the late 1990s the party leadership, then under Hu's
predecessor Jiang Zemin, has rightly become more and more preoccupied
with how corruption is corroding the party. "If we do not crack down on
corruption, the flesh-and-blood ties between the party and the people
will suffer a lot and the party will be in danger of losing its ruling
position, or possibly heading for self-destruction," Jiang declared in
2002, in his last political report to the National Congress. High-level
officials had been arrested and imprisoned for embezzlement and
racketeering; they included the party secretary and mayor of Beijing,
Chen Xitong, a member of the Politburo. Cheng Kejie, vice-chairman of
the National People's Congress, was executed for taking pounds 2.5m in
kickbacks for arranging land deals and contracts for private business.
In the financial system the highest-profile casualties were three of
prime minister Zhu Rongji's hand-picked "can-do commanders", selected
to sort out the financial crisis of the late 1990s, and one of whom, Li
Fuxiang, leaped to his death from the seventh floor of Beijing's
Hospital 304 while under investigation. To put this in a British
context, it is as if the Mayor of London, the speaker of the House of
Commons, the chief executive of HSBC, along with a deputy governor of
the Bank of England and the deputy chief executive of the Financial
Services Authority had all been imprisoned for fraud with one
committing suicide.

For all the strengthening of the anti-corruption and Orwellian sounding
"Central Discipline Inspection Committee", corruption remains deeply
embedded. The number of arrests of senior cadres members above the
county level quadrupled between 1992 and 2001, and since then have
included a ring of officials in Gansu, one of China's poorest
provinces, caught embezzling pounds 500m. Four provincial governors and
one provincial party secretary have been charged recently - the top
posts in China outside Beijing. And in September 2006 came the arrest
of Shanghai party secretary and member of the politburo Chen Liangyu
for his involvement in the misappropriation of pounds 206m of social
security funds.

The Chinese economist Hu Angang, in his trailblazing book Great
Transformations in China: Challenges and Opportunities, calculates that
over the late 90s the cumulative annual cost of corruption was between
13.3%% and 16.9%% of GDP and is still around that level today. Every
incident of corruption - smuggling, embezzlement, theft, swindling,
bribery - arises in the first place from the unchallengeable power of
communist officials and the lack of any reliable, independent system of
accountability and scrutiny. Corruption has become part of the system's
DNA, now threatening the integrity of the state.

To see how, look no further than the combination of one-party control
and corruption and how it deforms the legal system. The judicial
apparatus is politicised from top to bottom. Every president and
vice-president of a court is appointed by the party; and the courts are
funded by provincial governments. The court bureaucracy works on the
same basis as the rest of the government, with a party committee system
superintending each rung of the court hierarchy. Judges often make
decisions at the instruction of the committee or government
independently of the legal merits of the case.

Many judges still have no formal legal training - the majority are
retired army officers, only too ready to do the party's bidding. The
scale of the corruption is stunning. In 2003, 794 judges were tried for
corruption (out of a national total of 200,000). In 2003 and 2004, the
presidents of the provincial high courts of Guangdong and Hunan were
both found guilty of corruption. When the party does not or cannot
influence the judgment in a case, it can use its influence over the
police to decide whether to slow down or not enforce the judgment.
Enforcement rates in China are lamentable; for example, only 40%% of
provincial high court decisions are enforced. The lack of a clear
system of property rights, with the party-state claiming particular
privileges, can make debt enforcement against state organisations close
to impossible.

As a potential watchdog to correct any of this, the media is crippled.
China now has more than 2,000 newspapers, 2,000 television channels,
9,000 magazines and 450 radio stations, but they are all under the
watchful eye of the party in Beijing or provincial propaganda
departments. These authorities issue daily instructions on what may and
may not be reported; journalists who digress will be suspended from
working or even imprisoned. China is estimated to have 42 journalists
in prison, the highest number in the world. Editors know roughly how
much slack they have; but recently, under Hu Jintao, there has been a
tightening of the leash. The right to travel independently and report
from a non-local city had allowed more aggressive reporting of
corruption; but it has been rescinded. Some prominent editors have been
fired. For instance, Yang Bin, editor of China's most forceful tabloid,
the Beijing News, was dismissed in 2005 for reporting village protests
against unfair confiscation of land. Other journalists have been
prohibited from publishing. The Committee to Protect Journalists, in
its 2005 report on repression of the media, quotes the government-run
People's Daily: "[During 2004] censorship agencies permanently shut
down 338 publications for printing 'internal' information, closed 202
branch offices of newspapers, and punished 73 organisations for
illegally 'engaging in news activities'."

In February 2006, three of China's most distinguished elders - Li Rui,
a former aide to Mao Zedong, Hu Jiwei, former editor of the People's
Daily, and Zhu Houze, a former party propaganda chief - published a
letter condemning the approach: "History demonstrates that only a
totalitarian system needs news censorship, out of the delusion that it
can keep the public locked in ignorance," they wrote. Far from ensuring
stability, they continued, such media repression would "sow the seeds
of disaster".

All this is obvious to western eyes; what is less obvious is the way
the same system of control undermines the economy. Successful
businesses have to be successful in business terms - with managers
freely exploiting opportunities, developing products and brands and
promoting on ability. No such autonomy is possible within Leninist
corporatism; party needs come before those of business, enforced by a
national system of party committees in every enterprise, finance from
state-owned banks and a complex system of accounting and ownership
rights that leaves majority ownership of most enterprises with the
state. Private shareholders have very limited ownership rights;
companies' fixed assets are separated out in company accounts and can
still only be legally owned by state and public bodies. And as MIT
economist Yasheng Huang argues, government shareholders interfere,
especially if a firm is successful. Countless Chinese firms, he says,
have been driven to bankruptcy or thwarted in their growth ambitions
because the government has exercised its ownership privileges to meet
party objectives.

In short, the party state is at the centre of a spiderweb of control of
the economy, radiating out from the tight ownership and direction of
the 57 sectors the party considers the economy's strategic heart like
steel and energy to a more relaxed stance the less important the party
considers an enterprise's activity - such as packaging or hairdressing.
Even they can be controlled if need be. The general rule is that the
more politicised and controlled a Chinese enterprise, the lower its
productivity and performance. Thus the performance of China's State
Owned Enterprises (SOEs), which control two-thirds of industrial
assets, has hardly improved during 20 years of reform. One in three of
their employees is estimated to be structurally idle. SOEs are on a
financial edge and barely profitable. According to one influential
estimate, even the tiniest upward movement in interest rates or the
slightest decline in sales would mean that 40%%-60%% of their enormous
bank debts would not be serviced, rendering the entire Chinese banking
system bankrupt. They are commercial and business disaster areas.

Even large private companies, although better performing, are still
affected. Davin Mackenzie, managing director of iVentures, which is
based in Beijing, says that almost no private company, however well
run, wants to leave the opaque, informal world of guanxi personal
relationships in which the main aim is to hide revenue, cash, and
profits from potential political direction. The vast majority, he says,
run themselves out of the "cash box in the back of the Mercedes". Most
private Chinese companies have three sets of accounts - one for the
banks, one for the tax authorities, and one for management. Most do not
last long; the average duration is three years. The law of the jungle
prevails: you do what you can get away with. China is the
counterfeiters' paradise, where intellectual property rights are
neither respected nor enforced. Between 15%% and 20%% of all well-known
brands in China are fake; two-thirds of the imports confiscated by US
Customs as fakes were made in China. Counterfeiting is estimated to
represent 8%% of GDP - eloquent testimony to Chinese business strategies
and the ineffectiveness of the legal system.

The cumulative result of all this is economic weakness, despite the
eye-catching growth figures. Innovation is poor; half of China's
patents come from foreign companies. Its growth depends on huge
investment, representing an unsustainable 40%% or more of GDP financed
by peasant savings. But China now needs $5.4 of extra investment to
produce an extra $1 of output, a proportion vastly higher than that in
economies such as Britain or the US. But 20 years ago, China needed
just $4 to deliver the same result. In other words, an already gravely
inefficient economy has become even more inefficient. China's national
accounts tell the same story. Hu Angang calculates that China is now
back to the Mao years in term of the inefficiency with which it uses
capital to generate growth.

Behind all these problems lie Leninist corporatism. Capitalism, I
contend, is much more than the profit motive and the freedom to set
prices which China's reforms have permitted. It is a system in which
many different actors freely take different decisions according to
their best judgment; some are right and some are wrong, but the system
never has to bet on any one being right for everyone - as in an
authoritarian system of centralised economic control. But this economic
pluralism is closely intertwined and dependent upon the wider political
capacity of different citizens to be able to be part of a public space
in which they can debate options and choices. It is because democracies
possess such public spaces that, over decades, even the weakest tend to
manage themselves better than authoritarian states. There is less
likelihood of group-think, conformism and top-down plans that militate
against good decisions - or of the quick reversal of poor decisions.

This public sphere is a whole network of "soft" independent processes
of scrutiny, justification, transparency and accountability that range
from a free media to independent justice. Representative government in
which the people regularly vote for their governors is but the coping
stone of this structure. And the processes of scrutiny and deliberation
do not stop just with the state - the same processes are extended to
capitalism and the market economy, and through having to justify
themselves, makes them more honest and better performing.

But none of this can happen if individuals are not free and capable of
being involved - and having the capacity, through the independence that
property ownership, education, trade union membership and citizenship
confers, freely to challenge and change individual policies, whether
they are those of the government or the company they work for. These
social processes work best the less social distance there is between
people. The more inequality and the more social distance, the less well
these processes of pluralism, capabilities and accountability can
function. And the less well capitalism then functions. So China leads
to an unexpected insight. Capitalism works best the more inequality is
capped - and the more and better developed its democratic institutions.

The west is unforgivably ignorant about China's shortcomings and
weaknesses, which leads it vastly to exaggerate the extent of the
Chinese "threat". China is certainly emerging as a leading exporter,
but essentially it is a sub-contractor to the west. It has not bucked
the way globalisation is heavily skewed in favour of the rich developed
nations. Its productivity is poor; it lacks international champions;
its innovation record is lamentable; it relies far too much on exports
and investment to propel its economy. To characterise China as an
unstoppable force whose economic model is unbeatable and set to swamp
us - the stuff of almost every ministerial and business lobby speech -
is to make a first-order mistake.

Rather, the west needs to understand the depth of China's problems and
the possibility, if not probability, of an economic and political
convulsion as China seeks their resolution. What the west must avoid is
a position where it forces the Chinese leaders' hand and China retreats
towards economic isolation and freezing the reform process. The
challenge to the global trading and financial system would be profound;
not only would an important source of global demand be scaled back, a
key source of financing the US trade deficit would be removed. China's
progress would be shaken to its core.

The interest of the west is to help China avoid this fate and encourage
a peaceful transition to a pluralist China within a legitimate system
of accountability; a country that is comfortable with liberal
globalisation and the international rule of law. To describe the goal
of policy in this way is demanding enough; more demanding still is to
execute it. The simple extrapolations of China's growth, predicting
that it will eventually become a one-party, economic colossus, lead to
an alarmist climate in which it is easier to justify trade protection
or, in the United States, potential military activism. Such responses
are naive. We have to play it long, encourage and help to co-manage the
change that must come. Only thus will the world be a safer and still
prosperous place.

· Will Hutton's The Writing on the Wall is published on January 18 at
pounds 20. To pre-order a copy for pounds 18 with free uk p&p go to
guardian.co.uk/bookshop or call 0870 836 0875

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