China: Boom or Boomerang

By Orville Schell

Editor’s Note: First the Terminator, then the president—there is no shortage of people trekking to China, filled with wonderment and doubt about the future of the world’s most populous nation and fastest-growing economy. It’s a place full of monumental contradictions. There is no one better to make sense of it all in a Dig than Orville Schell, dean of UC-Berkeley’s Graduate School of Journalism and author of nine books on China. He has just returned from a trip to China.

A week of protests between villagers and police in China’s industrial heartland culminated on Jan. 15 in the death of a 13-year-old girl and the wounding of at least 60. Similar clashes with police and paramilitary units in December left at least 30 dead.

The protests stem from villagers’ anger over environmental and land-use issues in the rapidly industrializing country. At the same time, however, that very industrialization played a major role in China’s announcement this week of huge increases in trade surpluses and currency reserves.

If you have been impressed by China’s extraordinary progress over the last two decades but still harbor uncertainties as to whether its development model will prove viable over the long haul, let me assure you that you are not alone. Indeed, the more one knows about China and the more impressed one becomes, the more difficult it is to assess its successes, much less prognosticate with any certainty about its future trajectory. All one can say with certitude is that, win or lose, it will have a profound effect on the world.

Seen from different vantage points, China can appear to be many different things, even to be moving in forward and retrograde motions at the same time.

[State Department’s detailed profile on China]

A business executive who is impressed with the endless new high-rise buildings, neon billboards, shopping malls, luxury hotels and new ring-roads and fly-overs in cities like Beijing, Canton and Shanghai may see an economic miracle whose high growth rates are destined to impel this most dynamic and catalytic agent in the global marketplace forward almost indefinitely.

[RAND-sponsored essay on China and Globalization (.pdf)]

An American general may see China’s growing military clout as a sign that Beijing is determined to become the newest superpower, ready to challenge U.S. traditional military dominance not only in Asia but throughout the world.

A student of international development may view China (unlike Russia) as a paradigm of pragmatic reform for having marketized its economy within the political and social context of its old Leninist system, rather than initiating simultaneous political reforms and risking instability.

And admirers of China’s respect for education, diligent work ethic and zealous entrepreneurial spirit may see China as an unstoppable engine of labor efficiency, industrial production, managerial energy and even future research.

However, viewed from a different vantage point, from the perspective of a citizen in Harbin drinking benzene-contaminated water, for example, China can appear far less invulnerable and its future progress can seem much less assured.

[Far Eastern Economic Review on The End of the China Love Affair]

When an economist looks behind the impressive growth rates and trade statistics at the country’s banking system, financial markets and pension system, he or she may be alarmed by how insubstantial, badly managed and unfairly regulated they are.

[RAND-sponsored report on China’s Economic Fault Lines]

A lawyer may worry, despite the advances made in commercial and administrative law, about how shallow are the roots of the rule of law in China, especially when it comes to any case that has sensitive political implications.

Scientists and environmentalists may be alarmed by the recklessness of China’s industrialization, wanton exploitation of natural resources and the vast range of environmental degradation they encounter.

Sociologists may find it almost unimaginable that, given the way society is delaminating into rich and poor and that these new class fissures are causing local disaffection and protest, Chinese society can continue to cohere.

Scholars who have studied Chinese history and culture and have an appreciation of how important these aspects of life have been in grounding China in shared assumptions and values may find the deracinated state of the countrys culture, its confused identity, the absence of any true north on its moral and ethical compass, deeply unsettling.

And political analysts hopeful that its increasingly open markets will lead more rapidly to the democratization of political life may find the retro-nature of China’s Leninist system of one-party governance, which is almost completely dependent on economic growth for its legitimacy, less than reassuring.

Behind the facade of very real external success, skeptics find perilous and unresolved contradictions everywhere in China. Indeed, it would not be too extreme to say that of all the nations of consequence in the world, there is none with more unresolved major problems.

So, which view best represents the true China: China the unstoppable “economic miracle” or China teetering on the precipice of ever more glaring contradictions?

The truth is that both of these contradictory versions of China are real. This is the case because China is in the process of one of the most tectonic and monumental transitions of any nation in the last hundred years. It is trying to evolve from its Stalinist, centralized, revolutionary past to some new and uncertain future. And the unavoidable, and unanswerable, question is: Will it make it?

To even broach this question one must first ask several others: What does it mean to make it? What is China’s model for reform? What will China look like when it “gets there”? In other words, by what standard should we judge its progress?

The best way to understand the range of this contradiction and opinions about its nature is to look at both sides of China’s contradictory progress.

China as a Success
For anyone who was in China during the spring of 1989 as demonstrations against the Chinese Communist Party and government rocked the country to its foundations, China’s resurrection through the marketplace in the 1990s has been nothing short of astounding. In those dark months and the years that followed the Beijing Massacre, there were few who imagined the People’s Republic of China and its party leadership would survive that crisis, much less manage to lead the country so that it would flourish.

[China’s history, from 2200 BCE to the present]

That China did manage to fend off a seemingly ineluctable end-of-dynasty, tipping-point moment was in large measure due to then-supreme leader Deng Xiaoping. Indeed, as a savage crackdown against political dissidence began after June 4, 1989, causing almost everyone to fear that reform of all kinds would end, the 85-year-old Deng met with his military commanders to commemorate the service of those who had died while “quelling the turmoil.” He surprised everyone present—especially hard-line Maoists who felt that the only salvation of the Communist Party’s unilateral rule was return to a less open and permissive system—by asking all assembled a simple rhetorical question. “Is our basic concept of reform and opening wrong?” he asked. “No!” he answered. “Without reform, could we have what we do today?”

Then, he declared emphatically, “Our basic proposals, ranging from our development strategy to principles and policies, including reform and opening up to the outside world, are correct.”

It was still far from clear, however, whether Deng would be able to prevail over those who saw his economic reform policies as the road to ruin. Deng had famously declared of his Special Economic Zones (SEZs) in the 1980s: “There are those who say we should not open our windows, because open windows let in flies and insects. But we say, ‘Open the windows, breathe the fresh air and at the same time fight the flies and insects.’”

But now, it looked as if the insects had overwhelmed the situation.

It was not until 1992 that Deng felt strong enough to once again open the floodgates of economic reform. Escaping conservative Beijing, where he felt stymied, he went to Shenzhen, the market-driven SEZ on the border with Hong Kong. There, he made an iconic visit to the stock exchange and several modern electronics companies, where, like an itinerant evangelist, he began extolling the market and, in effect, economic reform.

[International Monetary Fund-sponsored speech on China’s economy in general]

“As long as we pay attention to economic efficiency, product quality and foreign economic exchanges,” he proclaimed, “we need not be worried about anything else.”

He went on to urge Chinese “to boldly take heed of and absorb all accomplishments of every civilization achieved by the human race . . . including those of developed capitalist countries.” He concluded by saying that “leftism” (meaning hard-line Maoists) had done “terrible harm to our Party in the past.”

His utterances were like a clap of thunder, for they announced loudly and clearly to everyone that engaging in business and making money had now been re-sanctioned at the highest reaches of the party. And, his very symbolic trip set China off on the tear of economic growth that continues today, more than a decade later.

[IMF-sponsored speech on China’s economic challenges]

By the end of 2004 China could boast of the following:

[China’s National Bureau of Statistics (click English in upper right corner)]

Despite the tense relations with Taiwan and increasing friction with Japan, China’s image as a constructive world player also has steadily grown. A 2005 BBC poll showed that 48% of those queried in 22 countries saw China’s global role as “mainly positive,” suggesting how far China has come in correcting its post-1989 image.

Not since Mao took power in 1949 had China been viewed so positively around the world. And never in its history, or that of any country for that matter, have so many people’s material lives been improved so rapidly as during the past two decades.

[Preview “The Chinese Century”]

That the former “poor man of Asia,” which was once isolated, reviled and steeped in losing ideology dedicated to world revolution and developmental backwardness might have found a way to transform itself into a productive, modern and globally engaged—if not democratic—country filled with modern cities that seemed to arise overnight has indeed been impressive.

[IMF Roundtable discussion about the Chinese economy]

China as a Failure
If one, figuratively speaking, turns China over, however, and examines its progress not from the perspective of its strengths and the manifold visual signs of modernity that are everywhere evident in its cities, but from the perspective of its vulnerabilities, a very different picture emerges. It is one that leaves some observers wondering both about its fundamental stability and its long-term viability.

[The Economist on the dangers of China’s “reheated” economy]

For starters, there is China’s enormous population, approximately 1.3 billion, making it the most populous nation on Earth. It must find a way to maintain one-quarter of the world’s population on 7% of its arable land. As more and more of its agricultural land is converted to industrial use, housing and suburban growth, highway and railroad rights of way, golf courses, recreation parks, airports and shopping malls, its ability to feed itself is diminished.

Moreover, as the PRC, which once militantly eschewed materialism, becomes a consumer society, the per capita consumption of natural resources is skyrocketing. This has seriously strained China’s resource base, even as the nation has begun to import more and more raw materials and commodities.

[China Online, an independent Chicago-based website focusing on Chinese business issues, discusses this issue.]

In 2004, China overtook the U.S. as the globe’s largest consumer of industrial and agricultural goods, and the consequences have been catastrophic for the country’s environment. Whether sufficient costly technology can be brought to bear quickly enough to both allow the high rates of economic growth to continue and to begin to compensate for all the environmental degradation that has already taken place is one of the most important questions China faces.

When on Nov. 13 an explosion in Manchuria rocked a workshop at the No. 101 Chemical Plant at the Jilin Petrochemical Company, the world caught a glimpse of the kind of contradictions that will bedevil China’s continuous “economic miracle.” In this case, the contradiction was a particularly intractable one, namely between high-speed economic development and environmental protection. 

As more than 100 tons of highly carcinogenic benzene and nitrobenzene flowed into the Songhua River, officials and the state-controlled media lied about what had happened. Only after the downriver city of Harbin (with a population of 9 million) was forced to turn off its municipal water system for more than four days, putting the city on the edge of urban panic, were the rough outlines of the disaster revealed to the public and apologies for the deception made. But no amount of apologies is capable of remedying the fact that as industrialization continues apace and generates growth rates of more than 9% every year, there is no likely remedy for this contradictory dark side of China’s economic miracle. 

While there is an increasing awareness of China’s environmental problem, and while impressive strides have been made to understand the situation, the added increments of environmental degradation brought about by the growing population, increased consumer demand, the expanding industrial base, growing dependency on an export economy, greater human mobility and the consequence of ever larger resource use have so far meant that the desecration of the environment, as has just been so painfully made evident along the Songhua River, continues to far outpace any remedial action.

China now faces:

Not only have the consequences of China’s high-speed industrial growth polluted its air, contaminated its rivers and abused its land, but the degradation is having costly consequences on both its public health and economy. The health costs are as yet unknowable and thus incalculable. The impact on China’s GDP is estimated to be 8 to 15%.

At the same time that China’s high growth rates have created winners, they have also created losers by radically expanding the gap between rich and poor. In a so-called “communist society” where many older people spent their lives fighting in “the revolution” for a more equitable society, this growing state of inequality has created dangerous tensions that have begun to manifest themselves as strikes, protests, demonstrations and riots.

Although China’s leaders have talked repeatedly about the need for China to replace “the rule of men,” renzhi, with the “rule of law,” fazhi, the judicial system is still answerable to the Chinese Communist Party and still far from a model of due process and protection of rights, or the guardian of freedom of speech, assembly and religion, all guaranteed by China’s constitution.

[Human Rights Watch’s section on China]
[New York-based group Human Rights in China]

Official corruption is epidemic and growing, while injustices are rarely addressed. Because there are few checks and balances—such as a free press—on the Chinese government and business, China has ended up as 78th on Transparency International’s best-to-worst ranking of corruption in 159 countries.

China currently has 134 million people 60 and older, and that figure will jump to 240 million by 2020. But since it is still converting from a system in which all healthcare and retirement benefits were handled by a person’s state employer, it does not yet have a viable new pension system in place. For the elderly and unemployed, especially those whose State Owned Enterprises (SOEs) have failed, the consequences of this deficiency are dire and have led to dangerous levels of disaffection and unrest.

China’s financial markets—it has two stock markets, set up in the late 1980s—have evolved into little more than gambling casinos manipulated by the rich and influential. This means that the markets remain unable to provide the country with sufficient investment capital to keep up with its pace of development. The result is that Chinese enterprises must rely either on foreign investment or capital from the state-owned banking sector, which itself is insolvent and saddled with a level of nonperforming loans that would make a normal commercial bank insolvent.

Although precise figures are impossible to come by, it is believed that government pressure on banks to continue making “policy loans” to unprofitable SOEs has resulted in the state now owning some $500 billion of uncollectible debt. Whether China’s banks can find a way to write these loans off their books through state-funded asset management corporations and by “going public” without creating a banking crisis is still far from certain.

In addition, as more urban workers are sidelined or laid off from bankrupted SOEs that cannot compete with the private sector and as the houses occupied by many urban workers are taken by the state for larger projects, urban unrest is growing. And because the state fears such unrest, pressure to extend new “policy loans” to keep workers off the streets remains.

Because the party knows that so much of its ability to keep people both inside and outside of China believing in the viability of its leadership depends on its ability to maintain a favorable psychology around the idea of a “China miracle,” state banks find themselves caught in a serious bind. On the one hand, they are being urged to reform and become bottom-line focused. On the other hand, the state has few other monetary tools at its disposal to fund the economy and avoid unrest.

Unfortunately, the crisis of incipient mass unrest is not limited to the cities. As the rich get richer and the poor get poorer, the divide between urban wealth and rural poverty grows; officialdom at the township, county and provincial levels becomes ever more independent from central control and increasingly corrupt; and as injustices of every kind have increased, peasant outrage has led to thousands of local demonstrations, strikes, riots and even mass uprisings that are in certain ways reminiscent of the situation out of which Mao’s communist revolution initially arose.

Indeed, Reuters reported that in 2003 there were some 58,000 instances of rural protest, a 15% jump over the previous year, and the rate of such incidents has climbed each year since. These rarely reported disturbances have left hundreds dead and required the mobilization of tens of thousands of paramilitary, People’s Armed Police and even People’s Liberation Army soldiers. In 2004 the number of instances of unrest was reported to have risen to almost 75,000.

However, because incidents of rural unrest are rarely reported in the national press, it is difficult for Chinese (or anyone else) to get an overall sense of how widespread and how deep such disaffection among peasants actually is. But as one recent Chinese survey of the countryside, “An Investigation Into the Peasant Situation,” put it: “We observed unimaginable poverty and unthinkable evil. We saw unimaginable suffering and unthinkable helplessness, unimagined resistance with incomparable silence. And, we have been moved beyond imagination by this unbelievable tragedy.”

Largely because of the situation in the countryside, over the last decade China has absorbed the largest migration in human history. One hundred million to 150 million peasants have left the countryside to seek employment in the cities, where they have fueled the economy with low-cost labor. But even as they have become an important part of China’s export economy, they have also added to potential instability. And,  estimates are that in the next few years tens of millions more peasants will swell this already mass migration, creating new pressures in city infrastructure. Because few have such amenities as healthcare, pensions and unemployment benefits, all too many would be left destitute with no safety net should the economy slow down.

Due to the policy of one child per family and the preference for boys, only 100 girls are now born for every 147 boys, which means that poor men have trouble finding wives, that kidnapping is rampant and that gender ratios in society are out of balance.

Of all the flashpoints, there are few more dangerous than the Taiwan Strait. Beijing claims the island of Taiwan as a sovereign part of China. Taiwan views itself as de facto independent. China has 600 short-range missiles aimed at Taiwan and threatens to use force if the independence rhetoric becomes too intense. While relations with the U.S. have not been too bad of late, our commitment to militarily supply and possibly defend Taiwan against such attack could well draw us into a war with China.

And then, there is the question of Japan, whose occupation of China in the 1930s and ‘40s remains a lodestone for anger and nationalist sentiment in China. Moreover, it is a sentiment that the party seems glad to exploit in order to better galvanize the Chinese people against some external opponent. (The party leadership remembers 1989 all too clearly.)

It is not likely that China and Japan would go to war over the island territories in dispute, but because Japan has recently committed itself to including Taiwan as part of its own area of “strategic concern,” it is possible that Japan could be brought into a clash on the side of the U.S. in the Taiwan Strait, should conflict over the independence of that anomalous island ever erupt.

Conclusion
What is confusing about this contradictory state of affairs—even to specialists with many years in the trade—is that contemporary China currently embraces within it conditions that can lead even an astute observer to equal and quite opposite analyses of its health and its future. China is still a nation in a very high-stakes process of transition in which its revolutionary past and its still uncertain modern future are struggling to find a greater state of equipoise. Both government and society are molting from the old revolutionary and Marxist-Leninist principles and institutions established under the tutelage of “Big Leader” Mao Zedong to a modern nation that aspires to become . . .  aspires to become what?

This is the question of questions. Toward what is China aiming? What is the model it now aspires to emulate?  Figuratively speaking, what is the new true north on the compass guiding China’s future reforms?

For example, what will be the ultimate fate of the Chinese Communist Party, which now rules unilaterally? How do leaders intend to detach China from its revolutionary past, still symbolically represented by Mao’s portrait on the Gate of Heavenly Peace? Does China wish to become a true democracy, or is it in the process of road-testing some form of hybrid “new authoritarianism,” what the party is fond of calling “socialism with Chinese characteristics.”

These are only a few of the unanswerable questions that lurk behind the facade of China’s extraordinary dynamism and growth, just as toxic spills result from the too hasty siting of a petrochemical plant along a vital river. All of China’s recent very stunning development, its impressive statistics and its bounty of new goods that have helped elevated millions of its people’s standard of living have come with a hidden price which will only slowly come due. The next decade of China’s progress will, in a sense, witness the important process of overall accounting.

One aspect of Mao’s political philosophy that still has relevance for understanding the present is his idea that the best way to understand a situation or a problem is to examine it through the lens of contradiction. “The law of contradiction in things, that is, the law of the unity of opposites, is the basic law of materialist dialectics,” he wrote in 1937 in his essay “On Contradiction.”

If most of his ideas have proven irrelevant, if not downright destructive, to China’s development, his notion that contradiction exists in the process of development of all things—is still an excellent way to understand what is going on in China today. Indeed, it is perhaps the only way to make sense of it.