Hong Kong: A House Divided

Section 2. China

     For an entirely different set of reasons and circumstances, the development of the PRC over the past 29 years has, to a great extent, paralleled the early development of Hong Kong. After the death of communist revolutionary and Chinese leader Mao Zedong in 1976, the Chinese leadership, led by Deng Xiaoping, set into motion a series of sweeping economic reforms. Deng broke the PRC out from 30 years of state mismanagement of the economy and society and put China on a path towards a quasi-free market system in 1978. Marking a radical departure from the previous 30 years of rule, Deng’s reforms was contingent on offering material incentive to China’s farmers and workers. Seeing that economic growth was immediate in the agricultural sector, Chinese planners soon moved to reform the industrial sector in 1984. Staring in 1994, the financial sector was targeted for radical reform as well.

     Economic reforms have dramatically and rapidly changed the Chinese economic landscape, but change in the political realm lags behind. Thus, when Hong Kong reverted to China, China was at an earlier stage of economic and social development. Significant potions of the Chinese leadership viewed the democratic reforms that had been instituted in Hong Kong shortly before the Retrocession as unnecessary, if not with apprehension.

     While these reforms were also viewed by Hong Kong business elites with apprehension, the Hong Kong elections in 1995 had taught this segment of the population a valuable lesson in political mobilization based on political patronage. Given these two coinciding attitudes, along with the business elites’ new savvy in maneuvering within a quasi-free political sphere, Beijing’s agenda for Hong Kong has been allowed to be implemented—thanks to the success of pro-Beijing political parties in Hong Kong, which are composed of Hong Kong’s old business elite. Whether the lessons learned in Hong Kong will be implemented in the mainland remains rather doubtful, as the Chinese régime has a whole set of domestic social problems to deal with that are much more pervasive and serious than those it has faced in Hong Kong.

     The PRC[1] today can be thought of as a country of extreme contradictions. The supreme irony is that while many China watchers view it as one of the most repressed places on Earth in social and political terms, it is actually one of the freest places on Earth in terms of economics.

     When examining China, a broad picture emerges. In theory, certain parts of the country contain some of the freest markets in the world, (Hong Kong, for example), with few regulations controlling the market. This economic freedom, however, exists under a political machinery whose members are bent on advancing their own financial positions and personal positions within the government. On the whole, the PRC is dedicated to protecting its social order to prevent chaos and, therefore, places an emphasis on control that limits social and political dissent. Therefore, one can understand why Hong Kongers viewed the 1997 Retrocession with skepticism.

     Therefore, when we try to get a handle on China’s inconsistent transformation, the following incongruity arises: The rate of political liberalization is not equal to, and pales in comparison with, the past 20 years of economic reform. However, this was deliberately built into the system under Deng Xiaoping’s maxim of “both hands aggressive.” Deng advocated that one hand would be aggressively promoting economic growth while the other would aggressively controlling Chinese society, thus creating a policy model. This administrative model assumes that a middle class could emerge in China in economic terms but that the new class would not have the access and sophistication necessary to develop alternative social, religious, and political thought.

     Controlling that contradiction has become harder and harder for the régime to do. Hong Kong’s example and the recent ouster of the KMT in Taiwan show that when given a choice, the people tend to vote governments out of power—a risk the Chinese government is not ready to take despite the past 20 years of economic reform. So it becomes useful to examine how the interplay between social control and material wealth works in China if we are to get a sense of how Hong Kong will fare under Chinese rule.

     Therefore, I will first focus on the most recent Chinese history, starting in 1978, with the accession of Deng Xiaoping and the repudiation of the leftist Gang of Four, which formally marked the end of Maoist dominance in Chinese politics. Then, the course of economic reforms that have brought China to the brink of entering the WTO will be examined. In doing so, it will be obvious that China has adopted a Hong Kong-style export orientation that demands efficiency but also puts millions out of work. This efficiency begs the question of increased social control, but in the light of China’s projected entry into the WTO, the ties between politics and economics in China have become much more pronounced. However, the WTO will demand that these ties be broken. But, because the stability of the PRC has been tied to economic success and social control, joining the WTO will present several major problems for the central leadership. In response to these questions, it seems as if the central PRC leadership has been looking to Hong Kong’s past for some potential solutions.

2.1 To get rich is glorious.

     After Mao’s death in 1976, Deng Xiaoping began a series of reforms that has radically altered the PRC.

     From 1949 to 1976, China was under the influence of the temperamental revolutionary Mao Zedong. His death coincided with the death of Chinese Premier Zhou Enlai (Mao’s trusted and moderate lieutenant) in 1976. Their deaths brought an end to an era in which Mao’s personality cult and his vicious politicking went unchallenged. Mao’s death left a huge a power and ideological vacuum. Three factions—the Gang of Four, Hua Guofeng, and Deng Xiaoping—fought for power. The forced retirement of Hua and the arrest of the Gang of Four in 1978 and their executions in 1980 marked the end of the dominance of ultra-leftist elements within the Chinese leadership clique. This faction’s policies were even more radical than those espoused by Mao during his lifetime. Under Mao’s leadership, such man-made catastrophes as the Great Leap Forward, the Great Famine of the 1950s, the Anti-Rightist Campaign in 1958, and, most notably, the Cultural Revolution during the late-1960s and early-1970s were allowed to go on.

     Deng Xiaoping’s turbulent career in Chinese politics serves as the best indicator of social conditions in China during his lifetime. In 1967, during the Cultural Revolution, Deng Xiaoping (like millions of others) was purged by leftist and radical elements in the CCP for his “rightist” leanings. Deng and fellow high-level official Liu Shaoqi had advocated using material incentive to make peasants more productive in the wake of the massive famine that killed 30 million Chinese. Deng was purged for his famous comparison of capitalism and communism; they were like the difference between a “white cat” and a “black cat”—either cat was a good one, in the end, as long as it caught the proverbial mouse.

     Five years later, though, Deng made a comeback under the sponsorship of then-Premier Zhou Enlai. The Gang of Four—Mao’s wife, Jiang Qing, Wang Hongwen, Zhang Chunqiao, and Yao Wen-yuan—purged Deng again in 1976. However, Mao’s death in 1976 stripped the Gang of Four of its power and influence. After the demise of the Gang of Four and Hua Guofeng, Deng was “rehabilitated” in 1977 and by December 1978 was the dominant leader. With this consolidation behind him, Deng Xiaoping became the paramount leader in China.

     While Deng was not a “revolutionary,” as was Mao before him, Deng was first and foremost a pragmatist who was politically shrewd and cunning. Using embellished euphemisms about adhering to the “Maoist line,” Deng began a series of economic reforms after the Third Party Plenum that marked a huge departure from Maoist socialism, moving towards a hybrid market system with “Chinese” characteristics. Since their implementation, these broad economic reforms have included change in nearly every facet of the Chinese economy, starting with agriculture, then moving to industry, and finally, into the financial sector. These reforms have gone on to change the heart of China’s economy and, more importantly, have also gone on to substantially alter its politics and society. By the 1980s, economic liberalization had caused a “tentative emergence of a civil society,” which has since been carefully checked by the Chinese régime.[2]

     Deng began to institute reforms at the agricultural base of China’s economy. Up until 1978, China’s economy had been run under the command socialist system. Mass collectivization of Chinese agriculture into communes had begun in 1953, along with the nationalization of industry and the banishment of private property. As opposed to a free market system, in China’s command socialist economy, production was not determined by price within a market but was instead planned in Beijing by myopic central authorities. Even if central planners were qualified economists with perfect information, they could not possibly account for every factor within a market as large as China. However, for the most part, the central planners were not economists but newly promoted peasants who were now top-dog Communist Party cadre. Under their tenure, incentive was absent, idleness rampant, and what products in the economy that were produced were shoddy or unusable. With this system, China suffered from a shortage economy for more than 20 years.

     The ultimate example of mismanagement was the Great Famine during the late-1950s. Many Chinese peasants were reduced to foraging for tree leaves and roots because the central planners had not foreseen a drought, nor had they been able to come up with plans that worked. The authorities, led by Mao, had curtailed production orders and killed capable landlords, replacing them with peasants who lacked knowledge and experience in controlling crop production. Worse, the peasant cadre were provided with unreliable crop projections and were not allocated equipment, the combination of which depleted the grain reserves. Because of the confiscation of private farmland and the ideological suppression of landlords by cadres, no crops were produced, and, as a result, millions starved. By 1978, it was apparent to some Chinese leaders that the communes that were supposed to be a “shortcut to communism” were not working.

     The first step towards reform involved the previously mentioned political consolidation under Deng Xiaoping. Deng was then able to institute the substantial reforms that called for farmers to work under a “production responsibility system.” Starting in coastal and southeastern areas of China, agricultural reform was initiated by breaking up the commune system. Then the government offered farming households induced land-ownership rights with 15-year leases, which allowed freedom of production instead of state planning. In order to soften the blow of radically altering the system, the state also instituted a dual-price market system guaranteeing that certain commodities and staples, such as rice, would remain at fixed prices to benefit both consumers and farmers. The most important reform was the move away from garnishing a percentage of crops by the state; state and provincial authorities were limited to taking a fixed amount of the yields.

     The reforms freed farming households to produce beyond the state tax and to generate a cash crop that could be sold on the free market. The results were noticed almost overnight. Agricultural production went up significantly, and yields per hectare went up 200 kilograms in two years. The new wealth generated by farmers was also significant, as average earnings went from 20 RMB a month to more than 200. Freedom of production had been given to the market and to local farmers, presenting an opportunity to make money, and that opportunity proved to be irresistible.

     Since the reforms were instituted, in 1978, China has moved to the world forefront in terms of overall production and productivity. China’s main staples are rice and wheat. Moreover, China now leads the world in production of meats, vegetables, and fruits. In 1999, China led the world, producing approximately 100 million tons of wheat and nearly 200 million tons of rice. The Chinese were second to the United States in coarse grain production (corn, rye, oats, etc.) and second to India in tea production.[3]  The following data will offer further evidence of the success of Deng’s initial reforms.

Table 2.1 Cultivation Area and Agricultural Production. 

Source: China Statistical Yearbook, 1997.

As the data indicate, the total area of cultivation per person has gone down in the past 20 years, but yields have continued to rise. Also, in 1978 there were approximately 99 million hectares under cultivation; since then, the number has shrunk to 95.5 million hectares in 1996. The conclusion that can be drawn from these trends is that Chinese agriculture has, indeed, become more efficient and productive. Farmers have been able to streamline production costs with purchasing Western fertilizers and farming equipment, which was previously prohibited by their high cost and by Sino-Western politics.

     The first place the farmers’ success was noticed was in the sudden variety and marked increase in quality of vegetables and goods available at urban markets. Long sought-after staples of Chinese cuisine, such as peanuts and exotic vegetables, were available after having been absent for more than 20 years.

     The Chinese marketplace had previously worked under a coupon-and-cash ration system. Workers would be allocated coupons by their work group—danwei—and those, combined with the cash they had, could purchase goods. However, under a shortage economy such as China’s, the only goods that were available were basic necessities. Therefore, having lived for more than 25 years under a system in which coupons would expire before any sought-after goods were available, urban consumers had amassed a lot of cash by the time agricultural reforms started. The new cash crops could also be bought outside the coupon system. Together, these two markets, one free and one coupon-based one, constituted the dual-price system. Consumers were allowed to buy however much of whatever they wanted to, so long as these new cash crops were available. It is obvious that with this incentive, these goods were there to stay. The cycle fed off itself, and the wealth in the countryside and the wealth to buy new goods in the cities were allowed to co-exist for the first time in 40 years.

     The boon for farmers did not go unnoticed in the urban areas, where many of the 300,000 state owned enterprises (SOEs) and collectively owned enterprise and industries were located. After observing the success of agricultural reforms, the Chinese leadership instituted radical industrial reform in 1984. Agricultural reforms needed more urban wealth if they were to continue, the authorities thought, and if Deng’s goal of tripling per capita income by the year 2000 were to be accomplished, industrial reform would be the next logical step. Therefore, reform was aimed at breaking the cycle of a shortage of consumer goods by stopping the production excess of unwanted and/or unusable goods while reducing labor costs and increasing efficiency.

     Substantial change at the factory level started when the state encouraged a private incentive system to replace the command production system that was in place for more than 20 years. Very much like its agricultural-reform scheme, the PRC shied away from offering full private ownership. As the later Russian example would show, issuing stocks in a new company where a private one led to private monopolies being formed where state ones had been. The Chinese state therefore offered quasi-private incentive by allowing 33 percent of all revenues and profits to remain at local levels rather than taking all of it for state coffers. Also, to prevent managers from staying merely for the short term, future advancement and transfers between factories were now contingent on long-term positive managerial performance. To encourage a more productive work force at a local level, managers enticed workers with a dividend of new profit, which was contingent on output—meaning that the final salary was substantially better than the 32 RMB state salary per month. These state-issued reforms demanded that managers be aware of market forces and learn necessary management skills that would make them successful.

     The régime also set up four initial Special Economic Zones (SEZs) on a national level, the most notable being the Shenzhen SEZ, which is directly across the border from Hong Kong. These areas were set up to allow complete free-market practices to solicit foreign capital and breed domestic innovation. Central planners also had the goal of raising capital by issuing public stock in state industries. However, in order to do this, the state needed to institute financial sector reforms. These reforms sought to make state-owned companies and finances solvent (the goal being profitability), and they required that the implementation of Western accounting and business principles. However, these new standards exposed how inefficient the SOEs were and how they needed substantial reform in order to make the loses they incurred manageable at the very least. That reform, though, has involved a massive reduction in the numbers of SOEs, which has put millions out of work.

     By the early 1990s, managers had the incentive to be productive, instead of “going to work” and reading newspapers and drinking cups of tea, as had been done in the past. Workers were now much more productive than they had been under the command system. Average per capita earnings tripled from 800 RMB per year in 1978 to 2,400 RMB by the late 1990s. Newly empowered farmers and villages began to pool capital and form village enterprises. Other entities, such as joint-ventures between former SOEs and foreign companies, began to take over a larger portion of industrial production. Purely private companies—most recently, in the form of information-technology firms—have emerged alongside with the remaining SOEs to become the main actors in the new Chinese marketplace. The next data set will demonstrate the move away from state control. It is interesting to note that the number of workers in industry has decreased as production continues to rise.

Table 2.2 Industrial production as a function of ownership

Source: China Statistical Yearbook, 1997.

The trends speak for themselves. Industrial production has ballooned in the past 20 years, but the state has a decreasing stake in the total outputs, while the percentages of private industry and “other” have increased. Other statistics also reveal that a shrinking percentage of China’s labor force works in industry, going from a high of 70.5 percent in 1978 to 50.5 percent in 1997, while the percentage of workers involved in the service sector has gone from 12.1 percent in 1978 to 26 percent in 1997.[4] These production numbers, however, have not come without pain.

     Financial reforms (starting in 1990) have exposed the deep-seated nature of the SOE problem. Until recently, Chinese financial institutions had no incentive to turn a profit. Most banks, such as the People’s Central Bank, acted as mere money sieves to the SOEs, providing the “soft budgets” for these government-operated enterprises. However, as the data show, the remaining SOEs are losing out to the competitiveness of new, smaller, and more-efficient companies that do not have the obligation of acting as a social-welfare provider for state workers. Very much like the initial agricultural reform, SOEs are now being supported by a dual-price system that shield SOEs with “soft budgets” (i.e. state funds) from privately owned companies that operate under independent “hard budgets.” Central leaders have instituted financial reform that demand Chinese banks make money and learn Western management skills on the spot. However, with these reform initiatives, the central leadership has had to finally acknowledge that their state-owned enterprises had been literally bleeding out capital.

     Major reform has been held back because supporting the remaining SOEs has become a huge burden on the banking sector. In order to sustain the economic growth, the state has been forced to cut off the majority of the SOEs. The state must bankroll reform and social programs because the SOEs have blocked the way for the establishment of a sophisticated private financial sector that can finance debt, generate new wealth, and pool capital. The state’s efforts at streamlining its portfolio have been substantial thus far, but Beijing is being cautious, as many of the largest industries, such as steel, coal, and oil have been preserved. Most of the fiscal resources spent on SOEs make up a quasi-social welfare system, because the SOEs provide all a worker could ask for: housing, education, wages, food, health care, etc. These colossal industries, (steel works, ship-building, airlines, telecoms, refineries, etc.) were pushed and created by Mao and other PRC planners as a part of China’s path to self-reliance and defense in the 1960s. While massive industries were built, they were inefficient and overstaffed, and what industrial base was built become a substitute for a comprehensive social-welfare system. A 1997 report indicated that most of the money allocated to the SOEs is spent on social services: 15-20 percent is spend on medical care, schooling and housing. Retired workers take up as much as 25 percent of labor costs as current staffs— in most SOEs, it is 30 percent of workers.[5]

     A further consideration is the sheer number of people employed by SOEs—at the start of the 1990s, nearly 70 million. Still another 30 million worked for the government. All of these people enjoyed free health-care services. Since the reforms, though, the numbers have been shrinking; current estimates say 85 percent of the population does not have health-care coverage.

     One strategy the state has adopted from Hong Kong is to raise capital through a stock market. The hope is that public offerings will be able to raise capital not only to support the main state industries but also to support the predominant medium-sized ones that lose the most money. However, the recent public offering of PetroChina has only raised half the capital that the state wanted, which raises worries that other offerings will also fall flat. In fact, the number of Chinese-owned listings have actually fallen by more than half (250 to 100) from 1997 to 1999, and in terms of capital raised, the numbers have been declining from a high of $17 billion in 1997 to $5 billion in 1999.[6]

     It is obvious that the régime has decided to adopt a Hong Kong-style efficiency in its economic policy, but this is where Chinese politics and economics show their close association. To cut state-owned enterprises out of the portfolio, leaving the millions who work in them unemployed would be politically dangerous. Having a significant portion of the constituency unemployed is not good and, of course, breeds discontent that risks political foment.

     Other state efforts threaten to add to the financial burden—a 1999 initiative sought to provide coverage for all of China’s 200 million urban workers, but the success of this undertaking has yet to be seen. Therefore, the régime would rather pour more money into these ailing industries and new programs than to risk any challenge to its authority. However, it is my contention that the Chinese leaders have not yet recognized the potential benefits they still have domestically. Currently, the Chinese tax base is very limited. China has a value-added tax on goods and services, a marginal income tax on only the richest of the nouveau riche segment of the urban population, and a very low—7 percent—tax on foreign earnings by overseas companies in China. To alleviate the problem of SOEs and the lack of a social-welfare system, I would argue that creating a sophisticated taxation system is necessary. The tax base would help to alleviate the SOE burden and could create a social and physical infrastructure that would cushion the transition from the former state-directed economy to one that can deal with the World Trade Organization’s provisions.

     The burden cannot be handled entirely by taxation. Increasing taxes could lead to even more luan and cost the régime more social and political capital. Considering this bind, certain elements of the Chinese leadership have looked to foreigners for a solution. What they saw was the WTO. The leadership’s reasoning behind the push for the WTO in 1987 not only came out of optimism towards the potential benefits derived from international trade but also out of a pragmatic calculus that said, China needs foreign capital—not foreign aid—if it ever wants to sustain substantial economic growth. However, the prime tenet of the WTO demands a separation between economics and state control. This will pose a substantial problem for the Chinese régime, which now lacks the ideological legitimacy that Marxism and communism provided.

2.2 “Above all, the Party brooks no challenge.”

The past 20 years of reform pose a very pertinent question of ideology, which has been the basis of political legitimacy in communist China. Scholar Kaplana Misra (1998) offers that the exercise of power in China comes as a result of intellectual and personal debate at the highest levels of the party. Rather than going into exhaustive detail about the ideological debates that go on at the highest levels of the Chinese government, it is suffice to say that the socio-economic reforms have presented a dilemma for the leaders. Therefore, the régime has moved to consolidate its political control as a response to the ideological vacuum. Relinquishing control over the market has been a significant step for the régime; however, the CCP has proven more reluctant to let go of other levers of control.

     Since Deng’s death, in 1997, it has become apparent that the successive dominant elements in the Chinese government, led by President Jiang Zemin, have formally cast their lot with the path of economic reform towards an efficient and market-driven economy. This pro-commerce stance bears echoes of Hong Kong’s growth; during the 1960s, it will be remembered, social freedoms were limited in fear of radical elements that threatened to upset the political order. Therefore, in China, contemporary events have paralleled Hong Kong’s past but have come out of an entirely different context.

     Initial fears that economic reform would die along with Deng were ill-founded, as the leadership in charge today (Zhu Rongji and Jiang Zemin, for example) is pursuing such multilateral liberal economic institutions as membership in the WTO and increased economic privatization. But it also apparent that these leaders are adhering to the foremost of the Four Cardinal Principles of Deng—preservation of the party’s premier position in Chinese society, as political crackdowns in 1989 and 1999 have shown. The régime has moved to prevent a civil society from emerging. It is thought that a civil society would lead to the creation of a political opposition in China, which would threaten stability and economic prosperity. A traditional Chinese aversion to luan—chaos—has been evident in the populace’s willingness to accept strong-armed rule, which still does not allay the régime’s human-rights and pro-democracy critics. Therefore, it comes as no surprise that, while the relatively progressive Prime Minister Zhu Rongji ranks second behind President Jiang Zemin in the government, Zhu ranks number three in the CCP behind ultra-hardliner Li Peng—still known in some circles as the Butcher of Tiananmen.

     The government apparatus, according to many people inside and outside China, is growing increasingly out of touch with the people whom it portends to rule and represent. Increasingly, a gap between actual CCP practice and official Marxist-Leninist ideology is growing wider, as market reform has shown. Therefore, it has become increasingly difficult for the party to reconcile the difference between what it preaches and what it practices. Misra and others argue that a “performance-based legitimacy” has emerged that keeps the CCP  in power. The most significant and paradoxical political developments of the Deng Xiaoping era in China was the decline of legitimacy during a period in which its performance had, in fact, exceeded expectations and achieved astonishing levels of economic growth, and enhanced living standards.[7]

     This disconcerting inherent ideological paradox—a free market-driven economy under a tightly controlled Marxist-Leninist government apparatus—has not been an accident but has resulted by design. Deng Xiaoping’s reforms in 1978 not only de-emphasized a centrally planned economy during past 20 years, it also broke down such socio-economic controls as the influence of the danwei workgroup and allowed a more horizontal power structure to flourish within a more-efficient government bureaucracy. However, the rate of socio-political change has been much slower. The tension between ideology, personal freedom, and an ever-larger gap between rich and poor have led to significant movements by students, dissident intellectual elements, corrupt elements within the government itself, and, most recently, a quasi-religious Buddhist group, all of whom have threatened law and order and the party itself.

     Good examples of the larger issues confronting the régime are the celebrations for the PRC’s 50^th anniversary in October 1999. The “strikingly uncharasmatic leaders” of the régime spent an estimated $4 billion in what some critics called a “manufactured display of triumpalism.”[8] The festivities included parades of dancers, pageants, new “revolutionary” slogans, and military parades. Beyond the superficiality of the proceedings, these “spontaneous” (read: manufactured) displays of patriotism and pride in 50 years of the party revealed that the CCP felt it necessary that the Chinese people be reminded of the reasons behind CCP. Apparently, the CCP felt justified in spending billion of dollars in this public-relations campaign because the party has alienated itself from its roots.

     Increasingly, many of China’s rural peasants living in central and western China have been growing more and more discontent with their plight, as they hear about the fortunes being amassed in the urban and southeastern areas of the country. Often, this discontent has expressed itself, causing luan in the form of rioting and looting in places such as Tongren in Guizhou province. The distribution of wealth and prosperity in China has not been equal, favoring the southeast and the east of China and excluding the western and northwestern regions. Of China’s 1.3 billion people, some 800 million people live in rural areas. Of those, 200 million are deemed as “surplus” rural agricultural labor; the vast majority face crushing rural poverty, as the following data will show.

     Another 100 million people form an illegal floating migrant urban work force that fills short-term labor demands but are technically not allowed to do so. Another 300 million urban and rural workers are quasi-employed and only working two to three days a week despite their holding supposedly full-time positions.

     These disparities reveal that hundreds of millions of people have been excluded from China’s new prosperity and have been isolated from Deng’s economic transformation. The following data better illustrate this, revealing a per capita income range in China that is almost as large as the rest of Asia.

Table 2.3 Comparison of Per Capita Income for Selected Chinese Provinces 1995 (in U.S. Dollars)

Source: China Statistical Yearbook 1997[9]

Table 2.3a Comparison of Per Capita Income for Selected Asian Countries 1999 (in U.S. Dollars)

Source: The Economist: Pocket World in Figures, 1999.

While millions of rural peasants grow increasingly alienated from the party as they wait for prosperity, the régime is also alienated from the 100 million nouveau riche—the business and youth elite who represent the face of post-reform and “modern” China. This new class is aware of the moral “bankruptcy” of the régime and has pursued material wealth, but, like many of the disenfranchised in the countryside, some members have turned to such things as religion, material wealth, consumer goods, and pop culture to fill the ideological gap.

     The most public and recent example of this disenchantment can be seen in the success of the Falun Gong Da Fa movement. The quasi-Buddhist and Taoist movement combines traditional breathing exercises associated with tai qigong with meditation to produce a New Age belief/relaxation philosophy that draws on “cosmic forces” to attain enlightenment for its followers. The success of the group is emblematic of a Chinese people seeking the metaphysical solace in their lives that the régime once promised in its pursuit of class reform and communism. Falun Gong Da Fa purports to have as many as 100 million followers in China, led by spiritual guru Li Hongzhi, who lives in New York City. Other estimates have placed membership from just more than 2 million to more than 10 million.

     Falun Gong made headlines in April 1999, when it organized a silent vigil of 10,000 of its members in Tiananmen Square to rally for greater religious freedom. The protest was eerily silent and peaceful, and it came as an utter surprise to the régime. The silence was deafening to the leaders—the thought that such a mass movement could have gone undetected (the group relied on electronic mail for communication) was deemed to be too much of a threat. A massive crackdown ensued in July, after the régime officially branded Fulan Gong as an “evil cult.” Unlucky Fulan Gong members who were arrested (including around 1,600 party cadre) were reportedly subjected to torture with electrical cattle prods and beaten into submission.

     Falun Gong activists still persist in protests, while the group’s countless members still practice Li Hongzhi’s exercises in private.[10] Since the crackdown, Beijing’s Tiananmen Square has been the staging ground for a bizarre drama enacted out daily by Fulan Gong members and PRC authorities. Usually six to 10 Fulan Gong members are spotted by the authorities when they try to unfurl a banner or try to hand out fliers to passing tourists. The Fulan Gong members are usually tackled and kicked to the ground by plainclothes policeman. Eventually, the Fulan Gong members are thrown into a security van, which speeds out of the square towards a local police station. News reports indicate that this routine happens almost every day (it has been witnessed by the author). What’s more, onlookers in the square are videotaped; any film that the authorities believe has captured the preceding events is instantaneously confiscated and destroyed, and some tourists have even been detained for questioning by authorities.

     Therefore, instead of undertaking deep institutional reform within society, the régime has instead chosen to live with a perpetual socio-economic tension, dealing with it the best it knows how: through force. Deng Xiaoping elucidated as much in a June 6, 1989, speech given to loyal Beijing military officials shortly after the Tiananmen crackdown on June 4, 1989.

Is the basic point of reform and opening up wrong? No, it is not … In the beginning of the 1980s, when the Special Economic Zones were first established, I talked with comrades from Guangdong Province on stressing two things simultaneously. On one hand, I told them to attach importance to reforms and opening up; on the other hand, I told them to emphasize sternly cracking down on economic crimes and also to emphasize ideological and political work. That is the theory of two basic points. Looking back, however, we find there have been obvious shortcomings. We have been strong on the one hand and weak on the other.[11] 

     The hand that Deng had called weak came down with great fury in June 1989 and has been unfurled again; it is the same hand that looms over Hong Kong. Given the traditional Chinese antipathy for disorder, this approach does not come as a surprise. On a larger scale, the development and growth of other East Asian countries have shown that strong-armed governments have been the norm. Scholars José Campos and Hilton Root have examined the growth of the so-called Asian tiger economies, and their research represents a useful framework withl which to consider the Chinese régime’s methodology. (1996) 

Régime leaders in the high-performing Asian economies (HPAEs) understood that the challenge of economic growth required the coordination of expectations of different sectors of the population. They responded to this challenge by collaborating on the design of institutions that spread the benefits of growth-enhancing policies widely, made the reversibility of the policies costly, and consequently, gave individuals and firms confidence that they would share the growth dividend. This assurance, in turn, mitigated opposition to the policies and created a sociopolitical environment conducive to sustaining economic growth.[12]

It is apparent that Campos and Root advocate democratic ideals and come down harshly on the situations they have observed.

The role of a “strong authoritarian state” in the facilitation of this bargain needs to be reconsidered. Hard dictatorial régimes in which policymaking acts independently of constituent oversight have rarely generated sustained economic growth. An inherent contradiction exists among authoritarianism, investment, and growth. Being above the law, authoritarian régimes can use their power to expropriate the wealth of citizen. This prompts investors to take their investments and expertise elsewhere or to limit investments to short-term projects. Economic growth had been durable in East Asia, as contrasted to the autocratic régimes throughout the developing world, precisely because leadership established institutions, rules, and procedures that limited government discretion over economic policy.[13]

2.3 An external and internal threat to the régime: the WTO

     To go along with the régime’s strict socio-political policy, the Chinese government has been practicing sound economic policy as well, using Hong Kong’s export orientation as a model. However, in contrast to Hong Kong, we have seen that capital generation in China is much more difficult to accomplish. Very much like Hong Kong, China has turned to trade as its path to prosperity. The régime has proved this by practicing prudent fiscal policy. In the face of other countries in the region devaluing their currencies during the 1997 Asian financial crisis, the Chinese did not devalue the yuan, the standard unit of  China’s currency, the Renminbi, and kept the peg at ¥ 8.29 RMB to $1. The régime’s motivation behind staying with the peg was that devaluation would have led to increased exports at the time but would have been viewed with skepticism by the many Western trading partners who will have sway when China joins the WTO.

     The régime has pursued entry to the WTO in hopes of attracting foreign capital and foreign technology. WTO negotiations between the United States and China have dragged on for 13 years; in November 1999, a deal was finally secured after Jiang Zemin and Zhu Rongji personally involved themselves.[14] The Sino-American WTO agreement is a unilateral one but is pivotal, because the United Staets is the largest member of the WTO, and the Sino-American agreement will serve as a guide for all other WTO agreements. Admission into the WTO means a reduction of high Chinese protective duties on food, commodities and goods for China’s trade partners. It also allows for foreign companies to take majority stakes in Chinese companies, at 51 percent. Practically, it also means that the Chinese régime must protect its lesser-quality domestically produced goods in the face of better foreign products that will be less-expensive because of tariff reductions.

     For foreigners wanting to do business in China, the Chinese market looks promising. According to the U.S. Commerce Department, from 1995-1997, Chinese internal retail spending rose at a rate of 25 percent a year, reaching $351.2 billion in 1998. The WTO will allow foreign products to come into the Chinese market at manageable prices. This will force Chinese companies, in both the private and state sector, to become much more efficient. However, unlike Hong Kong’s selective immigration policy, there is no way to control the numbers  of workers in China. Therefore, while WTO rules and regulations allow for the infusion of foreign capital and business practices, it also will result in massive layoffs of inefficient and surplus Chinese workers. Chinese Prime Minister Zhu Rongji, who has engineered most of China’s recent economic reforms, has called the coming unemployment a “grim situation.” However, this problem also stems from China’s greatest economic advantage—its massive labor force.

     Joining the WTO also means that the government will have to disconnect itself from the economy and must reduce the amount of regulation that it currently imposes upon foreign companies, which have faced great difficulty in the Chinese marketplace. It is not that foreign companies are discouraged from entering the Chinese market, but they are not allowed to enter it without a license. Granting licenses for foreign companies to do business in China is an excruciatingly slow process, with a formidable bureaucracy to contend with.

     United Airlines, for example, has been flying to China and selling tickets in its Chinese branch offices for more than 10 years. Officially, though, United is not doing business in China and is only represented by branch offices, which can issue tickets but is technically not selling them. This ad hoc arrangement has worked for the short term, but this arrangement offers little legal protection against liability for United. Also, a blanket of obscure and often contradictory rules and regulations exists that is backed by an equally formidable bureaucracy. Often, the only way to get around this system is to use appropriate levels of guanxi—patronage. While guanxi was practiced at the highest levels of government in Hong Kong, it is practiced throughout the entire government in China.

     A recent example of the failure of paying the appropriate amount of guanxi and the consequences of liability came when a “license crackdown” forced several Chinese-language editions of popular magazines in China, such as Cosmopolitan, Esquire, and Elle, to remove their mastheads and names from their front covers. The crackdown stripped the publications of their brand label—however, the action was perfectly within the bounds, even though this “violation” was known about for years. The case illustrates that a blanket of rules and regulations exists, and officials can enforce (or ignore) these laws at their own discretion at any time. Granted the magazine market is relatively small—circulation for the much-tamer Chinese version of Cosmopolitan reaches 200,000 people, whereas the U.S. circulation reaches 2.9 million. Despite this recent headache, publishing companies cannot help but see the numbers involved: in 1998, $600 million was spent on advertising in magazines in China, a 35 percent increase from the year before. [15]

     Despite this, there is a sluggish attitude towards foreign companies in the China. A history of ruinous foreign capital flight during the 1930s has been attributed by some scholars as the reason that the Chinese market has been slow to open up to foreign companies. However, others see the Chinese stratagem in dealing with foreign companies as one of letting foreign companies make just enough money to keep them in China for the long-term but taxing them as much as the Chinese government can get away with. The régime, desperate to raise cash, still imposes blanket of fees, taxes and regulations that ensure it will make as much money off the foreigners as it can before the WTO ends these practices. The restrictions on licensing and issuing licenses dampen the investment climate for foreign companies, but many foreign companies, it is thought, will remain committed to long-term investment in China because leaving a market of China’s size would be foolish.

     These regulations illustrate the inefficiency in the Chinese market. Officials are afraid of being cut out of profits as they realize the régime is moving towards a Hong Kong export-orientation economy. In business terms, the government is looking to Hong Kong as a model for itself. It sees Hong Kong as being a free market backed by a strong rule of law, and it has moved to create a court system that foreign investors can trust. However, as the régime works to build a Hong Kong-style court system in the mainland, China is still a place where there is government involvement in almost every aspect of the market and society. The Chinese communist system reflects the imperial system that came before it. In administrative terms, a huge bureaucracy exists that is supposed to keep its members in check. In practical terms, though, guanxi allows the abuse of power for personal advancement and the preservation of one’s own position to actually get the business of government accomplished. This is true, and has been true, both at a local and national level since the implementation of the Imperial Examination System during the Ming Dynasty. This mentality explains why the PRC has been actively undermining the Hong Kong court system it wishes to emulate.

     Therefore, it remains problematic that while the WTO will take government out of business (as has been done in Hong Kong) the régime will step up its social involvement and political control over China. This policy prescription fits Deng’s call for both hands being aggressive and even takes into consideration that Hong Kong has been a place where laissez-faire economic policy has been backed by a strong judiciary. Therefore, the régime’s interpretation of the Hong Kong context would build upon its own domestic considerations and incorporate the guanxi system into policy. However, in reality this would actually be contradictory to what made Hong Kong great in the first place and dims the hopes for Hong Kong.

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References

Mark Bayuk, Commercial Officer, U.S. Department of Commerce, “China Today,” (Discussion with author and St. Olaf College student group, U.S. Embassy, Commercial Section, Beijing, 31 January 2000).

Karby Leggett, Staff Reporter, Asian Wall Street Journal, “China” (Discussion with author and St. Olaf College student group, Asian Wall Street Journal, Shanghai, 25 January 2000).

Cheng Li. “200 Million Mouths Too Many: China’s Surplus Rural Labor,” 1997, in Schell & Shambaugh, eds., The China Reader, 1999.

Kalpana Misra, From Post-Maoism to Post-Marxism: The Erosion of Official Ideology in Deng’s China. New York & London: Routledge, 1998.

Elizabeth Rosenthal. “Trade Agreement Reveals Contradictions in China” NYT  16 November 1999.

Patrick Tyler. “Rural Poverty,” New York Times: December 1995, in Schell & Shambaugh, eds., The China Reader, 1999.

U.S. Department of State, “Contact China: A Resource Guide for Doing Business in the People’s Republic of China.” Beijing: U.S. and Foreign Commercial Service, 1999.