Thursday, 2 October 2008


The long march backwards

Oct 2nd 2008
The Economist

A surprising new book argues that China is becoming less,
not more, of a capitalist economy

MOST people, particularly those living outside China,
assume that the country’s phenomenal growth and increasing
global heft are based on a steady, if not always smooth,
transition to capitalism. Thirty years of reforms have
freed the economy and it can be only a matter of time until
the politics follows.

This gradualist view is wrong, according to an important
new book by Yasheng Huang, a professor at Massachusetts
Institute of Technology. Original research on China is
rare, largely because statistics, though plentiful, are
notoriously unreliable. Mr Huang has gone far beyond the
superficial data on gross domestic product (GDP) and
foreign direct investment that satisfy most researchers.
Instead, he has unearthed thousands of long-forgotten pages
of memoranda and policy documents issued by bank chairmen,
businessmen and state officials. In the process he has
discovered two Chinas: one, from not so long ago, vibrant,
entrepreneurial and rural; the other, today’s China, urban
and controlled by the state.

In the 1980s rural China was in the ascendancy. Peasants,
far from being tied to the land, as has been assumed, were
free to set up manufacturing, distribution and service
businesses and these were allowed to retain profits, pay
dividends, issue share capital and even a form of stock
option. State banks rushed to provide the finance. Nian
Guangjiu, a farmer from impoverished Anhui province, built
up a business selling sunflower seeds (a popular snack),
employed over 100 people and made a million yuan (nearly
$300,000) in profit in 1986—just a decade after Mao’s
death. Because most of this activity was set up under the
misleading label of “Township and Village Enterprises”,
Western academics largely failed to spot that these
ostensibly collective businesses were, in fact, private.

But then, in 1989, came the Tiananmen Square protests. A
generation of policymakers who had grown up in the
countryside, led by Zhao Ziyang, were swept away by city
boys, notably the president, Jiang Zemin, and Zhu Rongji,
his premier. Both men hailed from Shanghai and it was the
“Shanghai model” that dominated the 1990s: rapid urban
development that favoured massive state-owned enterprises
and big foreign multinational companies. The countryside
suffered. Indigenous entrepreneurs were starved of funds
and strangled with red tape. Like many small, private
businessmen, Mr Nian was arrested and his firm shut down.

True, China’s cities sprouted gleaming skyscrapers, foreign
investment exploded and GDP continued to grow. But it was
at a huge cost. As the state reversed course, taxing the
countryside to finance urban development, growth in average
household income and poverty eradication slowed while
income differences and social tensions widened. Rural
schools and hospitals were closed, with the result that
between 2000 and 2005 the number of illiterate adults
increased by 30m. According to Mr Huang, the worst
weaknesses of China’s state-led capitalism—a reliance on
creaking state companies rather than more efficient private
ones, a weak financial sector, pollution and rampant
corruption—are increasingly distorting the economy.

But what about the growing cohort of Chinese companies
starting to strut the world stage? Surely that is evidence
of a healthy and expanding private economy. Mr Huang’s
evidence shows that, on closer inspection, these firms are
either not really Chinese or not really private. Lenovo, a
computer group, has succeeded because it was controlled,
financed and run not from mainland China but from Hong Kong
(a happy legacy of the founder’s family connections
there—not something enjoyed by most Chinese businessmen).
The subsidiaries of Haier, a white-goods maker, were also
put out of reach of mainland bureaucrats early on. Wahaha,
a food producer, Galanz, a maker of microwave ovens, and
many others all depended on foreign protection and capital
to grow and escape state strictures.

Indeed one of the main, and underappreciated, functions of
foreign investment in China has been to play venture
capitalist to domestic entrepreneurs. As for Huawei, a
telecoms group and one of China’s much vaunted “global”
companies, its structure and links to the state are so
convoluted that the most diligent China-watchers have
little idea if it is a private or state firm. They do,
however, agree that Huawei’s opacity is a microcosm of
China’s distorted economy. Could China genuinely embrace
entrepreneurial capitalism again, as it did in the 1980s?
Its current leaders under President Hu Jintao, who cut his
teeth in Guizhou and Tibet, two of the poorest and most
rural provinces, talk about supporting the countryside and
reducing social inequality. But nothing much has been done.
China’s deep problems demand institutional and political
reform. Sadly, as Beijing’s heavy-handed control of the
Olympics suggests, there is scant hope of that.

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