The Coming Collapse of China, by Gordon Chang, London, Arrow, 2002

 Let us assume you are a UK business person, with a reputation as a solid citizen who does their homework well. You learn aboutChina’s history before you go there, to make yourself conversant with the country you intend to invest in. You learn that traditional Chinese historiography has a new dynasty begin with capable rulers receiving the mandate of heaven to carry out various reforms and extend the boundaries of Chinese administration. These are followed by a golden age of stability, prosperity and cultural achievement. However, as routine sets in, so does corruption and decay. Finally, the dynasty loses heaven’s mandate through internal rebellion or external invasion, only for a new dynasty to be established in war and violence, and for the pattern to repeat itself. The first question you ask, then, is where is the present communist dynasty situated.

After some further investigation, you plump for the view that the present communist dynasty is headed to a golden age. So you sink a few hundred million pounds sterling in setting up your operations inChina on the grounds that the country is diagnosed by the pundits as stable, large and with great potential. It is stable, you have been told, because the Chinese communists are firmly  in charge. China’s population is anything between 1.3 billion and 1.5 billion, if the unregistered births in the countryside are somehow accounted for.  Since 1978, when the diminutive Deng Xiaoping levered himself into power in order to ditch Mao Zedong’s strategy of waging permanent class war on the people of China in favour of economic development, per capita incomes have quadrupled, and the Chinese middle class  numbers about 200 million people. Furthermore, the government has just announced that its objective is to quadruple national income by 2020.

Then you buy Gordon Chang’s book, entitled The Coming Collapse of China. Its author knows China like the back of his hand. He is a practising lawyer, has lived inShanghai for two decades and obviously knows a lot of people. Furthermore, he writes fluently, mixing illustration and analysis in equal portion. And his message is as clear as a bell: the Communist party-state may look impressive, but peer beneath the surface, and what you see is a country in long term decline, with a regime on the verge of collapse.China is about to succumb to corruption and decay, he says.

Nervously, you ask him: how come? Ideology, says Chang, is in the driving seat, and not pragmatism. If the regime really had taken to heart Deng Xiaoping’s maxim to “seek truth from facts”, then many problems which malinger un-resolved at the heart of the party-state would long since have been dealt with. But they have not been, and they cannot be because ideology is the measure of each proposed solution. The reason is that the party-state is incapable of changing its nature, defined in terms of democratic centralism, the leadership of the party, and the body of Marxist-Maoist-Leninist thought.

The party-state is therefore only capable of evolution within its own frame of reference. Take for instance, the idea of privatisation, which has been part of the mantra of global public policy recommendations emerging from the bowels of international institutions for two decades. Put simply, it refers to the sale of state-owned assets to private owners on a market open to most contenders. But in China, private property was outlawed under the communists and it was only in 1999 that the Constitution was amended to recognise the contribution of private business to the country’s development. Scarcely a ringing endorsement, but better than none.

Marketisation, not privatisation, is the official name in China for the sale of party-state assets. And what it means is the creation of a party-state regulated market for control of state, township or village-owned enterprises. The party-state sells assets in the market and other party institutions buy them. Not for nothing is the party called the Gongchan Dang, the party of public assets. It runs the budget, banks, the bond and equity markets, the financial institutions and state, township and village enterprises. Collaboration with it is indispensable for private businesses.

The implications for our worried business person are very important. Gordan Chang is saying that the reforms which have been introduced over the past two decades inChina have reached their limit. They cannot progress much further within the existing party strait-jacket. Indeed, he goes on to say that the party is using a dash of free market thinking in order to help build socialism, “China-style”, rather than capitalism.

China is not evolving out of a command economy under communist monopoly control into some form of authoritarian state, presiding over a market in the name of a nebulous ideology. The states that took that route, likeTaiwan,South Korea,Chile or Spain had all been created in opposition to the spread of communism. Their various dictatorships ruled with an iron fist, and harnessed capital markets and financial institutions to state purposes, but they were built and predicated on the defense and promotion of private property rights, for some. Public ownership for these states, was no insurmountable political problem, so much as one policy option.

For the Chinese communists, public ownership of the means of production used to be equated with plans and all the accoutrements of command economies. Marketisation has thrown out the plan in favour of the process of introducing market competition, and using market signals as a more effective tool for allocating resources efficiently. This is one point where Gordan Chang does less than justice to China’s economic transformation: given all the problems inherent to China’s statistical apparatus, there is little doubt that resources are being used much more efficiently now than over twenty years ago.

Building socialism China style, Gordon Chang implies, means creating a highly competitive market, rigged in favour of domestic producers, and resistant to penetration by foreign companies. There are, indeed, many examples, when foreign companies have wandered into theChina market, overconfident in their own capabilities and under-skilled in dealing with the complexities of the business environment in China. Whirlpool, the US white goods giant, ended up having Kelon, a township enterprise, sell Whirlpool washing machines  under its own brand name.

Chang cites the beer industry as an example. All the big names from the advanced industrial countries entered the market in the course of the 1990s. After all, here was a potential market of 1.3 billion thirsty Chinese—the modern equivalent of nineteenth century missionaries’ vision of selling one bible to every Chinese family. But they ended up with a fraction of the total market share, huddled in the up-market hotels of the big cities, catering to western visitors.Britain’s Bass exited in 2000. Guinness  withdrew from its licensing arrangement.Australia’s Foster’s threw in the towel. Many scaled back their operations. Here is what Chang quotes Peng Zouyi, vice-chairman of Tsingtao beer, as saying: “We can say with certainty that the retreat of the foreign beer makers fromChinais irreversible”.

Extrapolate that story forward to 2020-30, and spread it over all industries(even the markets most penetrated by foreign suppliers have 70% of the market supplied by domestic producers), and you have the US right’s nightmare. China is fast becoming an 800 pound guerrilla in the global jungle. Its intent is to exploit the US as the prime market for its exports, a key source of technology and the prime supplier of security throughout the Asia-Pacific, and the world, in order to replace the US as the world’s leading power in the course of the coming decades. A number of policy recommendations flow from this analysis: one of them is that the US has every interest in promoting China’s evolution to becoming a market-democracy along western lines as soon as possible.

Chang is arguing his own case, not the State Department’s wish list. Fat hope, he says, of any evolution taking place inChina. The Chinese people have not yet come to the end of their two hundred years of suffering. They are going to have to fight in order to oust the communists from power. He predicts civil war, and a bloody one to boot. Furthermore, collapse is not in some distant future. It is imminent.

The signs, he says, lie all around. Unemployment in the countryside may be the lot of upwards of 200 million people, and the unemployed in the cities are far above what official figures record at just over 3% of the urban labour force. Corruption is endemic from top to toe of the party, which is thoroughly unpopular, and the opposition–presently weak—can only  strengthen as it acquires the technological means to organise.

One fundamental weakness of the party,  says Chang, is that it is feeding off a moribund ideology. Nobody believes it any more, not even party members. Its only use is to sustain the party in power. Otherwise, communist China has opened its windows wide to its own past and to the rest of the world. As the Chinese saying goes, “an open window inevitably attracts in flies”. Its house is now abuzz with religions of various types—a typical situation from the past when China’s official religions have been in decline.  Protestant house churches are active, as are Buddhists and catholics. The Falun Gong, which has been severely persecuted by the regime since 10,000 members gathered in front of government headquarters in Beijing in April 1999, has a guru living in New York, who preaches that the troubles of this world—including rock ’n roll and homosexuals—can be dealt with by a combination of meditation and military discipline. The leader of the sect Eastern Lightning considers himself to be Jesus Christ Redivivus. In short, the natural pluralism ofChinais exploding into view as the communist party’s de facto monopoly on power shrinks.

Another fundamental weakness, says Chang, lies in the financial system. Anyway you look atChina’s official economy, the signs of trouble are everywhere. Successive governments have postponed the day when the state enterprises(soes) are finally shorn of their cradle-to-grave social welfare functions, for fear of violent reactions in the party’s own working class constituencies. Overmanning in them is endemic, and many of them are de facto insolvent.

A series of reforms, dating back initially to the mid-1970s, have shifted their losses from one institution to another. Every gimic in the party’s great book of fudge has been used to avoid them being declared bankrupt. Indeed, the party-state’s innovative approach to accounting could have taught Enron’s top team a lesson or two. State subsidies to soes have been reduced, making the general government budget look better. The burden was then shifted to the banks, who promptly fell sick. With up to 80% of total loans going to soes, bank’s non-performing loans(npls) soared. To cure the banks, loss-making soes were shifted sideways in 1999 to Asset Management Corporations, created for the purpose of  cleaning the bank’s books and having the AMCs sell off the assets. But, Chang points, out party officials with a stake in the sales could not agree on sale prices.

As if that were not enough, the financial markets in Shanghaiand Shenzen have been a casino—some would say that at least casinos play by rules. Indeed, the two markets were officially re-opened in 1992 as an alternative source of funding for soes. The over 1000 firms listed on the markets are soes; the terms of listing have been negotiated within party networks; and the state-controlled media have tried to chat up the corporate prospects of its companies to the 60 million-odd shareholders inChina—a number, by the way, not too different from party membership. Keeping capitalism in the communist family is what marketisation is all about.

Then there is the government budget. Official statistics show the general government running a gentle deficit. Indeed, in mid-1990s, a rule was passed to restrict year-on-year deficits to spending on capital projects. That proved      an open door to the government issue of bonds. With tax revenues shrinking, the party-state simply raised funds in other ways. The result on the expenditure side was a steady rise in payments on interest and principal, roughly equivalent by 2000 to the budget deficit—a point which Chang left out. What he has insisted on, though, is that the size of the overall government deficit is much, much higher than recorded. On his count, if the npls are transferred back to the budget, as well as the very sizeable hidden armed force budget, and unfounded pension liabilities are thrown in for good measure, the total public deficit as of 2000 was about 148% of GDP. Chang concludes that the financial system is where the end of the regime may begin.

Up to this point, there is much that I can agree on in Chang’s analysis. The party-state can only evolve within its own terms of reference, but I consider ideology is in the back seat and pragmatism to the fore. To my mind, the Chinese communists have become old-style Tories, who approach the future firmly facing the past as the only source of information about a future we all know little about. Indeed, Chang cites former President Jiang Zemin in support of my view, to the effect “we can advance to the future only through looking at the past clearly”. Chang goes on to adopt what can only be termed a determined progressive’s view—the sort of position that New Labour people may espouse, or the Great Helmsman himself. Actually, Chang entones, the best way to advance forward is to look towards the future.

My view is that that was precisely the posture of the Chinese communists in 1949. They knew the future, and what it held. They also knew what had to be done to accelerate its advent. So they nationalised, dismantled, confiscated and engineered society with a view to changing human beings in China. Not surprisingly, they lost their way—as well as the lives of tens of millions of people. Mao invited his people to make a Great Leap Forward—and up to thirty million people lost their lives in a man-made famine. In the Cultural Revolution, starting in 1966, Mao sought to transformChina’s culture and wrench it from its moorings. At least one million people died during its excesses, in addition to the millions of school-going age who lost out on their education. In ditching class war in 1978 for development, Deng was appealing to a party with little appetite for more heroic leaps into the unknown. 

In 1978, the country was seething with discontent. It was a desperately poor country. Per capita income was 7% of theUS. 60% of the population lived on less than one dollar a day. International trade was the lowest out of the then 120 developing countries. It was the peasants in Xiaogang Production Brigade of Fengyang County, Anhui province who took reform into their own hands, re-established the market mechanism and won the acquiescence of local party officials. Later, the central government adopted this initiative as a “reform”. Similar flexibility was demonstrated with regard to party ideology.Chinawas said to have made a “premature” attempt at transition to communism.

With ideology relegated to the back seat, and pragmatism in charge, the economy took off. The results have been remarkable: over the next quarter century,China’s GDP per capita rose at 8% annually, 200 million people were lifted from poverty, and measured in purchasing power parities,Chinabecame the world’s second largest economy.

Chang rightly says there is still plenty of discontent around now. But he does not elaborate on what could be a powerful argument in his own support. As de Tocqueville pointed out in his analysis of the causes of the French revolution, it was not so much the spread of misery prior to 1789 which lit the spark as the spread of prosperity. More wealth in late eighteenth centuryFrancecontributed to raising expectations which the monarchy proved unable to meet or to manage.

The analogy holds in part forChina. Many millions of people are much better off than before, and tens of millions more know that they may, by hard work and luck, achieve similar good fortune. They are more demanding of their governors, who rule over a China which is fast transforming under their eyes. They cannot afford to stand still as all is flux about them. On this, I am in fundamental agreement with Chang.

This is the point where we diverge. First, the party-state is recognizably the same as it was but,in my view, it is nonetheless different. It is the same organisation. It has the same ancestors. Its rituals and official language derive from the same source. But its personnel is notably better educated. It is presiding over a market economy, albeit with peculiar institutions. Many of its own members are doubling as business people. It still rules with an iron fist, but Sweden’s Wallenberg Institute has recently won central government support to teach about human rights inChina. In other words, the party ain’t what it used to be, while protesting all along that it is the same.

Second, Chang does not muster an argument to convince me about the detonator of the bloody revolution which he says is imminent. That a detonator is necessary for revolution to occur, there can be no doubt. But if you predict revolution, then identifying one or a possible range of factors would definitely add gravitas. I can identify four detonators which he mentions: WTO accession; war overTaiwan; peasant or working class anger; and internal party feuds. If they all came together, the party would no doubt face sudden death—face it, but still be alive to fight the fight.

Take WTO. Accession holds the  party-state to a thorough-going market opening exercise within a relatively short timetable of about 5 years. Chang quotes Robert Knapp from the US-China Business Council that the WTO puts China“on track to international standards and universally agreed-to standards of trade and economic behaviour and to the reconstructions of the way its own state deals with its own economy”. True enough, and much painful market adjustment, backsliding, and learning as well as opportunities lie ahead. But the main point I take from China’s WTO accession is that this is a major opportunity for Beijing to re-establish central control and regulation over independent-minded provincial and city barons, while becoming a champion of open world trade against protectionism in Europe, the US and Japan. To the extent that rich country governments throw money at farmers, steel workers and textile firms—as they do and possibly will—China will have plenty of opportunities to justify delay, say, in opening sensitive agricultural markets. The WTO was always designed to encourage mercantilist states to abandon protectionist vice to acquire some free trade virtue.

Taiwan could serve as a detonator. The rise of the independence movement has mainland patriots seething over the prospect thatChinamay continued not to be united. Indeed, two incidents, one in 1996, and the other in 2000, saw battle positions being taken up on both sides of the straits. The communist leadership threatened war in the event of a declaration of independence byTaiwan—a threat which was not spoken lightly, and was definitely taken very seriously inTaiwan. So seriously, that both sides were more than willing to explore alternatives. To synthesise, the mainland order of priorities in foreign policy in effect places Taiwan low down the list, as long as the “one China, two systems” position of Beijing is held to. The last thing thatChina’s communists need in the light of their many other problems is war. After all, they imbibe with their Marxist mother’s milk that revolution is the progeny of war. Mao’s heirs prefer evolution, please, to revolution.

There is plenty of peasant and working class anger. Officals’ houses have been burnt by angry peasants, fed up with venal officials raising “fees” to fund their own activities. Workers are not adequately represented through the official trade union, and there is an abundance of reports at managerial abuses of fundamental worker rights. Interestingly, this is one area where foreign investors from the EU, the US or Japan can show the way by demonstrating that excellent human relations in companies are a Good Thing—to quote from “1066 and All That”. Lafarge, the French cement giant, won the official union’s “dual love” award for taking over an soe plant north ofBeijing, upgrading health and security measures, introducing fair but severe discipline, and making a clear commitment to employee training. But that illustrates just how difficult a task the discontented face to organise themselves into an effective force inChina, capable of challenging the incumbent communist power: the reasons for discontent are distinct, just as the source are diverse. Organising them is a task many times more complex than the CCP’s already awe-inspiring task of trying to preside overChina’s emerging pluralism.

Finally, internal feuds could escalate until such time as insiders start competing to win over constituencies outside of the regime or even outside ofChina. One such source of feuding could develop between protectionists’ interests and those in favour of open markets. Indeed, the politics behindChina’s entry negotiations to the WTO suggest that those forces were influential. They did not prevent the leadership from deciding on entry. Reformers in the regime definitely backed entry as a means of promoting the short of changes they wanted. Those included extensive challenges to the existing ways of doing things. As Long Yongtu, one of China’s chief trade negotiators told party cadres at the height of the negotiations, “A very major problem …is that every department is not only itself the appointed referee but also a player in the game, and also the same people who make up the rules of the game”. What that spells in the future is many discrete battles across the length and breadth of the party state as officials are levered out of managerial positions or into regulatory jobs.Chinais getting more complex as it joins the world economy, not less.

Chang has written a very stimulating book, and I would advise readers—including my apocryphal business person to read it. It fields serious arguments about one quarter of the world’s population. And it does so in a light prose which all can read with pleasure. No polisci jargon to trip readers up here. No Marxist lexicon required as you leaf through its pages. But there is a trace of a Mao-cult, nonetheless.

At one point Chang launches into his own suggestion forChina. What the country needs, he says, is a “Neutron Jack” Welch. The American, Chang writes, is(was: Jack was still in the saddle, so to speak, when Chang’s book came out) accomplishing with GE what Mao Zedong sought to do for China: create a continuous revolution”. Welch confronts problems; (post-Mao)China, he says,  has never learnt to do so.

God spare China, says I,  any further Great Helmsmen, with their Big Leaps, their Clean Slates, their Utopias, and their  Cultural Revolutions. That silent prayer, I believe, links party and people in China today.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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