The Party: The Secret World of China's Communist Rulers (27 page)

In the words of Cheung:

You want a business licence? The locality will assign someone to do the walking and talking for you. Want a building permit? They will give you one with money-back guarantees. Unhappy about that dirty creek passing through the site? They may offer to build a small lake for you. They will help you find architects and builders and, at the production phase, recruit workers for a reasonable fee. They sell their cheap electricity, sell their parks and entertainment, sell their easy transportation, sell their water supply, sell their glorious history and even sell how good-looking their girls are–no exaggeration!

Cheung’s joke about good-looking girls was a reference to the county in Anhui province which held a beauty contest in 2005 to select the most beautiful local women to head teams to travel the country seeking investment for the area. Criticized all over the country for his gimmick, the area’s party secretary replied: ‘Beauty is an asset. Why not use it?’ A locality with 300,000 residents, according to Cheung, often employs as many as 500 people whose sole job it is to solicit investment.

China has witnessed a rising tide of violent protests against local development projects this century, a phenomenon of great concern for the leadership. But local governments have also sanctioned demonstrations to agitate in favour of investment in their localities. In Hunan in 2009, two neighbouring cities conducted campaigns demanding that a high-speed rail track from Shanghai pass through their area. The government in Xinhua county in Loudi city launched the ‘Railway Defence Movement’, while officials in nearby Shaoyang encouraged thousands of residents to take to the streets to bring the project there. In the end, both areas were accommodated with a piece of the project. Once the decision was made, the government removed photos of the state-sanctioned protest marches from the internet, to ensure the phenomenon of rival demonstrations did not spread.

The pivotal role of local governments in promoting their own economies means that each locality operates in a way like a stand-alone company. Localities promote investment, strong-arm banks for finance and often hold shares in the businesses themselves. In other words, they operate much like a company might. At the same time, the local party’s overwhelming powers within its own borders effectively make each district its own separate jurisdiction, with direct control over the courts and over local regulations governing business activities. According to this formulation, every jurisdiction is a company, and every company a jurisdiction–all of them with powerful incentives to compete against each other.

Beijing has been smart enough to harness local dynamism to test new ideas, and then feed back the successful experiments into the national policy grid. The market economy was built on allowing special economic zones in places like Shenzhen in the early eighties to pursue liberal investment policies, while the rest of the country remained stuck with central planning. Policies on health, pensions and land reform have all been stress-tested at local level in recent years before being expanded nationally.

The golden age of decentralization under communist rule–the period from 1978 to 1993–was also the apogee of private sector growth and wealth generation. China’s GDP increased by 280 per cent in these fifteen years; absolute poverty was cut by 50 per cent in the first half of the eighties alone and real incomes rose rapidly. ‘If each of China’s provinces was taken as an economy, about 20 out of the top 30 growth regions in the world in this period would be provinces in China,’ according to a paper prepared by a number of the country’s top economists. This era ended in one of the central government’s periodic panics about its waning authority in the provinces. The policy cycles follow a familiar pattern, the Chinese economists say: ‘Decentralization leads to disorder; disorder leads to centralization; centralization leads to stagnation and stagnation leads to decentralization.’ The turning point in the current cycle in the early nineties was Beijing’s alarm at the collapse in its share of national tax revenues, to just over 20 per cent, about half the level of fifteen years earlier. The introduction of a new tax policy that year ensured that a much larger share of the revenues now goes straight to Beijing.

The downside of the stellar growth rates that local dynamism has provided is the wasteful investment-led growth economic model that it has spawned, a phenomenon that is now a matter of legitimate global concern. India has achieved growth rates of 7 to 8 per cent by investing about one-quarter of its gross domestic product. China, by contrast, as local governments spend willy-nilly to keep up with the Wangs and the Zhangs next door, has invested nearly half of GDP to get a few percentage points more than its giant neighbour. As long as China continues to invest more than it consumes, its surplus production will head offshore in search of new export markets. In turn, the economic imbalances, such as those which underwrote the US housing bubble, will persist rather than subside.

If Hu Jintao and Wen Jiabao were to be judged by their ability to meet their promise to rebalance China’s economic growth model, their first five years were an abject failure, for much the same reason. The pair had tried to put their stamp on policy the moment they came to office. In place of the growth-at-all costs programmes of the outgoing administration, they proposed a kinder, gentler prescription for development, a China that would be greener, fairer, more peaceful and less reliant on the smokestacks of heavy industry and cheap exports. Their rhetoric was partly political marketing. Chinese politicians, like their peers around the world, aim to differentiate themselves from their predecessors. But by the time they strode out on stage at the Great Hall of the People to launch their second term in 2007, they had presided over a blistering half-decade of record economic expansion. Far from slowing down, production of energy-intensive steel, cement and aluminium had in some cases tripled and the trade surplus had increased eightfold. Riots and protests had reached record levels, according to the limited official figures, and China had become more unequal than ever before under communist rule.

Rather than reinforcing Beijing’s writ in the provinces, Hu and Wen discovered that the radical recentralization of tax collection paradoxically only encouraged more economic freelancing outside of the capital. To raise money for the programmes they were still required to deliver, but no longer had the direct taxing power to fund, especially in education and health, localities were propelled into business more than ever. In the words of commentator Liang Jing, the new tax rules ‘forced good girls to become whores’. To make up the budget shortfall, local governments ‘bullied the peasantry, exploited the workers and destroyed the environment, while the central government turned a blind eye, concerned only for GDP and tax revenue, regardless of the process’. Some of the grassroots revenue-raising programmes deployed by local governments desperate for funds are hair-raising. In May 2009, Gongan county in Hubei province ordered state employees collectively to smoke at least 23,000 packs of cigarettes a year, to protect, it said, ‘tax revenues and consumers’ rights’. The more the officials smoked, the plan envisaged, the more money the local authority would collect in taxes. The policy was rescinded after a public outcry.

Most local governments have turned to real estate for cash, selling land at often inflated prices to make up budget shortfalls. ‘The reform of the tax system means that local governments have no other source of revenue, so they concentrate on land,’ said Yu Jianrong, an academic specializing in tracking farmers’ grievances. Yu says his surveys have found that as much as 30 per cent of the fiscal budgets of the government in Hebei are raised through the sale of land, a finite resource. Throughout China, about 60 per cent of protests are related to anger over local governments selling land.

Against this background, it is little wonder that the leadership’s policies to rebalance the economy have had a limited impact. The analogy often used to describe the challenge faced by Hu and Wen is the old one of turning around a supertanker, to illustrate the time needed for such a massive task. In truth, the Chinese economy is less like a single supertanker than a vast armada of small, headstrong commercial ships, all still determined to proceed full-steam ahead, whatever the cost to the fleet as a whole. If China continues to invest far more than it consumes, the domestic economy will eventually stagger under the weight of its own imbalances, with an impact on the rest of the world. In the case of local governments, they are already running out of land to sell. Chinese leaders have never needed western economists or the World Bank to tell them that the present economic model has run out of puff, however much growth they can squeeze out of the system in the coming years. China’s economic problems are well understood by policy-makers. The system’s blindspot is overwhelmingly political.

So far, the central government’s best efforts to retain the dynamism of localities while reining in the over-investment and corruption they have spawned have been political as well. Beijing has begun demanding that select party bosses in smaller counties come to the Central Party School in the capital, rather than attend smaller institutions in their own areas. To instil in them a greater sense of the centre’s priorities, every one of the 3,000-plus county party bosses will be lectured directly by Politburo members and ministers, as part of mandatory courses ahead of future promotions. Beijing once would not have bothered with these lowly party chiefs, whom they derided as ‘sesame officials’, because their powers in the localities they ruled over seemed puny viewed from the centre. The people under the direct control of these same party chiefs call them by a much more respectful name, ‘parent officials’, because they know they have the power to make life-or-death decisions about their lives, no matter what the centre says. Beijing has now started to pay more attention to them as well.

Beijing has cannily leveraged a modern tool to keep the sesame officials in line, allowing Chinese journalists and bloggers to expose local abuses of power in a way they would never tolerate with senior leaders in Beijing. In 2009, a flurry of regional officials were brought down by what the Chinese call ‘human flesh search engines’. A photo posted on the internet of a district official in Nanjing in charge of real estate displayed him smoking Nanjing 95 Imperial cigarettes, which cost about $22 a packet, and wearing a Swiss Vacheron Constantin watch, which retails for about $15,000. The official protested the watch was a fake, but was sacked anyway and put under criminal investigation. In Shenzhen, the drunken party secretary from the local maritime administration, filmed abusing the father of a young girl he had tried to molest in the washroom, was sacked after the incident was posted online. ‘My level [in the Party] is the same as your mayor. So what if I pinched a little child’s neck? Who the fuck are you people to me?’ the official yelled. In rural Yunnan, local jail administrators were removed after netizens ridiculed their explanation for the head injuries of a dead prisoner. They said he had died after playing a blindman’s-buff-type game with other prisoners, but were forced to admit the inmate had been beaten to death.

The local parties’ habitual secrecy, enforced by the grassroots propaganda departments under their control, might matter little in instances of mere economic disobedience. A few extra steel mills built in defiance of central government diktats on industrial policy or a few rivers dirtier than they should have been, however bad that is, will not bring the country to its knees. But in instances such as the Sanlu case, where the city’s impulse to cover up a problem in its most profitable business was bolstered by the centre’s political priorities, the outcome was devastating. The largely invisible hand of party bodies, in assorted guises, at a variety of locations and at different levels of its competing hierarchies, was behind every important decision taken in the Sanlu case. In the public frenzy that followed the revelations about the poisoned babies, the Party ensured that the pivotal, and even sinister role played in the scandal by its institutions never became a topic for debate.

Even by the standards of China’s explosive growth, the expansion of the Chinese dairy industry had been astonishing in the previous decade. Pushed by a government which saw health benefits from the addition of dairy products to the Chinese diet, consumption of such products doubled in the five years from 2001, and revenues grew at an even faster pace. Mengniu (‘Mongolian Cow’), the largest firm, which received investment from Goldman Sachs and Morgan Stanley and a business plan designed by McKinsey & Co. before listing on the Hong Kong stock market, had revenues of $5.9 million in 1999. By 2007, the once small private company in Inner Mongolia had became a certified national champion of Chinese industry, with sales of $3.1 billion. As the company liked to say: ‘Even though he is a cow, he runs with the speed of a rocket!’

Sanlu was another fast mover. Under Tian Wenhua, its then new chairwoman, Sanlu had pioneered the practice of outsourcing milk production in 1987, something the rest of the industry in China would later rush to emulate. Sanlu lent cows to farmers, who repaid the debt by delivering milk back to the company via a huge network of collection stations and middlemen. In return Sanlu collected a management fee. Instead of producing milk, the company transformed itself from a small local dairy into a milk-marketing giant.

For fifteen straight years, Sanlu was the top seller of formula in the country, making it the largest taxpayer in Shijiazhuang, an invaluable asset for a city otherwise struggling to attract industry and investment on a par with China’s premier metropolises. In Chinese corporate parlance, Sanlu was a collective, an enterprise in which the managers and workers owned the shares, usually under the political supervision of the local communist party and government. In 2005, with its competitors closing in, Ms Tian forged an alliance with Fonterra, the world’s number one dairy exporter, from New Zealand, which offered state-of-the-art technical expertise, to cement its place as an industry leader.