Country Driving: A Journey Through China From Farm to Factory (47 page)

They had few bank loans for that reason. In China, acquiring such a loan isn’t easy for a small entrepreneur, and it always requires more
guanxi
. Boss Gao told me they would need to make friends with bank officials and loan officers; everybody would expect dinners and bribes.
In order to avoid this expense, Boss Wang had invested strictly cash, and Boss Gao had only small bank loans. He saved his bribes for the more important officials. He told me that in Lishui such cadres required a gift with a value of roughly two thousand yuan—nearly three hundred dollars. In Wenzhou it would have been even more expensive, which was one reason they had located in this part of the province. “The rent is cheaper here, and it’s cheaper to pull
guanxi
,” Boss Gao explained.

At first, the details of
guanxi
seemed mysteriously complex, because as a foreigner I was distracted by the rituals—the banquets and the secret meetings. But over time I realized that it’s actually a system, and in a place like southern Zhejiang it’s highly functional. Gifts are standardized and portable, which makes them a kind of currency. A carton of Chunghwa can be received by one businessman, given to another, and then passed on to a cadre, who might in turn bestow it upon a higher-up. If only Chunghwa cigarettes could talk! There are probably boxes that have traveled from the marshes of Ouhai to the gardens of Hangzhou, spanning the whole length of Zhejiang Province, pausing for brief sojourns in Buttontown or Pleatherville. And most important,
guanxi
is convenient. Boss Gao told me that sometimes he gave officials a cash card that could be used at the local supermarket. I asked how he knew the correct amount.

“You just know,” he said.

“How do you know?”

“I can’t explain, but it’s obvious,” he said. “Around here even a schoolchild can figure it out!”

One afternoon that March, I was sitting with the bosses in their upstairs office when a trio of officials arrived from the tax bureau. The visit was completely unexpected. Boss Wang had been doing some paperwork at his desk, and Boss Gao was working on the sample books, which had just arrived. He was pasting bra rings onto the pages when the tax cadres walked in. For an instant Boss Gao froze, like a man caught playing a child’s game, and then he quickly closed the book. Striking a more dignified pose, he stood up and offered the cadres a hot pink business card.

None of the officials was particularly well dressed, but they held
their heads high, and one of them flashed an identification card from the Lishui State Tax Bureau. His name was Liu. He wore blue jeans and an orange T-shirt, and he had the kind of crew cut that often means trouble in China. That’s the official haircut of the Chinese bully; my heart always sinks a little at the sight of a flattop. Nevertheless I handed Cadre Liu a business card of my own. He studied it for a moment and shrugged: if I wasn’t connected to the factory, he had no interest in me. He turned to Boss Wang.

“We brought some of your registration papers,” he said. “You need to sign them. You’re supposed to have done this before you started production.”

“I kn-kn-know,” Boss Wang said, “we’ve been p-p-planning to do that. But we haven’t started selling anything yet.”

Boss Wang’s stutter always appeared when he was nervous, and now his eyelids fluttered and his voice rose a couple of octaves. He poured cups of tea for the men, gesturing for them to sit on the pleather couch. But they remained standing. Cadre Liu wandered over to examine the door.

“This place doesn’t seem very safe,” he said. “Why don’t you have a better lock?”

“We just moved in. We’re still setting everything up.”

“Somebody could come in through the window. Where do you keep the receipts?”

Boss Wang showed him a metal file box.

“You should make it more secure. There’s theft around here.”

The other two men made a slow circuit of the room, examining the barren furnishings. One of them studied the screen of Boss Gao’s computer; another flipped through a sample book. “Is this what you make?” he said.

“Yes.”

“What materials does it require?”

“Just metal and nylon coating. It’s very simple.”

“What are the byproducts? Anything dangerous?”

“No. Just water. And high temperature. It’s not a problem.”

“You know,” Cadre Liu said, “it would have been better if you had contacted us earlier.”

Boss Wang flushed. “I c-c-called the tax bureau but I couldn’t get an answer about the registration, so I figured I’d wait. You have to understand, I don’t know anybody here. We’re just getting s-s-started. It’s better if we meet personally, so I thought the phone wasn’t convenient.”

Two of the men finally settled onto the couch, but Cadre Liu still drifted. Now he stood by the window, peering out at Suisong Road. “The environment here isn’t very good,” he remarked.

“Everything is still new,” Boss Wang said. “They haven’t finished the street.”

“How many workers do you have?”

“T-t-twelve or thirteen. After we have customers we’ll add more.”

“How many?”

“Maybe fifty to sixty.”

“What about that part of the building down there?”

“That’s not ours. That’s being rented by another company. They’re moving here from Shanghai.”

“What’s their product?”

“Thermoses.”

Cadre Liu nodded—he probably did this everywhere, gathering intelligence on any new companies that could be shaken down. He turned again to Boss Wang. “Do you have an accountant?”

“We have a secretary who handles accounts. We don’t need a real accountant yet.”

“Well, you’re going to need one soon.”

“Once business picks up we’ll hire one.”

Cadre Liu took another card out of his pleather money bag. “You should call this company,” he said. “My friend is the boss, and he can provide an accounting service.”

There was only the slightest pause before Boss Wang responded. Then he said the right thing: “H-h-how much?”

“I think it’s around six or seven hundred a month. But I’m not sure. You can call them. They’re a very good company.”

Boss Wang left the card sitting on his desk. For Cadre Liu, it served two purposes: a favor for a friend and an additional source of intelligence, because the accounting service would give him a line of infor
mation on the business. The best part, of course, was that the bra ring factory would pay to be monitored.

Cadre Liu produced the registration papers and Boss Wang stamped them with the company chop. At the end, the official mentioned the accountant again.

“OK,” Boss Wang said. “I’ll call them. I just want things to be c-c-convenient.”

“We want things to be convenient, too,” said Cadre Liu, smiling. He left the room; the others followed; nobody shook hands. The moment the men were gone, I realized how tense I’d felt just watching the conversation, and I sank back in my chair. But Boss Wang had already picked up the office phone. He dialed the number on the card and said, “
Wei
, I’d like to ask you to introduce an accountant to me…”

GUANXI
IS LOGICAL
(“Even a schoolchild can figure it out!”), and at the individual level it clearly works. An official receives a gift; a factory receives favorable treatment—there’s no mystery to such exchanges. But it’s hard to see how this system pays off for a city as a whole. In Lishui, I drove on brand-new roads past massive construction projects, and often I wondered: Who pays for all this? By Zhejiang standards, Lishui was underdeveloped; in 2006, the annual per capita GDP was only $1,460. Nowadays, with the planned economy long gone, there was relatively little money coming from the central government. Chinese cities have to raise much of their own funds, but by law they can’t issue municipal bonds, like American cities. They also can’t charge significant property taxes, because land is still nationalized. The tax base is weak, especially for a fledgling industrial region: in Lishui’s development zone, companies received tax breaks for their initial three years of production, and after that most of them would cheat on their earnings reports anyway. It worked out well for the factories and the officials—they got favors and cash and all the Chunghwa a man could smoke—but it was impossible for the city to survive on its tax revenue.

And yet Lishui, like most Chinese cities, spent money everywhere. From 2000 to 2005, Lishui invested $8.8 billion in infrastructure, which
was five times the amount for the previous half century. After that massive spending campaign, they immediately topped it: in the first half of 2006, when the bra ring factory opened, Lishui’s infrastructure investment rose by another 31.7 percent, as compared to the previous year. Real estate investment increased by 57.2 percent. This was real cash, all of it parlayed into new roads and new bridges and new buildings; it wasn’t just a matter of Chunghwa changing hands. But where did it all come from?

The answer lay beneath all that construction. It was land, or more precisely it was the way that land-use rights transfer from rural to urban regions. In the Chinese countryside, all land is collective, and farmers like Wei Ziqi have no right to sell their plots or homes on the open market. Instead, the village handles all deals, and even the village has little power to negotiate if a city decides to expand into their farmland. In these situations, the city can acquire the land at will, and they pay set prices that have been established by the government. After the sale is made, and the farmers have moved off the land, the city can build basic infrastructure and reclassify the region as urban. And urban land-use rights can be auctioned off at market rates, to the highest bidder. It’s a type of arbitrage, buying rural land and reselling it as urban, and it can be practiced only by governments from the township level up.

The profits from such exchanges are immense. Wang Lina, an economist at the Chinese Academy of Social Sciences, told me that cities in coastal regions receive roughly half their fiscal revenue from real estate transactions. She described Chinese cities as resembling corporations, with the mayor serving as the CEO. “Their goal is to make money, obviously,” she said. “But they can’t only sell real estate. Investors aren’t stupid—they know enough to wonder who’s going to buy apartments in a city that has no industry.” In order to solve this problem, local governments often build a development zone, where they sell land-use rights at cost. The cheap prices attract factories, which provide some tax revenue, but the key is that they expand the city. More bosses, more shopkeepers, more migrants—all of it means more suburbs and a better real estate market.

If a city hopes to stay solvent, it must continually expand. In order
to build infrastructure, the local government takes out huge loans from state-owned banks. Wang Lijiong, the director of Lishui’s development zone, told me that back in 2003 the city had borrowed over sixty million dollars in order to start blowing up the mountains and building roads. “If you want to get wool, you have to raise the sheep,” he explained. But there were many parts of China where officials had gambled on investors who never arrived. When this happened, the development zone remained half-built, and the loans failed, and the whole bubble collapsed.

By 2006, the central government had realized the risks of this system, and they were trying to slow growth. They raised interest rates, and they required cities to undergo a more stringent application process for major expansions. But authority had become so decentralized that rules were hard to enforce. Wang Lina said that the Ministry of Land Resources simply didn’t have enough staff to do the necessary on-site investigations. Sometimes they even relied on satellite images to try to figure out which cities were embarking on major construction projects. Budgets were a disaster, because governments could effectively decide what to report and what to hide. Wang had recently researched a town in Henan Province where the government reported a year’s fiscal revenue of only two hundred million yuan, or roughly a quarter of a million dollars. But they had spent five times that amount on infrastructure projects. Wang couldn’t tell where the money came from—she assumed the city had profited from real estate transactions, but there were many ways to avoid reporting such deals. The cadres, like everybody else, were involved in the
guanxi
game; major deals were accompanied by bribes and gifts, and nobody left a paper trail. And only a fool bothered to think about long-term goals. “Every five years you change the local government officials,” Wang said. “So they know they have a limited opportunity. Do they worry about the next generation of leaders? They have to get it while they can.”

Wang, like many scholars, believed that eventually the Chinese government will have to privatize land. With stable income from property taxes, they could end the current system of real estate speculation, but there isn’t much incentive to make a change now. And the people who
suffer the most are those with the least power: the farmers. Their loss of land helps subsidize China’s urbanization, and they have no legal recourse—it’s hard enough to overthrow a single village Party Secretary, not to mention the whole system. In any case, most peasants are so intent on migrating, or coping with the transition to private enterprise, that the last thing they worry about is changing the constitution.

In a country where everybody is on the move, the land itself is fluid, at least in the legal sense. All around a city like Lishui, farms are being converted to suburbs, and every construction site means more revenue for the government. East of downtown, one major development was happening in a place formerly known as Xiahe. Xiahe was a village on the banks of the Hao River; in the old days peasants raised rice, tangerines, and vegetables. But a few years ago the Lishui government had acquired a 16.5-acre section of the village. For the rights to this land, the city paid slightly less than one million dollars, most of which was used to compensate local farmers who had to move out. I met a Xiahe resident named Zhang Qiaoping, who had supported a family of four on a plot of land that consisted of roughly one-third of an acre. When Zhang lost his land, he was given a payment of fifteen thousand dollars.