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Ending Excuses for China at Age 60

John Lee

On Thursday, Oct. 1, it was exactly 60 years since Mao Zedong told his people, “The Chinese people have stood up,” and declared the founding of the Peoples’ Republic of China.

Anniversaries usually simply mark the passing of time but this one is more significant. Leaders from Deng Xiaoping onwards have been telling the world that China is assiduously laying the groundwork for fundamental economic and political reform — but only after it recovers from the chaos and destruction of the Mao years. Yet, when Thursday came around, it was almost 30 years since Deng Xiaoping took power and began reforms — exactly half the age of modern China. The reform period exceeded Mao’s 27 years of terrible rule. But China’s leaders appear to have lost interest in seriously pushing the reform agenda and Beijing’s excuses for not doing so are wearing thin.

Why is it important for China to build institutions, and institute changes that might eventually trigger political reforms? Because authoritarian China is failing in one significant respect: the Chinese state is rich and the Chinese Communist Party powerful, but the civil society is weak and the vast majority of people remain poor.

Agitating for political reform is not popular amongst most China-watchers, even in the West. However, we frequently need to remind ourselves that while the CCP is uniquely placed to guide the destiny of China, the well-being of Beijing and the CCP is not the same as the well-being of the Chinese people. What is good for the Chinese state is even frequently no longer good for the vast majority of its people.

How is this possible when China’s GDP has been rising so spectacularly since the 1990s? It is because of China’s model of investment-led state corporatism, which was hatched after the 1989 Tiananmen protests to preserve the economic power and relevance of the CCP.

Most Western commentators focus on the spectacular success of China’s export sector and the emergence of China as the world’s factory. But the biggest contributor to Chinese growth is actually domestically funded fixed-investment, which constituted over 50 percent of GDP in 2008 and over 45 percent of growth in that year. Due to the massive $586 billion stimulus in 2009, around 75 percent of growth this year has been achieved through state-led fixed investment.

Even more important than the high reliance on fixed-investment is where the capital is going. China is unusual in that bank — drawn from the deposits of its citizens funneled into state-controlled banks — constitute around 80 percent of all investment activity in the country. Even though state-controlled enterprises produce between one-quarter and one-third of all output in the country, they receive over 75 percent of the country’s capital, and the figure is rising. State-controlled enterprises received over 95 percent of the 2009 stimulus money. Consequently, the Chinese state sector owns more than two-thirds of all fixed assets in the country.

But it is not just about who gets the money that matters. Economic growth in poor countries is valued if it manages to raise the standard of living of the majority of citizens. The problem with predominantly state-led models for growth is that they put emphasis on building the wealth of the state rather than the people. This creates profound and structural inequalities.

Tellingly, the 50 million-200 million middle class citizens in China (depending on how we define the term) are the strongest supporters of the party. Demand for CCP membership is growing fastest among this group of elites. Of the 75 million card-carrying CCP members, almost a quarter are professionals and skilled workers, a third are students, and another third are successful businesspeople. Joining the CCP has become a career move. By controlling the most important industries, the bulk of the country’s capital (through state-owned-banks), as well as overseeing an extensive system of awards, promotions and regulation, the CCP continues to control and dispense a dominant share of the most valued economic, professional and intellectual opportunities.

Meanwhile, around 1 billion people are missing out on the fruits of prosperity. The country’s “bottom billion” are outsiders in China’s state-led model of development. They have little prospect of rising up, and frequently bear the brunt of the corrupt and incompetent rule dished out by China’s 45 million local officials.

A little known fact is that, of the hundreds of millions in China lifted out of poverty, 80 percent had their lot improved in the first 10 years of reform leading up to the Tiananmen protests — before the state retook control of the economy. In the 1990s, poverty alleviation slowed dramatically and since 2000, the number of poor has actually doubled in absolute terms. In one generation, China has gone from being the most equal to the most unequal country in Asia.

The planned 60th anniversary celebrations in Beijing and other cities was no doubt spectacular. But they primarily demonstrated the success of the CCP and wealth of the Chinese state — not to mention the might of the People’s Armed Police and People’s Liberation Army. China needs to build institutions — especially rule of law, accountability and transparency — and the state needs to take its hand off the levers of economic power. The CCP knows that these conditions will likely lead to political reform. The party will therefore remain hesitant to pursue reform. But doing so will confer greater legitimacy onto the CCP, the party’s leadership will be truly responsive, and it will allow the Chinese people to finally stand up.

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