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Beijing's annus horribilus

By John Lee - posted Monday, 2 February 2009


The 21 million or so Australians know January 26 as Australia Day. But, for 1.3 billion Chinese, as well as the 40 million of China’s diaspora around the world including 650,000 in Australia, it ushered in the new Chinese New Year.

The Year of the Bull - signifying success through courage, hard work and fortitude - should be an auspicious one. But celebrations will be more muted this year. China is indeed entering troubling times. Growth forecasts have been revised down from 12 per cent to about 5 per cent within the last six months and Beijing will still not commit to a figure. As its once seemingly impregnable economy falters, China’s 1.3 billion people will look to their leaders for courage, hard work, and fortitude in order to reform the Chinese “authoritarian model” toward a more sustainable path.

The increasing problem of fleeing bosses in Guangdong sums up the country’s turn for the worse. Guangdong is China’s richest province and is the epitome of the Chinese “economic miracle”. For the last five years, the economy in this province had been growing at an average of 30 per cent per annum. Yet, in the last two months of 2008, almost 120 chief executives simply packed up and left as signs grew more ominous that their businesses were failing. These bosses left an average of 20,000 workers in the lurch and with unpaid wages. At Guangdong - the chosen destination for almost 30 million migrant workers - tens of thousands of itinerant workers have no choice but to go home empty handed every day. Currently, there is no law against fleeing bosses. Until now, Guangdong province never needed one.

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President Hu Jintao tried to put a positive spin on the previous year by concluding that: “For the Chinese people, 2008 was a very extraordinary and uncommon year.” In reality, 2008 ended badly and ominously for the government.

December 2008 saw the publication of Charter 08 signed by more than 300 prominent Chinese, including high profile intellectuals and government officials. The charter called for those both inside and outside government to work for “the rapid establishment of a free, democratic and constitutional country”. The charter ambiguously described itself as a “civic” petition rather than one advocating “opposition” to the government. The objective behind it is unclear but it is the most significant call for political reform in China since the failed Democracy Party that died in the late 1990s.

The timing of the charter’s release also comes at a time of immense Chinese economic insecurity. This is not a coincidence. The Chinese Communist Party’s (CCP) implicit bargain with its people is that it will remain in power in order to secure prosperity for the country. This is now under threat. More importantly, many of China’s intellectuals, bureaucrats, and even politicians are beginning to see that it is the Party itself that is the cause of many of China’s problems.

If not a “catastrophic year”, 2008 will definitely be seen as the year when cracks appeared in the façade of the Chinese “economic miracle”. By the end of 2008, the Shanghai Exchange had declined by two thirds. Growth in the Chinese export sector, responsible for 40 per cent of GDP growth over the past decade, is flat-lining. Some estimate that 20 per cent of factories in the Pearl River Delta area - the jewel of Guangdong province - have already closed down and half will be gone by the end of the year. Although there are no reliable figures on the numbers of people laid off in the export sector, it is most likely to be in the tens of millions.

Importantly, economic growth is almost certain to dip below the 8 per cent mark - the point at which unemployment (and therefore unrest) begins to rise dramatically. If we look at informal but probably more accurate indicators such as power consumption, the Chinese economy is close to stagnating and even contracting. Power use in China fell 9.4 per cent in November 2008. December figures have not been released.

Two steps forward, one step back

Mass urbanisation and the creation of industrial centres such as those in Guangdong province has been one of the drivers of China’s boom. But modern China remains a largely rural society. If China is to become what its leaders term “a moderately prosperous country” by 2020, raising living standards in rural China is the key. In the early 1990s, there were still about one billion people in rural China eking out a living. Even now, there are still around 740 million rural Chinese.

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Critically, in the 1980s, across-the-board incomes in rural regions were rising at the same rate as overall economic growth. Chinese peasants and those in rural communities - not just urban dwellers - were getting richer. The private sector - much of it based in rural China - was humming along and received almost three quarters of all the domestic capital in the country. Eighty percent of the poverty alleviation that occurred in China took place in the first 10 years of reform from 1979-89.

Deng Xiaoping came to power in 1978 and was China’s de facto supreme leader until the early 1990s before his death in 1997. In 2006, Time magazine named him one of “Asia’s Heroes” - a Maoist who reinvented himself and his country. He is understandably credited with leading reforms within China that have led to its economy averaging 9.8 per cent growth per annum for 30 years. But Deng’s genius was not that he planned the miracle. Many of Beijing’s major policies in the 1980s were actually “command and control” failures. But where the people showed independent initiative such as in the spontaneous creation of the highly successful township and village enterprises, Deng had the wisdom to allow it to occur. China’s economic return was built on the back of Chinese entrepreneurialism. This, Western leaders expected, would lead to political reform. It almost did. The Tiananmen protests in 1989 brought the leadership to its knees. But the CCP survived and China’s political-economic model changed.

The CCP decided to enlarge its role in China’s economy and society in order to remain in power. The rise of an independent and dominant private sector proved to be threatening. Critically, the private sector was excluded from competing in the most lucrative industries, which were reserved for state-owned-enterprises (SOEs). Moreover, promising private companies were subsequently denied loans from banks. Instead, three-quarters of these went to SOEs - an exact reversal of what occurred in the 1980s.

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A shorter edited version of this article was first published in The Australian on January 27, 2009.



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About the Author

Dr John Lee is a foreign policy visiting fellow at the Centre for Independent Studies in Sydney and also Managing Director of research & conferences company L21. Dr Lee has a Masters and Doctorate from University of Oxford. His most recent book was Will China Fail?, released in late 2007.

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