Business and Technology in China

Business and Technology in China

The Understanding China Today series offers students and general readers the opportunity to thoroughly examine and better understand the key contemporary issues that continue to keep China in the news and sometimes at the center of global controversy. These issues include business, technology, politics, government, civil liberties, family life, and gender concerns, among others. Narrative chapters in each volume provide an introduction and brief history of the topic, followed by comprehensive discussions of the subject area as it pertains to China’s present and future. With each volume, specialists and scholars present a solid, up-to-date foundation for learning about contemporary China, written in an accessible, engaging manner. As the world moves into the second decade of the 21st century, China’s position on the global stage is more prominent than ever. The Understanding China Today series provides vital insight into this international powerhouse for new generations of students, and others, seeking to understand a complex, ever-changing nation with a future as fascinating as its past.

Business and Technology in China JING LUO

UNDERSTANDING CHINA TODAY

Copyright 2010 by Jing Luo All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher. Library of Congress Cataloging-in-Publication Data Luo, Jing. Business and technology in China / Jing Luo. p. cm.—(Understanding China today) Includes bibliographical references and index. ISBN 978-0-313-35732-9 (hard copy: alk. paper)—ISBN 978-0-313-35733-6 (ebook) 1. Business enterprises—China. 2. Technological innovations—Economic aspects—China. 3. China—Economic policy—21st century. I. Title. HD2910.L85 2010 338.0951—dc22 2010000947 ISBN: 978-0-313-35732-9 EISBN: 978-0-313-35733-6 14 13

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This book is also available on the World Wide Web as an eBook. Visit www.abc-clio.com for details. ABC-CLIO, LLC 130 Cremona Drive, P.O. Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America

Contents

List of Figures and Tables

vii

Preface

ix

Chronology of Recent Events in the People’s Republic of China

xiii

1.

Growth

1

2.

Handling the Global Financial Crisis

33

3.

Growing Pains

49

4.

Innovative Nation

85

5.

Economic Reform

125

6.

The China Model and Sustainability

161

Notes

193

Bibliography

217

Index

223 Photo essay follows page 84

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List of Figures and Tables

Figure 1.1: China’s GDP Growth 1978–2008

2

Table 1.1: The U.S.-China Business Council Top 15 U.S. exporters to China in 2008

14

Figure 1.2: Per Capita Annual Income (Yuan)

15

Table 1.2: Urban and Rural Incomes of Selected Regions

16

Table 2.1: Losses of Chinese Banks during the Global Financial Crisis

39

Table 2.2: Losses of Chinese Firms during the Global Financial Crisis

39

Figure 4.1: Technical School Graduates in 10,000s

113

Figure 4.2: Number of Students Abroad and Returned

121

Figure 4.3: Number of Postdoctoral Graduates (1985–2008)

123

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Preface

In roughly three decades, China has grown from a povertystricken country into the third-largest economy in the world. As we speak, China is making yet another leap: emerging from the global financial crisis, it is transforming from ‘‘world’s manufacturing center’’ into the world’s biggest buyer. But the best part of the story is not yet heard: China’s next target is to build an ‘‘innovative nation’’ with a knowledge-based and energy-efficient economy. Imagine that a blue sky will come back to the cities and that rural streams once again will be safe for women to wash clothes and children to swim. In fact, that is exactly what the world depends on for a better future. The question is what has fundamentally changed to make all this happen? An obvious answer is the adoption of the market mechanism in 1978. A less obvious but more profound answer is that Mao Zedong had created, unintentionally, through prolonged and ruthless class struggles, not only the reversing economic momentum, but also a mentality ready to reject ideological entanglement. Thus, the China phenomenon is a fruit of the conjugation of push and pull, of which the pushing force, or the internal force, was decisive. The result is overwhelming: once the ordinary Chinese were allowed to get

x

Preface

rich, their will cannot be thwarted and their creativity knows no limit. The new generation is free-thinking and pragmatic. In their mind, if the West appropriately learned technology and got strong as a result, so too can the Chinese; if democracy brings social harmony, the Chinese embrace it and gradually phase it in; if globalization is the way of modernity, the Chinese charge in that direction wholeheartedly. If, however, the West sinks into ‘‘subprime mortgage crisis’’ and the like, the Chinese are not willing to follow. The past 150 years of modern history have done much of the enlightenment, to a point at which the Chinese are just too cynical to let the ‘‘invisible hand’’ of market mechanism run loose. They carefully maintain the prosperity by shrinking the gap, building a safety net, developing domestic markets, and working toward justice, fairness, equality, rule of law, and so on, so that elements that may derail the economy are under control. In this, the Chinese Communist Party, the middle class, and people of all strata seem strongly bonded together. This is known as the ‘‘China Model.’’ Going forward China faces a strong headwind. Rising costs of labor, shortage of energy, shortage of natural resources, and government-monopoly-induced corruption are but a few of a long list of hurdles. Successfully managing the market mechanism may be the best of challenges. Ask a government official or a grassroots entrepreneur, and they will tell you that the market economy is such that if you try to regulate it, you may end up killing it; but if you fail to regulate it, it grows out of control. This book presents China’s challenges in six chapters: Growth, Handling the Global Financial Crisis, Growing Pains, Innovative Nation, Economic Reform, and The China Model and Sustainability. The book will present challenges and show how the country prepares itself to win. The book was written with classroom needs in mind. Chapters are structured to complement typical lectures on modern China. Special terminologies are explained; a bibliography with abundant online resources and a chronology are included. The book is also intended for the general public. Instead of

Preface

xi

extensive theoretical discussions, the reader will find individuals’ stories and cases that are helpful for understanding the nature of events. I am indebted to the generous supporters surrounding me. Dr. Lu Bin, chair of the Department of Urban and Regional Planning at Peking University, and Professor Gong Liwei, architect and senior engineer at the Design and Research Institute at Tsinghua University, provided enormous help during my research in Beijing. Mr. Luo Qiang, of Golden Concord Non-Ferrous Metals Holdings Limited, was an important source of inspiration on industrial development in China. I am appreciative of Ms. Kaitlin Ciarmiello of ABC-CLIO for her careful editing work. Last but not least, I would like to thank Bloomsburg University where I work for its generous support of all academic work that I do.

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Chronology of Recent Events in the People’s Republic of China

1949

1950

1951

The People’s Republic of China (PRC) is founded on October 1 in Beijing. The Nationalist government withdraws to Taiwan. Mao Zedong declares the ‘‘People’s Democratic Dictatorship.’’ Mao is appointed chair of the Central People’s Government; Zhou Enlai is named premier; and Zhu De becomes general commander of the People’s Liberation Army (PLA). The Sino-Soviet Treaty of Friendship, Alliance, and Mutual Assistance is signed in Moscow by Mao Zedong and Joseph Stalin. In June, Mao denounces American aggression in Korea. In October, the Army of the Chinese People’s Volunteers publicly enters Korea in support of North Korea. Also in this year, the Marriage Law is promulgated by the central Government. The Trade Union Law and the Agrarian Reform Law of the PRC are also passed. The Korean War progresses, with Chinese troops taking Seoul. Mao Zedong’s son, Mao Anying, is killed in

xiv

1952

1953

1954

1955

1956

Chronology

Korea. Domestically, the Agreement of the Central People’s Government and the Local Government of Tibet on Measures for the Liberation of Tibet is signed in Beijing; the agreement recognizes Tibet as part of China and grants the region autonomous status. The Three-Antis Campaign is launched in January, targeting corruption, waste, and bureaucratism. In February, the Five-Antis Campaign begins; focused on business operations, it is commonly viewed as the precursor to deprivatization campaigns. Deng Xiaoping becomes deputy premier. The armistice ending the Korean War is signed on July 27. The First Five-Year Plan (1953–1957) starts. Deng Xiaoping becomes finance minister. Zhou Enlai and Indian prime minister Jawaharlal Nehru sign a joint communique that becomes the first international declaration to include the PRC’s ‘‘Five Principles of Peaceful Coexistence.’’ The first National People’s Congress (NPC) convenes. Deng Xiaoping becomes deputy chair of the National Defense Council. Zhou Enlai attends the Asian-African Conference (Bandung Conference) in Bandung, Indonesia; the conference seeks to build a united front of Asian and African nations against colonialism and racism. Deng Xiaoping is elected to the Politburo. The Chinese Language Reform Committee releases the first batch of simplified Chinese characters for use in newspapers in Beijing and Tianjin. In April, Mao Zedong delivers his influential speech ‘‘On the 10 Major Relationships.’’ In September, the Eighth Party Congress elects Mao party chairman; Liu Shaoqi, Zhou Enlai, Zhu De, and Chen Yun are elected deputy chairmen; and Deng Xiaoping is elected as secretary general of the Chinese Communist Party (CCP). In May, Mao Zedong calls for greater artistic and academic

Chronology

1957

1958

1959

1960

1961

1962

xv

freedom with the slogan ‘‘let a hundred flowers bloom, and a hundred schools of thought contend.’’ Mao Zedong delivers his speech ‘‘On the Correct Handling of Contradictions among the People.’’ In June, the People’s Daily states that rightists are trying to overthrow the Communist Party and an Anti-Rightist Campaign is launched. In May, the Great Leap Forward is launched with the phrase ‘‘more, faster, better, and more economically soundly’’ as its general guiding principle. In August, at the Politburo’s Beidaihe Conference, the People’s Communes plan is endorsed; the plan results in the organization of 26,000 communes in less than two months. In March, the State Council appoints the Panchen Lama to chair the Preparatory Committee for the Tibetan Autonomous Region. Democratic reforms start in April in Tibet. In April, Liu Shaoqi replaces Mao Zedong as president of the PRC, with Song Qingling and Dong Biwu as deputies. During July and August, an extremely serious drought hits vast areas of China, affecting 30 percent of farm production. Rebellion erupts in Tibet. Lin Biao replaces Peng Dehuai as defense minister. In July, the Soviets notify China of their withdrawal of technological support. With the exception of Xinjiang and Tibet, serious famine occurs across China, causing tens of millions of deaths. Wu Han’s controversial play Hai Rui’s Dismissal is published in January. The 26th World Table Tennis Championships take place in Beijing, with the Chinese winning both the men’s and women’s singles titles. In October, Chinese troops launch major offensives on the Sino-Indian border. A cease-fire is declared in November. Mao Zedong steps up emphasis on class struggle.

xvi

1963 1964

1965

1966

1967

1968

1969

Chronology

In May, Mao Zedong launches the socialist education movement in rural areas. In January, Zhou Enlai launches an extensive tour of Africa. In August, the United States bombs North Vietnam. In October, China carries out its first nuclear test. In May, China carries out its second nuclear test. In June, the Wenhuibao newspaper denounces Wu Han’s drama Hai Rui’s Dismissal as an anti-Party poisonous weed, thereby signaling the coming of the Great Cultural Revolution. The Tibetan Autonomous Region is formally inaugurated in September. In May, the Politburo sets up the Cultural Revolution Group and calls for attacks on all representatives of the bourgeoisie who have infiltrated the party, government, army, and cultural world. In July, Mao Zedong swims in the Yangzi River at Wuhan, refuting the rumor that he is sick. In August, Mao Zedong, Lin Biao, and Zhou Enlai preside at a Cultural Revolution rally in Tiananmen Square at which Red Guards make their first appearance. The Guards subsequently begin destroying historical relics. Chairman Mao’s Quotations are first published in the form of the Little Red Book. Deng Xiaoping is ousted from his offices. In June, China tests its first hydrogen bomb. By December 25, 350 million copies of Mao’s Little Red Book have been distributed. The army takes control of government offices, schools, and factories. Millions of young people are sent to the countryside to receive reeducation from peasants. In March, Chinese and Soviet forces clash at Zhenbaodao Island in the Ussuri River. More clashes occur in the following months. In July, the United States lifts restrictions on travel to China, and in December, it lifts its partial trade embargo. Liu Shaoqi dies.

Chronology

1970 1971

1972

1973

1974

1975

1976

1977

1978

xvii

In April, China launches its first satellite. In April, the U.S. ping-pong team visits China and is followed by U.S. Secretary of State Henry Kissinger, who comes to Beijing in July. In October, China is admitted to the United Nations. In February, President Richard Nixon signs the joint Shanghai Communique in China, admitting that there is one China and that Taiwan is a part of it. In September, China purchases 10 Boeing 707 civilian jet airliners from the United States. Deng Xiaoping becomes vice premier in August. The United States and China announce their intention to establish liaison offices in each other’s capital. In April, Deng Xiaoping addresses the United Nations and denounces the world hegemony of the United States and the Soviet Union, the world’s ‘‘superpowers.’’ In January, Deng Xiaoping is elected deputy chairman of the Chinese Communist Party Central Committee (CCPCC). An earthquake hits the city of Tangshan, killing more than 250,000 people. Premier Zhou Enlai dies in January, and Mao Zedong dies in September at age 82. Mao’s death ends the Great Cultural Revolution. The radical group called the ‘‘Gang of Four,’’ led by Mao’s widow Jiang Qing, is arrested by Hua Guofeng, Mao’s handpicked successor. University admissions based on college entrance examinations start. Enrollment based on recommendations ends. Deng Xiaoping is politically rehabilitated. The ‘‘Deng era’’ begins. Deng Xiaoping steps into the spotlight as an important leader and begins to repair the devastation caused by Mao Zedong’s rule. Deng’s market-oriented reforms, embodied in the maxim ‘‘to

xviii

1979

1980

1981

1982

Chronology

get rich is glorious,’’ spark over 20 years of exponential growth, lifting the masses out of poverty. In December, the Coca-Cola Company reaches an agreement with China to sell its soft drinks in the country and open up bottling plants. In the same month, the Third Plenum of the 11th Chinese Communist Party Central Committee (CCPCC) shifts the party’s focus to modernization, which is also seen as the onset of the economic reforms. In January, Deng Xiaoping visits the United States and resumes the Sino-American diplomatic relationship. From January to February, Chinese troops invade Vietnamese territory and destroy logistics facilities. In July, the Fifth National People’s Congress (NPC) announces the Criminal Law and the Organic Law of the Local People’s Congresses and Local People’s Governments. Special economic zones are opened, including Shenzhen, Zhuhai, Shantou, and Xiamen. In September, the party criticizes Mao Zedong’s Cultural Revolution as ill judged and calamitous. In October, political dissident Wei Jingsheng is sentenced to 15 years in prison. In February, the NPC Standing Committee declares regulations on issuance of academic degrees. In December, the People’s Daily declares that Mao Zedong made great mistakes during his last years and that his Great Cultural Revolution was a disaster. Deng Xiaoping is elected chairman of the Military Commission, and Hu Yaobang replaces Hua Guofeng as chairman of the Chinese Communist Party Central Committee (CCPCC). Both Zhao Ziyang and Hua Guofeng are appointed deputy chairmen. The trial of the Gang of Four is held. In September, British prime minister Margaret Thatcher arrives in Beijing to start discussions about the future of Hong Kong.

Chronology

1983 1984

1985

1986

1987

xix

Selected Works of Deng Xiaoping is published in July. Sino-British talks over Hong Kong’s future begin. In October, the Third Plenum of the 12th Chinese Communist Party Central Committee (CCPCC) adopts a decision on reform of the economic structure, shifting the focus to urban enterprises. Measures are taken to strengthen the Tibetan economy. Fourteen coastal cities and the island of Hainan are opened to foreign investment. A Sino-British declaration on Hong Kong’s return is signed. In May, the Chinese Communist Party Central Committee (CCPCC) releases its Decision on the Reform of the Educational System. In September, Deng Xiaoping, during an interview with Mike Wallace of CBS for the television show 60 Minutes, endorses Mikhail Gorbachev’s reforms in the Soviet Union and indicates that China’s economic reforms are not in conflict with communism. In September, the Shanghai Stock Market reopens for the first time since 1949. The Bankruptcy Law is issued in December. In May and December, students in large cities stage demonstrations demanding more rapid reforms and more democracy. Faced with rising democratic pressures, the Chinese Communist Party (CCP) reiterates its determination to stick to the ‘‘Four Cardinal Principles.’’ Hu Yaobang resigns in January. Writer Liu Bingyan is expelled from the party. Zhao Ziyang is appointed general secretary of the CCP, replacing Hu Yaobang. Student unrest occurs in 22 Chinese cities. In November, Deng Xiaoping remains in control of the Central Military Commission. In December, Zhao Ziyang resigns as premier and is replaced by hard-liner Li Peng. In October, 2,000 Tibetan monks demonstrate in Lhasa in favor of Tibetan

xx

1988

1989

1990

1991 1992

Chronology

independence; the demonstrations lead to clashes with Chinese authorities. China slides into economic chaos due to the rising inflation that peaks at more than 30 percent in the cities, ultimately setting the stage for future protests and prodemocracy demonstrations. Hainan is approved for provincial status. The first exposition of nude paintings opens in Beijing in December. On May 16, Deng Xiaoping and Mikhail Gorbachev meet and announce the normalization of Sino-Soviet relations. On June 4, followed by several weeks of students protesting in Tiananmen Square in Beijing, troops arrive with tanks, allegedly killing hundreds of protesters. The event once again isolates China on the world stage. On June 5, President George Bush suspends high-level relations with Beijing in protest against the massacre. On December 10, U.S. National Security Adviser Brent Scowcroft meets Deng Xiaoping in Beijing. Soon after, Deng plucks Jiang Zemin, who was relatively unknown, from Shanghai to be the new Communist Party chief. Jiang replaces Zhao Ziyang. In January, almost 500 students who participated in the demonstrations of the previous year are released from detention. In April, President Yang Shangkun promulgates the Basic Law of the Hong Kong Special Administrative Region (SAR) adopted by the Seventh National People’s Congress (NPC). The law is scheduled to take effect on July 1, 1997. Campaigns that aim at strengthening patriotism and discipline are launched at educational institutions. The first partial direct elections are held in Hong Kong. During his tour to Hainan and coastal cities, Deng Xiaoping reiterates his determination to continue

Chronology

1993

1994 1995 1996 1997

1997– 1998

1999

2000

2001

xxi

China’s economic reforms. Beijing establishes diplomatic relations with South Korea. Chinese president Jiang Zemin meets with U.S. president Bill Clinton in Seattle, Washington, during an informal meeting of APEC leaders. The Three Gorges Dam project starts. Hong Kong holds legislative elections. Dong Jianhua (Tung Cheehua) is selected chief executive of Hong Kong. Deng Xiaoping (1904–1997) dies at age 93. Deng’s successor, Jiang Zemin, visits Washington. The British formally hand Hong Kong back to China on July 1. The Asian Financial Crisis negatively affects many of China’s coastal businesses and causes severe deflation. The Chinese government maintains the yuan’s value. U.S. president Bill Clinton visits Beijing. NATO’s accidental bombing of the Chinese embassy in Belgrade, Yugoslavia, sparks a crisis in Sino-American relations. China and the United States reach an accord on the terms of China’s entry to the World Trade Organization (WTO). China recovers sovereignty over Macao. Chen Shuibian of the Democratic Progressive Party is elected president of Taiwan, while Li Denghui (Lee Teng-hui) of the Kuomintang Party (KMT) resigns. The 9th National People’s Congress (NPC) is held in Beijing in March; the Congress stresses anticorruption efforts and economic cool down. In an act of terrorism, hijacked civilian planes take down the World Trade Center in New York City on September 11. An Asian-Pacific Economic Cooperation (APEC) meeting held in Shanghai in October is attended by American president George W. Bush. Jiang Zemin pledges to support the American war on

xxii

2002

2003

2004

2005

Chronology

terrorism. China joins the World Trade Organization (WTO) in December. China wins a bid to host the 2008 Olympic Games. The 16th Congress of the Chinese Communist Party (CCP) is held in November. The party completes a sweeping leadership reshuffle. Jiang Zemin and other older leaders allow for a younger generation to take control, headed by Hu Jintao and Wen Jiabao. Jiang Zemin remains chairman of the Central Military Commission. The SARS outbreak occurs in November, and attempts to cover up the spread of the SARS infection cause scandal. The Tenth National People’s Congress (NPC) is held in March. Hu Jintao and Wen Jiabao are elected president and premier, respectively, of the PRC. Jiang Zemin and Zhu Rongji step down. Hu Jintao quietly consolidates power while both he and Premier Wen Jiabao reveal populist agendas in their first year in office. Chen Shuibian is reelected president of Taiwan in March, taking advantage of the popularity generated by an unsuccessful attempt to assassinate him. The growing belief that the assassination attempt was contrived sparks suspicion of Chen Shuibian’s campaign strategy. In September, Jiang Zemin steps down from his last position as chairman of the Central Military Commission. In December, President Bush meets with Hu Jintao at the 12th APEC meeting. Both sides express a commitment to a stronger Sino–U.S. relationship. CCP stresses curbing corruption and strengthening education of morality and ethics. A Chinese exploration team reaches the highest peak of the South Pole. National People’s Congress passes the Anti-Secession Law. China starts floating the renminbi (RMB) based on market demand and in reference with major currencies.

Chronology

2006

2007

2008

xxiii

Shenzhou 6, a manned spacecraft, is launched and returns successfully. The agricultural tax of 1958 is eliminated. The State Council makes a proposal to stress China’s innovative and competitive abilities in building a newstyle country. Protection of migrant workers’ rights is urged. The Three Gorges Dam is completed with a total length of 2,309 meters. The Qinghai-Tibetan Railway of 1,958 kilometers opens. Three volumes of Selected Works of Jiang Zemin are published. China hosts the Beijing Summit of the Forum on China-Africa Cooperation. National People’s Congress passes Property Rights Law, emphasizing investment in low-income housing. The State Council proposes a plan to expand the service sector and issues National Rural Minimum Living Standard Guarantee System. Chang-e 1, a lunar exploration satellite, is successfully launched. The Shanghai Stock Market Index rises from 3,000 early in the year to 6,124 on October 16. The State Council makes energy saving and emission reduction part of the evaluation package for businesses managers. The Labor Law is promulgated to require a clearly defined contractual period. Violent riots break out in Lhasa, Tibet. A 7.9 magnitude earthquake hits Wenchuan County, Sichuan Province, on May 12 killing 69,227 people. During August 8–24 and September 6–17, Beijing successfully hosts the 29th Summer Olympics and the Special Olympics. China ranks first in gold medals in both Olympics. The scandal of melaminetainted formula produced by Sanlu is revealed. Thousands of children are poisoned. China successfully conducts the flight of Shenzhou 7, a manned spacecraft. Shanghai Stock Market plummets to 1,600; the government cuts benchmark interest rate and one-year bank deposit rate. Lehman Brothers declares bankruptcy; the government deploys a stimulus package of

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2009

2010

Chronology

4 trillion RMB. The Chinese mainland and Taiwan start direct air and sea transport and postal services, ending a 59-year ban. The State Council announces a plan of reform in healthcare and medicine to provide basic healthcare to all rural and urban residents. Hu Jintao attends a financial summit in London and commits to joining efforts in combating the global financial crisis. The State Council urges preventive measures for H1N1 flu. The China, Russia, India, and Brazil Summit is held in Russia to outline cooperation between the countries. Serious ethnic riots break out in Urumqi, Xinjiang Autonomous Region, killing more than 180 people. Gross domestic product of the first six months grows by 7.1 percent, reflecting economic recovery. China reports 2009 GDP of 33.5 trillion RMB or 8.7 percent increase over the 2008 figure. Google threatens to pull out of China after accounts of political dissidents are hacked, reveals that hackers exploited a ‘‘back door’’ intended for government’s forensics research. Secretary of State Hilary Clinton gives speech on free Internet. U.S. makes $3.1 billion arms sale to Taiwan. President Obama meets Dalai Lama in the White House, triggering Beijing’s strong protest. In defiance, Google stops censoring web searches and news services in China and plans to redirect users to its services in Hong Kong.

(China. Cartography by Bookcomp, Inc)

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Chapter 1

Growth The economic reform launched in 1978 by Deng Xiaoping has resulted in profound changes in China. The most obvious change would be the country’s productivity. As a result, people’s standard of living is significantly higher. According to the National Bureau of Statistics of China (NBS), back in 1978, China’s gross domestic product (GDP) was merely 364.5 billion renminbi (RMB). In 2008, the GDP reached RMB30.067 trillion or approximately 4.2 trillion in U.S. dollars, which was a 9 percent increase over the figure of 2007. Urban per capita income grew by 14.4 percent, and rural per capita income grew by 15 percent. The 9 percent growth represents, however, a fall from five years of consecutive double-digit growth due to the global financial crisis. Within three decades, China’s GDP has risen to number three in the world, next to Japan and the U.S. To get a feel of what the GDP figure means, one compares the GDP with its value of purchasing power parity (PPP). The PPP theory says that for each identical product or service there is only one price, inflation and other adjustments considered. Although it is not always easy to find ‘‘identical’’ products, the theory is a convenient tool for estimating purchasing powers across economies. For example, a regular haircut costs 10 yuan in China, which includes washing, drying, and, occasionally, a cup of tea. This converts to 1.45 in U.S. dollars at the current exchange rate of $1 to 6.88 yuan. A barber in the United States

2

Business and Technology in China China’s GDP Growth 1978–2008

Figure 1.1. Source: National Bureau of Statistics.

might charge $10 before the tip for a 10-minute quick cut without washing, drying, or tea. Obviously, the yuan is worth a lot more in reality than what the exchange rate tells. The PPP value of a nation’s GDP is measured based on the cost of a common basket of goods and services. To make it simple, if measured on PPP basis, China’s GDP is estimated to be $7.97 trillion, according to the World Bank, surpassing Japan and ranking number two in the world, second only to the United States (with a GDP of $14.44 trillion in 2008). Nevertheless, China remains a middle-income country due to its large population of 1.3 billion.1 The World Bank estimates that China’s ‘‘$1 per day poverty rate’’ may have increased from 10 percent in 2004 to between 13 and 17 percent in 2008, as a result of rising prices.2 Yet, China’s progress is astonishing. In 2005, President Hu Jintao announced China’s goal of achieving the $4 trillion GDP by 2020. Results as of 2008 show that he surpassed his goal for GDP well ahead of his prediction. On May 16, 2005, in his speech delivered at the opening ceremony of the Fortune Global Forum, Hu had the following to say: We in China have identified the goal for the first 20 years of this century. That is to firmly seize the important window of strategic opportunities to build a moderately prosperous society of a higher standard in an all-round way for the benefits of our over one billion people. By 2020, we will quadruple China’s GDP of 2000 to approximately 4 trillion US dollars with a per capita level of some 3,000 US dollars, and further develop the economy, improve democracy, advance science and education, enrich culture,

Growth

3

foster greater social harmony and upgrade the texture of life for the people. We are deeply aware that China, for a considerably long period of time to come, will remain a developing country. The population figure of 1.3 billion alone will make the fulfillment of the above goal a formidable challenge and we must be prepared for a long and uphill journey ahead.3

Many elements have contributed to China’s economic takeoff; three seem to stand out: market mechanism, science and technology, and a stable society, all of which will be examined throughout this book. The book begins by selectively examining the GDP components in more detail and with respect to the underlying changes in the society. For purposes of consistency and convenience, up-to-date data compiled by the National Bureau of Statistics of China (NBS) will be used throughout the book, unless otherwise indicated. THE RISE OF THE TERTIARY SECTOR

Since the start of the economic reform, a fundamental change has gradually taken place: China’s primary and secondary sectordominant economy is changing into a tertiary sector-dominant economy. The ‘‘primary sector’’ is typically composed of agriculture, forestry, fishery, and mining. The ‘‘secondary sector’’ is typically composed of heavy and light industry and construction. The tertiary sector is known as the service sector. Before 1978, approximately 90 percent of the GDP was contributed by agriculture and industry. This situation had a political backdrop— that is, the primary and secondary sectors were home to peasants and workers who were, according to the classical communism, the leading classes of the society. The Chinese Communist Party (CCP), as the leader of these elite classes, certainly would stress these economic sectors more than anything else. Additionally, the Cold War was big reason why these sectors were special, as they provided weaponry to the military. Around 1990, after some 12 years of economic reform, the primary sector started to decline dramatically, ceding place to the tertiary sector that provides services, such as education,

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Business and Technology in China

scientific research, hospitals, tourism, and so on. In 1990, the primary, secondary, and tertiary sectors contributed 41.7 percent, 41 percent, and 17.3 percent of the GDP. By 2007, the shares of primary, secondary, and tertiary sectors were respectively 3.6 percent, 54.1 percent, and 42.3 percent. The economic structural change occurred for several reasons. First, the reform of State-Owned Enterprises (SOE) in urban areas had led to tens of millions of workers being laid off. The service sector suddenly becomes China’s new hub of employment opportunities. The most practical way to rejoin the workforce is to open small businesses, such as restaurants, hotels, clothing stores, and other service-oriented businesses. Second, rapid urbanization and expansion of farming technology meant three things to rural China: (1) many farmers lost their land and became town dwellers willingly or otherwise; (2) fewer farmhands are needed to till the family plot, more and more backbreaking work being done by machinery or by businesses that offer machinery farming services; and (3) farmers dream of enjoying a dazzling variety of opportunities in the cities. This has led 150 million migrant workers to find jobs in China’s cities, primarily in construction projects (secondary industry) and the service area (tertiary industry). Third, the service sector is a ‘‘gender-equal’’ sector, meaning that women have better opportunities to develop their potential there than in the primary and secondary sectors. In certain areas, such as stores, hotels, airports, and banks, women have better job opportunities than men. Equality is certainly a relative concept in China. Many say that there was more equality, whether it is gender- or incomerelated, during Mao’s time than in the transitional society today. But few would want to go back. People are more willing to solve the discrepancies that have arisen rather than give up the market mechanism. That said, economic polarization and social discrimination are serious problems that the Chinese government monitors closely. In fact, numerous reports have revealed exploitation of migrant workers, in particular, female migrant workers. Nevertheless, the general trend seems to be that the tertiary

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sector is a favorable place for women to join the workforce. For example, the Statistics Bureau of Shandong reports that, in 2007, 70.27 percent of working-age women (16 and above) are employed,4 despite the fact that rural working women remain more tied to farming-related jobs (64.19 percent) than men (50.64 percent), as a matter of tradition. In 2007, 18.98 percent of working women found jobs in the tertiary sector. This number was 3.86 percent higher than two years ago. These women found jobs in business sectors, such as retail, hotel, catering, finance, education, health care, social welfare, and social security offices. The report indicates that most jobs are temporary or seasonal and pay hourly wages, reflecting characteristics of the sector. Nevertheless, it is obvious that both economic growth and social stability will benefit from an expanding tertiary sector. Many speculate that China’s social equality in general will be improved markedly due to the expansion of the tertiary sector. Finally, the dominance of the service sector has been the trend of all developed economies where knowledge-based industry takes the central position, pushing research and development (R&D) and education to a new height every day. According to the World Bank’s data, in 2005 the United States, Britain, Canada, Israel, and Germany’s tertiary sectors respectively accounted for 77 percent, 76.3 percent, 75.3 percent, 75.6 percent, and 68.7 percent of these countries’ economies. The Chinese government has put developing the tertiary sector on the top of the agenda since 1992. ‘‘The Decision of the CCP Central Committee and the State Council on Ramping up Tertiary Industry,’’ issued in 1992, is a milestone policy that led to the crucial economic structural shift. For example, it carries the following directives: Article 1. A developed tertiary sector is the necessary result of economic and social progress. It reflects the developmental level of a country’s economy. Our country’s tertiary sector has lagged behind and no longer fits the broader economic development . . . We must seize the opportunity to raise the tertiary sector to a new level.

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Article 4. During the 1990s, a large proportion of the labor force moves out of the primary and the secondary sector each year, creating new demand for employment opportunities. The tertiary sector has a unique potential in absorbing the extra labor, thanks to its diverse disciplines, specialties, and in particular, its capability of hiring a great number of talents in science and technology. Accelerating the tertiary sector will be the primary means to alleviate our country’s worsening pressure of employment. Article 5. By the end of the 20th century, our people’s living condition will reach the level of ‘‘relative comfort.’’ In contrast with the ‘‘survival level,’’ ‘‘relative comfort’’ not only represents a risen income level, but more importantly, the quality of life and social service must also improve. With the expansion of the economy, our people not only will raise their expectations on clothing, food, housing, transportation, communication, hygiene, and living environment, but also they will be more demanding with respect to cultural entertainment, broadcast and television, books, sports, physical rehabilitation, travel, and spiritual life. Developing the tertiary sector is the only way to answer the increasing material and cultural demands and to fulfill the task of promoting socialist material civilization and spiritual civilization.5

CHINA’S MIDDLE CLASS

The rise of the tertiary sector brought along a new social strata—the middle class. There are debates on how the middle class concept should be defined. Within the frame of these lines, let us adopt the popular consensus that intellectuals, government employees, and businesspeople form the core of China’s middle class. It is not by coincidence that the highest incomes are earned by people in this group. Moreover, this is also the fastest expanding group. Economists, politicians, and marketing experts already have conducted a good number of studies on China’s middle class. Property ownership, housing and transportation, access to technology, and political tendencies are among the most studied topics. The following are some of the findings. The household income of a Chinese middle-class family tends to range from $6,000 to $25,000 per year, according to a study

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by MasterCard Worldwide, Asia Pacific.6 According to this study, the population size of China’s middle class has grown to 87 million in 2005 or 39 percent of China’s urban households. By 2016, this population is estimated to reach 340 million or 60 percent of China’s urban population. Living in gated communities and driving import cars, the Chinese middle-class earnings currently account for 27 percent of China’s total disposable urban income. This percentage will likely reach 40 percent by 2015, according to the study. Travel is not only a way to celebrate a long-deprived freedom; for intellectuals, it is also about living a traditional ideal ‘‘reading ten thousand books and traveling ten thousand miles.’’ The middle class are known as ‘‘travelers class’’ for good reasons. NBS data show that, in 2007, 34.9 million international-bound Chinese visitors (person-times) were traveling for private purposes, which was more than three times the number of 2002. Domestically, there were 1.6 billion travelers (person-times) in 2007, which was approximately twice the number of 2002. The Monitor Group, an international marketing research firm, studied purchasing behavior of the Chinese middle class with respect to their occupation and demographic features.7 Their study examined China’s tourism market and found three distinct types of Chinese tourists—business, leisure, and backpacking travelers. Of the three groups, the backpackers tend to be the most sophisticated travelers who have time, do not mind spending heavily on technology and equipment, and are focused on unique experiences. The business travelers are willing to spend as well due to the fact that their trips are mostly reimbursed. The leisure travelers, on the other hand, tend to be cost-conscious. In the area of store shopping behavior, the Monitor Group identified six categories of Chinese middle-class consumers, including ‘‘Early Heavy Buyers,’’ ‘‘the Smarts,’’ ‘‘the QualityOriented,’’ ‘‘Trend Followers,’’ ‘‘Driven Businesspeople,’’ and ‘‘Value Seekers.’’ Early Heavy Buyers consist primarily of professionals in the tertiary industries and junior managers at multinational business firms. They are typically young, well educated,

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and generally familiar with Western lifestyles. As consumers, they often shop online and spend heavily on discretionary items. They tend to buy the latest products and fashions that set them apart as trendsetters. Trend Followers tend to be junior whitecollar employees and civil servants who are newcomers to the middle class. They have a stable salary and some leisure time. Less well informed than trendsetters, they tend to wait for discounts and promotions. Value Seekers consist of white-collar workers and government employees who are at the lower level of the middle class, but who have become good shoppers as their income rises. They tend to be the most critical with respect to quality and prices. However, they do spend handsomely to show off their status. The Smarts, the Quality-Oriented, and Driven Businesspeople tend to be old timers of the middle class. The Smarts tend to shop in specialty stores rather than outlets; the Driven Businesspeople possess higher purchasing power and tend to pay premiums for convenience, because most of them are wealthy and busy entrepreneurs. The Quality-Oriented are similar to the Smarts and the Driven Businesspeople, but they have more leisure time and focus on family priorities when making purchasing decisions. The middle class is behind the wheel. A popular saying goes that ‘‘behind every private car there is a middle-class family.’’ Statistics provided by NBS show a dramatic change in private car ownership. In 1985, there were 19,000 private passenger cars on the streets. In 2000, 3.65 million cars were registered. By 2007, 23.16 million private cars were owned. In urban areas, there are 10.2 private cars per 10,000 residents, up by nearly 50 percent from the figure in 2000. These numbers do not include private trucks that are related to business uses. If private light trucks are included, however, the registered vehicles in 2007 total 28.76 million. In comparison with the 135.9 million registered passenger cars in the United States in 2007 and 74.4 million gallons of gasoline consumed in the year,8 China’s passenger car market has a lot of catching up to do. That said, the 2009 passenger car sales figure is reported to be 45 percent above the 2008 number

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reaching 10.3 million units, making China the biggest auto market in the world. Much of the surge, however, was attributed to Beijing’s economic stimulus.9 As a result, Beijing will constantly keep an eye on signs of inflation for many years. Political tendencies of the Chinese middle class are certainly no less tempting an area of study to researchers than their shopping behavior. It is widely believed that the middle class is the standard bearer of democracy, freedom, and rule of law. In reality, however, it would be a mistake to equate the Chinese middle class to radical democratic revolutionaries who would strive to replace the CCP’s one-party rule with a multiparty government. In that respect, the Chinese middle class favors gradual democratization under the socialist system, which they liken to Sun Zhongshan’s ‘‘tutelage’’ stages. Sun Zhongshan, founder of the Republic of China in 1911, realized that the Chinese populace was not ready to accept democracy. His plan was to install a strong government to teach the people their rights and procedures, before letting a full-fledged democratic system take over. Keenly aware of China’s contemporary history, and in particular, the impacts of the Opium War (1840s) and the Great Cultural Revolution (1966–1976), China’s middle class supports the current government in achieving a harmonious and relatively affluent society (xiaokang shehui). Having witnessed the unsuccessful Russian reform, they are appreciative of Deng Xiaoping’s strong helmsmanship in guiding China to engage in a socialist market economy. The Chinese middle class believes that no other political force could play the role of the CCP in leading China to economic prosperity. For them, the economy is number one, the rest is of lesser importance. Despite the fact that members of the middle class view corruption of government officials with the utmost disdain and anger, that they complain loudly about lack of justice, and that they even braved the deadly repression during the 1989 Tiananmen Event to demonstrate against governmental corruption, members of China’s middle class are essentially of the opinion that China’s problems can be resolved through the reforms. They share the understanding that while

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the CCP has made mistakes, it is capable of correcting mistakes too. Professor Jonathan Unger, head of the Contemporary China Center at the Australian National University, describes the political stance of China’s middle class as follows: ‘‘Don’t expect regime change or democratization any time soon. The rise of China’s middle class blocks the way.’’10 As such, it becomes relevant, too, to reevaluate the representation of the CCP. Is today’s CCP the same communist-leading force that works to eliminate capitalism and to bring about a society of communism in which there is no private possession whatsoever and in which people’s motivation is driven not by material gain but rather by the communist conscience? Is the CCP the same party that engaged in bloody class struggle during the 1960s and 1970s? The popular Chinese consensus is that the 21st-century CCP is no longer one man’s party but rather it embodies a broad representation within itself. It is no longer the leader of the proletariat marching toward the goal of wiping out capitalism. As evidence, the CCP is implementing former President Jiang Zemin’s theory of ‘‘Three Represents’’—representing the advanced productive force, the advanced culture, and the majority of the people. President Jiang’s theory openly welcomes entrepreneurs to join the CCP, as long as they support socialism with Chinese characteristics. The 21st century’s CCP has emerged as a fan of the market mechanism. The image is boosted by thirty years of economic growth, as well as a successful record in maintaining Hong Kong and Macau’s prosperity. Despite disbeliefs in the West, the Chinese reality has become far more complex. The traditional catch-all label of ‘‘communism’’ can no longer represent the new reality. The traditional view needs to be changed. Metaphorically, to watch a 3-D film, one needs to wear 3-D glasses or risks missing much of the details. THE RISE OF AN OUT-GOING ECONOMY

One way to understand the growing scale of China’s import and export sectors is to watch the impacts of each global economic crisis.

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China stood strong against the Asian Financial Crisis of 1997– 1998 without devaluing RMB, largely thanks to RMB’s inconvertibility, which served as a protective shield against speculators. The Chinese government was able to peg the renminbi to the U.S. dollar at the exchange rate of 8.3 RMB to the dollar. Additionally, at that time, almost all of China’s foreign investment was in the form of fixed assets, a situation that prohibits drastic funds movements. China suffered limited losses thanks to an underdeveloped financial system at the time, as well as through tough interventions by the government in timely diffusing construction bubbles. These measures helped China stave off recession temporarily, but likewise they dragged the growth when the economy should have surged. Countries such as the United States have pressured China to give up the peg system. Eventually, the renminbi-dollar peg was partially eliminated in 2005, and RMB has dropped to below 7 to the dollar as of mid-2009. The Chinese economy gradually has grown out of the cocoon of protectionism to open up to the world. NBS data show that the total volume of imports and exports for 2008 was at 2,561.6 billion U.S. dollars, of which the value of exports was 1,428.5 billion U.S. dollars, with a moderate trade surplus of 295.5 billion U.S. dollars. The year-end foreign exchange reserves of China reached 1.95 trillion U.S. dollars, up by 27.3 percent over the previous year. Because of the global financial crisis, however, both imports and exports were on the decline.11 The economy was hit hard. One way to look at the growth of China’s foreign trade is to compare changes with respect to dependency ratios. In 2008, the ratio of import and export to GDP was 60.9 percent, in which export to GDP ratio was 34.1 percent. In contrast, in 1997, the ratio of import and export to GDP was 34.5 percent; and export to GDP was 19.4 percent. In other words, during a period of 11 years, China’s foreign trade sector has almost doubled, and the export sector alone has grown to be close to the level of import and export combined in 1997. Wider exposure to foreign trade means more money made, but it also means that China is becoming more vulnerable to

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global economic crisis, and that has become the reality. Despite the 9 percent rise in GDP in 2008, analysts predict a slowdown ahead, snapping a five-year streak of double-digit growth. The Chinese government is doing all it can to safeguard an 8 percent GDP growth in 2009. The challenge has set in: on the one hand, China relies on fast economy growth to alleviate pressure of job demand that seems to grow even faster; on the other hand, the sudden drop of orders from foreign buyers is taking its toll. For example, exports fell in November and December of 2008 for the first time in seven years. As a consequence, thousands of factories were shut down in China’s export-driven southeast region. Job losses are in the tens of millions. According to a Wall Street Journal report, out of the 200 million migrant workers nationwide, 10 million had already returned to their farmlands by January 2009.12 The latest figure from the Bureau of Agricultural Administration of China indicates that, by January 2009, 20–25 million migrant workers had lost their jobs.13 With factories closing due to the plunge in orders, the masses of jobless workers raise the specter of more social turmoil and conflicts over land and farming rights. Although migrant workers have their buffer space—the family plot—to return to, job loss tends to have a psychological impact, as it involves a difficult adaptation process.14 The government is doing everything possible to ease unemployment pressure, and more important, to prevent unrest that may arise when laid-off migrant workers return to their hometowns that likely have insufficient accommodative services. On the heels of the U.S. government’s $700 billion bailout package, the Chinese government announced a 4 trillion RMB ($586 billion) plan in November 2008 to boost domestic consumption through higher domestic spending, particularly on construction and other infrastructure-related projects.15 In the West, the concern is centered on potential consequences if China’s economic slowdown continues, which is likely to drag down surrounding economies. In January 2009, the Chinese government set out a budget of 850 billion RMB ($124 billion) by 2011 to improve health care. The long-awaited reform plan for its health care system will

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provide universal medical coverage to the entire population of China. Insurance will cover all medicines, and an agency will be established to administer the system.16 These measures, however, tend to take time to show effects. Domestic industries have already weakened as demand for autos, real estate, and other goods drops, particularly in the early stage of the economic crisis. The economy was hit again by the Sichuan earthquake that occurred in May 2008; the death toll was close to 70,000. The Chinese government, once again, intervened to stop the encroachment of the financial downturn. The Chinese government is fully aware of rural troubles, including occasional violent protests, and deals with them aggressively. The government attributes such incidents to the following causes: (1) peasants’ land rights have not been properly protected, (2) environmental pollution has not been properly contained, (3) migration has not been properly handled, and (4) peasant assets have not been protected. The government openly admits that in the past years all focus has been placed on growing the GDP, leaving rural interests insufficiently attended.17 Further measures will be taken, according to the Bureau of Agricultural Administration, to ensure peasants’ land rights issued in Document Number 1 of 1984, including their right to transfer land. Under these measures, no one will be allowed to force peasants to give up their land or to divert land use for nonagricultural purposes. Furthermore, the government will increase investment in agricultural infrastructure, and raise levels of subsidies for agricultural machinery, animal feeds, and fertilizer. The government also will raise the minimum purchasing price for grains. To do so, the government will increase public grain reserve levels as a measure to stabilize market prices. Meanwhile, agricultural exports also will be encouraged. To improve peasants’ life quality, the government encourages manufacturers and vendors of home appliances to open rural markets and deliver quality products. As a result, China’s trade sector continued to grow through 2008, ranking third on the list of the largest export markets

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of the United States, next to Canada and Mexico, with a total of $71 billion in 2008 up from $65 billion in 2006 and $41.9 billion in 2005. Top exports to China include (1) computers and electronics, $13.9 billion; (2) crop production, $9.2 billion; (3) transportation equipment, $7.6 billion; and (4) waste and scrap treatment equipment, $7.6 billion.18 The U.S.-China Business Council lists 15 top U.S. exporters to China in 2008 (see Table 1.1).19 In 2006, the U.S. pharmaceutical industry exported approximately $346 million to China—increasing by 54 percent from 2005 and by 305 percent from 2003. In 2007, according to industry sources, U.S. medical device exports to China totaled $870 million—a 29 percent increase over 2005 and a 71 percent increase over 2003.20 China’s role in the world economy is becoming increasingly important. Former treasury secretary Henry Paulsen states, ‘‘today more than ever the world is looking to China to be a big contributor to global economic growth.’’21

Table 1.1. The U.S.-China Business Council Top 15 U.S. exporters to China in 2008 State California Washington Texas Louisiana New York Illinois Oregon Georgia North Carolina Ohio Pennsylvania Massachusetts Tennessee Michigan Arizona

Exports ($billion)

Export Growth (percent), 2000–2008

11.0 9.9 8.4 3.5 2.8 2.5 2.5 2.0 1.9 1.8 1.6 1.6 1.4 1.3 1.3

221 422 482 230 263 371 710 512 455 522 491 211 771 509 724

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THE RISE OF PEOPLE’S LIVING CONDITIONS

A good way to understand China’s economic changes is to follow rural and urban household income and spending, and the trend of Engel’s Coefficients (EC). When one examines Figure 1.2, the first thing that catches one’s attention would be the discrepancy between rural and urban incomes. In general, eastern provinces enjoy higher disposable incomes than inland western provinces. The closer to the east coast, the more money is made. Table 1.2 compares incomes of 2007 in a number of provinces. In 1999, worsening income gaps were a major reason underpinning the launch of a national economic movement known as ‘‘Developing the Northwest’’ launched by former President Jiang Zemin. Filling the gaps is seen by the government as fundamental to social harmony. On the other hand, however, there is concern that a drastic equalization of income gaps regardless of economic conditions may cause difficulties, too. For example, some experts suspect that while income discrepancies may indeed lead to social instability, whether reducing income discrepancies may generate real benefits for rural people is not necessarily certain. One scenario is if income levels are more equalized the economy may fail to produce enough goods to meet rising expectations.

Figure 1.2. Source: NBS

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Table 1.2. Urban and Rural Incomes of Selected Regions Annual Per Capita Household (RMB)

Eastern Regions and Cities

Urban

Shanghai Beijing Zhejiang Guangdong Jiangsu Tianjin Fujian Shandong Liaoning

23622.73 21988.71 20573.82 17699.30 16378.01 16357.35 15506.05 14264.70 12300.39

Annual Per Capita Household (RMB)

Rural

Western Regions and Cities

Urban

Rural

10144.62 9439.63 8266.15 5624.04 6561.01 7010.06 5467.08 4985.34 4773.43

Sichuan Chongqing Shanxi Qinghai Ningxia Yunnan Xinjiang Gansu Tibet

11098.28 12590.78 11564.95 10276.06 10859.33 11496.11 10313.44 10012.34 11130.93

3546.69 3509.29 3665.86 2683.78 3180.84 2634.09 3182.97 2328.92 2788.20

Source: NBS Yearbook 2008

Despite the eye-catching differences, the rising curve represents a fundamental uplift of people’s lives across the nation. The rough reality was when Deng Xiaoping’s economic reform was initiated a schoolteacher made a 60 RMB monthly salary on average; a senior factory worker made 100 RMB per month on average; and the national average of per capita annual income was 343 RMB (urban) and 134 RMB (rural). This difference was insignificant when the market was generally short of goods and services. In less than three decades, despite the fact that the population had increased by about 300 million, the average annual per capita incomes have risen to 15,781 RMB (urban) and 4,761 RMB (rural) in 2008. Bank savings have dramatically risen as well. The total rural and urban savings also rose to 1,725.3 billion RMB in 2007, from 21 billion RMB in 1978. People’s living standard has tremendously improved, essentially because of the dazzling variety of goods and services that money can buy. Nevertheless, China’s primary challenge remains with guaranteeing people’s basic life needs. China’s per capita GDP ranks number 127 in the world as of 2010. China’s Premier Wen Jiabao considers China’s population both its strength and challenge: regardless of how small a difficulty is, when multiplied by

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1.3 billion, it turns into a huge problem; regardless of how big a problem is, as long as 1.3 billion people concert their efforts to deal with it, the problem will be easily solved.22 In 2008, the Chinese government raised the poverty line from average annual income of 785 RMB, or 115 billion in U.S. dollars, to 1,067 RMB or 156 billion. This new poverty line has increased the number of poor people to 43.2 million who now qualify for government relief. The government has promised to eradicate poverty by 2020.23 Such efforts have won global praise. While income numbers reflect living conditions, economists also resort to EC to gauge expenditures on basic materials, as income levels may fail to reflect living conditions under certain circumstances. EC refers to the percentage of spending on food in the total consumption expenditure. Thus, lower EC numbers represent better living conditions. When Deng Xiaoping set the national standard of living to reach the ‘‘relative comfort’’ by 2000, his goal was translated into more specific objectives. Professor Xiao Jingjian of the University of Rhode Island and editor of the Journal of Family and Economics, looked into Deng Xiaoping’s plan as it was laid out from the perspective of calorie intake. For example, for urban areas, a relatively comfortable life included fulfilling the following requirements: an EC range between 45 percent and 47 percent; per capita daily intake from food to be 2,600 calories which may come from 80 grams of protein and 70 grams of fat; life expectancy to be 70 years; every three literate persons to subscribe to one newspaper; per capita living areas to be 8–10 square meters or approximately 100 square feet; a family of three to have a living space of a two-bedroom house; the rate of complete living suites to be 60 percent; and per capita green public area to be 8 square meters. For rural areas, the following objectives were set: the EC range to be between 45 percent and 50 percent; daily protein intake to be greater than 75 grams; reinforced concrete-structured living areas to account for 80 percent or more of living areas; household television possession rate to be 75 percent; the average educational level to be eight years; life expectancy to be 70 years; the rate of households

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using electricity to be more than 95 percent; and the availability of clean water to be greater than 90 percent. On the scorecard, 95 percent of the country had achieved the goal by 2000, including 100 percent in the eastern regions, 78 percent in the central regions, and 56 percent in the western regions. Professor Xiao notices that Chinese consumers are paying more attention to food quality, and as a result, non-staple foods have increased.24 NBS surveys show that the ECs have been on steady decline, indicating continuous improvement in living conditions. In 1978, the ECs were 57.6 percent for urban residents and 67.7 percent for rural residents. In 2002, these numbers were respectively 37.7 percent and 46.2 percent. The ECs in 2007 were 36.3 percent for urban residents and 43.1 percent for rural residents. According to a 2007 report by the Beijing Bureau of Statistics, people in urban Beijing are on the verge of reaching a ‘‘wealthy’’ life per global standards. The EC declined from 58.7 percent in 1978 to 30.8 percent in 2006 for Beijing’s urban families with an average spending of 1,442 RMB on clothing, up 91 percent from 2000, which still represents a decrease of 0.8 percentage points in the period. In 2006, every 100 families in urban Beijing had 206.1 mobile phones (up 650 percent), 95.7 personal computers (up 198 percent), and 18.9 video cameras (up 250 percent), all of which had dramatically increased since 2000. The 15 million permanent residents of Beijing owned 1.81 million private cars in 2006, up 17.6 percent from 2005.25 A fast pace of life calls for fast food; and eating out results in a bigger proportion of the income spent on food. Does this tip the EC model? Although no conclusion has been made with regard to this question, some experts point out that many urban families, particularly those in big cities, do eat out frequently, and rural families seldom go to restaurants. In a 2009 report by Emily Chang, CNN–Beijing, titled ‘‘The Kings of the West Are Ruling the East Too,’’ Chang reveals that China has 2,573 Kentucky Fried Chicken restaurants, and a new one is opened every day. McDonald’s has 1,065 restaurants, and plans to add 10,000 jobs

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and more than 150 more restaurants in 2009. Beijing residents do not consider Western foods the cheapest in town; however, they generally appreciate Western fast foods as trendy, convenient, clean, and even healthy. The fast food has obviously attracted the modern middle class pursuing a modern lifestyle. Chang reports that China’s fast food business will balloon to 58.8 billion U.S. dollars in 2009, and that it weathers the global financial storm quite well. Moreover, as Chang indicates, while many factories are shutting down, the ones that provide fast food businesses with cooking equipment are thriving.26 However, food expenditure makes only part of the sampling range of the EC model; the proportion of other expenditures on life’s basic needs present an important picture too. For example, the Chinese are paying more for education and health care than industrial countries. In 2005, Chinese urban residents spent 7 percent of their income on health care, higher than Japan’s 3.97 percent and South Korea’s 4.37 percent, and doubling that of many other industrial countries. Expenditures on entertainment contribute to the quality-of-life picture as well. The Chinese urban and rural people spent only 3.5 and 2.13 percent of their total income on entertainment and service in 2006, while average Americans spent 20 percent.27 These numbers are expected to improve in the next phase of economic reforms. The following are a few more aspects reflecting China’s living standard. Housing Space

Changes in family housing space represent a great leap forward. Housing reform, which will be further discussed later, has made it possible for every family to own a home. According to NBS data, at the time when housing reform started in 1986, the per capita floor space was approximately 14 square yards in cities, and 17 square yards in rural areas. In 2006, urban per capita floor space had risen to more than 32 square yards in cities and 36.7 square yards in rural areas. Rural floor space in 2007 was up further to 37.7 square yards according to NBS.

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The increase of home space is among one of the changes that has a profound psychological impact. It reversed the humbling situation under the public housing era in which three generations sharing a small apartment was not uncommon. The change has given people a sense of pride and dignity, and a feel for modern life. Strong evidence is in the booming new home decoration and repair business in which foreign companies like Home Depot are catching up with other industrial leaders that arrived earlier. Social Welfare

Before 1978, the SOEs offered a ‘‘cradle-to-grave’’ benefit umbrella to employees. Rural residents never enjoyed health care or pension benefits. After the reform started, SOEs gave up their benefit programs, due to restructuring or simply bankruptcies. Today, providing basic insurance and pension benefits to 1.3 billion people is a new challenge that the government is still trying to find ways to meet. The health care system is a good example. From the 1950s to the early 1990s, the urban population was served by two major publicly funded insurance programs: the Labor Insurance Program (LIP) and the Government Insurance Program (GIP). LIP covered approximately 10 percent of the total population working for SOEs, and GIP covered approximately 5 percent of the population working for the government. Inequality and insufficiency are two main problems with these programs. Since the late 1980s, the government has implemented reforms in multiple stages. From 1988 to 1994, a system of medical cost-sharing and social-pooling accounts to cover retired population, and catastrophic insurance programs were tested in a number of cities. The cost-sharing solution was tested further between 1995 and 2000 during which time several models were tested, including a three-tier program for which costs were shared among patients, government subsidies, and providers. Such a program required rationing of drug coverage with a predetermined payment plan. These pilot measures were promoted in 57 cities. Beginning in

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late 2000, reforms were made to hospital systems. The goal was to reduce high drug costs that amount to as high as 50 percent of total health care expenditures, whereas in other countries such as the United States, drug costs account for less than 10 percent. This was primarily caused by the existing system that allows hospitals to run pharmacies, linking drug sales to profit.28 By 2011, China plans to provide health insurance to all rural and urban populations.29 Currently, China has three main basic medical insurance plans, which vary greatly. 1. Urban Employed Basic Medical Insurance (UEBMI), established in 1998, is employment based and covers only urban workers. It is made of a collected fund for inpatient stays and individual medical savings accounts for outpatient visits. Payroll taxes paid by employers and employees finance the UEBMI. Contributions are equivalent to 14 percent of annual salary in Shanghai, but only 8 percent in western provinces. About 200 million out of a total of 250 million urban employed participate in UEBMI. 2. New Rural Cooperative Medical Insurance (NRCMI), established in 2003, consists of a pooled fund for inpatient stays and is financed by various government bodies and participants. Monthly contributions are on average 50 yuan ($7) in western provinces, split RMB10 ($1.50) from participants, RMB20 ($3) from provincial government, and RMB20 from the central government. Benefits are limited, with reimbursement rates that can be as low as 30 percent for inpatient expenses, and operated on a ‘‘pay-first, claim-later’’ basis. Nevertheless, the scheme has expanded rapidly, and an estimated 800 million out of a total of 850 million rural citizens participate in NRCMI. 3. Urban Resident Basic Medical Insurance (URBMI), established in 2007, covers the urban population not covered by the UEBMI scheme, such as children and students. It consists of a pooled fund for inpatient stays and does not cover outpatient visits, except in wealthy regions. Various government bodies and participants finance URBMI, with total contributions per participant standing somewhere between UEBMI and NRCMI levels. Benefits are limited, and significant copayments are required. Coverage is expected to be available in all cities by the end of 2010, and an estimated 100 million urban residents already participate in the URBMI.30

Two health care reform documents released in April of 2009 announced further details. The State Council’s ‘‘Opinions on Deepening Healthcare System Reform’’31 sets the reform framework

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through 2020. The Ministry of Health’s ‘‘Implementation Plan for Immediate Priorities in Healthcare System Reform 2009–2011’’32 provides implementation details. According to these documents, in 2010, the government will raise subsidies for health insurance premiums of the URBMI and NRCMI schemes, which together cover 900 million people, to gradually narrow the huge differences in benefits among these plans. To reduce drug costs, the government will publish a National Essential Drug List (NEDL) expected to contain 400–700 items with many low-cost generics and traditional Chinese medicines. The central government will guide prices, provincial governments will be responsible for procurement and distribution, and basic medical insurance will cover prescriptions. Grassroots health care providers may not levy a surcharge on drug sales. The government will require all health care providers and retail pharmacies to stock and retail drugs on the NEDL, and grassroots health care providers may stock and retail only those drugs listed on the NEDL. All other health care providers will be encouraged to use drugs on the NEDL as their primary choice remedy. Thus, the NEDL is expected to largely define the drug market in all but the urban hospitals. Additionally, the documents stress training of more healthcare professionals to assure equal access. To achieve this goal, hospitals will be asked to reform their fee structures as well. A few other areas have shown significant development as well, such as pensions, accident insurance, and unemployment insurance. NBS reports that at the end of 2008, a total of 218.90 million people or approximately one-sixth of the total population participated in a basic pension program, showing an increase of 17.53 million people from 2007. Of this figure, 165.97 million were staff and workers, and 52.93 million were retirees. A total of 316.98 million or more than one-quarter of the population participated in urban basic health insurance programs. Migrant workers are receiving health insurance as well—a total of 42.49 million participated in urban health insurance programs, an increase of 11.18 million. Increasing participation in unemployment

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insurance and accident insurance programs illustrates the transition of workers’ mentality from the planning economy. Around 124 million participated in unemployment insurance programs, increasing by 7.55 million, and 138.10 million participated in work accident insurance, an increase of 16.37 million, of which 49.76 million were migrant workers. About 2.61 million insured received reimbursement in 2008. A total of 23.34 million urban residents and 42.91 million rural residents received the government minimum living allowance, an increase of 7.25 million. Education has become more accessible today than in 1990. In 2007, the promotion rate from primary schools to junior secondary school was 99.9 percent; the rate from junior high school to senior high school was 79.3 percent; and the rate from senior high school to higher education was 71.8 percent. These numbers contrast with 74.6 percent, 40.6 percent, and 27.3 percent in 1990, respectively. China has obviously invested heavily in developing higher education. One perspective to keep in mind is that improving living conditions is not the government’s responsibility alone. It involves public acceptance, which may take time. By tradition, the Chinese family was a self-sufficient unit and relatively closed to the outside world. Modernization brought people onto a new platform on which mutual dependence at the society level is a necessity. Moreover, risks and related costs far exceed what a traditional family could handle. During the past three decades, the Chinese public has been increasingly aware of social benefits and has become more confident in programs that are common in the West. On the other hand, the public also has been developing their trust in the government that is still reminiscent of political turmoil in the past and capable of making powerful interventions to the economy in the 21st century. THE RISE OF ENTREPRENEURS

Economically, China is in a transitional state with a shrinking public sector and an expanding sector of Privately Owned

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Enterprises (POEs). Ideologically, the pursuit of material wealth is no longer regarded as a root of evil there, but rather, admired as ‘‘glorious’’ (Deng Xiaoping). Moreover, the CCP encourages its members to take the lead in getting rich. A CNBC program refers to China as the ‘‘Republic of Profits,’’ which shows in a way that American media are gradually becoming aware of the nature of modern China’s Communism. The CCP has switched to populism since former President Jiang Zemin envisioned that a stable society is one that enables people to get rich. This is by no means an invention of the CCP. The concept of storing wealth in people’s homes rather than in the government’s warehouses was an idea of Mencius (fourth century BCE). This change has been substantiated by hundreds of entrepreneurial stories. China’s Finance Net published ‘‘10 Hundred-Millionaire CCP Members Taking the Lead in Getting Rich.’’33 ‘‘Red capitalists’’ is a new phenomenon of the transitional society. Many are still trying to find a compromise with the concept. The attitude has been to get rich first and ask questions later. A few of these stories are selected and presented below. Lu Zhigang, 56, is chairman of the board of the Fanhai Group, a real estate firm headquartered in Beijing. His personal property is worth 27.98 billion RMB, ranking number eight in Forbes Richest Chinese 2007. His key to success was to be able to secure funding to develop 8 million square meters (approximately 2,000 acres) of prime land and to market real estate at the peak of the market. Not every billionaire had smooth sailing; some worked their way up the hard way. Lu Guanqiu, 62, is chairman of the board and party secretary of Wanxiang Group, a manufacturing firm for automobile parts headquartered in the Zhejiang Province. Lu is worth 13.13 billion RMB and ranks number 33 in Forbes Richest Chinese 2007. Back in 1969, Lu headed the Ningwei County People’s Commune’s Farming Machinery Repair Shop and worked on the job for 10 years. In 1979, he turned the repair shop into a car parts factory, producing ‘‘wanxiang zhou,’’ or ‘‘universal joint’’ (a device connected to the steering system),

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and from which the company’s name ‘‘Wanxiang’’ (meaning ‘‘multidirection’’) was derived. In 1983, Lu posted the tree seedlings grown in his family plot as collateral, a total worth of 20,000 RMB, equivalent to approximately $4,000 at the time, and contracted the factory under his leadership. The policy at the time, known as Contract Responsibility System (CRS), allowed public firms to enter into a profit-sharing agreement with the local government. Lu was one of the first to take advantage of this opportunity. In 1988, Lu bought out the factory by purchasing all of its shares originally owned by the county government for 15 million RMB. In 1990, Lu’s Wanxiang Group was established, with the company’s stock listed at the Shenzhen Stock Exchange. From 2000 to 2001, Lu bought out three large competing firms. By then, Lu had turned a rural county’s farming machinery repair shop into a modern industrial firm. Some billionaires are entertainment experts. Chen Tianqiao, 34, chairman of the board of the popular online gaming company Shengda Net (snda.com) headquartered in Shanghai, is worth more than 8.6 billion RMB, ranking number 52 in Forbes Richest Chinese 2007. When Chen was a student at Fudan University’s Economics Department in 1990, he was awarded ‘‘Best Student Leader.’’ Networking pays, in addition to sound business decisions. An expert in public relations, Chen maintained good relationships with government organizations. After serving on several deputy positions in a variety of companies, Chen rose to the top of Shengda Net and established a most popular interactive gaming network offering among other services a multiplayer gaming platform (MMORPG). Chen has seen profit flowing in as China’s net users jumped to number one in the world: in 2008 total Internet user-accounts in China were 300 million.34 According to China Internet Network Information Center (CNNIC), 555 million ‘‘netizens’’ play games on the Internet, and 52 percent of the total number of accounts are held by 22-year-olds and under.35 Although most people never made it to the rankings of these leading entrepreneurs, they improved their lives by hard work

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and creative thinking, and their stories are no less exciting. Wang Yuancheng’s story is one such example.36 In 1988 Wang Yuancheng left his village in Ningyang County, Shandong Province, to join the millions of the migrant workforce. After working as a laborer on odd jobs for a few years at Taian City, he started a printing business named ‘‘Oriental Press.’’ As SOEs went through restructuring, millions of employees were laid off. The unemployed population brought an opportunity: they urgently needed retraining. Seizing this opportunity, Wang opened Taian’s first computer skill training school, ‘‘Oriental Computer School,’’ in 1993. During the next 10 years, the school trained 15,000 people, mostly migrant workers and laid-off employees. In 1999, he donated to the construction of three ‘‘Hope Computer Schools,’’ which provided computer skill workshops to thousands of children residing in mountainous villages. In 2001, Wang invested 200,000 RMB to set up the first hotline telephone service to help migrant workers find jobs. Like everywhere else in the world, the rich in China tend to be politically active as well. Fighting for equality for the underprivileged working people of whom he was a member had become Wang’s top agenda. Unlike doing physical labor, fighting along the legal front requires special training. When Wang left his home village, however, he had to drop out of high school. Despite the fortune he had built up, he had an uphill battle ahead—making up the lost education. Over the years, Wang had always managed to make time in his busy schedule to study on his own. The hard work eventually paid off. He received a bachelor’s degree and a master’s degree in law. Wang has published profusely in professional journals and has been a popular speaker at universities. His personal Web site has become a source of inspiration for many young people (http:// www.wangyuancheng.com/about.asp). In 2003, Wang was elected representative to the 10th National People’s Congress (NPC). During his term as representative, Wang sponsored a number of bills to protect migrant workers, all of which were passed. These bills included ‘‘Bill

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of Protecting Interests of Migrant Workers in Urban Area,’’ ‘‘Bill of Establishing a Law of Residential Relocation,’’ ‘‘Bill of Establishing a Law for the Promotion of Equal Employment,’’ ‘‘Bill of Establishing a Law for Promotion of Equal Access to Education,’’ ‘‘Bill of Establishing a Law for Guild Organizations,’’ and ‘‘Bill of Establishing a Law of Business Operations under Special Permissions.’’ It is not surprising that education has been stressed in China more than ever. From top leaders to the grass roots, the Chinese are convinced that the country’s future lies in utilizing modern science and technology. If the West is ahead because Westerners were able to learn science and technology properly, so too can the Chinese. One case was reported by Nicholas Kristof, a prominent journalist with the New York Times, who specialized on China issues. He recorded what he witnessed during a visit to a small village in Shandong where his wife grew up: I visited several elementary and middle schools, accompanied by two of my children. And in general, the level of mathematics taught even in the peasant schools is similar to that in my children’s own excellent schools in the New York area. My children’s school system does not offer foreign languages until the seventh grade. These Chinese peasants begin English studies in either first or third grade, depending on the school. Frankly, my daughter got tired of being dragged around schools and having teachers look patronizingly at her schoolbooks and say, ‘‘Oh, we do that two grades younger.’’

Most impressive, after Kristof had posted a video of his visit on the New York Times’ Web site, a reader responded that she saw in the video the house where she grew up. Her name was Litao Mai; she was the third college student in the village. Ms. Mai; worked for Merrill Lynch in New York and described herself as ‘‘a little peasant girl’’ transformed into ‘‘a capitalist on Wall Street.’’37 As a side note, Merrill Lynch was bought out by Bank of America in 2008 at the peak of the financial crisis. The most profound experience, one that marks China’s era of transition, belongs to a small and shy country woman. Tang

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Ruiren was born in 1930 in Xiangtan County of the Hunan Province. Her family was so poor that she had to beg for a living in early years. At age 14, she was married into Shaoshan, Mao Zedong’s hometown. Like all hardworking women at the time, she was never able to go to school. In 1959, when Chairman Mao returned home for a visit, Tang was honored to pose next to the great leader for a photo opportunity during which Mao kindly addressed her as a ‘‘relative,’’ since her husband’s family name is also ‘‘Mao’’ and his family was actually Chairman Mao’s neighbor. This meant a great deal at the time when Mao was worshipped as a god. Because of this coincidence, tens of thousands of Red Guards who were on pilgrimages in Shaoshan during the Great Cultural Revolution sought her autograph. Tang Ruiren remembers her sore fingers and the fervor of the radical youngsters. When Deng Xiaoping disbanded the People’s Commune in 1980 and implemented the ‘‘Household Responsibility System (HRS),’’ like her fellow villagers, Tang Ruiren found it hard to adapt. She wept for days when her family was also allocated a farm plot. People were clearly trotting on the capitalist road farther and farther, she complained. More shock was yet to come, however, when Shaoshan County decided to turn Chairman Mao’s hometown into a tourist hotspot. Everybody cheered and hundreds of small tourist businesses were started overnight. Unwillingly, Tang took out her life’s savings of 1.7 yuan and started a rice gruel stand. She was so embarrassed to be a vendor at first, since Mao had said that profit was evil, that she hid herself behind trees to attend the business. One day, a Shanghainese tourist stopped by and yelled, ‘‘Boss, I need a bowl of gruel!’’ Tang was shaken; she was struck by the word ‘‘boss.’’ No one had ever called her ‘‘boss’’ throughout her life, and she loved it. Not long after, Tang started her first restaurant named ‘‘Mao’s Family Kitchen.’’ By 2007, her MFK chain counted 202 restaurants across China, employing more than 20,000 workers, earning a respectable revenue of 1.1 billion yuan annually, and paying 90 million yuan in annual taxes. Back in the 1950s, the average personal annual income in Shaoshan was 69.9 yuan. That number had turned into 9,452 yuan in 2008. When a foreign journalist

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asked her whether she liked Chairman Mao or Deng Xiaoping better, Tang smiled, ‘‘Chairman Mao gave China independence, and Deng Xiaoping brought us prosperity. They are both great.’’38 There are many explanations about how China has developed into one of the world’s top economies within merely three decades. In this regard, Kishore Mahbubani, a former diplomat of Singapore, provides possibly the best of answers in his recent book The New Asian Hemisphere: it is the market mechanism. Mahbubani states: The explosive impact of the application of free-market economics to China should not have been surprising. Each Asian society that has applied freemarket economics has experienced spectacular economic growth. Most discussions on the virtues of free-market economics have focused on efficiency. Clearly, countries that apply the principles of free markets experience huge increases in productivity.39

Another factor that has played a defining role in China’s rising was Deng Xiaoping’s helmsmanship. The market system was shunned as taboo during Mao Zedong’s era. Deng Xiaoping not only had the iron wrist to break the taboo, but also was able to implement a gradual transformation, avoiding turmoil such as seen in Russia’s reform. Deng named the gradual economic transition the ‘‘socialist market economy’’ and prescribed two strategies to make the transition happen, both of which have only come to be appreciated over time: (1) domestic stability, and (2) peaceful rising on the international stage. Deng held firmly that without a stable social environment, there would be no meaningful economic development. Here, China had already learned a hard lesson in the 19th and 20th centuries while dealing with foreign invasions and domestic political turbulence. Deng Xiaoping was determined to engage in stability and economic development without wavering. For example, here is how Deng stressed his opinion with respect to China’s international stance: With respect to world situation, I have three sentences to say. The first sentence is, we must adopt an objective view of things; the second sentence is, we must stand our ground firm; the third sentence is, we must handle events calmly. Let us not rush things; we can’t rush anyway. Let us be calm,

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be clear minded, and maintain an absolute tranquil mind. Let us bend our head and focus on one thing only, that is, our own business.40

Moreover, to remind the citizens of his message, Deng wrote the following 28-character verse: Lengjing guancha (observe analytically), Chenzhuo yingfu (handle calmly), Wenzhu zhenjiao (secure battle formation), Taoguang yanghui (keep a low profile), Juebu dang tou (never be the front-footer), Yousuo zuowei (strive to make real achievements).

In practice, China carries out the ‘‘equal distance diplomacy,’’ staying away from power struggles while seeking every business opportunity. One example of China’s diplomatic handling is the way it resolved the U.S.-China air collision event in 2001 in which a Chinese fighter jet crashed killing the pilot after a collision with an American intelligence gathering aircraft over the South China Sea. The Chinese government demanded an apology, without deepening the conflict further. Throughout the Bush era, Beijing maintained a good relationship with the U.S. government although, at the same time, Beijing maintained a good economic and diplomatic relationship with Islamic countries as well. In the same period, it improved relationships with neighboring countries and made inroads into Latin America and Africa. As such, China maintained its concentration on economic development while steering clear of major global conflicts. China was not able to stay clear, however, from Western criticisms on its business ties with countries that have a poor record of human rights. On the issue of ethnic conflicts, the Chinese stance has been one of non-interference which was elaborated by the former premier Zhu Rongji during an interview with CNN’s Judy Woodruff in 1999.41 Zhu Rongji believes that ethnic conflicts rooted in history belong to ‘‘internal affairs’’ and must be resolved by the groups involved. If international

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intervention is needed, such responsibility would lie with the United Nations. Broad international business connections have allowed China to secure energy resources to fuel its growing number of vehicles on the road, as well as its high energy consumption industries. Lacking fossil fuel resources, China must extend its quest over the border to Russia, the Middle East, Africa, and Latin America. In August 2008, China’s state-owned China National Petroleum Corp (CNPC) signed a $3 billion agreement with Iraq to develop the Al-Ahdab Oil field south of Baghdad, one of 41 contracts that Iraq put out for international bidding.42 The nonintervention and economic-trade-above-all principle has dominated China’s diplomacy for decades. China’s strategy in Asia, for example, known as implementation of ‘‘Good Neighborliness’’ and ‘‘Mutual Trust, Mutual Benefit, Equality and Coordination’’ has led to its leadership in the Association of Southeast Asian Nations (ASEAN). The diplomatic adeptness has been admired by many scholars in the field. ‘‘It took Beijing 150 years to learn,’’ as Joshua Cooper Ramo, author of The Beijing Consensus, pointed out, and it has turned ‘‘China Threat’’ to ‘‘China Opportunity.’’43 China’s fast economic growth raises many questions with respect to its sustainability. President Hu Jintao has assured the world that China will continue to stick to the following courses: (1) China will continue to improve the quality of lives of 1.3 billion people, satisfying their growing material and cultural needs. To achieve this goal, China will develop technology and a knowledge-based economy. (2) China will continue with its current economic reform for a socialist market economy. In the meantime, China will also step up its institutional innovation to encourage creativity and inherent dynamics for economic and social development. (3) China will participate more broadly in the international market place. To do this, China will improve its quality and efficiency of its economic growth, develop vigorously the circular economy and build a sustainable eco-system.

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(4) China will endeavor to create a win-win market place for its trade partners. This includes increasing imports, encouraging foreign investment, and stepping up improvement of intellectual property rights protection.44

The world is keeping a critical eye on whether China will be able to live up to these promises. In a sense, the test has been served: will China be able to survive the global financial crisis of 2008–2009 and come out a stronger economy? There is evidence that it will.

Chapter 2

Handling the Global Financial Crisis The devastation of the 2008–2009 global financial crisis on China’s economy is yet to be assessed. One could say with certainty, however, that the crisis has generated a broader and deeper devastation than the 1997–1998 Asian Financial Crisis. During the latter crisis, the Chinese government defended the economy by pegging the yuan to the dollar and simply safeguarding the renminbi valuation with force. This time, however, the government has to do more by setting up a stimulus package of 4 trillion RMB or US$586 billion. Moreover, the package is in close range to the $700 billion U.S. stimulus package, despite the fact that China’s GDP is less than one-third of the U.S. GDP. This reflects a significant change in the structure of China’s economy wherein the size of exports has risen to one-third of its GDP as of 2008.1 In 1998, the export sector was less than one-fifth of the GDP. Ripples of the U.S. subprime mortgage crisis reached China in the second quarter of 2007, but the crisis did not take its toll until 2008. By the time the mortgage crisis had triggered a world financial tsunami, China’s GDP growth rate had maintained a double-digit pace for four years in a row: 11.4 percent in 2007, 10.7 percent in 2006, 10.2 percent in 2005, and 10.1 percent in 2004. The momentum extended into 2008 when

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Western economies fell into recession. Despite the fact that China’s exports sector was hard hit and tens of millions of jobs were lost, China’s GDP growth of 2008 was a spectacular 9 percent.2 For 2009, China makes all efforts to ‘‘safeguard’’ the target of 8 percent growth, while experts generally expect a growth of no more than 6–8 percent. In fact, before the economic downturn in the latter half of 2007, the Chinese government was concerned about the overheated economy reflected by the runaway stock markets and the high-rising housing market, all of which reminded it of the 1997 Asian Financial Crisis. The government therefore had initiated cooling procedures, including tightening credit and suspending construction projects. The correction efforts turned out to be unnecessary because of the world financial crisis and some preventive steps had to be undone. For example, the two hydroelectric projects—Longkaikou Dam and Ludila Dam on the Jinsha River—were asked to halt work. According to a China Central Television (CCTV) report (June 20, 2009), in 2008, the Ministry of Environmental Protection had urged these projects to wait for an environmental assessment before starting construction. The projects went forward anyway encouraged by local governments of Yunnan. Construction companies believed that, given the advanced stage of the projects, the construction plan eventually would be approved, despite the fact that the halt work order was reissued. Analysts believe that again economic pressure has taken an advantage over environmental protection, as the stimulus package was set to support energy and infrastructure improvement.3 Unlike the U.S. banking sector, the Chinese financial system had limited exposure to the U.S. subprime market, and therefore it was able to operate without major corrections. The serious effects that China suffered were primarily exports-related. During the first half of 2007, the export sector was on track for high growth, having reached close to 30 percent of its GDP. The sudden collapse of Lehman Brothers in the United States halted the growth and resulted in loss in November, for the first time since 2001. Because of increased reliance on exports, the impact

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hit hard in coastal cities, such as Shanghai and Shenzhen. Massive layoffs dampened consumer confidence, which immediately led to drastic contraction in sales of automobiles and real estate. Markets for building materials declined, affecting all other infrastructure-related industrials. October of 2009 was the worst month for China’s stock markets. Tao Wang, head of China Research, UBS Securities, expected the number of unemployed to rise above the announced 20 million urban registered laid-off workers to about 40 million by the year’s end. This increase accounts for migrant workers who were excluded from the registration process. Wang further worries about sporadic unrest due to the fact that migrant workers do not enjoy insurance benefits, health care, or a ‘‘safety net,’’ and also due to widespread unfair treatment to migrant workers. Many migrant workers are owed back pay and do not have proper channels to air their complaints.4 Observations by Chinese media seem to corroborate Wang’s predictions. One phenomenon was the early return to home of migrant workers. Every year, around the end of December, cities’ train and bus stations across China are crowded with homebound migrant workers. With their luggage of all sizes, shapes, and colors, they stage a most miraculous scene of the time—migrant workers on their way home to celebrate the new year and spring festival. In 2008, however, under the storm of the world financial crisis, many returned home earlier. According to a report in China Business News, the Guangzhou Railway Station served 1.174 million passengers from October 11 to 27. A total of 129,000 more passengers passed through the station than the same time a year ago. Sun Guang, one of the migrant workers interviewed at the station, told the journalist that he had worked in Guangzhou and the vicinity for 11 years, making an average monthly income of 3,000–5,000 yuan ($404–$674). Sun had decided to go back to his village in Zhumadian of the Henan Province where he would start a business of raising livestock.5 Bankruptcy waves hit small and medium-size enterprises (SMEs) particularly hard, and those that were weak in technology were the first to bear the brunt of the crisis. Reports indicate that

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during the first half of 2008 alone, 68,000 SMEs across the country collapsed. On the other hand, companies that had upgraded technology thrived. One thriving fabric manufacturer in Dongguan of Guangdong Province, backed by an investment from Hong Kong, had purchased 500 computerized weaving machines; each is capable of producing more fabric than what 28 skilled workers do in a low-tech factory.6 The toy industry turned out to be a most vulnerable sector. The toy industry in China has several unfavourable characteristics: it is (1) one of the largest export-oriented businesses, (2) primarily low-tech, and (3) hub of massive employment. Because jobs in the toy industry typically are contracted to a wide range of town and village enterprises (TVEs), its failures tend to affect a wider geographic zone. The Xinhua News Agency reported that more than 50 percent of China’s toy exporters had closed in the first seven months of 2008. When Hejun Toy Company, one of the world’s largest toy makers, collapsed, 7,000 unemployed workers congregated for two days in front of the county government’s building requesting to be paid salaries that had been delayed for two and a half months, amounting to 24 million yuan total. The government advanced the payment, quelling a potential major protest.7 China’s State Council has announced measures to address the situation faced by exports and real estate development, both of which have dulled industrial production, and both of which are among the biggest employers. These steps included raising export tax rebates on toys and textiles to 14 percent and providing policy incentives to homebuyers. For example, the governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, indicated that, given the state of the global economy, more needs to be done to stimulate domestic demand. Additional measures may include further interest rate cuts, which the government already has done multiple times since September 2008, and an increase in infrastructure spending designed to stimulate economic growth.8 As a result, analysts speculate that China’s deployment of the economic stimulus package may result in a slower appreciation of the yuan against the dollar.9

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Earlier, the Bush administration had vigorously pressured the Chinese government to float the yuan in hope of reversing trade deficits. The recent devaluation of the dollar and China’s domestic stimulus package seem to lead toward the same results anyway. Symptoms of psychological trauma, such as depression and suicide, rose; the trend alerted medical and social organizations. One example is Yingshan County’s relief project. Many migrant workers returned early to Yingshan County of the Sichuan Province from their employment cities in Guangdong. Many were employed by factories that produced shoes for export. Out of the 6,000 or so shoe factories across the Guandgong, 1,000 had collapsed by the end of 2007. Yingshan County’s survey indicates that most migrant workers know little about what the financial crisis is except that they lost their jobs as a result. They remain in disbelief that the good-paying jobs were gone overnight. The hardest part is coping with the psychological barrier to re-adaptation. Many unemployed migrant workers found it unrewarding to work at their home villages making less than half of the monthly income they earned in the cities. The county worked to provide counseling and retraining. Psychological counseling has traditionally been a neglected area, as psychological disorder used to be attributed to ideological weaknesses. The financial crisis changed this view.10 Most of the returnees lack appropriate guidance and opportunity for retraining. To fill the gap, freelance advice circulates on the Internet, like the one called ‘‘10 Things to Avoid’’: 1. Don’t resign; don’t change job; don’t change work field; don’t start a new business; 2. Look for possible back-up jobs; 3. Don’t ask for raise, since job cuts hit high-salary makers first; 4. Help friends get a job, so they’ll help you; 5. Save money, buy government bonds, don’t buy stocks; 6. Send money to parents; older people may have a harder time; 7. Don’t buy car; 8. Don’t be overconfident, expect the end of the financial crisis to be more difficult;

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9. Don’t divorce, don’t give birth; 10. Even if life is still easy, be thrifty; trim spending to 70 percent.

In a way, the candor of these admonitions reflects the reality of a serious hardship felt by the common Chinese. However, Pieter Bottelier, a senior adjunct professor at Johns Hopkins University School of Advanced International Studies, indicates that what may be more troublesome for China is the situation of college graduates. As tens of thousands of university graduates fail to find jobs, the economy as well as social stability may be affected down the line. Professor Bottelier writes: The problem of unemployed university graduates is new in China, but politically and socially not less troublesome than the problem of unemployed migrants. In this respect, China’s labor market is beginning to resemble India’s, where large numbers of university graduates have been unemployed or underemployed for many years. Of China’s 5.6 million university graduates in 2008, 1.7 million are reported to have been unable to find a job (Ming Pao [Hong Kong], December 15, 2008). The main blame for this is thought to be a disconnect between some of China’s higher education programs and market needs, but the slowing economy must also have been a factor. The projected number of university graduates for 2009 is 6.1 million (Ming Pao, December 15, 2008).11

The silver lining of economic recovery is in China’s restructured banking system that had shaken off much of the nonperforming loans (NPLs) during the SOE reform in the late 1990s. Banks continued with lending, reducing impact of the global crisis. The bad news is that China’s financial system did not completely stay clear of the U.S. derivatives market. Banks that held U.S. mortgage-backed securities (MBS) or derivatives through bankrupted U.S. banks, such as Lehman Brothers, lost heavily. Table 2.1 lists a number of bank losses based on data from the fourth quarter of 2008.12 The indirect impacts, however, affected the economy more widely. Table 2.2 shows losses resulting from a slowing export market and fluctuations of the currency market. The Chinese market typically suffered from the latter kinds of impact.13

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Table 2.1. Losses of Chinese Banks during the Global Financial Crisis Banks

Losses (billion)

Bank of China Industrial and Commercial Bank of China People’s Construction Bank of China China Life Insurance Company Ping An Securities Ltd

$1.996 $1.34 $.673 RMB 1.08 RMB 15.7

Source: Geng Zhaojun and Guo Qibang, ‘‘A Report of Losses of Chinese Companies during Financial Crisis.’’

People in business widely believe that China’s crisis is an ‘‘economic crisis’’ rather than a ‘‘financial crisis.’’ What this means is that with governmental stimulus money in place, bank lending in China not only stabilized, but also expanded sharply in December 2008 and January 2009. It is widely speculated that China’s recession may bottom out in 2009 ahead of the rest of the world. Analysts agree that final outcomes will depend on the efficiency of the recovery measures and transparency with which these measures will be implemented. Chinese newspapers feature pages of debates about how deep China’s recession is, whether a Table 2.2. Losses of Chinese Firms during the Global Financial Crisis Companies

Losses (RMB billion)

Air China

1.9

Eastern Airlines

2.3

China Railway Engineering Corporation U-Right International Holdings Ltd He Jun Toy Industry

1.9

CITIC Pacific Ltd. Country Garden

2.8 .836 14.7 1.8

Causes Fuel futures and currency exchange rates. Fuel futures and currency exchange rates. Devalued Australian dollar. Loss of export contracts in textile products. Loss of export contracts of toy products. Devalued Australian dollar affecting real estate. Losses due to derivatives in real estate.

Source: Geng Zhaojun and Guo Qibang, ‘‘A Report of Losses of Chinese Companies during Financial Crisis.’’

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second and a third wave of financial crisis will occur, and how the government will deal with social unrest if they do take place. On March 13, 2009, in his press conference held at the Great Hall of the People and attended by hundreds of Chinese and foreign journalists, Premier Wen Jiabao revealed details of Beijing’s recovery plan. The package of 4 trillion RMB (equivalent to $586 billion) will be dispensed during a two-year period to curb the current crisis. Out of this money, 1.18 trillion RMB (or approximately $169 billion) will come out of the central government’s coffer, while the rest will come from banks and other financial sources. The government’s share will be invested primarily in projects concerning people’s daily life, technological transformation of existing industries, ecological protection, and major infrastructure constructions, such as highways, railroads, and bridges. The premier stresses that the stimulus package is deployed to offset risks, rather than to plug financial holes. The premier guarantees that the funds’ use will be traced and monitored with the utmost care, and that dedicated phone lines will be set up for people to report abuse of the stimulus funds.14 Premier Wen indicates that because Beijing unfailingly places ensuring social harmony on the very top of its agenda, it plans to put in place several welfare benefit plans beyond the 4 trillion RMB stimulus package. These plans include a reduction of taxes and fees by more than 600 billion RMB for 2009, an increase of retirement payments, a performance bonus plan in addition to pay raises for 12 million teachers, more subsidies aimed at increasing farmers’ income, and investment of 850 billion RMB within three years to revamp the nation’s health care system. About 1 trillion RMB will be used to complete infrastructure and energy-related projects, such as new highways, railways, electricity grids, and nuclear plants from 2009 to 2010. About 100 billion RMB had been allocated for the rest of 2008 with 25 billion RMB going into roads, railways, and airports; 34 billion RMB for improving rural infrastructure; 10 billion RMB for subsidized housing; and 13 billion RMB for new medical and education facilities.

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Premier Wen states that offsetting risks alone is not enough and that the economy must be creative in turning crisis into opportunities. Wen shares the opinion that the most promising way to recover China’s economy is to explore China’s domestic market. Allegorically, Wen said that, following the Chinese mentality, if one wants to have water to drink, the surest way is to dig a well. With respect to the Chinese government’s Keynesian new deal, Willy Lam, an analyst with Jamestown Foundation, says that the main goal here is to ‘‘bao-ba’’ (literally, ‘‘to save the 8 percent’’)—that is, to maintain an 8 percent GDP growth in 2009 and 2010 by creating enough domestic demand to balance the slowly disappearing exports to regions such as the United States and the European Union. Lam believes, however, that there is room to suspect whether the stimulus plan will produce the kind of multiplier effect expected. Lam writes: [G]iven that unemployment will continue to rise until the rescue plan takes effect some time next year, urban as well as rural residents will likely remain frugal. Moreover, the preemptive rescue plan does not address a key reason why the Chinese citizens’ savings rate of 46 percent is one of the highest in the world, which is the paucity of social security benefits. It was only after the Hu-Wen team had taken office in late 2002 that the central government began putting together a nation-wide health insurance and pensions program.15

Premier Wen is confident, however, that the government will spend on building a safety net in addition to not only achieving the 8 percent GDP growth, but also absorbing the 2008 fiscal deficit of 180 billion RMB. Wen indicates that since the government had issued only 30 billion RMB worth of government bonds in 2008 in comparison to 140 billion RMB worth of bonds issued in 2003, there remains ample room for deficit spending. For the Chinese, the nerve-wracking fact is, however, that a large asset had been invested in U.S. treasuries and bonds as China’s ‘‘strategic investments.’’ These investments play a wide range of functions, basically leveraging China’s currency values, trade policies, and, sometimes, political maneuvers.

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Safeguarding these assets has remained on the mind of Chinese leaders in the economic recession during which time the dollar has devalued against other currencies amid drastic domestic interest rate cuts and during which inflation has remained a threat. As of March 2009, China owned $767.9 billion worth of U.S. government treasury bonds, making it the largest buyer of U.S. debt and surpassing Japan.16 An uneasy moment occurred during one of the premier’s press conferences when a Wall Street Journal reporter inquired about the above concerns. Premier Wen took the opportunity to express his ‘‘deep concerns’’ and to urge President Obama to ‘‘keep his promise’’ in protecting Chinese assets. His emphatic pitch when stating ‘‘as a matter of fact, I am indeed rather worried,’’ was clearly heard by the West. The Chinese government and the whole world are waiting to see whether China’s measures will work. Once again, the spotlight shines on China’s role as a heavyweight global player. The first quarter GDP numbers released by NBS show that from January to April 2009, value added of the industrial enterprises above designated size (enterprises with an annual income more than 5 million RMB) was up by 7.3 percent year-on-year, although this represents an 8.4 percent drop over the same period of the previous year. Textiles and automobiles continued to be profitable, whereas exports decreased by 14.4 percent yearon-year.17 Investments in real estate, railway, highway, and airports went up year-on-year, reflecting infrastructure spending as part of the stimulus plan. On the downside, electricity and steel production was lower than the same period last year. The reduced export figure, a year-on-year decline of more than 20 percent as of the end of April, caused a great concern to policymakers. Tang Guoqiang, deputy bureau chief, International Trade Research Center of the State Council, believes that much of the improvement in the foreign trade area will be slow due to the international economic environment. Tang believes, however, that with the global recovery that started taking place in 2009, people will start buying.18 For Wang Yiming, deputy chairman, National Macro Economy Research Institute, the first quarter results showed a

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mixture of warm and cold. As he puts it, ‘‘We are half happy and half worried. This means that our economy is at a sticky point.’’19 Car sales during the first quarter was a bright spot, thanks to the stimulus policy that cut sales tax by 50 percent for cars with small-cylinder engines (1.6 liters and below). Sales of the first quarter surpassed the same quarter last year by 9.4 percent. Huang Yonghe, chairman of the China Automobile Research Center, says that Chinese consumers need cars and do have money in their pockets; however, boosting their confidence is key to bringing consumers back to the market. Huang assures that the government’s stimulus measures indeed have raised consumers’ confidence levels.20 In April 2009, overall sales had increased by 14.8 percent year-on-year, which is related to a series of measures taken to stimulate domestic demand. For example, rural spending increased by 17.7 percent, which is 3 percent higher than urban regions. Chinese economists attribute the surge to a recent policy of promoting home appliance sales to rural China.21 Li Daokui, chairman of the International Economy Research Center at Tsinghua University, believes that due to the rising consumer confidence, China’s economy already may have come out of the valley and is picking up steam. He believes that China’s GDP volume will surpass that of Japan by the end of 2009.22 China’s GDP of $4.2 trillion in 2008 is already close to Japan’s GDP of $4.3 trillion. While former Communist countries have suffered from the global financial crisis as a group, some bear more losses than others because of their transitional economic structures that make them vulnerable. Does China’s ‘‘socialist market economy,’’ marked by strong government intervention, have an advantage in defending the domestic economy against the global financial crisis? The answers by most Chinese economists are overwhelmingly positive. Chinese financial experts believe that China, in effect, has suffered much less damage, thanks to its current system, than a number of former Communist countries, such as the Czech Republic, Hungary, and Romania. These

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countries had developed an overreliance on Western economies, such that their markets lack China’s kind of strong protective mechanisms. Overall, the successful experience of weathering both the 1997 Asian Financial Crisis and likely the 2008–2009 global financial crisis has made the Chinese more confident of the China Model—and part of that model is not relying on conservativeness but rather in seeking opportunities. Benefits raked in from economic reforms and openness have led Wang Lengyi, a research scientist of Shanghai Academy of Science, to believe that Shanghai’s opportunity lies in opening new trade relationships with developing countries, as its exports to the ‘‘Four Asian Dragons’’ (Hong Kong, Singapore, Taiwan, and South Korea) have been on steady decline. Hua Sheng, economist and president of Yanjing Overseas Chinese University, believes that those countries exposed to the subprime mortgage crisis feel the pain, whereas China stands to enjoy opportunities. In his opinion, the current financial crisis hurts China’s manufacturing firms more directly, with only ripple effects reaching the financial system. Therefore, China’s financial system remains sound and, in particular, backed by a strong foreign exchange reserve, one of the world’s largest, valued at nearly $2 trillion. U.S. Treasuries and other dollar-denominated bonds make up more than half of those holdings. In March 2009, the PBOC proposed a new international currency reserve system to replace the dollar, which reflects China’s increasing concerns over dollar devaluation and confidence in the country’s growing influence.23 Not all analysts are optimistic. Opposite opinions hold that more financial tidal waves are on the way, and what is seen is only the precursor of more severe economic attacks. Sun Lijian, vice president of the College of Economics at Fudan University, warns that because the market has little liquidity, each round of debts due will turn into a new session of financial crisis and result in more bankruptcies and cause more damage to consumer confidence. Sun believes that the stimulus package of

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4 trillion RMB serves only as a blood transfusion to the patient; whether the patient’s body is capable of generating its own blood will be the determining factor. Sun projects that the recovery of China’s economy will be in a ‘‘W’’ shape for quite some time until a new economic structure emerges.24 The multiple-wave theory is explained more systematically by Chen Jian, an influential economist of Shanghai, who believes that, unlike the first wave of a financial storm that attacks from within the financial systems of industrial countries, secondary storms will strike manufacture-oriented developing countries like China. Because such attacks come from outside, damage to these countries will be more difficult to control due to much wider and diverse areas of impact, and the impact will be greater than the current losses in foreign trade–related areas alone. For example, unlike dealing with the financial crisis, whereby the direct injection of Troubled Asset Relief Program (TARP) funds into larger banks or even the temporary takeover by the government of insolvent banks could save the situation, it will be almost impossible for the government to adopt a similar strategy to save a manufacturing crisis. The government could not possibly bail out troubled manufacturers who exist as a function of the market demand for their products. Chen’s scenario would be a much more intensive version of what has happened already to coastal regions like the Zhujiang River Delta Region and the Yangtze River Delta Region. Chen foresees the potential secondary storms to develop in a six-step sequence: 1. Sharp decline in exports causes rise in bad debt in international trade. 2. High reliance on exports will result in high unemployment, particularly in coastal areas. 3. As a result of lowered confidence, stocks and housing markets collapse which in turn seriously constrains domestic demand. 4. As a result of reduced consumption, receivables decline and warehouses are stuffed with unsold goods. Moreover, this causes ‘‘triangle debt’’ to rise sharply. 5. Banks will tighten credit and adopt conservative lending practices. Such practices often require borrower to pay back the dues before new loans are advanced.

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6. Increase in nonperforming loans will result in lowered trust by customers of the banking system. As a result, the phenomenon of ‘‘run on the bank’’ occurs, and social unrest arises as a consequence.

As a matter of prevention, Chen urges the government to maintain transparency and to be highly vigilant of precursors of such a storm on the financial horizon. Additionally, Chen recommends promoting the traditional-style education with morality and patriotism as core themes.25 One must not underestimate the potential power of mass ideological movement in dealing with financial crisis, although the two seem unrelated. If confidence is key to rejuvenating spending, as both Premier Wen Jiabao and President Barack Obama believe, then, mass ideological campaigns, the ones that had rallied the Chinese people behind the government and the Communist Party during Mao’s revolution, may indeed work. The multiple-wave scenario, however, is a minority opinion. Most analysts believe that the worst is behind. Per CCTV’s financial reporting, the real estate market has resumed its previous rapid pace.26 Conversely, cool-minded economists urge that attention should be paid to economic performance in 2009 as a whole and in the few years ahead. In the long run, the real solution, as most economists agree, is in developing China’s domestic market. Unlike Japan, South Korea, and other Asian countries with limited domestic markets, which drive their economies to rely on exports, China has a huge domestic market yet to open. This reality has been obvious to the world and to the Chinese since early years of the reform. However, a real determination to develop the domestic market seems to finally have been put into practice only recently. Interestingly, the inspiration comes from the fact that export demand has collapsed. Tao Wang, head of research at UBS Securities in China, believes that rebound will not come from external situations improving, but rather from the Chinese government’s stimulus package, the terms of fiscal policies and credit (bank lending), and the ability of implementation of the stimulus plan.27

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What then is essential to developing the domestic market? What would be the magical button to push such that spending will go up, and a vibrant new production phase will arise? According to Tao Wang, the magical button is named the ‘‘safety net.’’ When the quality of life improves, in particular, when a system is put in place to provide health insurance, social security, and other kinds of insurance that are essential to people’s livelihood, the Chinese consumers will change their habit of saving 50 percent of earnings in the bank. Thus, China is faced with a different kind of transition—from focus on investment to focus on consumption. Wang calls this transition ‘‘forced rebalancing.’’ She believes that China’s sustainable growth will depend on it. Professor Bottelier of Johns Hopkins University drives this opinion further by saying, If they (the Chinese government) do the right things, China could come out of this crisis stronger than when it entered it, with a more balanced economy, a lower external surplus, a higher proportion of GDP dependent on consumer spending, and lower overall investment and savings rates. That would be good for China and the rest of the world.28

The stimulus policies seem to suggest that the Chinese government shares this perspective. However, it may take a long time to depart from the high growth pattern because of employment pressure among other factors. Many question whether China will ever be able to resume its double-digit growth. Here, opinions on both sides seem to converge. On the Chinese side, ‘‘safeguarding 8 percent’’ has been the open slogan. Few would chant for the double-digit perspective. Professor Bottelier does not expect China to go back to the turbo growth rates of recent years, as the bubbles in the property sector may take a long time to diffuse. He indicates that commercial real estate and high-end residential housing are overbuilt, and that China needs to build low-cost housing with the government’s stimulus money. This low-cost housing will be consumed by decades of continued urbanization ahead; thus it

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will provide a way to sustain economic growth.29 David Dollar, director for China and Mongolia of the World Bank, foresees a growth rate of 7 percent following the pattern of most mediumincome countries.30 Tao Wang of UBS Securities believes that China is not likely to resume double-digit growth at least before the United States and other Western economies recover from the global financial crisis. She believes that the double-digit growth in the past was more of an exception than a trend, and that an 8–9 percent growth would be healthy. The preliminary 2009 GDP figure announced on January 21, 2010, by NBS bureau chief Ma Jiantang is 33,535.3 billion RMB, representing an 8.7 percent increase over 2008. Quarterly growth rates were 6.2, 7.9, 9.1, and 10.7 percent respectively.31 Ma Jiantang attributed the progress of recovery to people’s confidence in the system. However, Ma urged a close watch on the Consumer Price Index (CPI) figure which rose toward December 2009. CPI is used to gauge inflation and policy changes. The 2009 GDP figure, however, was interpreted broadly as a precursor of a credit-tightening policy and caused sharp downward swings in stock markets worldwide.32 In fact, a prolonged recovery in the United States and some European economies may be a direct and immediate test to the Chinese economy. Recent reports indicate that since the beginning of May 2009 exchange rates between RMB and the U.S. dollar have been tracking an unfavorable trend, with RMB dropping to 6.82 yuan to the dollar. As a result, Chinese exports as well as export-related jobs are faced with higher pressure. Whether China could quickly stimulate its domestic market will be key to its ability to sustain recovery and growth. In a sense, it determines whether China could turn crisis into opportunities.

Chapter 3

Growing Pains For three decades China has been developing its economy without paying due attention to damages to the environment. As a result, the growth has become a double-edged sword. On the one hand, it has pulled tens of millions of people out of poverty in short order; on the other hand, it has produced environmental consequences that nearly offset the value of growth in real terms. The ramp up in laws and regulations to protect the environment in recent years has yet to show results. The good thing is, the government has finally come to the understanding that China’s sustainable growth depends in large part on effective control of the damages to the environment. However, the issue is a more complex one. Environmental challenges represent only the tip of the iceberg. They are found to be closely related to corruption and to the fast-paced urbanization that often spins out of control. Thus, pollution, corruption, and runaway urbanization are understood as a triple threat to the harmonious development today. POLLUTION

In a sense, becoming the ‘‘manufacturing center of the world’’ has been a costly deal. To prepare for the 2008 Summer Olympics, for example, Beijing had invested $10 billion since 2001—when the city was named host of the Olympics—to improve air quality, including relocating and temporarily shutting down factories,

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according to Jeff Ruffolo, a media consultant for the Beijing Organizing Committee for the Olympic Games.1 Other reports put the spending figure at $20 billion.2 In deciding Beijing’s qualifications for hosting the Games, its level of pollution was a major negative factor. Beijing’s smog-covered sky, the city’s freeways crowded with slow-moving traffic, which were major sources of pollutants, and the tens of thousands of factories within three to four hundred kilometers feeding a variety of particles to the wind were clearly incompatible with the world’s most celebrated athletic event that promotes health. Beijing had promised to clear the air by the time of the Games’ start. The promise was indeed fulfilled. Implemented on July 20, 2008, the odd-even license plate rotation system that restricted the number of cars on the road must have worked magically during the last push. About a week before August 8, at the Games’ opening ceremony, air quality readings indicated 103 to 109, which approached the critical number 101, the acceptable level on a scale of 1–500, with 500 being the worst air quality.3 During the days of the Olympics, August 8–24, the air quality reached the required standard with ‘‘Grade 1’’ air quality (on a scale of 1–50, with 1 being ‘‘excellent’’) for 13 out of 17 days, and the rest within standard range.4 Beijing’s residents reported that for decades they had not seen a deep blue sky over the yellow-glazed palace tiles. Beijing showed to the world that it has the capability of controlling its air quality and will be able to solve other environmental problems effectively. For people who watched the Olympics’ opening ceremony, they must be convinced too that the show signifies that China not only has determination, but also the discipline to achieve its goals. According to the 2006 survey conducted by the Bureau of State Environmental Protection (upgraded to the Ministry of Environmental Protection in 2009),5 the urban air quality was far below standard in that the air was filled with a dangerous level of particles from construction and industrial emissions. The survey showed that out of 559 cities, only 4.3 percent belonged to ‘‘level I’’ (‘‘good air quality’’), 28.8 percent belonged

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to ‘‘level III’’ (‘‘bad air quality’’), and 58.1 percent belonged to ‘‘moderate air quality.’’ Oddly enough, the remaining 9.1 percent of air was ranked ‘‘below level III.’’ According to the same survey, water pollution also painted a gloomy picture: 28 percent of China’s freshwater was rated ‘‘Grade V’’ (‘‘No direct human use; appropriate for use in agriculture’’), and 10 percent was rated as ‘‘Below Grade V’’ (‘‘Not appropriate for human use’’). The country’s two longest rivers were heavily polluted: 12 percent of the water from the Yangtze River was rated ‘‘Grade V’’ or below; and 25 percent of the Yellow River’s water was rated as ‘‘Grade V.’’ Problems such as these were not generated overnight. During the prereform era, environmental concerns were dismissed as capitalism; factories and workers followed production quotas and disregarded everything else. Agricultural policies at the time stressed production quotas. To achieve higher production, peasants were called on to claim land from mountains and forests. Ecological habitats were destroyed because of routine use of fertilizers and poisonous pesticides. As a result, the Great Leap Forward (1958) and the Great Cultural Revolution (1966–1976) wreacked havoc on China’s resources and ecology. The process left one-third of the land devastated by soil erosion.6 In addition to the ideological impact, uncontrolled population growth had taken its toll on the environment. The government had encouraged a large population as a strategy to boost its labor force and military capacity. Today, China accounts for approximately 22 percent of the world’s population, but only 7 percent of the world’s arable land. In 1980, the population reached the 1 billion mark, which triggered the family planning campaign launched by the government with the most stringent efforts in enforcement. During the 1990s, however, the population was still growing at 125 million per year, and the newly added population would consume 45 million tons of grain each year. As a result, forest coverage was fast shrinking and went as low as half of the world’s average. Until China joined the United Nation in 1973, awareness of environmental protection was next to nonexistent. Progress was

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achieved soon, although much of the improvement was prompted by disasters such as the one that happened in 1974 in Tianjin, one of the four provincial-level municipalities. In that event, farmers piped heavily polluted Ji-River water into 3,000 acres of farmlands. Not a single stalk of wheat was harvested that year. The State Council was alerted, the Tianjin Chemical Plant was identified as the polluter, and the remaining water from the Ji-River canal was diverted into the sea. Damage to marine ecology was never known. The chemical plant was ordered to build more than 50 water treatment facilities.7 In the same year, Beijing held the first national conference on environmental protection during which time the environmental Protection Leading Group of the State Council was established to coordinate various ministries and government organizations to promote environmental education and to implement a series of remedial measures. This is one of the cases in which cultural exposure and the consequences of pollution generated new concepts, in this case, awareness of environmental protection. Admittedly, most of the similar events that happened in places of lesser political and economic importance were ignored. Since the economic reform started, China has made tremendous progress in establishing a regulatory framework to address rampant environmental problems. Such efforts have increased most obviously during the past decade. For example, Beijing has implemented the State Automobile Emission Standards, which are defined in terms of levels of emission quantity and proportion of carbon dioxide (CO2), nitrogen dioxide (NO2), and ozone gas (O3). Four standards of automobile emission, popularly known as State Number 1, 2, 3, and 4, with State 4 being the highest standard, have been issued so far. State 5 has been drafted and is said to be forthcoming. In 2009, Beijing began to collect pollution treatment fees according to automobile emission levels.8 As of early 2009, 90 percent of taxi cabs and 97 percent of city buses qualified for State 3, and 4,000 city transportation vehicles already used natural gas. Checkpoints are set up on 230 city streets to detect substandard

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vehicles; dedicated telephone numbers for reporting illegal practices are also announced on billboards. Starting January 1, 2009, vehicles with yellow stickers, those below the State 2 standard, were not permitted to operate within the 5th Beltway (out of a total of six beltways, with the 6th Beltway being the outermost). Additionally, the Beijing Municipal Government has set aside 1 billion RMB ($145 million) in incentives to encourage upgrades to Green Sticker vehicles (State 2 and above). Incentives are distributed in the forms of rewards and tax benefits in amounts of 500 RMB to 22,000 RMB. Moreover, Beijing has launched a clean air campaign known as ‘‘Drive One Day Less (per week).’’9 According to the New York Times, China surpassed the United States in 2009 to become the world’s biggest buyer of wind turbines. China’s automakers will be required to reach a corporate average of 42.2 miles a gallon to beat the current average of 35.8 miles a gallon for new cars, minivans, and sport utility vehicles. By comparison, the corporate average goal announced by President Obama is 35.5 miles per gallon by 2016.10 The following is a list of laws enacted since 1989 with a brief outline. Environmental Protection Law, 198911

In 47 articles, the law urges individuals, government organizations at all levels, and production units to dutifully protect the environment by following the standards set by the State Council. The law stresses integration of environmental planning with production planning. For example, Article 24 stipulates, Units that cause environmental pollution and other public hazards shall incorporate the work of environmental protection into their plans and establish a responsibility system for environmental protection, and must adopt effective measures to prevent and control pollution and any harms caused to the environment by waste gas, waste water, waste residues, dust, malodorous gases, radioactive substances, noise, vibration and electromagnetic radiation generated in the course of production, construction or other activities.

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Although, this is one of the earlier laws, its coverage is nevertheless comprehensive. Its framework for punitive measures became standard in newer environmental laws. Law on Prevention and Control of Environmental Pollution by Solid Waste, 1995 (amended 2005)12

The 2005 amendment includes 95 clauses. In addition to preventive and punitive measures, one feature of this law is to call on every citizen to adopt a lifestyle that generates minimal solid waste. Much stress is put on eliminating one of the most traditional and yet increasingly serious problems—the littering of packaging materials. Article 18 stipulates that manufacturers and vendors must recuperate packaging materials once used. Moreover, the law is careful enough to include a clause on recyclers: Units and individuals that collect, store, transport, utilize or treat solid waste shall take measures to prevent the scattering, running off and spilling of solid waste, or other measures to prevent pollution of the environment; they shall not dump or pile up, without authorization, or discard or litter solid waste. (Article 17)

In particular, the law stipulates that substandard technologies must not be used or imported. An important dimension of this law is that it set strict measures to prevent polluting companies from transferring their operations to remote and poor regions. Articles 59 and 60 require any transfer of hazardous materials to be strictly controlled. Extensive punitive measures are listed in Articles 67–87, with respect to levels and categories of perpetration. Law on Prevention and Control of Atmospheric Pollution, 1995 (amended 2000)13

This law particularly stresses atmospheric protection in urban areas. The law encourages use of clean fuel for home use; and if coal must be used, then, only coal with low-sulfur discharge is permitted. Strict restrictions are placed on automobiles’ exhaust

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emissions. Article 37 stipulates, ‘‘Automobiles that discharge pollutants in excess of the national discharge standards shall not be permitted to be manufactured, sold or imported. Specific measures for supervision and management shall be formulated by the State Council.’’ Law on Prevention and Control of Water Pollution, 199614

This law was enacted for the purposes of preventing water pollution, protecting and improving the environment, safeguarding human health, ensuring effective utilization of water resources, and applying science and technology in water treatment. The law forbids discharging a number of common pollutants, such as oil, sewage, mercury, cadmium, arsenic, chromium, lead, cyanide, and yellow phosphorus into surface water. It carries stipulations that allow qualifying government bodies, usually above the county level, to delineate protection zones, particularly those in scenic spots and cultural sites, and to provide protection and maintenance for these sites. Individuals who suffer from damages of polluted water have the right to file lawsuits against the polluting party. However, there are obvious loopholes with respect to enforcement procedures. For example, Article 14 does allow enterprises to discharge pollutants into water bodies as long as they register and report to local government, or pay a fee (Article 15). When decisions are left with local governments that may not have relevant technology, and when permission of discharge is fee-based, effective environmental protection becomes questionable. Law on Prevention and Control of Pollution from Environmental Noise, 199715

This law was enacted to control noise pollution that may cause damage to people’s health. Like many early laws there is ambiguity, some of which may be intentional, in favor of urban construction needs. Construction projects may emit noises with permission or on a fee basis. Article 3 stipulates, for example,

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‘‘This Law shall not apply to prevention and control of noise hazards incurred in the course of production or business operation one is engaged in.’’ Here, the logic of the law is questionable, leaving loopholes for companies to avoid punishment or restrictions by getting unqualified projects underway anyhow. Energy Conservation Law, 1998 (amended 2008)16

To crack down on rampant waste in energy consumption, China now considers energy conservation a fundamental national strategy. The government will be cutting down on energy consumption per unit of gross domestic product by 20 percent by 2010. The 2008 amendment shows tougher requirements on energy conservation. It requires construction projects, the transportation sector, and government buildings to cut energy consumption. The amended law also requires governments at all levels to increase investment in public transportation infrastructure, improve public transportation services, and encourage people to use public transportation. Additionally, the law requires local governments to set up their own energy regulations based on geographic situations, following the spirit of Energy Conservation Law, and to raise the standards of saving wherever possible. Renewable Energy Law, 200617

To increase the share of renewable energy, which includes solar, wind, hydraulic, geothermal, and marine energies, from 3 percent in 2003 to 10 percent by 2020, the Renewable Energy Law imposes a number of requirements. The law requires power grid operators to purchase resources from registered renewable energy producers. Frameworks for financial incentives, such as funds to encourage renewable energy development, discounts and tax preferences for these projects, are also offered. The law provides pricing advantages to renewable energy companies by setting national standards through the National Development and Reform Commission (NDRC), a regulatory department of the State Council. NDRC will adjust the buying price as

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necessary, primarily by averaging the costs across the total number of buyers. NDRC also will set a renewable energy plan for the entire country, including specific renewable energy targets that act as a framework for implementation of the law, whereby provincial governments and planning agencies will then develop specific implementation plans and local goals. NDRC will examine what would be entailed to purchase and use solar photovoltaics (PV), solar water heating, and renewable energy fuels. The law lists penalties for companies and businesses that do not follow related regulations and policies. Administrative Measures on the Control of Pollution Caused by Electronic Information Products, 200718

The products covered by this law include electronic radar equipment, electronic communications equipment, broadcast and television equipment, computer products, and some household electronic products. The law requires products marketed in China to use materials, technologies, and processes that are safe for the environment and are in compliance with national or industrial standards for the prevention and control of pollution. Products must include labels that indicate the names and contents of hazardous and toxic chemicals, and whether they can be recycled. The law requires packaging materials to be nontoxic and easily recyclable. The government will publish an annual catalog listing banned or restricted toxic and harmful substances involved in the production of electronic information products. The law applies to both imports and domestic products. Circular Economy Law, 200819

The Circular Economy Law was passed on August 29, 2008, by the National People’s Congress and went into effect on January 1, 2009. According to this law, industries and factories that may emit high-pollution emissions, including steel and nonferrous metal production, power generation, oil refineries, construction, and printing facilities, must be closely monitored. Recycling,

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energy-saving, and waste-reutilization projects must meet strict standards. Industrial manufacturers as well as farmers must adopt water-saving rules and water-saving technologies, strengthen regulation systems, and install water-saving equipment in new buildings and farming projects. Traditional oil-fired fuel generators and boilers must be converted to clean energy consumption generators using natural gas or alternative fuels instead of petroleum-based fuel. Government buildings are required to maximally adopt renewable energy such as solar and geothermal energies for heating purposes. The law requires coal-using enterprises to recycle waste products. In agriculture, the law encourages local governments to fund methane generating projects, such as those that use livestock waste and other farming by-products. Tax incentives are granted to enterprises that participate in these projects by providing equipment, technology, or direct investment. In general, from the 1989 Environmental Protection Law to the 2008 Circular Law, coverage in protection of the environment through legislative means has gradually broadened. New laws and regulations are more refined and more comprehensive. However, because China relies on governments above the county level to monitor and, at times, draft supplemental procedures, and given that at least for the time being these agencies tend to be poorly trained and prone to corruption, law enforcement remains a weak link. Additionally, local governments are bound to balance between environmental protection and job creation. Given these circumstances, a clean and healthy environment can be achieved only gradually. CORRUPTION

Curbing corruption is of top importance to the Chinese government. Because of the single-party ruling system, corruption cases generate direct consequences on the ruling party’s legitimacy. Hence, more than anything else, corruption provokes popular discontent and threatens social stability. As the process of globalization

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advances, the Chinese society bears more symptoms of Western societies, such as drug use, prostitution, and a variety of types of corruption and fraud that were unseen during the prereform time. One could be certain, for example, that for every type of corruption found in the West, whether it is Bernie Madoff’s Ponzi scheme or Eliot Spitzer’s scandal, one may find its Chinese match. Yan Sun, a professor of political science at City University of New York, points out that, in fact, corruption is endemic in all post-communist societies, and China is no exception.20 In the Chinese system, two factors have provided hotbeds for corruption: (1) the weak legal environment versus a strong administrative power in which law enforcement lacks effectiveness because of the absence of an independent judiciary; and (2) the transitional economic system in which private and public sectors coexist makes power-for-money swap a typical category of economic crimes. In addition, greed is gaining ground at all levels; the spiritual vacuum left by the collapse of traditional communism is yet to be filled. In the latter case, efforts are made by experts who are particularly concerned with morality of the society, like Yu Dan, professor at Beijing Normal University, to interpret the traditional ConfucianDaoist ethics to address the spiritual needs of an industrial and globalized society. They examine people’s behavior from the perspective of Confucian values, such as respect, responsibility, generosity, forgiveness, and filial piety. The central theme is to help people tame materialistic urges. Not surprisingly, the CCP is drawing from Confucianism such concepts as harmony, serving by example, and so on. Typically, however, laying any ideological groundwork is a long-term process. In the meantime, one witnesses a mixture of traditional ethics, pragmatism, Western ideology (such as ideals of individual freedom and social democracy), and nationalism on the ideological background. Civil Service Corruption

Traditionally, CCP members are called on to lead the communist cause without seeking self-interests. ‘‘Serve the people

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heart and soul,’’ Mao used to admonish. In a transitional society, profit-seeking remains embarrassing or confusing to a good number of party leaders. The law of Public Service (1984), Article 53, stipulates that public service personnel are prohibited from ‘‘engaging or participating in profit-making activities, or taking a part time position in a profit-making firm.’’21 Except for bonuses in SOEs and government offices, public officials— who nonetheless harbor dreams of material wealth—do not have a venue to personal wealth. This is a remarkable transitional dilemma. Under such circumstances, the system suffers an unavoidable deficiency. During the past 30 years of reform, the Chinese government of absolute power under Chairman Mao’s control has been reformed into a government under the law. Despite this outcome, and the CCP’s collective leadership, the administrative power nevertheless is uniquely strong. The root of the problem exists in the ownership structure. Because the government owns all natural resources, including rivers, land, forests, mines, and so on, government officials who deploy these resources on behalf of the government have a unique privilege. Rules and regulations are set by administrative bureaus, making it possible for higher-level officials, mostly party members, to become local lords. This gives corrupt officials convenient access. On the surface, they serve according to democratic procedures; in reality, their words are final decisions that directly affect people’s lives and the economy. They are at liberty to levy fees, impose fines, and set up zoning codes. As a result, farmlands are lost to real estate developers, and polluting factories may never get shut down. Cases such as these are not uncommon. As Wang Lin, author of Anti-Corruption—A War between Rule of Law and Rule of Man, points out, ‘‘those who possess administrative power possess money, wealth, and even women.’’22 Like elsewhere, power and money make the most dangerous mix, probably all the more so in China. The party does not seem to have a particularly effective way to stop power-money trade, but rather it uses harsher punishment each time crimes have been committed and damages done. The reality is that because people’s servants may

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not always have sufficient inner strength to refrain from helping themselves, they will do it again when the time is right. The situation is often increasingly complex. An investigation of a residential construction accident in Shanghai in July 2009, for example, revealed that government officials were shareholders of the real estate development.23 Anticorruption campaigns, such as the ‘‘Strike Hard Campaigns,’’ seem to have only slowed down the crimes. In fact, the more campaigns are launched, the more sophisticated and frightening the cases become. Conversely, corruptive forces find every opportunity to subjugate their targets to achieve their goals. As such, weaknesses of public ownership give rise to a rampant black market. The political and economic reforms in the new era are geared toward uprooting these problems by changing the rules of the game. Obviously, changes of this kind do not happen overnight. On the demand side, non-state-owned small businesses that exist outside central plans, for example, lack access to various material allocations and financial means. As Professor Yan Sun indicates, it is not uncommon for these businesses to offer inducements to party officials. Favor seekers often exceed small businesses to include ambitious developers, dubious construction contractors, land speculators, public office buyers, struggling SOEs, organized smugglers, or any business trying to grab a project or loan. After 1992, SOEs were forced to restructure and to compete in the market, and more local power was accumulated at the local level; this situation made the scale of corruption widen beyond government officials. There have been a number of cases of executives at smaller SOEs who strip their firms of substantial assets to engage in stock flipping; local agencies have also been found to hike fees.24 As such, profiteering by administrative leaders in conjunction with interest groups constantly plagues the society, causing heavy economic losses, even losses of lives, despite harsher punishment. According to Hu Angang’s estimate, the economic loss between 1999 and 2001 due to corruption mounted to between 14.4 percent and 14.9 percent of the GDP.25 One of the major and earliest exposed high-level corruption cases, in the postreform era was that of Chen Xitong, a former

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mayor of Beijing. In 1998, Chen was sentenced to prison for 16 years for bribery and embezzlement of state funds. The money was used to cover his extravagant lifestyle and that of his cronies between 1991 and 1994 during which time Chen headed Beijing’s municipal administration. Among the spending figures, 35 million RMB were used to build villas, 2.4 million RMB were used to purchase services, and more than 1 million RMB was spent on food.26 Two years after Chen’s sentencing, Cheng Kejie, a former vice chairman of the National People’s Congress, was sentenced to death for taking $5 million in bribes. While Cheng’s was one of the highest-profile cases in the country’s marathon anticorruption drive,27 around the same time, three smaller cases were no less shocking. Wang Xuebing, former president of Bank of China and alternate member of the Central Committee, and Zhu Xiaohua, vice governor of the People’s Bank of China, were jailed for banking fraud. Li Fuxiang, director of China’s State Administration of Foreign Exchange, committed suicide while being investigated for illegal foreign currency trade. On May 29, 2007, Zheng Xiuyu, former chief of China Food and Drug Unit, was sentenced to death after pleading guilty to accepting bribes worth $850,000 in exchange for approving drug licenses. During his term, China’s food and drug exports were suspected to have been tainted with poisonous chemicals.28 A more recent court sentence was handed to Liu Zhihua, former deputy mayor of Beijing. He was handed a death sentence with a two-year reprieve (equivalent to life in prison) on October 18, 2008. The lighter sentence was due to Liu’s cooperation in recovering most of the bribes paid to him and his mistress. Liu was elected to deputy mayor of Beijing in 1999 and was dismissed from the Communist Party in 2006. Liu was charged for accepting bribes totaling about 696.59 million RMB (more than $100 million) and gifts in return for favors for real estate developers.29 These high-level corruption cases suggest that the party is limited as to what it can do to maintain healthy government— primarily by practicing self-policing. This becomes difficult when police officers or their cronies are the perpetrators. As a

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result, more high-level corruption is followed by even harsher punishment, and the cycle continues. As mentioned earlier, with deepening decentralization, provincial-level governments have acquired more control over resources and corruption has become more widespread as well. Local officials nearest the grassroots level, for example, have been found trading farmers’ land, taking advantage of the land rights system according to which China’s land ownership is actually lease-based with the state as ultimate owner. Thousands of farmers have lost their land to local officials who resold to developers, according to Professor Yan Sun who names the phenomenon ‘‘competitive corruption’’ where, unlike the central planning era, local officials now enjoy discretion over quality and quantity of services they provide: They can arbitrarily decide whom to award land, projects, or contracts and at what prices; whom to grant loans, shares, and services and on what terms; or how much in fees and levies to demand or absolve. Because the stakes are so much larger now, involving capital goods rather than manufactured goods, the payoffs for officials and the cost for businesses escalate as well. This entails great waste and burden on the economy.30

In practice, a typical behavioral pattern is that the perpetrators hide behind exemplary performance until they climb to a higher position to trade power for wealth. Such is the case of Liu Zhihua. The former Beijing mayor worked his way up from an ordinary coal miner. He was remembered as a dedicated hard worker and an exemplary party member.31 While this does not mean that all party officials fall when bribes escalate, it is popular opinion, however, that even good officials have trouble avoiding traps, because corrupting parties are creative in getting what they want. Therefore, China’s civil service system must reform such that the power-for-money swap is no longer convenient or worthwhile to the perpetrator. The continued introduction of market mechanism, democratization, and supervision by news media is likely to make this happen. Already, the Chinese government has made it routine to set up

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report hotlines. More important, the Chinese government is pursuing structural changes to provide a systemic immunity for government organs at all levels. One such effort is seen in recruitment and promotion. These procedures used to be guanxi-based (connections); in the 21st century, they have become more meritocratic. To improve government transparency, China reinstated the civil service examination for all junior positions in 1993. In 2008, about 775,000 people took the exam, competing for roughly 13,500 positions and marking a 21 percent increase in test takers over 2007. The ministries with the largest number of applicants include the Ministry of Commerce, Ministry of Foreign Affairs, and the NDRC.32 Similarly, promotion is based more on evaluations and sometimes on public opinion polls. Evaluation of organizations and firms is no longer based on productivity alone, as it was in the 1980s, but rather on a long list of considerations, including fiscal revenue, per capita income, worker safety, education, employment, social welfare, family planning, conservation of land and natural resources, environmental protection, and investment in scientific and technological development. Green GDP or ‘‘smart growth,’’ in President Hu Jintao’s words, has become an evaluation standard. That said, CCP membership is still important—as most senior-level officials, whether in municipal, provincial, or central government, are party members. Overall, it appears that the competitive review process is different. In fact, it marks a significant departure from the traditional political loyaltybased evaluation. One noticeable change is in the knowledge structure of officialdom: more positions are filled by collegeeducated applicants. College or equivalent education is now a standard requirement. Candidates for leadership posts at the county-chief level or higher must meet standardized minimum requirements—such as a bachelor’s degree, specified training programs at the Central Party School (CPS), or experience in two posts at a level of leadership immediately lower. Cadres also receive on-the-job training. In addition to the CPS, inland

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cadres are sent to coastal regions to attend workshops. Additionally, the government sends approximately 40,000 officials for training each year to European countries and the United States, ranging from yearlong programs to weekly training at Harvard University’s prestigious John F. Kennedy School of Government. According to one report, more than 90 percent of cadres at the ministerial level have received some training abroad.33 These changes contribute to healthy government by raising its level of professionalism. At the current stage, however, professionalization is a rather uneven process with remote and underdeveloped regions lagging far behind. Also, the government finds itself in market competition in hiring. From 1999 to 2001, the Ministry of Commerce (MOFCOM) lost 72.8 percent of all new recruits within the first three years of employment. The 2006 Civil Service Law is believed to have addressed this problem by allowing more flexibility in salary levels.34 Ultimately, however, the reform will have to put administration essentially under the supervision of law and media. Proposals included introducing competition in the administrative system and separating the party’s role from the administration, thus, making administrators answer to people’s interest rather than serving themselves and their bosses.35 Grassroots-Level Corruption

Grassroots-level corruption reflects weakness in law enforcement, ineffective regulatory systems, and society’s rising level of greed. The case of cough syrup serves as an example. In 2007, Wang Guiping, a tailor of a small town located in the Yangtze River Delta Region, unsatisfied with the thin profit in tailoring, decided to sell chemicals—in this case, counterfeit glycerin of industrial grade—to pharmaceutical manufacturers. The cost of pharmaceutical grade syrup was $1,815 a ton at the time, much more expensive than the industrial grade which is not for human consumption. Yet, to maximize profit, he went for something he could buy for about 60 percent less than the price of the

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pharmaceutical grade glycerin—diethylene glycol, which is used in antifreeze and is deadly to humans. Wang, with a ninth-grade education, located the cheaper chemical with similar sweet taste in a chemistry book. Profit was all he cared about. According to an investigative report by the New York Times, Wang’s sales talent and forgery skills worked. He forged licenses and clinical test results, fooled pharmaceutical manufacturers, and shipped the toxic product to Qiqihar Pharmaceutical who used it in five drug products: ampoules of Amillarisin A, a medication for gall bladder disease; a special enema fluid for children that was sweetened with this chemical; and as an additive to pain relievers, arthritis treatments, and blood vessel disease injections. One of southern China’s most well-known hospitals in Guangzhou administered Amillarisin A in April 2006. At least 18 people who were treated with the medicine, some of whom were in advanced stages of these diseases, died within weeks. Once on the market, sales companies added their might in pushing the product. When Wang was finally caught and put in jail, many more had died, and some may never be identified because the deaths occurred in remote and less populated locations.36 The case reveals, in addition to a weak food and drug regulatory capability in China, the astonishing level of money craze, immorality, and ignorance of some 21st-century entrepreneurs. Counterfeiting seems to be a major enemy faced by the Chinese law enforcement. Before Wang’s case was forgotten, a food poisoning case surfaced in September 2008. This case was known as the Scandal of Sanlu Milk Powder.37 The manufacturer was found mixing tripolycyanamide, also known as melamine, in milk to ‘‘raise’’ its protein level and fool quality checks. Melamine is commonly used in coatings, laminates, wood adhesives, fabric coatings, ceiling tiles, and flame retardants. It was estimated that approximately 53,000 children were poisoned after consuming tainted formula or milk. Some developed kidney failure and four died. The quality control chief of the Bureau of Drug Regulation, equivalent to the U.S. Food and Drug Administration (FDA), resigned as a result. Melamine was found in a

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number of overseas markets in Asia, reflecting extended damage beyond China’s border. This episode is one of a string of events of tainted food products. In 2007, many pets in the United States became ill after eating melamine-tainted pet food. Some 69,000 toys made in China, for example, were recalled in the United States over concerns of excessive amounts of lead paint. Premier Wen Jiabao, during his visit to Beijing’s hospitals, was quoted as saying, What we need to do now is to ensure that nothing like this happens in the future, not only in dairy products, but in all foods. Manufacturers and owners of dairy companies should show more morality and social responsibility in these cases. They are heartless, so we have to create strict law and legislation. I’m sorry.38

Tian Wenhua, former head of Sanlu, the first dairy company implicated in a scandal that engulfed much of the Chinese dairy industry, was sent to prison for life and fined 20 million RMB (approximately 3 million in U.S. dollars). The now-collapsed Sanlu was fined 50 million RMB. Two men who made and sold milk tainted with melamine were sentenced to death.39 The punishment did not bring closure for the many critics who dug deeper into the facets of a larger situation that keeps generating similar events. Their scrutiny implicates the government’s shortfalls. Although the government directed its spearhead toward the milk industry, many believe that Chinese cow farmers had been struggling to cope with rising costs of animal feed. Since 2006, corn prices had risen sharply as a result of the hype of alternative energy, which involves producing ethanol from corn. Meanwhile, a rice shortage had resulted in further squeezes of feed grains production. Melamine was sold and bought openly as a ‘‘protein booster,’’ because of its nitrogen content. In the qualitycheck process, nitrogen is detected as an indicator for protein levels. The technology is said to have been upgraded since the milk scandal; however, melamine had been in use for a few years.40 Thus, one costly lesson that the Chinese government learned is the

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importance of updating its regulatory technology. In a deeper sense, the Sanlu case was a lesson about how to manage the infinitely complicated market economy. To reduce damages caused by the shrinking demand for milk products, the Chinese government decided to subsidize dairy farmers. In northern Hebei Province, the government earmarked 316 million RMB in late 2008 for subsidies which translates to giving a farmer 200 RMB per cow.41 Gray Areas

Some practices may not be straightforward to judge, and therefore, they customarily are classified into the category of cultural practice, rather than corruption. The way guanxi (connections) is maintained is a typical example. Guanxi derives from the tradition of the family-based and Confucianism-oriented society. Businesses are maintained within the family circle and the privilege of business partnership is shared only with members of the family or connections. This tradition is by no means unique to China. One encounters its various forms wherever Confucian culture reaches, such as South Korea, Japan, and Singapore. Indeed, cultural boundaries do not always match geographic boundaries; and geographic boundaries may not signify differences when it comes to the business negotiation table. ‘‘In China people make friends before they do business as interpersonal relationships are an important part of China’s traditional culture,’’ says Ye Sheng, a consultant in Guangdong Province. Ye attributes guanxi to a complex cultural system of personal relations or moral obligations, which most Chinese conceive as a shortcut to achieve success. ‘‘Chinese people believe in human relationships, but Westerners believe in contracts . . . it is all cultural difference.’’42 The line between cultural differences and violation of the law may from time to time come too close. Relationship-building, for example, could occasionally cross the line, making the Chinese guanxi closely resemble corruption. One case is that of Jason Chi,

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former president of Lucent China, who turned the company into the largest Code Division Multiple Access (CDMA) technology equipment provider in China. In April 2004, Lucent fired four top executives, including Chi, citing possible violation of the Foreign Corrupt Practices Act (FCPA). According to a report in The Global Times,43 from 2000 to 2003, Lucent Technologies invited more than 1,000 Chinese officials from telecom firms, mostly SOEs, to visit Lucent’s facilities in the United States, with all expenses paid by Lucent, approximately $10 million. Some of these officials apparently visited Hawaii, Las Vegas, the Grand Canyon, Disney World, and New York City. The Chinese officials were allegedly identified as being capable of bringing business to Lucent. Guanxi is less and less appealing to China’s younger generation, those who are age 35 and under, who grew up as single children in an urban environment, according to Suzanne Fox, founder and president of Fox Intercultural Consulting Services LLC. She found that younger, urban generations tend to put their own careers and nuclear families ahead of their extended and elderly family members. One influential factor may have been that many of these younger men and women were witnesses to modern Western business practices, because many attended master’s programs or worked in foreign countries. Rather than basing their credentials on familial ties, these younger citizens focus more on individuals’ merits. Collected Works of Mao Zedong and Confucius’s Analects are no longer read; instead, readers are looking to success stories from Warren Buffet and Donald Trump. For them, the ends justify the means. Getting ahead and making money is seen as being more important than group dynamics or saving the credentials of a colleague. Thus, Fox indicates that the emphasis is now on the importance of sound business principles and credentials, making it easier to accomplish things without relying exclusively on guanxi in contemporary China. The backdrop is a change in accelerated industrialization, marketization, and globalization, which push China’s shift toward the rule of law and which, in

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turn, weakens the need for guanxi. According to Fox, ‘‘Guanxi is certainly still relevant—it is a simple fact of life that having the right connections helps anywhere—but it is no longer the golden ticket to obtaining good jobs and accomplishing business objectives in China.’’44 WHY HIGH CORRUPTION DID NOT HAMPER HIGH GROWTH

It is obvious that the Mao-style anticorruption campaigns are insufficient in curbing modern economic crimes. The rule of law and the use of modern technology must be relied on to guarantee maximum safety for the people. While this is true and China’s law enforcement has been increasingly technologyequipped, economic crimes become more sophisticated as well. One question that arises is why has China’s economy been capable of sustaining its high growth amid high corruption? Several factors have been identified that have kept corruption at bay: 1. The expanding private sector may have been a natural control over corruption, according to Professor Yan Sun.45 Although the private sector is not free from corruption, it is more mindful with production details and quality control, due to competition. Employees tend to have a strong sense of responsibility because of their accountability. Currently, the private sector stands at 65 percent of the GDP and contributes up to 80 percent of the GDP’s growth.46 Based on this theory, as more SOEs are converted to POEs, it is hopeful that corruption will be further reduced. 2. From the angle of economic systems, despite serious shortfalls, the market mechanism seems to have a built-in immunity. The stock market, for example, demonstrated an immediate response to the tainted milk case. Following the Sanlu scandal, several companies with questionable products saw their stocks dive sharply. The price of Mengniu, China’s largest dairy producer in volume and a source of contaminated milk, fell 64.6 percent to 7.68 Hong Kong dollars at the Hong Kong Stock Exchange. In a similar scenario, Yili Group, another large dairy producer headquartered in Inner Mongolia, saw its shares tumble at the Shanghai Stock Exchange by the daily limit of 10 percent to 9.93 RMB. In the meantime, good companies, such as Beijing-based Sanyuan Dairy’s shares rose by 46.67 percent during four trading days in a row.47

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3. International engagement helps. With China becoming a more and more involved global player, particularly since it joined the World Trade Organization (WTO), transparency of its economic and political systems has been steadily improving. For example, the Chinese government has grown more confident and more open with each major test. The handling of the avian flu of 2003 may have represented the first leap toward transparency. Due to pressure from the World Health Organization (WHO), the Chinese government reluctantly turned from covering up to punishing the guilty parties and aggressively tracing the sources of infection. Since then, the government has learned to mobilize public support. Reversing the cover-up tradition, the Chinese government has actively reported coal mine accidents, major corruption cases, major natural disasters such as the Sichuan Earthquake, impacts of the 2008–2009 global financial crisis, and every case of the H1N1 flu in 2009. Moreover, it encourages people to report on corruption using a hotline under the ‘‘Sunshine Project.’’ In so doing, the government has won people’s support through their own involvement. For example, donations to Sichuan earthquake recovery from ordinary people amounted to billions of dollars. The 2008 Summer Olympic Games was a success credited to support by every Beijing citizen. In exposing corruption, people’s participation plays an effective role. Hence, the increasing involvement by the people in what used to be the government’s responsibilities contributed to curbing crimes. 4. The CCP has a true interest in throwing out bad apples and replacing them with people who are highly trained and with honorable professional records. As the ruling political party, the CCP as a whole is keen on staying in power. The party sees corruption as its deadliest enemy, because each case poses a great threat to its legitimacy, particularly during sensitive times such as economic downturns. In this regard, the West is often wrong in applying its broad assumption that the CCP is an enemy of the people.48 The reality is that the CCP and the people share a common interest in eliminating corrupt officials. Thus, collaborative effort in monitoring power abuses may have stopped many corruption plots in the process. 5. The CCP takes law building and raising people’s trust in the legal system more seriously than ever. In a recent speech on the ‘‘construction of judicial human resources,’’ Wang Shengjun, president of the Supreme People’s Court, noted that judicial personnel must be imbued with the spirit of running the courts with seriousness, credibility, and support for the courts. They must strengthen the courts with science and technology. He urges China to build a body of judicial staff that is

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politically reliable, professionally up to the job, devoted to the people, and ‘‘fair and uncorrupt.’’49 Hence, the increasing professionalism with which cases are investigated and processed may also have contributed to keeping down business crimes.

The Chinese economy is in a transitional phase, a dynamic process loaded with changes, opportunities, loopholes, confusion, new laws, and creative ways of perpetration; and corruption rides along. As the system stabilizes, corruption is expected to decline. The Chinese government has been acting aggressively to plug holes in the system. For example, the government is keenly aware that an independent judiciary is critical for law enforcement. Without such independence, law enforcement can be hampered by the administration, and therefore, cannot effectively conduct ‘‘independent investigation’’ as defined in the constitution.50 The NPC has been trying to create a viable system for some time. In that regard, models from neighboring systems in Hong Kong and Singapore offer experiences that may be applicable. One feature of these systems is that they offer high salary and benefits packages to civil service personnel, and require high levels of morality and accountability in return. To the corruptive official, punishment includes heavy fines and loss of pension. In reality, however, whichever model China adopts has to be an integral part of its own system. Furthermore, anticorruption will be a never-ending struggle. URBANIZATION: TOO MUCH TOO SOON?

According to NBS, in 2007, the total population had grown to 1.32 billion with 44.9 percent living in urban areas. In 1978 when the economic reform just started, the total population was about 1 billion (0.96 billion), and the percentage of urban population was only 17.9 percent. These numbers show that the past 30 years have witnessed an unprecedented development in urbanization and migration. These two terms customarily refer to expansion of cities and rural population moving into urban areas or from smaller urban areas to larger ones. Urbanization

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and migration complement one another to form a unique phenomenon in 20th- and 21st-century China. According to Hu Angang, professor at Tsinghua University, the scale of China’s migration during the past three decades has surpassed that of European migrations overseas between 1820 and 1920 and migrations in U.S. history between 1870 and 1913 during the postwar industrialization period. Professor Hu believes that there is yet ample room ahead for further migration due to the fact that China’s urban population remains far below the urban population levels in industrialized countries, such as England (89 percent), France (77 percent), and the United States (81 percent). In his opinion, urbanization is the real solution to the rural-urban divide. Among the goals of freeing hard physical labor, redistributing rural population, investing in peasants, enriching peasants, and reducing the farming population, Professor Hu believes that the most important goal is reducing China’s farming population.51 Many factors led to rapid urbanization. From the demand side, the primary factor is the economic reforms that set off a rampant industrial expansion. New production sites were built, new services were offered, and urban residents acquired their own homes and automobiles. These changes cannot be accomplished without extra labor and space. And, the extra labor mostly came from rural regions. Moreover, economic reforms restructured SOEs, resulting in tens of millions of state employees being laid off. Cities therefore are constantly under pressure to create new employment opportunities for these workers. Ironically, urbanization itself creates not only jobs but also job losses, such that even larger scale urbanization is needed to fill the gap. For example, when urbanization invades suburbs causing peasants to give up farmland and become town dwellers, work opportunities for these people are essential. Because of high rural population density, this often results in more landless peasants waiting for employment than jobs created. If the challenge is not properly diffused, social unrest could result. In reality, this has become an unstoppable cycle, as well as a force that

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has driven a double-digit GDP growth for more than a decade, and that is a daunting reality. The concept that sustainability of an upward-bound economy is key to harmonious society is certainly justified. ‘‘Village in the city’’ (VITC) is a new phenomenon born by rapid urbanization. When cities expanded into the countryside, village after village found themselves enclosed in new city boundaries; high rises surrounded these villages in no time, before they could be absorbed into the urban structure. Shenzhen, for example, had 91 VITCs and had to resolve land rights issues with these villages. Because the land is collectively owned, the government could not simply seize the village property by force. The villages eventually will be urbanized, given that the incompatibility is simply too drastic for the two types of lifestyles to coexist. Moreover, village life is directly threatened by urban pollution; village constructions may likely turn into city slums, which the Chinese government strictly forbids. To reach a mutually beneficial solution, however, proves to be a thorny issue, because village properties are more valuable as time passes, to the point that municipal governments cannot afford to purchase them. VITCs provide many functions that are needed in the urbanization process. For example, when migrant workers come to town, they need dining and lodging services. In warmer climates, many migrant workers reside under the cities’ bridges, but this becomes inconvenient in colder climates. Under such circumstances, ‘‘villagers’’ build extensions to their housing units, often violating zoning regulations, to serve the migrants. In Shenzhen, for example, the zoning regulation for the villages restricts the highest residential construction to no higher than three floors. It has been reported that the actual average height, however, is 10 floors and many exceed 20. Not only does a large population dwell inside the communities, but also dwellers are grouped into communities according to cultural affiliations. It is a cultural tradition that migrants from the same provinces reside in the same ‘‘home villages,’’

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such as the ‘‘Hunan Village,’’ the ‘‘Henan Village,’’ and so on. Oftentimes, the villages conduct little or no communications among them, not even playing Mahjong together.52 In addition to serving Chinese migrant workers, VITCs shelter many foreigners as well. Some villages in Guangzhou are inhabited by West Africans, Arabs, and people from other international origins doing business in China. After a day of loading and unloading, they too have a great need to enjoy ethnic communication and their own cultural traditions. Cultural needs such as these seem to be better served by theses VITCs, than by high-end hotels in Guangzhou. Despite zoning code violations and other kinds of perpetrations against state or local standards, the urban villages are not equal to ‘‘slums.’’ According to Professor Wen Tiejun, head of the Institute of Rural Development of the People’s University in Beijing, two factors prevent communities from deteriorating into slums: (1) public ownership, and (2) the Confucian tradition. First, traditionally, the Chinese do not tolerate community disorder. Calling it ‘‘zero tolerance’’ is not an exaggeration. Whoever can work must find work, rather than drifting into homelessness or committing crimes. Additionally, strict social control, from family to society, based on traditional values, has always been in effect. Promoting order and collective spirit rather than disorder and individualism is essential in panConfucian cultures. Second, the Chinese government has always placed harmony at the top of its agenda. Despite occasional riots, the government has been successful in avoiding extreme dissent. In favor of control, public ownership allows the government many venues of direct intervention. Unlike Western countries where land ownership is completely privatized, land remains in the hands of the state in China; individuals may lease land only according to government terms. Therefore, the government retains the right to remove illegal constructions in urban villages.53 Cities devise their own strategies to improve their VITCs, depending on availability of resources. In Shenzhen’s case, it was

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not until 2004 that the Shenzhen municipality had reached the mutually accepted strategy of letting the VITCs develop their own real estate following the city’s standard codes. With rents going up, the cost of living rises as well, and so too does the demand for higher pay. Companies that cannot afford to pay higher salaries either relocate to the underdeveloped hinterland or collapse because of a labor shortage. The early stage of cheap products and cheap labor is phasing out. In this case, the VITCs play an important role in adapting to the fast rising economic standard. Is modernization to be blamed for the pains of urbanization? Professor Wen Tiejun believes so. He argues that China’s urbanization developed too fast (in fact, the fastest in the world) and has resulted in negative impacts on ecological environment, natural resources, and many social problems. Professor Wen calls it ‘‘plague of urbanization.’’54 However, an alternative model that Professor Wen favored—developing small towns to absorb migrant population—did not work out. It has been proven wrong to assume that Chinese peasants are traditionally rooted in their hometown and, therefore, would more likely find jobs in local towns first. Instead, migrant workers go directly to the largest cities, such as Guangzhou, Beijing, and Shanghai,55 because they could find the jobs and lifestyles they pursue. On the other hand, small towns are not free from problems of large cities; more important, small towns do not have the kind of accommodative resources that large cities do. On the supply side, approximately 150 million migrant workers come to cities to find jobs every year. Multiple factors drive peasants to quit farming. These factors can be further categorized as ‘‘pull’’ and ‘‘push oriented.’’ The ‘‘push’’ factor primarily lies in the reality that better farming technology has made farming less dependent on physical labor. Many jobs now can be handled by women or can be subcontracted to farmers who specialize in offering farming services, such as harvesting, seeding, and so on. Costwise, it is more beneficial for the farmer to work in town and pay for farming services at home rather than

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doing the farm work himself or herself. Technology has created a superfluous labor force ready to work in town. However, other forces, one of which is management, also generate extra labor. Unlike urban industries that make plans based on supply and demand, family-based agriculture is essentially unorganized, constantly resulting in unsynchronized production. The lack of planning drives the farmer to seek better and more reliable income. On the ‘‘pulling’’ side, one finds the best explanation for a typical farmer’s motivation for coming to town. The widening economic gap has created a powerful propensity for migration. Since the start of the economic reform 30 years ago, the gap between the rich and poor has provided a great momentum for mobility. In 2008, Beijing, Fujian, Hubei, and Hunan became trillionaire provinces, which is a term the Chinese media uses to group provinces whose GDP exceed 1 trillion RMB. Guangdong, Shandong, and Jiangsu are the three leaders in GDP growth. In 2007, Guangdong’s GDP was approximately 3 trillion RMB, and by 2008, it had reached 3.4 trillion RMB (with a 10 percent rate of growth). Shandong’s GDP grew by 13 percent in 2008 as well, exceeding 3 trillion RMB. Jiangsu’s GDP reached 2.5 trillion RMB in 2007. In 2001, Guangdong was the first province to reach more than 1 trillion in GDP, and Shandong and Jiangsu soon followed in 2002. Zhejiang broke the trillion mark in 2004, Henan and Hebei in 2005, Shanghai in 2006, and Liaoning and Sichuan in 2007. Guangdong, Shandong, Jiangsu, and Zhejiang have since taken the lead.56 In contrast, inland provinces like Qinghai (78.3 billion RMB), Ningxia (88.9 billion RMB), and Gansu (270.2 billion RMB) fall far behind. Farmers in poorer provinces simply want to be in richer provinces, and become urban dwellers in the largest cities. Their will cannot be thwarted for good reason. Rural people dream of urban conditions, such as education, health care, pay, and entertainment. Studies show that in the 1980s, for most migrant workers, working in remote cities and leaving their families

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behind was only a temporary solution; they would eventually return to their hometowns. While this is still true in 2010, the rising trend is for migrant workers to settle down in cities. To some scholars, the trend now warrants differentiation between two demographic terms: ‘‘migrant population’’ and ‘‘floating population.’’ Professor Ge Jianxiong, director of Fudan University Library and professor of geography and history, believes that ‘‘migrant population’’ is different from ‘‘floating population’’ in that migrants have a sense of settlement while the floating population does not. In terms of disposition of income, migrants would save their income in local banks and spend it locally, while floating population tends to send money home. For these new city residents, readapting to the rural lifestyle is becoming less convenient with each passing day. For the migrants, another phenomenon is that when they are deprived of the right to settle down permanently, they develop hostility toward local residents. Historically, conflicts between locals and foreigners are not uncommon.57 The Xinhua News Agency estimates that one-third of Shanghai’s population came from the provinces in 2006. While migrant workers filled Shanghai’s labor shortages, the city was not ready to manage migrant communities. One consequence was that 88 percent of unplanned births were in migrant families.58 On the family planning front, a headache for the government is that some migrant communities have their own midwives. Their practice is illegal and endangers women’s safety. In general, farmers with better education and from areas of better economic conditions do better, as they tend to move to town with business plans in mind. In large cities, such as Beijing and Shanghai, restaurants and hotels at all levels are operated mostly by provincial entrepreneurs. Migrants belonging to this category could easily acquire city Hukou (a city residential permit); they count for less than 10 percent of migrant workers. Migrant workers with lower education levels and from rural regions of medium economic conditions are likely to engage in labor-intensive jobs, such as construction work.

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The migrant workforce is expected to grow stronger. The 2000 Census shows that, of the 6.7 percent of the population that never went to school, most lived in rural areas and tended to stay home. A significant number of potential migrants who are educated are not yet able to join the migrant labor force because they cannot afford the travel expenses.59 This situation is not to be underestimated when the majority of the hinterland provinces fall into this category. Currently, a shortage of funding and the lack of psychological preparation discourage peasants in Gansu to seek jobs in Shenzhen. But this will change over time. China’s large cities must be prepared to accommodate more than 150 million migrant workers per year. Currently, the urban population stands at 44.9 percent, which means 727.5 million people are residing in rural China. In his speech at the 17th CCP Congress, in March 2008, President Hu Jintao set the tone for the next phase of development (through 2012) to vigorously pursue industrialization, informationization, urbanization, marketization, and globalization.60 Many suspect, however, that if China steadfastly pursues the urbanization levels of industrial countries, or 70–80 percent urban population, this would put 250 million new workers in the cities in a short time. Problematically, because China’s industrialization level is behind its rate of urbanization, and because employment opportunities are primarily born out of the service sector and the labor-intensive manufacturing sector, an intensified migration may indeed exhaust the cities’ accommodative resources. China may see slums, overwhelmed social benefit systems, and many other social problems. In fact, such concerns were behind past practices for decades. It was as early as 1958 that the Chinese government started the Hukou system. The system was intended to tie peasants to land and prevent an influx of workers to big cities. The Hukou followed the food ration management during those years of hardship. In the 21st century, some cities, such as Shanghai and Beijing, continue to use it for temporary migration management purposes although 12 out of the 23 provinces already have

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phased out Hukou completely. Until 1984, however, peasants were not permitted to seek employment in urban areas, and residents with provincial Hukou were not entitled to social benefits, not even schooling. Soon, the Hukou system was perceived as a social discrimination system in effect rather than a population management system. Not only was the rural population discouraged from moving into urban areas, but also residents from minor urban regions were not granted permission to reside in larger cities. The discriminatory function has angered many. ‘‘It locks people into different social classes entitled to different rights, which is objectionable,’’61 as Professor Ge Jianxiong puts it. In fact, many believe that the Hukou system is now a main barrier to industrialization and market economy. After five years of implementation of the CRS (1979–1984), peasants’ income rose and many started rural industries that directly served urban industries. As such, peasants were gradually allowed to migrate to towns. With the overall increase of personal wealth and an increasing awareness of social equity, the traditional residential restriction has become increasingly intolerable. Hukou has become a symbol of rural-urban divide. However, the answer to the question of whether to remove the system immediately is not clear. Professor Hu Angang of Tsinghua University calls for abolishing the Hukou system without delay. He believes that urbanization provides employment solutions to 70–80 percent of the job seekers. According to his estimate, migrant workers contributed 13.3 percent to the GDP in 2004, which does not include unregistered business activities. Professor Hu calls on governments at all levels to set up programs to help migrant workers, converting the traditional ‘‘restrictive policy’’ to a ‘‘welcoming policy.’’62 Questions remain, however, with respect to associated costs, should more migrants come to town, especially with the shortage of a social welfare system to deal with unemploymentrelated problems. Professor Cao Jinqing, director of the Social Development Research Center of Huadong Technical Institute,

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believes that the cost of receiving migrant workers is low thanks to the rural land tenure system. A remarkable thing that the Chinese government did, in his opinion, was the reallocation of land, finance, and labor within the Chinese countryside in the 1980s. Because rural households were assigned plots on a lease basis, they do not have the right to resell their land. The negative side of this policy is that, not being real landowners, many farmers lost their land to public officials who traded them with real estate developers; the positive side is, for most farmers, they are guaranteed a home to return to. Thus, peasants may leave their land, but remain residents in their village and work in factories without being long-term urban dwellers. For many farmers, it is their dream to work in cities but settle down in their hometown. For example, building a house in a large city may cost somewhere between 10,000 and 20,000 RMB per square meter or approximately 11 square feet, while the same space costs as little as 500 RMB to build in a typical rural town. Such benefits make the rural hometown a valuable buffer against contingencies outside. Thus, the land tenure system has become a form of social security that alleviates much of the pressure of dealing with unemployment and slums. Professor Cao attributes China’s land tenure system to having a critical role in the sustained growth for decades.63 Professor Peng Xizhe, director of the Institute of Social Development and Public Policy at Fudan University, agrees that urbanization is an effective way to reduce the divide, because peasants typically make more money in a month working in cities than they do in a whole year working in the countryside. However, Professor Peng went on to discover the education benefit of urbanization with respect to a migrant workforce. He believes that the 150 million annual migrant workers will change a harsh cultural reality left by the rural-urban divide: the countryside remains outmoded, whereas cities are undergoing industrialization. At least 150 million peasants are educated with the most advanced knowledge at no government costs. Urbanization educates the rural population through migrant working

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conditions, introducing them to such concepts as a modern way of life, entrepreneurship, and industrialization. This is what the peasants could hardly learn even after years of schooling at home. Professor Peng calls this phenomenon ‘‘the Chinese renaissance.’’64 On the opposite side, Zhou Chunshan, director of Urban and Regional Research Center of Sun Zhongshan University, is against removing the Hukou system and setting migration completely free. He believes that the system must be maintained as a buffer to prevent an influx until cities are capable of handling the migrant population. Hukou has the added benefit of keeping sufficient labor on the farmland and preventing farming from completely falling on the shoulders of women and senior men. Moreover, Professor Zhou believes that the goal of a modern city is to reach high quality; it is about converting real estate development to the development of research and technology. Cities that started earlier in the economic reform, such as those in the Zhujiang River Delta Regions (the Guangdong Province), gradually transitioned into high-tech manufacturing. In these cities, highly educated and better trained labor has replaced migrant labor straight from farmlands.65 Cai Fang, director of Demographics and Labor Economics Research Center at the Academy of Social Sciences of China, believes that abolishing the Hukou system may not provide an unfailing solution to the rural-urban divide, because employment of rural labor will not be necessarily compatible with urban development needs in the long run. Demand for higher salary jobs and better living conditions will rise following declining labor-intensive production and rising product quality. Firms that are not able to compete will have to relocate, unable to survive on thin margins that are derived from suppressing workers’ compensation. In such a situation, it likely will become difficult to hire qualified labor at the low pay levels of the past, and meanwhile, a large number of migrant workers will not be able to find jobs. He believes that despite the rise in cost of production, products made in China will remain competitive, because

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a Chinese worker’s salary will remain below 3–4 percent of an average American worker’s salary.66 China’s urbanization characterizes its economic development in the 21st century. The process presents unique challenges and growing pains, most of which are generated by industrialization, political system changes, and urbanization. The pressure is tremendous, and the propensity for change is great. A successful transition will lead to sustained economic growth, a better environment, and social harmony based on the elimination of the rural-urban divide, all of which are of global interest as well. To achieve success, China must rely on science and technology. Hence, therein lies the most important motivation behind the government’s slogan of building the country into an ‘‘innovative nation.’’ The next chapter will look into science and technology policies with respect to reforms in industry.

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Three Chinese bills. Chinese currency is known as the yuan. (Courtesy of Corel)

In this 1979 photo, then Chinese vice premier Deng Xiaoping tries on a cowboy hat presented to him at a rodeo in Simonton, Texas. Forged in absolute secrecy at the height of the Cold War 30 years ago, the diplomatic ties established between the United States and China were meant to balance out the Soviet threat. (AP Photo/File)

A Chinese peasant woman carries vegetables on a shoulder pole to her village near Yanan, in central China’s Shaanxi Province in 1995. As men move to cities to find better paying jobs, women are often left to look after the farms so that their families can retain long-term leases on the land. (AP Photo/Greg Baker)

A group of Chinese children have their McDonald’s lunch in the southern Chinese city of Guangzhou in 1999. (AP Photo/Vincent Yu)

Cars drive on Beijing’s second ring road in murky weather in 2004. Beijing vowed to clean up its often-polluted skies before the 2008 Olympic Games. (AP Photo/ Greg Baker)

Heavy traffic is seen along a city highway in Beijing in 2009. Beijing traffic authorities said the city will extend by another year traffic restrictions aimed at reducing congestion and improving air quality in the capital. (AP Photo/Andy Wong)

Anxious parents wait for their children to emerge from national college entrance exams in Beijing in 2005. While the number of students taking the exams increased by 1.4 million in 2005, reaching a record 8.67 million, the number of available positions in universities rose by only 280,000, reflecting the ever increasing competition amongst students for a space in the colleges. (AP Photo/Greg Baker)

Baidu.com founder Robin Li is interviewed as he arrives at Beijing airport in 2005. Li returned to Beijing after a successful initial public offering on the NASDAQ stock exchange in New York. The Chinese Internet search engine’s stock soared to $122.54, a 354 percent gain from its initial public offering price of $27. (AP Photo)

Eighteen-year-old students line up to get their ballot papers before voting for the first time in local legislature elections in Beijing in 2006. Voting to elect representatives for Beijing’s local legislatures began as millions of residents streamed to brightly decorated polling stations throughout the Chinese capital. Some 8.5 million voters were expected to cast their ballots for People’s Congress delegates to Beijing’s 18 counties and districts, and 181 townships, part of the communist leadership’s tightly controlled version of democracy, with mostly governmentapproved candidates making it to the ballot. (AP Photo/Greg Baker)

Students look for job opportunities at the 2007 Graduates Job Fair in Shanghai. Graduates from 28 universities attended the fair. According to state media young Chinese faced a severe job crunch in an increasingly competitive labor market, with nearly 4.13 million graduates entering the workforce in 2006, 750,000 more than the previous year. (AP Photo/Color China Photo)

Job seekers crowd stalls at a job fair in Beijing in 2009. Thousands crowded the first job fair in the city since a weeklong holiday for Chinese New Year. China’s economy is suffering from a collapse in global demand for Chinese textiles, toys, and other goods and a downturn at home in real estate, auto sales, and other industries. The government says some 20 million migrant workers lost their jobs. (AP Photo/Greg Baker)

Former President and Party Chief Jiang Zemin, right, smiles as he shakes hands with current top leader Hu Jintao, left, as they came together on stage at a ceremony celebrating the 80th anniversary of the founding of the People’s Liberation Army at Beijing’s Great Hall of the People in the Chinese capital in 2007. Past and present Chinese leaders appeared together on army day Wednesday, in a striking show of unity ahead of a key Communist Party congress later in the year. (AP Photo/Elizabeth Dalziel)

Performers paint on a giant scroll during the opening ceremony for the Beijing 2008 Olympics. (AP Photo/Julie Jacobson)

China’s Yao Ming carries the flag of China next to a small child during the opening ceremonies for the Beijing 2008 Olympics. (AP Photo/Itsuo Inouye/File)

A man walks past a display showing stock prices at a brokerage firm in Hong Kong in 2008. Hong Kong’s Hang Seng Index tumbled 12.7 percent, or 1,602 points, to 11,015.84—the lowest close it had in more than four years. (AP Photo/ Vincent Yu)

A worker assembles solar power panels at the Suntech factory in Wuxi, China. China has recently set new laws for the generation of renewable energy, including financial subsidies and tax incentives for the development of renewable energy sources. (Qilai Shen/EPA/ Corbis)

A woman with her baby looks at powdered milk products with notice boards of ‘‘no melamine’’ displayed inside a supermarket in Chengdu, Sichuan Province. (AP/Wide World Photos)

Customers surf the Internet at an Internet cafe in Beijing in 2009. Two more Web sites dedicated to social networking went offline in China in July 2009, amid tightening controls that have blocked Facebook, Twitter, and other popular sites that offered many Chinese a rare taste of free expression. (AP Photo/Greg Baker/File)

A Starbucks staff member hands out free coffee to customers at an event to mark the 10th anniversary of Starbucks’ launch in China, at the company’s original outlet in Beijing in 2009. The coffee chain Starbucks has started producing coffee grown by farmers in China and hopes to bring the blend to stores all over the world. (AP Photo/Greg Baker)

A model poses next to Chinese automaker Geely’s new model Panda on display at the Beijing Auto Show in 2009. China surpassed the United States as the world’s biggest auto market for the first half of 2009 after June sales soared 36.5 percent from a year earlier. In March 2010, Geely signed a $1.8 billion deal for Ford’s Volvo car unit. (AP Photo/Andy Wong)

Chapter 4

Innovative Nation SCIENCE AND TECHNOLOGY IS KEY

China’s reality is such that education and science and technology (S&T) have been slow reforming sectors, for historical and economic reasons. Education, for example, is on the expenditure side of the government’s balance sheet; so are national basic research projects. As a result, the government’s role in developing the knowledge sector and in creating an environment conducive to a broadbased innovation is of critical importance. New policies demonstrate a strong commitment by the government. Due to political turmoil of the Mao Zedong era (1949–1978), however, valuable time was lost. Consequently, China’s economy was on the edge of collapse by the time Mao died. During nearly two decades of reform, resources were invested in manufacture, leaving S&T behind. Thanks to the historic lesson, however, in the 21st century the Chinese government is going all out to develop S&T. In The Guideline of Mid- to Long-term Development of Science and Technology 2006–2020 (The Guideline),1 S&T is said to be essential to sustaining China’s economic growth. Finally, transforming the Chinese economy into a knowledge-based economy and the country into an ‘‘innovative nation’’ through an enterprise-centered national system with strong innovative capacity at the enterprise level is pronounced as the ultimate goal. In a speech given by Premier Wen Jiabao, he argues that to develop a country, a nationality, or an enterprise, developing its strength in innovation is more important than anything else. Under

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his initiative, the 17th Party Congress held in 2007 proposed that the CCP take the lead in building China into an ‘‘innovative nation’’;2 the term has since become the slogan of the new era. President Hu Jintao went even further in stating that S&T is the number one productive force and that China must take a road of independent innovation with Chinese characteristics. To achieve this goal, Hu states, [I]t is a must to give top priority to increasing the capabilities of independent innovation in the development of S&T; it is a must to promote the progress and innovation in S&T by innovating the system; and it is a must to foster a large army of innovative talents in the country; and it is a must to encourage S&T progress and the nation’s innovativeness with an innovative culture.3

More recently, during a 2008 tour of industrial facilities in Guangdong, Premier Wen stressed that only continuous innovations can enable the Chinese nation to stand up in the world and become a leader in industrialization.4 What all these political propaganda imply is a new reality: despite 30 years of reform, China is facing more challenges rather than less; and the new challenges will not likely be solved with the traditional approach of mass campaigns. Moreover, to break out of the barriers, relying on government’s resources is less and less a viable solution. The company’s innovative capacity will ultimately decide its fate. The concept of innovation is broader than scientific invention. It is more of an economic concept related to changes in productivity outcomes. Examples include creative use of existing products and ideas to provide new solutions, such as creating new methods, identifying new resources, finding ways to break up old monopolies to build a new economic structure, and so on.5 Saving energy and reducing cost is on top of China’s agenda in the 21st century. The sources of innovation are no longer government initiatives alone; they are becoming the responsibility of each and every company in the economic network. For SOEs, typically, the government sets the goals; the company finds its

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ways to meet them. While POEs have diverse goals and objectives, national projects are attractive to them and often make an important part of their planning as well. Everyone has now come to the understanding that S&T is essential to innovation, and companies rely on innovation to stay ahead; therefore, Chinese companies of the 21st century must expect to raise R&D expenditures. On the other hand, the society is convinced that an S&T-friendly environment is essential. It is unimaginable that innovation could prosper in a society where intellectual property is poorly protected and bureaucratic constraints hamper exchanges of personnel and opinions. In these respects, the Chinese government has made a great deal of efforts compared to the prereform situation, but obviously has not done enough. In a sense, more innovation comes from a freer society as a whole. As shown in the first chapter, what underlies China’s economic growth is the ongoing reform of the entire economic system. The reform has changed the framework of China’s ownership structure, leading to a thriving private sector and a more efficient public sector after a series of SOE reforms. In general, because of the challenges they are faced with, the POEs are more competitive in acquiring research and development capacities than SOEs, although the latter have demonstrated achievements in national-level projects, such as space and nuclear programs. The situation is reflected in patent applications. According to NBS, in 2007, the total number of patent applications submitted by domestic firms was 27,741 or a 31 percent increase from 2006. Out of this number, private enterprises submitted 2,312 or an 18.5 percent increase from 2006. SOEs submitted 1,921 or about a 26 percent increase from the 2006 figure. The large remaining portion of patent applications was submitted by various kinds of joint ventures established with state and private funds. These data suggest that currently state funding provides the main support for S&T, although most activities happen in companies of joint ventures. SOEs’ active engagement with S&T activities is considered a significant trend. It implies

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that SOE restructuring continues to weed out weaker companies that have lost competitiveness. However, due to concerns that an expedited transformation may result in wide-scale layoffs and social consequences—and that the government intends to prevent these at all costs—SOEs’ S&T progress will likely be slower than the private sector, despite their privileged funding preference status. Also noticeable is the patent applications number of foreigninvested firms which was 5,034 in 2007, an increase of 35 percent over the number of 2006. Since 1978, foreign companies have served as channels of technology transfer. The data shows that they continue to be active in supporting China’s S&T progress. The data also implies that China’s IPR environment has been constantly improving, providing the much needed legal environment for S&T transfer to sustain. Companies with investment from Hong Kong, Taiwan, and Macau submitted 3,299 patent applications which represents a decrease of 3.8 percent from 2006. This reveals that the main operations of these firms in China are primarily manufacturing-related, such as assembly lines. Nevertheless, they maintain a high-level of R&D activities. NBS data shows that overall China’s funding for activities in S&T, which includes R&D, application of R&D results, and R&D-related services, has been rising year after year. Expenditure on R&D increased rapidly. An interesting trend in this area is that expenditure on purchases of foreign technology tapered off from 372.5 billion yuan in 2002 to 320.4 billion yuan in 2006. In the meantime, purchases of domestic technology rose from 42.9 billion yuan in 2002, more than doubling to 87.4 billion yuan in 2006. Although expenditure on imports remains dominant, the rise in domestic technology purchases may imply the beginning of a significant change, that is, China is gradually coming out of the manufacturing-intense phase of the earlyreform era and developing toward a knowledge-based economy. This transition has long been the target. The high-technology area, for the time being, continues to be dominated by foreign companies. In a few sectors, however, the situation is being turned around by China’s acquisition of foreign firms. In such cases, the

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Chinese companies own or share ownership of the technology as well. China is exporting many kinds of high-tech products, but mainly in the areas of office machinery and information communication technology (ICT) equipment. In 2004, China surpassed the United States and European Union to become the biggest exporter of ICT goods.6 One example is the acquisition of IBM’s personal computer section by the China-based company Lenovo in 2004. The acquisition, which cost 1.75 billion in U.S. dollars, resulted in a joint venture with IBM holding an 18.9 percent stake. The price tag may be high; the deal, however, raised Lenovo’s sales ranking worldwide from number nine, just ahead of Apple Computer, to number three, just behind Dell and HP. The combined venture, headquartered in New York with operations in Beijing and in Raleigh, North Carolina, employs approximately 10,000 IBM employees and 9,200 Chinese employees.7 CHINA’S POSTREFORM INNOVATIVE SYSTEM AND S&T POLICIES

During the prereform period, the government set the goals and objectives for S&T primarily for national defense purposes. A notable achievement was the ‘‘two-bombs-and-one-star project’’ (or, the project of the atomic bomb, the hydrogen bomb, and the satellite). During the postreform era, although much of the traditional planning function has been decentralized, the government continues to manage the general direction of the economy. One difference is that the government tends to make decisions through wider consultations. Directly affecting S&T development are the policies made by the Ministry of Science and Technology (MOST). Policies of MOST represent collaborative opinions of those agencies that represent the most dynamic sectors, including the NDRC, the Chinese Academy of Science (CAS), the Chinese Academy of Engineering (CAE), the Ministry of Industry and Information Technology (MIIT), the Ministry of Agriculture (MOA), the National Science Foundation of China (NSFC), the Ministry of Finance (MOF), the

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Ministry of Commerce (MOC), the Ministry of Personnel (MOP), and the State Intellectual Property Office (SIPO). In fact, the list often extends to other institutions that are somewhat peripheral to policymaking. In addition to planning and management, these ministry-level agencies, along with their subagencies, also represent the largest government R&D resources. Chinese S&T policies are based on ministry-wide coordination conducted by the National Steering Group on Science, Technology, and Education whose responsibility it is to help MOST identify priorities, and design policies, laws, and regulations. One noticeable postreform characteristic of the State Council is its constant restructuring to retire outdated institutions and create new ones. For example, MIIT is a new ministry established in March 2008. This new powerhouse with 24 departments replaced the former Ministry of Information Industry. It integrated the NDRC’s former authorities on industry and trade management; the former functions of the Commission of Science, Technology, and Industry for National Defense, except nuclear power management; and the former functions of the Ministry of Information Industry and the State Council Informatization Office. Additionally, MIIT is responsible for managing Internet domain registrations and creating Internet policies. In general, Chinese S&T policies are developed to cover major areas pertaining to innovation activities that are of national interest. These areas include identifying and supporting core research programs that are perceived to be critical to the economy or national security, such as biotechnology, information technology, space technology, energy technology, new materials, and so on, as well as commercialization of research achievements. These policies also address peripheral issues, such as developing policies to facilitate S&T human resources, setting up reward systems, and appropriate measures to protect IPR. China’s economic progress has been in synchrony with the reforms in S&T policies. During the Mao era (1949–1978), especially during the Great Cultural Revolution (1966–1976),

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the slogan was ‘‘Red and Expert,’’ meaning intellectuals would have to be proven loyal before their knowledge could be of use. S&T was labeled ‘‘capitalist,’’ and so were most of the nation’s intellectuals. S&T was conducted by the government, in government labs, and for national defense purposes in particular. Since 1978, Deng Xiaoping worked hard to remove the traditional ideological constraint and paved the way for a new era of S&T. Under his leadership, the college entrance examination system was resumed in 1978 to replace the recommendation system based on family background and political loyalty. Special Economic Zones (1980) were opened in coastal regions to experiment with Western management, and the S&T system was reformed to encourage responsibility and connection of S&T with the needs of the society (1985). As such, Deng’s profound contribution is remembered as deprogramming the traditional mentality to release people’s long hidden enthusiasm in pursuing innovation. Under Deng’s leadership, the Communist Party’s core task was shifted from class struggle to the ‘‘Four Modernizations’’—industrial modernization, agricultural modernization, defense modernization, and S&T modernization. Deng was a magician of terminologies, and was known for creating such terms as ‘‘socialist market economy,’’ ‘‘to be rich is glorious,’’ and ‘‘S&T serves not only capitalism but socialism as well.’’ With these concepts, he fenced off attacks from hardliners and assured the people that it was okay to pursue material wellbeing even under socialism. As such, Deng ignited an economic development at a pace rarely seen in history. As the reforms continued, university labs began to offer R&D services to economic demands; many faculty members took advantage of their expertise to engage in entrepreneurship. This later became popularly known as ‘‘jumping into the sea,’’ which means giving up the ivory tower and trying one’s luck with the volatile market competition. In 1986, the Provisional Bankruptcy Law was promulgated, which marked the start of SOEs’ restructuring. As more and more SOEs were privatized, the pressure of market competition led companies to seek solutions from S&T

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to stay ahead. In the meantime, the government launched dedicated S&T funding programs under the direction of MOST, including the ‘‘National Natural Science Foundation’’ (1986) to support basic research, and the ‘‘863 Program’’ (1986) to address targeted basic research areas in which China needed to catch up with advanced world levels. The ‘‘Spark Program’’ (1986), the ‘‘Torch Program’’ (1988), and the ‘‘Technology Spreading Program’’ (1990) aimed at applying technology to improve productivity and bring changes to people’s living conditions. To acquire funding, individuals and institutions may submit research projects to MOST. There are certain restrictions, however; for example, individual applicants must be affiliated with a large company, preferably an SOE; additionally, the applicant must be a Chinese national less than 55 years of age.8 More about the national programs will be explained in the following pages. From the mid-1990s to 2001 when China joined the WTO, Chinese firms went through an intensive learning and restructuring process to comply with WTO standards. Transparency, for example, was a weak area of most domestic firms due to the fact that SOEs and most semi-state-owned firms were not yet structured to be accountable to shareholders, the dominant shareholder being the government. One consequence of this shortfall is that it gave rise to enormous volatility to a stock market, adversely impacting on a company’s ability to draw funding from the broad public. Buying and selling stocks tended to be short-term operations, popularly known as ‘‘flipping’’ stocks. Traders typically relied on technical analysis as it is abundantly available through the media. Few investors would hold securities for the long term. This is part of the reason why most people preferred parking their hard-earned money in a savings account or investing in government bonds. Since joining the WTO, China’s capital market has been improving gradually, as more Chinese securities are listed in Hong Kong and foreign stock markets. Internationally traded companies abide by international reporting standards and provide a better transparency

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than the rest. Their practice set an example to other firms and inspired changes. On the government side, it appears that the Chinese government is determined to learn from Western experience and stabilize the financial market by implementing Western-style regulations. On the other hand, the society as a whole is adopting the concept of transparency, being aware that a well-structured capital market means profit because it is fundamental in enabling solid enterprises and weeding out weak ones. The Guideline (2006–2020) demonstrates the Chinese government’s commitment to building up indigenous innovation capabilities and to creating a suitable framework, part of which is to stabilize the capital market. While a stable capital market is critical to the survival of new technology companies without shifting S&T to the enterprise-level, companies will nevertheless be unable to benefit from it. The legacy and mentality of state monopoly must be replaced by one of diversity at the level of companies and according to their needs. In personnel management, new policies attract overseas scholars with critical expertise. More and more research institutions are hiring managers through open search which appeals to overseas scientists who wish to work in China. New policies, such as the Guideline (2006–2020), encourage teamwork and the dareto-take-the-lead-and-dare-to-be-different spirit. For example, the Guideline (2006–2020) stresses respecting personal differences, promoting academic freedom, encouraging exploration for new theories, increasing tolerance for failure, and creating a new relaxed and harmonious cultural environment conducive to scientific research. These ideals were spelled out in such terms for the first time. How they will be realized remains to be seen. HIGH-TECH FRAMEWORK IN TRANSITION

Despite rapid economic growth for 30 years, China’s hightech framework remains at an early stage. Much emphasis has been put on borrowing Western technology, building assembly lines, and ramping up exports. Investing in building the country’s

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own high-tech infrastructure has not been seriously addressed until recently. Understandably, the priority was relief from poverty. This having been very much achieved, economic sustainability has come to be the next challenge. The question remains wide open: can the Chinese government bring about an innovative environment and, if so, how would they do it? The following is a review of what the government has done to put together a framework. The transformation in S&T framework is conventionally divided into five phases surrounding historical decisions made by the Central Party Committee (CPC): (1) Break-Ice (1985–1992), (2) Weight-trimming (1993–1998), (3) Localization (1999–2003), (4) Market Integration (2003–2006), and (5) Reassuming Direction (2006–2020).9 The nature of the transition was to expand funding channels and to expand the latitude of freedom to conduct S&T research. Phase 1, Break-Ice (1985–1992)

The CPC published The Decision of Reforming the S&T Framework in March 1985. The goal was to diversify S&T funding resources according to the nature, scope, and urgency of projects. Typically, national and local S&T projects are funded by the central government and provincial governments. For the most part, the government budgets for basic research and certain applied research projects that are of national interest. Other funding instruments are mobilized as well, including private funding, contractual funding, and so on. The Decision encouraged commercialization of research products. At the time of its issuance, the IPR laws came into existence to protect registered products. Furthermore, according to the Decision, as long as individual scientists do not violate rules and regulations concerning the public project with which they were involved, they were allowed to conduct personal S&T research in their spare time, outside the company, and through private ventures. Additionally, the Decision encourages cooperation between research

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centers and higher education institutions, supports agriculturerelated S&T research, decentralizes governmental control over S&T research, and promotes younger scientists of achievement to important management positions. Although the Decision was inspiring in many aspects, it did not result in tangible changes in the direction of competition, commercialization, and creativeness. S&T remained separated from the reality of economic development, and S&T personnel remained confined to statefunded labs and universities. Phase 2, Weight-trimming (1993–1998)

Based on Deng Xiaoping’s speech given during his 1992 tour of southern cities, which essentially confirmed that the economic reform would continue despite the crackdown of students’ demonstration in 1989, the CPC issued The Decision of Accelerating S&T Progress. This Decision played an essential part in breaking the traditional SOE inertia prevalent in the S&T area. According to the Decision, the government guarantees funding only to a limited number of national-level S&T projects; and for that purpose, S&T personnel at state labs also were trimmed. Other S&T agencies were encouraged to seek funding from enterprises, local governments, and foreign direct investment (FDI), or by setting up business ventures. The SOE-style of free and unaccountable government budgetary support came to an end. Suddenly, a great number of S&T centers were formed following the Decision’ s call of ‘‘openness, mobility, competition, and cooperation.’’ Many S&T centers established during this period became pillars of the economy. Phase 3, Localization (1999–2003)

In August 1999, the State Council issued The Decision of Strengthening S&T Innovations, Developing High-tech and Industrialization. The goal of this Decision was to encourage S&T organizations to put research into production. The Decision points out that to come out a winner in the increasingly fierce competition in the world depends on integrated national

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strength, and S&T is essential to determining a nation’s competitiveness, sovereignty, and economic security. As a result, developing S&T was pushed to the level of national security once again. The Decision urges S&T organizations to engage in marketoriented innovative activities; to reform education systems; and to improve related legislatures. It encourages transferring R&D from government labs to the enterprise level, and urges further opening to the outside world through international cooperation and exchanges. Finally, the Decision is mindful of improving logistic support. For example, it encourages the construction of national high-tech industrial development zones. The concept is largely inherited from Deng Xiaoping’s Special Economic Zones that walled off domestic interference at the time. The Decision addresses the need to support private S&T enterprises and medium-size S&T organizations by providing investment and banking services. Additionally, it encourages improvement of S&T personnel management system, and convenience of transfer of S&T results. To make these happen, the Decision stresses (1) providing meaningful rewards to scientists with achievements; and (2) further improving IPR environment. Phase 4, Market Integration (2003–2006)

In October 2003, the CPC issued The Decision on Issues Regarding the Improvement of the Socialist Market Economic System. The focus is on improving citizens’ quality by arming them with S&T knowledge. Meanwhile, the Decision stresses reforming scientific, education, and cultural systems to improve China’s national innovation capability. Free flow of human resources is a prerequisite to an innovative environment. Hence, to nurture, attract, and retain talents, a flexible personnel system is essential. The Decision encourages S&T organizations to adopt the market system that allows human resources to be distributed according to market needs. An important contribution of this Decision is that it stresses that China’s education system must be connected to the practice and that entrepreneurship must be encouraged.

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The Decision indicates that the greatest advantage of developing S&T is that it is capable of turning China’s huge population into a powerful resource of innovation, completely changing the population-burden pessimism. Phase 5, Reassuming Direction (2006–2020)

This period is marked by the release of The Guideline of Mid- to Long-Term Development of Science and Technology 2006–202010 by the State Council in February 2006. The Guideline sets sustainable economic growth as the primary target. In addition, the Guideline aims to achieve a number of world-class S&T breakthroughs by 2020, qualifying China as a member of the ranks of innovative nations in the world. A major difference between this latest guideline and previous documents lies in its admirable candor in identifying areas of weaknesses. For example, the Guideline recognizes serious mismanagement during the reform that resulted in waste of energy, environmental pollution, irrational economic structure, weak agricultural foundations, and underdevelopment in service and high-tech sectors. It indicates a weak education system that falls short in fostering entrepreneurship, creativeness, sense of competitiveness, and efficiency. The straightforward revelation of these weaknesses suggests that the Chinese government is determined to revolutionize the domain. The Guideline indicates that despite past success in economic reforms, serious problems remain. For example, the S&T system is not intrinsically congruent with R&D, because of its lack of connection with the market. Enterprises have yet to become the main bodies of innovation. R&D organizations generally lack coordination among themselves resulting in redundancy and waste. Lack of coordination among decisionmakers results in irrational allocations of resources. Additionally, evaluation systems fail to provide useful feedback to management. Moreover, the inadequate reward and advancement system fails to encourage innovative efforts.

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The Guideline indicates that solving environmental problems, preserving water resources, and clearing bottlenecks that constrain economic development will be critical to growth. Population growth and looming pressure of population aging are among the deepest concerns. The Guideline vows to contain China’s population to within 1.5 billion and birth defects to below 3 percent by 2020. The Guideline recognizes S&T as the number one resource in reaching these goals. It stresses the importance of self-reliance and integration of new learning and points out that it is insufficient to just import technology, because any learning without integrating with China’s own system would be futile. The Guideline identifies the following details to achieve by 2020: 1. Acquire a set of information technologies and manufacturing services that are critical to the country’s competitiveness in this area. 2. Promote integrated scientific farming technologies, guarantee food safety, and bring China’s agriculture to an advanced level. 3. Raise efficiency in energy consumption and preservation. In energy renovation, develop nuclear energy, and in the meantime, promote renewable energy. 4. Improve urban environment and community building; adopt a model of recycling economy to preserve resources. 5. More effectively prevent serious diseases such as liver-related diseases and HIV. 6. Ensure S&T self-reliance in national defense, particularly in weaponry systems. 7. Improve education, increase the level of tolerance, and bring up a new generation of scientists who will lead the nation’s scientific research and push it to the most advanced world level. Increase the rate of research citations, such that China will rank among one of the five most cited countries.

To achieve the above goals, the Guideline pledges to increase investment in S&T to 2 percent of the GDP by 2010, and above 2.5 percent by 2020; realize a 60 percent S&T return rate; and reduce reliance on foreign technology to below 30 percent.

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THE SYSTEM OF NATIONAL S&T PROGRAMS

S&T projects of national interests or initiatives are funded by the government, primarily through national-level S&T programs. As of now, 10 programs have been established to support national priorities. These programs are an important part of China’s innovative system in that they serve to activate a wide range of dependent research networks. S&T labs, universities, and private research centers may submit proposals to compete for funding or to participate in the bidding of national projects. Application guidelines are normally posted on the programs’ Web sites. Applications are reviewed and monitored by planning committees. However, typically many research results are not publicized, particularly the ones related to national security. The 10 major government programs are briefly introduced as follows: Key Technology R&D Program

The program sponsors key areas of S&T, with varying focuses in each Five-Year Plan. During the 10th Five-Year Plan (2001– 2005), for example, 12 projects were prioritized: large-scale circuit and software design, online security of banking and data management, genetic testing chips, electric automobiles, magnetic high-speed transportation, new drugs and modernization of traditional medicine, agricultural product processing, milk product processing, food security, water-saving agriculture, water pollution management, and research on technological standards.11 During the 11th Five-Year Plan (2006–2010), the priority was put on technologies related to energy saving and sustained economic growth. National High-Tech Development Program (863 Program)

The 863 Program was established in March 1986, hence the name. The program was originally designed to focus on seven areas, including biotechnology, space, information, laser,

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automation, energy, and new materials. The program subsequently expanded its coverage to interdisciplinary domains and S&T education.12 The Spark Program

Founded in 1986, the Spark Program aims at helping rural China with modern farming technologies, including developing rural industry, and training rural entrepreneurs. Operations include building Spark technology support centers, agricultural technology enterprises, and technology training bases.13 China Torch Program

Founded in 1988, this program aims at implementing S&T products in production processes, and at commercializing technological products. An important part of its operation is to promote international S&T cooperation; help returning overseas scholars set up their businesses; and develop such research facilities as business incubators, university science parks, and enterprise service centers. Training technical managerial personnel is an important part of its function.14 National Key Basic Research Program (973 Program)

Founded in 1997, the 973 Program focuses on funding basic research with four main tasks: (1) conduct multidisciplinary studies in agriculture, energy, information, energy resources environment, population, health, and new materials; (2) engage in explorative forefront basic researches; (3) conduct training in S&T; and (4) build centers for basic research. A few examples of research projects funded include ‘‘Basic Research on the Newgeneration of Iron & Steel Materials,’’ ‘‘Establishment of the Theoretical and Technological System on Disease Genome,’’ and ‘‘Research on Structural Performance, Molecular Design, Micro-structural Design and Manufacturing Process of the Photoelectrical Functional Crystal.’’15

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Key National S&T Industrial Program

Founded in 1992, the program focuses on supporting projects in agriculture, energy, transportation, communication, electronics, biomedicine, new materials, and social development. The program is particularly interested in funding the most advanced interdisciplinary, inter-domain projects, and projects that are key to the national economy but banned by foreign embargo.16 National S&T Program for Social Development

Founded in 1996, the program aims to improve the quality of life through conducting S&T projects in areas of medication, environment, natural resources, housing, marine resources protection and exploration, and natural disaster prevention. The program expires in 2010.17 National S&T Innovative Program

Founded in 1996, the program supports S&T-related peripheral projects, such as demonstration centers, test-drive programs,international coordination, product publicity, and so on. The program aims at providing services in these areas to the other research funding programs, such as the 863 and 973 Programs.18 National Knowledge Innovation Experiment Program of Chinese Academy of Science

Founded in 1998, the program aims at mobilizing S&T resources domestic and abroad, including human and data resources. The program manages the Hundred-Scientists Program, which was designed to recruit hundreds of scientists worldwide and to provide funding and research support to them. Another effort was to set up a project named ‘‘Light in the West’’ that encourages scientists to contribute to the government’s ‘‘Developing the West’’ campaign.19 The program expires in 2010.

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Founded in 1999, the fund supports SMEs in S&T projects. In 2009, the program funded 2,725 projects in areas of electronic information, biomedicine, new energy resources, and environmental protection, for a total investment of 1.6 billion RMB.20 State-funding programs have supported many projects. Overall, the policy mix has been effective to a great extent in getting things done. Despite lagging structural reform, China’s S&T investment has been accelerating with unprecedented speed. According to data from the Organisation for Economic Cooperation and Development (OECD). China’s R&D spending has increased nearly 19 percent since 1995 and reached $30 billion in 2005, making it the sixth-largest worldwide. Its total number of researchers ranks behind only the United States in world figures, followed by Japan. R&D has yielded important progress. China’s share in the world scientific publications rose from 2 percent to 6.5 percent over the decade ending in 2004. In some areas, China is quickly gaining the top ranking. For example, China already ranks second in international publications on nanotechnology. The country’s patent applications account for 3 percent of applications filed under the Patent Cooperation Treaty (PCT) of the World Intellectual Property Organization (WIPO), and these patents are doubling every two years.21 Dr. David Lampton, director of China Studies, Johns Hopkins University, indicates that the multiple facets of innovation are often ignored when assessing China’s progress. For example, packaging existing technologies for new purposes is also a kind of invention, and China has been good at that.22 The concept of targeting a few critical areas and dedicating available resources to them has been a successful strategy since the Mao era. It reflects the reality of a country with 1.3 billion people and very low per capita GDP. According to OECDcompiled data, in 2005, 66.5 percent of government funding went to government research institutes, with the remaining going to higher education (20.4 percent) and businesses (13 percent).

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There were 3,091 government research institutes, 1,792 universities and colleges, 28,567 large and medium-size enterprises (LMEs), and 248,813 SMEs.23 In higher education, more than 50 percent of S&T and R&D funding comes from the government. In 2005, expenditure by the top 50 universities accounted for 66 percent of total R&D expenditure in natural sciences and engineering in the higher education sector. Funds are distributed based on projects. Direct participation by higher education in the S&T market was 8 percent in 2005.24 A wide alliance between higher education and businesses is forming, taking advantage of S&T personnel and funding sources. Business incubators and science parks are examples. Government programs such as the 863 Program, the Torch Program, and the Sparks Program have lent support. However, funding efficiency could be improved. Despite the titles of the funds and their declared goals and objectives, funding scopes overlap. With respect to project selection, every program vows to maintain ‘‘openness, fairness, and accountability’’ as its guiding principle, and to choose projects to fund based on the priority ranking of national needs. However, official descriptions on respective Web sites are filled with political jargon that is hardly informative about the funds’ specifics. Evaluation procedures and standards are vague for most programs. These reflect not only a lack of transparency, but more important, a lack of responsibility, which was typical with state programs in the past. It is a fact that China is still struggling with the heritage of the planning economy, which may be the reason why funding allocation favors government research institutes. In addition to national programs, an increasing number of other programs are funded by provincial governments or by universities and research centers. Some are co-funded between the Chinese government and private investors. For example, the Youngtze River Scholars Program (YRSP) was founded in 1998 by the Ministry of Education (MOE) and a Hong Kong–based private foundation, the Li Ka-shing Foundation. The program sponsors young and middle-age scholars, home and abroad, to

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lecture at Chinese universities.25 Lecturers must be administrative leaders or high-achieving innovators. From 1998 to 2006, the program sponsored 1,107 scholars to lecture at 97 universities. Additionally, each year, the program gives out 0.5 million to 1 million yuan awards to ‘‘scholars of the year.’’ Similar programs include the ‘‘Hundred Talents Program’’ of the CAS and ‘‘National Distinguished Young Scholars Program’’ of the NSFC. Local programs funded by provincial governments include ‘‘Zhujiang River Scholar Program’’ (Guangdong), ‘‘Minjiang River Scholar Program’’ (Fujian), and ‘‘Sichuan Scholar Program’’ (Sichuan), which emerged to meet the demand. RISING HIGH-TECH EXPORTS

During the past three decades, China’s S&T has achieved remarkable progress in freeing itself from the rigidity of the planning economy and going in the direction of market orientation, open competition, enterprise-centered models, and individual creativity. The benefit of the transformation is reflected in the rising productivity, in particular, in boosting exports to unprecedented levels, and in the founding of new and innovative companies. The sector that most directly benefits from S&T is China’s exports. In the past 10 years, China has greatly increased its share in leading markets and exporting a wide variety of products. Products made in China are more ‘‘sophisticated’’ than those of countries with similar endowments and have expanded into many high-tech fields. According to NBS, in 2007 hightech exports were $347.8 billion compared with $281.4 billion in 2006. These exports are heavily concentrated in two categories: (1) office machinery, and (2) television, radio, and communication equipment. Exports such as pharmaceuticals are relatively weak. According to OECD, China had become the predominant assembler of Information and Communication Technology (ICT) equipment by 2005, contributing from 4 percent in 1996 to 20 percent of the world’s total in both imports and exports.26 According to an OECD policy review,

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however, foreign-owned enterprises, joint ventures, and wholly foreign-owned firms, including those controlled from Hong Kong, Macau, and Taipei, tend to be the producers of exporting goods. Their contribution accounts for 88 percent of the total exports. In particular, wholly foreign-owned enterprises have significantly increased their share in exports during the past decade, whereas that of joint ventures and especially SOEs somewhat decreased. This explains why in high-tech industries, notably ICT-related manufacturing, national brand names are still rare, and technologies transfer is characteristic of this period.27 SPROUTING INNOVATIVE COMPANIES

The government’s efforts in leveraging S&T organizations to seek their own futures rather than survive on public sponsorship has created many types of fallouts. These measures created both insecurity and opportunities for the scientific community. While many SOEs vanished, several among them later grew into China’s major S&T powerhouses. At each stage, creative entrepreneurs take advantage of the venues opened by new policies and start exciting businesses. Three stories illustrate the entrepreneurial dynamics; they are the stories of Lenovo, New Oriental Education and Technology Group, and Baidu.com, Inc. Lenovo

In 1984, 11 like-minded young scientists headed by Liu Chuanzhi started an importer technology firm with 200,000 RMB (US$25,000) funding from the CAS. Some 21 years later, the company took over IBM’s personal computing division. At a time when IBM’s portable computer weighed 30 pounds, Liu Chuanzhi launched the New Technology Developer, Inc. (the predecessor of the Legend Group) to engage in the PC market. In 1987, Legend Group was founded and the company rolled out the Legend Chinese-character card that later received the highest National Science-Technology Progress Award in China. A breakthrough both in technology and marketing in 1990

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allowed the company to leap ahead. When personal computers first appeared on the market, China’s PC producers merely assembled computers in small workshops in response to customer needs. Soon after, brand names were launched, including the Legend PC. Legend’s products became competitors of IBM PCs, and competing with IBM was the company’s strategy to grow. For example, to counter IBM’s ThinkPad line launched in 1992, the first notebook with a 10.4-inch color Thin Film Transistor (TFT) display and a TrackPoint (red ball) pointing device, Legend introduced its 1þ1 home PC that entered the Chinese marketplace in the same year. Legend’s competitive strategy caught the attention of the Chinese government, which was looking to support domestic high-tech companies, especially those that were competing globally. In 1992, Legend PC products were accepted by the China Torch Program. In 1994, the company’s stock was listed on the Hong Kong Stock Exchange. By 1996, Legend had become the market-share leader in China. The opportunity to become the dominant player in the domestic market and subsequently one of the biggest PC producers in the Asia-Pacific market came in 1997 when Legend signed an Intellectual Property agreement with Microsoft, the most valuable deal made for China to date. Two years later, IBM announced its exit from the PC retail business. As a result, Legend leaped to the top PC vendor position in the Asia-Pacific region, and came out number one in the Chinese national Top 100 Electronic Enterprises. To take advantage of the future Internet market, Legend developed an Internet PC, with its ‘‘one-touch-to-the-net’’ feature, which enabled millions of Chinese users to easily access the Internet. The current company name, Lenovo, came in 2003 when Legend announced its new logo to mark the company’s new direction of expansion into the overseas market. In 2004, Lenovo and IBM announced that Lenovo would acquire IBM’s Personal Computing Division, including its global PC (desktop and notebook computer) business. This decision was finalized in 2005, making Lenovo a top-tier (third-largest) global PC leader. Subsequently,

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Lenovo announced the closing of a $350 million strategic investment by three leading private equity firms: Texas Pacific Group, General Atlantic LLC, and Newbridge Capital LLC. The same year, Lenovo launched the ThinkPad X41 Tablet, the industry’s thinnest and lightest PC. Later on, the ThinkPad Z60 was equipped with a biometric fingerprint reader.28 As of 2010, Lenovo’s ThinkPad is the most popular PC in the world. New Oriental Education and Technology Group

Michael Minhong Yu was a country boy who went to Peking University to earn a degree in English. In his office at New Oriental Education and Technology Group in Beijing, a company dedicated to English training, Yu still hangs a photo of his family’s old farmhouse where he had lived for 18 years. The house is a duplex, with one side for residential use, and the other side for raising domestic animals.29 Michael Yu’s company was listed on the New York Stock Exchange (NYSE) in 2006. As of 2010, the company had a market capitalization approaching $3 billion. In the 1980s, Yu, like most young people of his age, cherished the idea of studying in the United States. Studying English was seen as a ticket to a better life. Then, the 1989 Tiananmen Event occurred, making it suddenly difficult for students to get visas. Yu had to stay home, not knowing all the opportunities that were waiting for him. By that time, Yu had become an English teacher at Peking University. To fulfill his dream of studying in the United States, however, he began teaching extra hours at English training schools, in the hope that he one day could sponsor himself to study in the United States. Having witnessed how English training schools operate, Yu realized that he might be able to start an English training school himself. When Yu started New Oriental in 1993, he was immediately successful, and the rest became history. In 1995, the number of students enrolled reached 15,000; by 2005, the cumulative enrollment had reached 3 million. In 2007, the enrollment for the year was more than 1 million. The New Oriental had become a business

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phenomenon: the company’s network includes 257 schools and learning centers, 23 New Oriental bookstores, more than 5,000 third-party bookstores, and approximately 4,900 teachers in 39 cities throughout China.30 Baidu.com, Inc.

In China, when computer users want to find information online, they ‘‘Baidu’’ it. In Chinese, ‘‘Baidu’’ means crossing the river on a ferry boat. Now it also is the name of a company referred to as the ‘‘Google of China,’’ except that Baidu has far surpassed Google in the Chinese search space. Baidu.com, Inc. provides Chinese and Japanese Internet search services primarily in China and Japan. The company offers Chinese and Japanese language search platforms that enable users to find Web pages, news, images, and videos. One popular feature is Baidu’s MP3 Search that provides algorithm-generated links to songs and other multimedia files.31 Robin Yanhong Li, trained in the United States, returned to China to start the search company. The company’s stock went up 350 percent on the first day of trading on the NASDAQ in 2005. Li was surprised at the stock market’s reaction: ‘‘I thought $27 was a very reasonable number; if it could go up to $40, I would have been very happy. It went to $150. Who could imagine that!’’ As of March 2010, the stock of Baidu.com (BIDU) is being traded on the NASDAQ at around $600 a share, surpassing Google’s share price. Born in an impoverished town 200 miles from Beijing, Li is grateful to Deng Xiaoping’s reform. In a TV interview with MSNBC, Li says: I feel very fortunate that I was born in the right time. When I grew up, China had a lot of open opportunities. The first opportunity for me was to go to college; the second one was to go to the U.S. to receive education. In 1999, I decided to open my own company.32

Li opened Baidu.com, Inc., in 2000, just two years after Google was founded in the United States. In 2009, Baidu enjoyed

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approximately 63 percent of the market share in China, while Google’s share was around 26 percent. With respect to Baidu’s number-one popularity in China, Li believes that the company’s cultural understanding and expertise in addressing the demand gives the company an edge. ‘‘We are closer to the user, and we can make decisions quicker,’’ says Li.33 Social networking and mobile search services, for example, are strong areas of Baidu. Kaifu Li, Google China’s president, believes that the primary reason for lagging behind is Google’s delayed entry into China’s marketplace. With regard to criticisms that Baidu’s search engine facilitates illegal music downloads, Robin Li vehemently denies it by indicating that Baidu does not store content files, as it is a search company. The founder of Baidu.com is confident that users will choose his company.34 Many factors contributed to these successful experiences, one of which was the opening of the stock market. The launch of the Shenzhen Stock Exchange (1990) opened up the capital market for company-based R&D, allowing the transformed SOE firms as well as private firms to tap into a wider range of funding resources, both in China and abroad. Companies may issue ‘‘H shares,’’ for example, to trade on the Hong Kong Stock Exchange for international investors, and ‘‘A shares’’ of the same stocks in the domestic market. The liquidity of funding resources energized R&D activities at companies’ labs, and university research centers. The government’s policy was to mobilize a concerted effort to promote S&T and let it receive financial support from the entire society. This turned out to be particularly helpful to SMEs that are short of funding opportunities. LIMITATIONS OF CHINA’S S&T FRAMEWORK

Because of its planning economy background, S&T reform is primarily a process of claiming freedom from the planning tradition. Under the traditional framework, everything was planned by the central or local governments, innovation was stifled, little was left to individual creativity. The Guideline (2006–2020) identifies

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a number of remnant barriers to S&T innovation. Not all barriers come from the planning legacy, however; some of the challenges derive from China’s traditional culture which stresses the maintenance of the status quo more than breaking new ground. The new generation is breaking new ground in all aspects, and that is a reality. When it comes to building an innovative nation, the innovator has to be the center. Education

Building an ‘‘innovative nation’’ is a widely encompassing process. To achieve this goal, China’s education system must do two things: a) further expand the coverage of higher education, making it more accessible; and b) stress the training of practical and creative abilities. During the Mao era, education experienced the heaviest damage. Unlike the manufacturing sector that made dramatic ramp-up during the past three decades, education modernization seems to have been changing at a slower pace. NBS data show that in 2006, out of every 100,000 population, on average, 1,816 students (or 1.8 percent) were enrolled in a four-year college, which was higher than previous years. In Beijing and Shanghai, the percentages were 6.9 percent and 4.2 percent, respectively; in Qinghai and Guizhou Provinces, the percentages dropped to 0.9 percent. Less than 8 percent of the population currently has a college degree, while 24 percent in the United States have a Bachelor’s degree or higher. These numbers suggest that offering higher education to more students remains a challenge. More important, education ideology needs a revolutionary change. Traditionally, Chinese education does not foster critical and innovative thinking, or entrepreneurship. Educators stress strict discipline and high examination scores; rote learning is by far a favored method; training in creative and critical thinking is suppressed, in a sense, when a high test score is the only thing that ensures high school admission and college entrance. The annual national college entrance examination is notoriously difficult because it stresses intricate details rather

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than problem-solving skills. Tests such as these force students to study for tests rather than foster innovativeness. Secondary schools that send more students to top national universities tend to command higher respect and, hence, higher tuition and fees. As such, pressure on students is high, coming from both parents and community. As early as kindergarten, students are loaded with afterschool lessons and assignments, and left with little time to play or engage in community activities. An English class may dedicate most of the class time to spelling and grammar drills, but little to communicative activities, because the latter is not included in high school or college entrance examinations. Hands-on experience is a much lesser component than found in schools in the West. Little training is offered to prepare students for future work environments. Thus, testing is more of a tool for selection than a learning aid that helps the student identify goals and objectives and improve. This test orientation makes China’s education incongruent with the country’s innovative goals, and it is not conducive to training a creative workforce, but rather may counter creativeness. The old saying that ‘‘grades are what students depend on to survive’’ remains a valid description of the reality. Reforming the testoriented education will liberate creativeness of students and must be done rapidly. On the other hand, these problems are also attributable to insufficient funding and lack of a high quality teaching force. For example, in provincial colleges, science lab conditions are widely insufficient. The availability of hands-on opportunities in secondary schools falls short even further. When teachers are insufficiently equipped, it is difficult for them to train students in critical and creative abilities. For example, in foreign language education, strong emphasis on grammar and vocabulary often at the expense of communicative skills training may be associated with the fact that most teachers are unfamiliar with target cultures. These shortfalls call for an increase in education expenditures. In 2008 the government’s education budget was 3.48 percent of the year’s GDP of 30.07 trillion RMB.35 Comparatively,

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developed countries’ education expenditures proportional to GDP are higher, for example: France—5.7 percent (2005), the United States—5.3 percent (2005), and Canada—5.2 percent (2002). China’s examination tradition dates back to as early as the Tang Dynasty (681 CE–960 CE), and some scholars push the date back to the Han Dynasty (206 BCE–220 CE). Civil service examinations had been the only venue to officialdom until the early 1900s. While civil service examinations had given equal opportunities to many brilliant statesmen who would have remained unknown, they were profoundly restrictive, primarily serving the state philosophy—Confucianism. S&T had no place in traditional civil service examinations at all and was repressed during the prereform time. Successful reform of education largely depends on support from the society. Here again, the market mechanism will be a driving force. When the market commands practical ability and encourages the connection between the classroom and economic development, changes in education will likely follow. In fact, this is already happening. Schools, students, and parents are coming to the understanding that what the job market expects of a college graduate is problem-solving skills, rather than a Peking University or a Tsinghua University diploma alone. NBS data show that more and more students are enrolled in technical schools instead of 4-year colleges (see Figure 4.1).36 In 2009, 10.2 million candidates took the annual college entrance examination; among them 62 percent were enrolled.37 The total number of candidates, however, was 400,000 fewer than 2008. Most of those candidates had chosen to attend vocational schools. Some speculate that the outcome may also have been a result of the ongoing global financial crisis. It is a fact that only the top-tier universities are actively connected to industries and are contracted with R&D projects. Hopefully, a positive cycle will prevail sooner rather than later, during which time the tie between education and industries will be closer, and to the extent that they become integral to one

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Figure 4.1. Source: NBS.

another. As Western experience proves, such a relationship is not only fundamental to an innovative culture, it is also a viable education funding solution. Competition

During the period of the planning economy, competition did not exist. In the postreform era, China struggles to set up a framework to not only encourage competition, but also ensure that competition achieves its original purpose—that is, rewarding the innovator. Market competition provides stimulus as well as guidance for innovation. The success stories listed in this book show that the market mechanism is achieving effects. Never has there been a time in China’s history during which successful entrepreneurs have grown in such a great number. Further improvement is critical to making this growth sustainable. A favorable system would be one in which distortive factors are kept so low that they do not hamper competition. One such condition would be rule of law rather than rule of guanxi; moreover, government intervention and protectionism at local levels

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need to be further reduced. Another condition includes the availability of financial resources that support SMEs, which tend to be the most innovative entities and the least funded. In these aspects, China has room for improvement. IPR Protection

IPR protection is key to stimulating innovative activities. The transition to more innovation-driven growth needs the protection of strong IPR, which includes powerful antitrust laws and reliable law enforcement. ‘‘Strike-hard’’ campaigns may achieve temporary results; however, real solutions will lie in establishing an effective legal environment. Since China joined the WTO and signed the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the Chinese patent system has been reforming to align with international standards. More patent applications have been filed as a result. A great deal of progress has been made, but much needs to be done to meet the needs of both domestic and foreign-owned innovative enterprises operating in China. OECD’s study indicates in its annual review of China’s IPR condition that infringement of IPR, particularly of copyrights and trademarks, continues to cause concerns. Both judicial and law enforcement are inadequate and need substantial improvement.38 Other reports indicate that legal training for law enforcement officers and legal personnel is insufficient. The lack of effective IPR protection could have direct consequences in the economy: it may offset motivation in R&D development both domestic and abroad, affect foreign trade, and lead to production of poor-quality and even dangerous products. The Chinese government and state media are putting a greater emphasis on IPR education. In the meantime, the legislation has been passing tougher laws that would make IPR infringement increasingly costly to the perpetrator. In 2006, China’s National IPR Protection Working Group released the 2006 Action Plan on IPR Protection targeting four

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areas: trademarks, copyrights, patents, and imports and exports. To date, many international benchmarks have been met successfully according to OECD. IPR protection laws are constantly updated to add new protective features. For example, the Trademark Law issued in 1993 and revised in 2001 was again revised in 2008 to guarantee that inventions outside the country are appropriately recognized.39 An immediate beneficiary of the improved IPR protection environment is the U.S.-based Pfizer Inc. The company has taken several trademark cases to Chinese courts. The company’s drug Viagra has become a profitable product in China with a price of 99 RMB or approximately $14 a pill, while the cost of production is only 1 RMB. The market was estimated to be worth 10 billion yuan.40 It follows that China’s domestic companies started to produce the drug under the trade name Weige and Pfizer filed for rights under that name. In 2001, the Bureau of National Intellectual Property Rights (BNIPR) granted Pfizer the patent for its erectile dysfunction (ED) drug Viagra under Pfizer’s registered Chinese drug name Wan Ai Ke. Essentially, the patent granted the exclusive right to Pfizer for using sildenafil citrate in treating ED. The ruling was appealed by 12 Chinese drug producers on the ground that Pfizer’s description of its product lacks specificity. In 2004, BNIPR revoked the patent, which prompted Pfizer to bring its case to the People’s Court. In a December 2006 ruling, the First Intermediate People’s Court of Beijing (FIPC) rejected BNIPR’s decision and ordered two Chinese companies to stop producing counterfeit Viagra. In January 2007, however, the same court reversed its ruling on the ground that several Chinese drug makers’ use of Weige, the Chinese name for Viagra, does not constitute trademark infringement.41 Pfizer eventually brought the case to Beijing’s High Court, which overruled FIPC’s ruling on September 7, 2007, and reaffirmed that Pfizer holds the patent on Weige effective until the patent expires in 2014.42 According to the patent, any Chinese company producing ED drugs using sildenafil citrate

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would constitute patent violation. Pfizer China was pleased with the ruling and posted the following statement: We view today’s decision as a confirmation of China’s commitment to effective patent protection in China and will enhance the confidence of the broader business community interested in investing in China. Pfizer will continue to vigorously defend its IP rights in China.43

In the area of copyright protection, the Chinese government has intensified its campaigns against piracy. For example, a national crackdown Hawk Action netted 5,981 counterfeiters in 2005, which was followed by Operation Mountain Eagle in 2006 that aimed at utilizing technology to raise effectiveness in law enforcement, and another series of campaigns dubbed Operation Sunshine I, II, and III through early 2007. Meanwhile, the government issued a regulation that imposes a 100,000 yuan fine per copyright infringement of works disseminated over the Internet. Despite these efforts, China’s copyright protection remains in its developing stage and inconsistencies are not uncommon.44 IPR laws are interpreted differently at times resulting in inconsistent rulings. Nevertheless, as the economic reform progresses, the awareness of copyrights and the pursuit of IPR protection are now embedded in people’s consciousness. One example is the recent lawsuit brought by 482 graduate students against Wanfang Data Co., Ltd.,45 in September 2008 at the People’s Court of the Chaoyang District of Beijing. The case concerns whether students owned copyrights of their theses. Students alleged that Wanfang included their theses in the company’s database ‘‘Dissertations of China’’ without their authorization. They demanded an apology and compensation for economic losses and emotional distress. Wanfang defended that the company’s practice does not constitute a violation of copyright on the ground that the company had signed agreements with related administrations, such as the universities and the hosting network of China Science and Technology Information Research Center (http://www.istic.ac.cn/). Wanfang’s second argument is that the database is designed to serve public benefit, and for that reason, the company collects only a nominal charge

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of 2 yuan, or approximately 30 cents in U.S. dollars, per dissertation copy when sold to the National Library. The plaintiffs argued, however, that the signed agreement was to allow the schools to publish their dissertations in different media, but not for transferring the usage rights. They believe that, essentially, any form of publication without the author’s authorization constitutes violation of copyright. With respect to the public benefit argument, the plaintiffs disagree in that, although the per-copy charge is low, the quantity is large. For example, the National Library in recent years has paid more than 700,000 yuan to Wanfang for using its database. Additionally, according to Wanfang’s own claim, their clientele includes 50 percent of all higher education institutions of China, which puts the company’s revenue well above 100 million RMB. Moreover, the court discovered that Wanfang also sold the access rights through mobile telephone services and other instruments such as access cards.46 The 482 graduate students sued for a compensation of 40 yuan per thousand words in addition to 7,000 yuan of compensation for emotional distress, or 350 million RMB in total. On October 15, 2008, the People’s Court of the Chaoyang District of Beijing decided in favor of the graduate students, ordering Wanfang Data to pay 364 graduate students economic damages and court expenses, ranging from 2,300 yuan to 3,200 yuan per dissertation theses. The judgment was hailed as a major victory in IPR protection.47 SME FINANCING

SMEs are leaders of homegrown innovative forces. They belong to the private sector that is producing more than half of China’s GDP. SMEs are active in launching new ventures that are essential to innovation and in fostering an innovative atmosphere. They also tend to have difficulties in securing loans for two reasons: (1) they are volatile, and most of them do not qualify for the investment grade for domestic or foreign banks; and (2) their success threatens the very existence of SOEs. Hence, given that China’s financial system is state-owned, it traditionally

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does not serve SMEs as a priority. As a result, large governmentsponsored S&T projects are funded by state appropriation; privately owned firms largely depend on self-funding; large-size private firms have access to both state funded programs and foreign venture capital; and as a result, SMEs are left with few funding opportunities. A typical way for small firms to acquire funding is to partner with large firms, in which case they trade a significant portion of patent rights. It is a traditional practice for the banking system to favor SOEs, in part because SOEs are the largest employers and must be supported at all costs. Conversely, the state system does not have the legal and regulatory settings for operating any adequately functioning venture capital system. It takes time for state banks to acquire experience so that they can identify and invest in high-risk ventures. The top-down approach, on the other hand, whereby the government instructs state banks to invest in SMEs’ R&D projects (known as ‘‘policy-lending’’) without sufficient regulatory oversight yet in place, is unlikely to produce desirable outcomes. Instead, this may result in new bad loans. The same shortfall exists with foreign banks as well, as most of them lack the expertise needed to manage risks with China’s SMEs. Succinctly put, how to fund innovations is a great challenge. The Guideline (2006–2020) proposes to introduce new funding mechanisms for policy banks and commercial banks to increase exposure to high-technology SMEs and startups. As the economy becomes more market-based, venture capital that can address market failures when they occur is needed. This is particularly important for SMEs that by nature have higher risk-return levels. One way for the government to support SMEs’ innovative ventures is through public procurement. While this is not uncommon in the West, the Chinese government typically does its procurement primarily with SOEs. Now, it has become important for the government to expand procurement to SME sources. The Guideline (2006–2020) treats public demand as a key factor in invigorating economic development and innovation. This represents a policy shift from the traditional entirely supply-side policies and indeed favors technology development. To conduct fair

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government purchasing, the government must first maintain transparency through coordination of agencies. The Guideline (2006–2020) clearly states that public procurement in technology products cannot be ‘‘ordered’’; it must be based on the demand for innovative and competitive products or services and through an apparent bidding process, regardless of the provider’s status. Given the size of the Chinese market and the importance of the government in the national economy, public procurement has the potential to become a significant financial source for innovative activities. For example, despite the fact that the volume of government procurement has been expanding rapidly, it accounts for only about 2 to 2.5 percent of the GDP, which is still far below the levels in most industrial countries, which average 10–15 percent of the GDP. China has much room to grow in this area. From OECD countries’ standpoint China’s government procurement must not be a domestic operation only, now that China is a member of the WTO. OECD countries are watching China’s government procurement practices with the highest interest, because whether China’s new procurement policies conflict with the WTO’s Government Procurement Agreement (GPA) carries a tremendous impact. China’s public opinion with respect to entrance into the WTO’s GPA is positive: it opens up China’s public procurement market and will not likely affect Chinese producers, China being ahead on many products.48 Joining GPA will likely broaden funding opportunities to Chinese SMEs as well. Following the principle of reciprocity, Chinese companies also may enter public procurement markets abroad.49 It is a fact that China’s domestic credit market may remain small for a long period and thus China will continue to attract foreign investment. As of early 2010, China’s entry into WTO’s GPA was under preparation. S&T Human Resource Management

In S&T development, successfully managing highly trained personnel is just as important as locating capital resources, and

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higher education is the main source of talent. According to OECD,50 university enrollments in China have increased quickly to the same level as in the United States and the European Union. The number of graduates has increased to comparable levels. Some 70 percent of S&T personnel work in domestic firms, mostly in large and medium-size companies, while 30 percent work in joint venture companies. One of the challenges in S&T human resources that China is faced with is known as ‘‘brain drain.’’ The history of persecution of intellectuals takes a long time to fade. At early stages of the economic reform, the repatriation rate of overseas students was low. As the economic reform sustains, more and more overseas intellectuals are returning to serve the country as the government’s attitude toward knowledge and intellectuals has changed. Favorable policies have been created to attract overseas students to return and establish businesses or research facilities. Nevertheless, the 1989 Tiananmen Event was a setback to an improving situation. However, the record of the past eight years indicates that the returning rate has been increasing. For example, out of the 144,000 students who were studying abroad in 2007, 44,000 (30 percent) have returned. This compares favorably with the data of 2000, for which out of 38,989 students abroad 23.3 percent returned (see Figure 4.2).51 OECD and U.S. data indicate that the European Union has become a more attractive destination for Chinese students, overtaking the United States in 2004. The second-ranking host country is Japan. The United States is by far the largest recipient of the highly skilled Chinese (57 percent), followed at a distance by Canada (18 percent), Japan (9 percent), Australia (7 percent), and the United Kingdom (3 percent).52 Although most overseas students return to take advantage of the favorable domestic opportunities, some are driven by patriotism. Dr. Chen Aimin is now president of Jinjiang College, a private undergraduate college affiliated with Sichuan University. She left the country to study economics at Pennsylvania State University in 1983, and later became a professor at Indiana State

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Figure 4.2. Number of Students Abroad and Returned. Source: NBS.

University where she won top honors for teaching. In 2005, Dr. Chen returned to Suchian University and assumed the position of vice president, before becoming president of Jinjiang College in 2006. Dr. Chen’s goal is to build a first-class junior Ivy League school in China. In a televised interview, Dr. Chen states that having worked and lived for 22 years in the United States, she finally finds an opportunity to fulfill her wish to serve her motherland with her expertise in education. ‘‘I had achieved everything a professor could hope for in the United States, such as tenure, promotion to full professor, and the award of outstanding professor. What remained ahead for me was to fulfill teaching duties,’’ says Dr. Chen. She returned to China for a more rewarding cause, which is to help China become a nation of educational excellence, to introduce new Western concepts, and to build a bridge of cultural understanding that includes introducing China to the world. ‘‘In that way, I expect to return a service to my country,’’ Dr. Chen says.53 Reform in human resource management could be a critical part of higher education reform. Without a competitive mechanism put in place, healthy changes could hardly happen. In the West, collaboration between universities and industries and other economic aspects is routine. A great number of the faculty

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rely on such relationships for grant opportunities and for identifying research projects. Personnel exchange between universities and industries, and among universities are not uncommon, given that the tenure system is a competitive process. In China, however, universities typically inherit the SOE legacy of lifeterm employment. Reform in personnel management in higher education has been a slow process. Higher education’s funding primarily came from the appropriation of the Ministry of Higher Education before 1986. After 1986, an evaluation-based hiring was applied, but only nominally. Contracts are renewed with few exceptions. In recent years, several universities have taken the lead to reform the system by installing a contractual system in the real sense, the goal is to ‘‘break the iron bowl (stable job),’’ to invigorate research and teaching through competition. Peking University and Tsinghua University started contract-based hiring as early as 2000.54 Shanghai University did not renew contracts with 19 percent of its faculty including 40 associate professors and 5 full professors in 2001, an event that stirred much debate.55 Tsinghua now hires research scientists uniquely on a contractual basis starting in 2009. Reform in the tenure system is believed to be an important step toward energizing innovativeness. In addition to overseas returnees, postdoctoral research centers in China are quickly becoming a main domestic source of S&T personnel. The postdoctoral centers recruit the most advanced scientists from among young doctoral degree recipients whose work represents state-of-the-art advancements, and offer a prestigious salary and the best research facilities. The Chinese postdoctoral system was founded in 1985 at the recommendation of Nobel Prize laureate Tsung-Dao Lee with support from Deng Xiaoping.56 As of October 2009, a total of 1,670 postdoctoral centers are located throughout the country.57 According to China Postdoctor, a network that coordinates research and employment opportunities, there were 7,903 postdoctoral researchers in research centers nationwide, representing a 19.2 percent increase from 2006. Some 2,640 researchers

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(33.41 percent) were enrolled in research centers in Beijing. Financially, the majority (59.64 percent) was self-sponsored and about one-fifth received government financial support. With respect to areas of studies, 40.35 percent of the postdoctors worked in the area of engineering, followed by science (20.09 percent), medicine (10.11 percent), economics (7.41 percent), and management (6.82 percent). The remaining 15 percent were distributed among areas of agriculture, literature, law, philosophy, history, education, and military science.58 From 1985 to 2008, the postdoctoral centers have produced a total of 35,124 graduates (see Figure 4.3). According to China Postdoctor, the Chinese postdoctoral system is different from the American system in at least three aspects. 1. The Chinese postdoctoral centers are funded and managed by the government through the Postdoctoral Commission involving representatives from a variety of government agencies. Daily management work is done by the office of human resources at the research-center level. Postdoctoral candidates must be reviewed and approved by the Postdoctoral Experts Review Committee at the government level. Much of the

Figure 4.3. Number of Postdoctoral Graduates (1985–2008). Source: China Postdoctor.

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research projects are under scrutiny of related managing agencies. Bureaucracy and rigidity of rules and procedures are often eminent hindrances. In contrast, the American system features government support and local management. Researchers have a greater flexibility in research and in selecting ways to take advantage of the market mechanism. 2. In the American system, postdoctoral students are normally paid onethird to one-half of the salary of professionals in the field. The Chinese system treats postdoctors with utmost respect, paying them higher salaries than those received by professionals, devising special incentive policies, offering the best working and living conditions, and making sure that their achievements are protected. 3. As a result of differences in social systems, with the Chinese being a semi-market economy, employment flexibility is more limited compared to that of the U.S. Employers and job seekers do not always have the right to their own hiring decisions. Forced retention is an existing residual of the planning economy that is being phased out.59

With regard to the last point, the Chinese government is fully aware of the personnel management deficiency and has made it a target of the current reform. A government newspaper, The Guangming Daily, had the following comments: With the development of the socialist market economy, competition is intensifying among regions, government organizations, and enterprises. As a result, free floating of talented personnel is unstoppable. It is absolutely normal for any talented person to join or leave a locality, an organization or a firm. What keeps people is a fair and just work environment. . . . However, some organizations set every barrier possible, including not releasing personnel documents and retaining the Hukou from being transferred to block talented people from leaving. They ignore the fact that the ‘‘jailed’’ talents are not able to deploy their expertise. The bureaucratic practice results in waste for both private and public interests.60

The situation of China’s postdoctoral system adds to the picture at the starting point of China’s innovation race. Many challenges are not unique to the domain of S&T, and some of the challenges have a greater impact on S&T than elsewhere. Deficiencies in personnel management belong to this category. The bright side, however, is that the Chinese are aware of their problems and are determined to make changes.

Chapter 5

Economic Reform Many questions about China’s changes can be answered by looking into the country’s past. In fact, the onset of industrialization dates back to the mid-19th century with the forced opening of treaty ports followed by China’s division into foreign concessions. The French opened a railway line connecting Yunnan to Indo-China, while the British and the Germans gained ground along the east coast. After the warships came the ‘‘soft power’’— U.S. and French missionaries—preaching from the coast to the hinterland, challenging the Confucian dominance. The Opium War opened a window to a heart-wrenching reality—China was a dysfunctional, corruption- and crisis-stricken medieval feudal empire managed under the most intricate bureaucracy one could find that had little chance to defend itself against invasion by Western industrial powers. It was thus agreed, from the emperor down to the farmer, and not without reluctance, that China must learn from the West and start to reform itself. Braids were cut, new schools opened, American-style republicanism was experimented. Then, came Mao Zedong who implemented a powerful European ideology—Communism. By 1949, the Communist movement had shifted property ownership from landowners to poor peasants in the vast rural areas through the Land Reform. The First Five-Year Plan that started in 1953 further converted private property into state-owned property. Urban capitalists were forced to surrender their enterprises, and

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farmers were organized into the People’s Communes. By the end of the 1950s, deprivatization was completed, the People’s Communes and SOEs became new homes to rural and urban populations, and the planning economy was in full swing. While the new Communist regime was prone to economic mismanagement, it was efficient in many aspects. Political movements suppressed dissent and mobilized the nation to build the country primarily through selfless contribution. Household spending was reduced to the survival level; savings went to the boosting of national defense. The successful detonation of the first atomic bomb (1964) and the launch of the first satellite (1969) happened during the years in which the nation was recovering from a deadly famine (1958–1961) that had killed more than 25 million. In addition to the heavy toll on the economy, subsequent waves of political purification campaigns eventually put the Communist regime in doubt. The last revolutionary upheaval, the Great Cultural Revolution (1966–1976), lasted for a decade and caused the heaviest devastation ever on China’s economy. Perhaps as devastating as the Mao era was the Communist failure that provided guidance and momentum—do the opposite and wait no longer. Deng Xiaoping’s economic and political reforms led to a volcanic eruption of economic ventures that have improved people’s lives by many folds. The current reforms are in greater depth than at any time in Chinese history. Market mechanism seeps into every corner, and SOEs are being transformed into private or semiprivate enterprises. Yet, China remains under the rule of one single political party, the system is officially still communist, and the economy is divided into two sectors—the state-owned and the private sector. Despite the prolonged period of growth in GDP in double digits or high single digits, questions point to the nature of the system that underlies perspectives of sustainability. To get a better understanding on this issue, it serves to look into details of economic reforms in areas that have been essential to founding 21st-century development.

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ECONOMIC STRUCTURAL REFORMS

In the 1950s, following the Soviet model, the Chinese economy was divided into the primary sector (agriculture), the secondary sector (manufacture and construction industries), and the tertiary sector (service industries). The shares of GDP produced by these three sectors were 50.5 percent, 20.9 percent, and 28.6 percent, respectively, in 1952. In urban areas, SOEs and POEs coexisted. By 1957, through the movement of Socialist Transformation, the private sector vanished, yielding to the dominance of public enterprises. The private sector was reduced to collectively owned enterprises from mergers of former private businesses and a small number of sole proprietors. The modern economy has evolved from reforms to this base structure. The process is known as building socialism with Chinese characteristics or market economy with Chinese characteristics in Deng Xiaoping’s terms. ‘‘Chinese characteristics’’ refers primarily to CCP’s leadership. The prereform system was composed of two core mechanisms— central planning and SOEs. Typically, the Chinese government carried out the central planning through the State Planning Commission of the State Council, which prioritized the production for a period of five years at a time. Pricing and distribution of goods were decided by the state rather than by the market. Information of supply and demand was gathered by the Planning Commission as an important basis for decisionmaking. Political agendas, however, often had the upper hand. This explains why China was able to carry out nuclear weapon research in the 1960s, even while the nation was struggling with an unprecedented famine. Typically, while central planning can be stunningly effective in allocating resources to critical programs and achieving results, it is ineffective elsewhere. Poor planning was routine, because efficiency is not as important in a central planning economy as it is in a market economy. One example is the Shenyang Smelter and the Shenyang Cable Factory case.1 Shenyang Smelter was a copper producer located next to the Shenyang Cable Factory, which used copper as

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raw material. Both are located in the northeastern province of Liaoning. Despite their proximity, the Shenyang Cable Factory had to receive its copper supply from the remote province of Yunnan, thousands of miles away. Meanwhile, the copper produced at the Shenyang Smelter was shipped to the Heilongjiang Province and other more distant provinces. The Chinese central planning economy was different from the Soviet’s economy in several ways, one of which was its lack of the Soviet-style uniformity, which was due to China’s extensive agricultural tradition and an extremely weak industrial background. Hence, the Chinese central planning economy focused on programs that were of national concern, leaving provinces with more freedom to make local economic plans, resulting in a stronger extraplan economy, or the portion beyond the national plan. Because of the lack of the Soviet uniformity, the Chinese government had its own way to ramp up production—through political and economic campaigns, such as the Great Leap Forward (1957), a widely impacting movement that was implemented in a variety of local ways. This background had its impact on the current economic reform. Professor Yi Feng of Claremont Graduate University, California, points out that the stronger extraplanning economy (versus the Soviet’s economy) resulted in an eminent feature of the Chinese reforms: they are more gradual and experimental than their Russian counterpart in the early 1990s.2 This turned out to be an advantage in the sense that it allowed urban industries to gradually absorb labor demand rather than having to face drastic pressures all at once. The right and left arms of central planning were the SOEs. Theoretically, SOEs are all directed by the central government. In reality, however, differences exist. Enterprises immediately under the central government rank higher in privilege than those under the provincial and county-level governments. Therefore, state control often yields to local control at lower levels. Because of this feature, SOEs are also known as ‘‘people-owned enterprises’’ (quan min suo you zhi) run by managers who serve as agents of the government. In the early 1950s, the Gross Value of

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Industrial Output (GVIO) produced by SOEs was 77.6 percent, and the remainder was contributed by the private sector. By 1978, the year of announcement of economic reforms, the private sector had been replaced by the public sector. Because planning was centrally conducted, state enterprises typically were assigned production quota and took no part in distribution and pricing. As such, the enterprises did not worry about market pressure, because it did not exist. Quality control and work motivation were notoriously weak. Political campaigns, such as ‘‘catching up with the U.S. in 30 years,’’ or the election of model workers and so on, may have boosted production, but they never had a long-term effect. Competition was nonexistent within and without the firms. Material reward was labeled capitalist style and hence excluded. A two-hour lunch break was universal. And, in the workplace it was not unusual to see workers chat, smoke, or play cards on the shift. By the time the Great Cultural Revolution ended in 1976, the Chinese economy was on the brink of collapse. On the other hand, employees were guaranteed lifetime employment, free medical care, child care, housing, and retirement benefits. Larger SOEs operated a full-service system, including hospitals, child care centers, primary and middle schools, and benefit packages that covered ‘‘from cradle to grave.’’ Deng Xiaoping’s economic reforms changed the whole picture. State enterprises were given autonomy in many areas, including planning and distribution to a high level. For example, at an earlier stage, the government instituted a ‘‘two-track system’’ to combine government quota with enterprise profit margin. State enterprises had to first submit the state quota at government-set prices, and then they were allowed to sell the beyond-quota products on the market at their own prices. A similar system was adopted in rural areas, which was known as the ‘‘Contract and Responsibility System (CRS),’’ that allowed farmers to keep their beyond-quota agricultural products and market them to earn cash. These measures gradually relaxed the government’s position in planning, ownership, and pricing

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control, and led to a market-based supply and demand. The economic impact was significant, and production and motivation were boosted to a level higher than ever. As SOE restructuring deepened, the government retreated to maintaining control of large enterprises, letting smaller and medium-size companies go through the privatization process. More than 80 percent of small and medium-size SOEs had to undergo restructuring, mergers, leases, contracting, joint-stock companies, and bankruptcies by the new millennium. To clear bad loans made by state banks, the government opened up a credit market and traded these loans as initial public offerings of stocks in 2002. The debt-equity-swap scheme lessened banks’ burden by getting rid of 1,400 billion RMB of NPLs.3 It turns out that this process remotely prepared China’s banking system for dealing with the 2008–2009 global financial crisis. Structurally, the reform had changed the state sector’s proportion in the economy: the GVIO produced by state enterprises decreased from 77.6 percent in 1978 to merely 33.4 percent in 2007. The number of SOEs also came down from 118,000 in 1995 to 20,680 in 2007. Most important, the remaining SOEs freed themselves from their social responsibilities, such as provision of housing, day care, schools, and hospitals for employees. Finally, the ownership structure of SOEs had changed from 100 percent state owned to a plurality of ownership, with the state having the majority share. The full exit of SOEs, however, will be a prolonged process because of ideological constraints and because of the ongoing establishment of a social security system is not yet ready to fully take care of unemployed workers.4 The GDP structure has also changed. Shares of primary, secondary, and tertiary sectors now stand at 3.6 percent, 54.1 percent, and 42.3 percent in 2007, compared with 41.7 percent, 40.1 percent, and 17.3 percent in 1990. The tertiary sector will be the source of new jobs, becoming a hotbed for private industries. Deng Xiaoping’s Open-Door Policy as well as China’s entry into the WTO created valuable opportunities for private firms to gain access to a wide range of economic fields previously

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held by the SOEs, such as banking, insurance, telecommunications, and the auto industry. SOEs went into a series of restructuring processes, mostly breaking up into privately owned or semi-privately owned entities. By 2006, private industries produced 65 percent of China’s GDP, and 70 to 80 percent of the GDP growth.5 The contribution is particularly eye-catching in import and export businesses. In 1978, total imports and exports were valued at $20.64 billion, with a trade deficit of $1.14 billion. In 2007, the value increased to $2,173.7 billion, with a surplus of $288 billion. The ratio of foreign trade to GDP increased from 9.8 percent in 1978 to 66 percent in 2007. The fastest economic growth first took place in geographically advantageous coastal cities with convenient transportation systems, as well as in large cities located in the eastern plains. Compared with inland provinces, these regions enjoyed lower rural-urban income disparities, higher numbers of educational institutions, more FDI, and better-suited infrastructure for modern industries. Resulting from these advantages, however, is a widening disparity between China’s east and west regions. Twelve western provinces and autonomous regions are particularly hit by harsh economic conditions, including Xinjiang, Gansu, Qinghai, Ningxia, Shaanxi, Tibet, Sichuan, Yunnan, Guizhou, Guangxi, Inner Mongolia, and Chongqing. To channel investment into underdeveloped regions, the government has created a number of incentive policies since 1999 under the slogan of ‘‘Opening the Great West.’’ This effort gained more urgency during the 2008–2009 global economic recession, as stimulating domestic demand becomes the only venue that can stimulate China’s economy when the global economy is shrinking quickly. In the case of a semi-market-based economy, the Chinese government has an advantage over its Western counterparts in setting up and implementing stimulus plans. However, a worsening situation of the economy was feared to be a factor behind the July 5, 2009, unrest in Xinjiang that led to more than 180 innocent citizens being killed. The government blamed it primarily on Uygur

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separatism and sabotaging forces beyond the border. The reality is widely perceived as more complicated. Thus, government intervention has shortfalls. While the SOEs are reformed into more effective work units, POEs gained ground at a faster pace. A POE is defined as an enterprise owned by domestic entrepreneurs with at least eight employees. Thus, by convention, the term POE refers to private enterprises in urban areas. Rural China predominantly has operated on family-based farming since 1978 when People’s Communes were disbanded and land was allotted to families. In urban regions, there is a growing number of sole proprietors. These two categories are not listed as POEs, however, because they are not employers. By 2002, one-third of the GDP was produced by the private sector. As of 2010, the private sector as a whole contributed more to GDP growth than the public sector. This is primarily because POEs have an advantage over their SOE counterparts—that is, they are free from employment of surplus labor. This allows POEs to effectively compete and dynamically upgrade their S&T advantages. Additionally, China’s POEs are admired for their aggressiveness in risk-taking. A popular joke goes, in March 2003, the air-bombing campaign over Baghdad quickly drained the U.S. air force’s stockpile of smart bombs. As generals at the Pentagon were busy trying to locate a supply line, a POE representative from Guangdong showed up at the door, carrying a case of the company’s ammunition samples. Obviously, producing weaponry is nowhere close to any POE’s capacity. However, the joke reflects a reality—the Chinese POEs are informed, competitive, and ready to turn every crisis into a business opportunity. Nevertheless, the development of POEs has not been smooth. When SOEs and POEs coexist, unequal distribution of resources is expected to favor SOEs. This is obvious in loan access, and the situation is exacerbated when large banks are themselves SOEs. POEs constantly complain about discrimination. The chairman and chief executive officer (CEO) of the privately owned New Hope Corporation, a fodder producer based in

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Sichuan, once described the disadvantage of being a POE as having to give SOEs a head start of 100 steps in a short-run race.6 Complaints such as these persist. The three decades of reform are marked by the victorious march of POEs. In the 1980s, POEs were allowed to operate only in sectors that were not of national importance, such as retail sales and agricultural products. Banking, insurance, the auto industry, telecommunication, and so on were out of their reach. With the deepening of economic reforms and China’s entry into the WTO, barriers are being cleared one after another. Private enterprises are beginning to enter these areas. Private-capital-controlled banks have been increasing rapidly, despite the fact that they remain small in size. POEs have entered such sectors as the auto industry and gold mining. The first Chinese brand automobile, Geely (good fortune), serves as an example. Geely Corporation was founded in 1997 by an engineering graduate student who first went into business to produce Geely refrigerators. Targeting the vast majority of lowincome Chinese households, Geely now specializes in affordable, compact, and energy-saving minicars. By January 1, 2009, the company ranked number nine in sales reaching 221,800 units per year. Geely’s international sales, primarily to African and Latin American countries, reached 30,000 units.7 In March 2010, Geely inked a $1.8 billion deal for Ford’s Volvo car unit. POEs have become major employment sources. By the end of 2002, POEs had employed 30 million workers. And, when considering the total employment of the private sector, including rural China, the employment capacity reached 88.8 percent of the workforce. As a result, the CCP 16th Party Congress held in 2002 denounced discrimination against private enterprises and vowed to offer equal opportunities. The CCP revised its Constitution to welcome private entrepreneurs to become members. In 2007, according to NBS data, POEs employed 127.4 million workers versus 614.8 million employed by SOEs. The economic reforms have profoundly changed China’s economic landscape of which a few sectors are reviewed below.

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Reforms in industrial sectors represent the most remarkable changes. During the three decades from 1949 to 1979, China’s industrial development was modeled after the Soviets. The trend continued after China broke away from the ‘‘big brother’’ in the early 1960s. Two distinct features of the Soviet model are notable. First, heavy industry became the top agenda of central planning. This emphasis was justified ideologically and strategically— because there is no compromise with capitalism, China must strengthen weaponry production. Thus, mining and manufacturing became areas of the biggest investment. Second, to save resources for heavy industry, service and light industries that produced items needed for people’s daily needs were suppressed. From 1953 to 1978, out of the yearly industrial output, the proportion of light industries dropped from 64.5 percent to 43 percent. In addition to central planning policies that favored heavy industries, the political situation of the 1950s also contributed to the shift. In the 1950s, industrialization paralleled transformation of private enterprises into SOEs or collectively owned entities. These enterprises were located predominantly in urban areas and in the light industry sector, such as textile mills and small factories of daily utensils. The Socialist Transformation Campaign in the early 1950s caused this sector to drastically decline in production output. Additionally, the Korean War (1951–1953) created further opportunities to assault the private sector, and many capitalists were suspected as being West– friendly, which was enough reason at the time for their property to be confiscated. By the late 1950s, ramping up industry production had turned into a production campaign known as the Great Leap Forward, which was aimed at catching up with the West in short order, the consequence of which was, however, a great famine. A popular understanding of this disaster is that strong labor was mobilized to the front of mining and steel producing, leaving

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farmlands in the hands of women and senior men. Natural disasters and poor farming policies also were blamed for the disaster. Since 1978, both the political agenda and economic planning have been revised to favor the rule of market mechanisms. The quasi-wartime industrial strategy was abandoned and replaced by export-led growth. Coastal cities were among the first to thrive. Heavy industry has gradually yielded to light industry, and the tertiary industry (the service industry) has grown the most rapidly. Moreover, a variety of modern industries emerged and quickly took the spotlight, such as transportation, telecommunication, computer, office machinery, pharmaceutical, nuclear energy, bioengineering, environmental products, and so on. Meanwhile, mining, ordinary machinery manufacturing, and the textile industry sank into the category of ‘‘sunset industry.’’ In lieu of uniform central planning, the government is leaning toward market-friendly strategies to steer the economy, such as tax incentives and various kinds of subsidies. As the government economic policies purport, China’s economy eventually will head for a knowledge-based economy in which S&T and the market mechanism ultimately will replace the traditional industrial gridlock.8 Within the industrial sector, the energy industry is probably the area in which reforms have gone in greater depth, and thus an up-close view benefits an understanding of these industrial reforms. REVAMPING THE ENERGY INDUSTRY

The fast economic development has put a heavy toll on the nation’s energy resources, causing fuel prices to rise. The most noticeable consequence is that it has caused widespread inflation in China during the past 10 years. Acquiring more energy resources is a pressing task. In reality, despite its emphasis hydraulic and wind-power projects, only 16 percent of the nation’s electricity is currently generated by renewable energy and 75 percent is generated by burning coal.

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China has a long history of coal reliance. In recent years, it has become the world’s largest source of carbon dioxide emission, surpassing the United States. Coal is expected to be responsible for three-quarters of that carbon dioxide.9 To modernize its industry and save its environment, China must transform its reliance on coal to other energy resources. In recent years, China has stepped up its diplomatic and economic outreach in Africa, Latin America, the Middle East, and other possible directions as well in search for oil—these efforts have been labeled ‘‘oil diplomacy.’’ In the 1950s, China’s transportation ran on natural gas that was stored in a bus’s set-top gasbag. The discovery of the Daqing Oil Field in the 1960s freed China from insufficiency in military and basic nonmilitary transportation, and buses no longer carried gasbags. This fragile self-sufficiency could support only the survival economic needs during the Mao era. After the economic reforms started in 1978, this development easily burned up the domestic supply of fuel. After 1993, China could no longer maintain its fuel self-sufficiency and became a net fuel importer. By 2002, China ranked number two in the world in energy consumption, after the United States and surpassing Japan. In 2003, its petroleum consumption ranked third, after the United States and Japan. Nuclear power in China remains underdeveloped, representing only 1 percent of total electrical power in 2003. China’s energy consumption structure is divided into four categories—utility, residential and commercial, industrial, and transportation. Utility fuel is used to generate heat and electricity. Because it is fundamental to every economic sector and to people’s daily life, utility fuel represents the largest category of energy consumption. The second-largest category is the residential and commercial areas, driven primarily by urbanization and booming commercialism. This sector represents about one-third of the nation’s total energy consumption. The third category is the industrial sector. As heavy industry has been shifting gradually away from old machinery that was

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inefficient in energy consumption, the reliance on coal has been yielding to the use of electricity, liquefied petroleum gas, and natural gas. Finally, transportation represents the fourthlargest area of energy consumption. This sector is expected to rise faster than other sectors because of the increasing number of personal cars.10 China’s energy consumption is anticipated to double between 2010 and 2020. Since 2008, the Chinese government has been forcing small to medium energy-inefficient companies to shut down. Despite the increase of imports and the utilization of other energy resources, such as hydro and nuclear power, energy supply nevertheless may fall short. To deal with this problem, one strategy is to examine China’s strength—its abundant coal reserve. China’s coal reserve accounts for 13 percent of the total world reserve, enough to sustain the country’s economic growth needs for a century or more, if it could be converted to cleanburning fuel. Indeed, one technology aims to extract liquefied products out of coal.11 The project of transforming coal’s complex mix of hydrocarbons into gasoline and diesel fuel (liquefaction) began in 2001 and has been given prime support by the government as an 863 Project. Coal-liquefaction technology was developed in Germany in the 1920s. During World War II, Nazi Germany relied heavily on liquefaction technology to fuel its mechanized armies. The two popular methods, known as Fischer-Tropsch and the Bergius approaches, both reduce coal’s long hydrocarbon chain into shorter hydrocarbon chains that form gasoline, diesel, and aviation fuels. The Bergius approach is more productive, yielding 55 to 56 percent of energy in coal, whereas the FischerTropsch approach results in a lower yield of around 45 percent. The Bergius approach, however, is more complicated and costly, requiring separate plants being built to process liquefaction under different conditions. The Chinese picked the Bergius approach. If China could successfully transform coal into synthetic oil, the country would rake in top profit, particularly in an era of

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energy crisis. Oil prices have been declining since the mid1980s, and interest in coal liquefaction has seen an international decline. Despite this, China joined with the United States, Japan, and Germany to study liquefaction in the Inner Mongolia Autonomous Region, Heilongjiang Province, and Yunnan Province. In 2003, China’s largest coal producer, the Shenhua Group, started mining the Erdos Coal Mine in Inner Mongolia with an initial investment of 25 billion RMB. Earlier in 2002, Shenhua had invested 10 billion RMB to build a liquefaction plant, the largest in the world, next to the Erdos coalmines. In December 2008, a trial run of 300 hours was conducted successfully. The result proved that China was capable of producing 1 million tons of fuel annually. A second and a third trial run were conducted in 2009, and if successful, the production capacity would increase three times. A report indicates that the first phase of a project of 5-million-ton annual capacity went into production in May 2009.12 In 2007, China’s crude import was about 178 million tons, representing 50 percent of dependency on foreign oil. The Shenhua Group believes that if more liquefaction plants are built, China’s dependency on foreign oil will be reduced.13 There are, however, two major dragging factors, one of which is the world’s oil prices, which fluctuated in 2008 alone from $147 per barrel down to $33.87 per barrel. Feasibility studies indicate that the per-barrel price must be above $40 for Shenhua’s liquefaction project to be free from financial risks. As a result, the NDRC called for a suspension of all liquefaction ventures, excluding the two run by Shenhua, one in Inner Mongolia and the other in Ningxia Hui Autonomous Region. Shenhua remains optimistic that coal liquefaction will have a bright future, given the reality of China’s energy demand. The other dragging factor is environmental concerns. The liquefaction process involves using large quantities of water (6.5 tons of water is used to produce 1 ton of fuel), which would take a heavy toll on the desert region. Shenhua’s solution is to pump groundwater from 100 kilometers away. Shenhua believes that the industrial

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water could be reused to water trees, thus reducing sandstorms blowing in the direction of Beijing. With respect to the treatment of CO2 released from the production process, the company plans to develop a sequestration project to prevent CO2 from being released into the atmosphere. From relying on raw coal to liquefaction, this development shows a profound transition from the traditional framework, both in ideology and in technology. During this transition, the modern Chinese industry pursues efficient and environment-friendly ways and means, not solely GDP figures. Shenhua’s story is only one of many. Most of these battles, however, are fought by SMEs whose primary challenges are of another order: obtaining credit. In other words, SMEs need a supportive banking environment. BANKING REFORM

According to the Financial Stability Report issued in May 2008 by the PBOC,14 by the end of 2007 China’s official exchange reserves grew by 43.3 percent over the 2006 figure to $1.53 trillion.15 Total external debt outstanding increased 16.68 percent over the previous year to $373.618 billion. These figures, according to PBOC, indicate a strong balance sheet. Additionally, fiscal revenue totaled 5.13 trillion RMB, an increase of 30.5 percent year over year; and fiscal expenditure grew 23.3 percent to 4.96 trillion RMB. PBOC noticed, however, that the consumer price index (CPI) number rose by a large margin of 4.8 percent, indicating inflation. PBOC recommends increasing supply, and meanwhile, urges strengthening the investment risk management system, improving financial regulatory agencies, and carefully monitoring spillover of the U.S. subprime mortgage crisis. In general, the function of PBOC is equivalent to the U.S. Federal Reserve System. Its administrative ranking is equivalent to ministries and to the China Banking Regulatory Commission (CBRC). Before 1979, PBOC was the only financial system serving all banking purposes, and primarily it operated as a

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clearinghouse for SOEs. In reality, however, it was not the central bank in a true sense or a commercial entity conforming to the law of the market economy. But since 1979, after a series of significant reforms, PBOC has become a true central bank. It has the power to create regulations and supervise its state banks, complete with the ability to separate policy-related finance and commercial finance. It also has the cooperation of other financial institutions with complementary services and functions. In 1984, PBOC stopped handling credit and savings to focus on its central bank functions by conducting macrocontrol and supervision over the national banking system. In 1994, the Industrial and Commercial Bank of China (ICBC), the Bank of China (BOC), the Agricultural Bank of China (ABC), and the China Construction Bank (CCB) became state-owned commercial banks. Three policy-related banks were created, namely, the Agricultural Development Bank of China (ADBC), the National Development Bank of China (NDBC), and the China Import and Export Bank (CIEB). As an example, ABC’s function is to support both rural development and rural disaster relief. Founded in March 1955, ABC is a state-owned commercial bank serving (1) enterprises, enterprise groups, and large-scale agricultural production bases engaged in primary agricultural production; (2) profit-earning enterprises engaged in primary agricultural production; and (3) development of rural social service systems. ABC’s clients are primarily TVEs, supply-and-distribution cooperative commercial organizations, and private businesses or individuals. Although defined primarily as a commercial bank, ABC retains some policy-lending activity in rural areas, such as agricultural development and poverty relief lending. In 1998, ABC’s policy lending amounted to 156 billion RMB, or 28 percent of the year’s total loans (some 553.8 billion RMB). Founded in December 1993, the ADBC, in contrast, is officially a policy bank, engaging primarily in lending to enterprises for purchasing and storing of grains, cotton, and oil. On a secondary front, both ABC and ADBC also operate in urban areas.

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To serve a fast-developing economy, the Chinese banking system had to first free itself from servicing toxic loans to SOEs. According to Professor Richard Burdkin, chair of the Department of Economics at Claremont McKenna College, the Chinese government was distancing itself from the SOEs. This was done through the Budget Law of 1994, which prohibits the government from borrowing from PBOC to finance underperforming SOEs. Before the reform, banks served as recordkeepers for SOEs instead of being commercial entities. Fixed assets primarily came from fiscal appropriations at the time. Economic reforms changed the role of fixed investment in enterprises; fundraising gradually became the primary source of funding, and state budget appropriations dwindled over time. Stocks and bonds markets have since opened up the credit market. In 1997, SOEs were allowed to be restructured or go bankrupt. The government issued bonds to bail out more than 500 billion RMB of bad loans. As a result, between 1998 and 2002, more than 25 million jobs in SOEs had been lost.16 Once loss-making SOEs were disbanded, the financial system lightened its burden. Nevertheless, SOEs typically rely on state budget appropriations and bank loans more than other types of firms; and this dependence is a primary hindrance to performance. On the banking side, raising efficiency and fighting off bad loans is no easy task. According to Dr. Chen Aimin, economist and president of Jinjiang College, three major factors limit Chinese banks from effectively exercising their supervising function. First, banks are prohibited from directly investing in enterprises. The function of supervising loan performance is assumed by the creditor, not by the banks. Second, because loans continue to be issued following administrative instructions, loanmaking decisions can be independent from loan performance. Third, because Chinese banks are SOEs, they are not immune to their own inefficiency. No mechanism generates appropriate incentives for the banks to diligently seek performance. As a result, Chinese banks continue to generate bad loans, despite the fact

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that improvements indeed are being made as more specialty commercial banks with more autonomy are being created.17 The Commercial Bank Law was put into effect in 1995, setting up the parameters for changing the specialized state banks to state-owned commercial banks. Since 1996, the financial organizational system with wholly state-owned commercial banks has been transformed into modern financial enterprises handling public banking within the scope defined by PBOC.18 In rural China, the reform to Rural Credit Cooperatives (RCC) has been an essential part of rural agricultural as well as industrial development. In this area, Dr. Chen Aimin and Professor Junqi Liu have conducted extensive studies to reveal a treacherous path that RCC reform has taken. During the economic boom, most banks left rural areas behind to serve large cities, resulting in a shortage of resources for RCCs.19 RCCs are part of three official financial institutions in rural China (the other two are ABC and ADBC). While other state-owned commercial banks (SOCBs), the ICBC, the Construction Bank of China (CBC), and the BOC also have branches in rural county towns, however, RCCs are closer to the daily production operations and local people’s lives than these other banks. RCCs can lend to all kinds of patrons, including individuals, TVEs, and privately owned businesses, as well as for all purposes, such as production and consumption. Their main borrowing clients are farmers and TVEs. In more developed rural areas, the township and county enterprises are the majority borrowers. As of 2008, about 32,869 rural credit cooperatives operate across China; their outstanding loans and total deposits account for approximately 9.6 percent of China’s banking sector.20 The burden of financial support in the countryside has been borne increasingly by RCCs since 1998, when the four state-owned commercial banks (that is, the ICBC, ABC, CBOC, and BOC) started to withdraw from rural areas to focus on big cities. RCCs are the primary source of finance in the countryside, reportedly handling 75 percent of all agricultural loans. In Beijing, Shanghai, and Guangdong, rural credit cooperatives have been transformed into rural commercial banks.

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RCCs differ from the ABC and other SOCBs in ownership and management. RCCs are nominally cooperative banks with a certain share of capital coming from households and supposedly they are managed by shareholders. They are stand-alone financial organizations, instead of banks within a banking network that can transfer liquidity and perform cross-subsidization. They provide services that the state commercial banks are reluctant to provide because of higher transaction costs, resulting from either small-scale transactions or remote locations. Compared with ABC, they have a larger share of time deposit that tends to make the costs of funds higher. Moreover, they are less equipped with management networking, professional advisory services, and other modern managerial and governance structures. Although they are named ‘‘cooperatives,’’ the RCCs did not start as member-driven institutions. They first developed as a part of the government’s collectivization effort in the 1950s and were made part of the People’s Communes and their production brigades. In February 1979, the People’s Communes were dissolved; as a result, RCCs came under the management of ABC. Following the government’s initiatives of rural reform, RCCs again were restructured to become real cooperatives. In 1996, RCCs were spun off from ABC and went directly under the regulatory framework of PBOC. As such, the assets of RCCs have grown large because of government support and patronage. As a result, the share capital contribution from households was almost completely replaced by the central bank’s funds. China’s RCCs became, therefore, de facto state-owned financial institutions and are cooperatives in name only. Moreover, being SOE institutions, RCCs bear all symptoms of SOEs, in particular, they are plagued with bad loans. In operation, RCCs are required to set up county-level apex institutions to provide a clearinghouse service for local affiliates and collect fees for such service. Some apex institutions also handle financial business directly. A Law on Credit Cooperatives has not yet been drafted, however. PBOC appoints the RCC staff and imposes reserve requirements and interest rate restrictions. RCCs

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have certain flexibility in setting interest rates for lending, within a range of the regulated rates. To encourage competition and creativity, PBOC recently announced that RCCs are allowed to charge a maximum interest rate of twice the central bank rate, while regular banks can charge only up to 1.7 times the official rate. While NPLs are endemic throughout China’s banking system, the problem seems more severe with the RCCs. At the end of 2002, the NPLs of the RCCs stood at 515 billion RMB (US$62 billion), a staggering 37 percent of their total outstanding loans compared with less than 25 percent for the four SOCBs. In poor provinces, the bad loan ratio could be as high as 99 percent. Most RCC NPLs date to 1996–1997, and many are policy loans provided in compliance with county and township government agendas. Loans to TVEs have had a high delinquency rate as well. The bad loan problems and generally poor management have led to lowered confidence of the rural population in these RCCs. Many borrowers would rather turn to friends for financial solutions. As a result, the government, including the central bank, has stepped up RCC reform. As a part of restructuring debt-laden rural credit cooperatives, the CBRC, a commission set up in April 2003 to take over some regulatory functions of the PBOC, is considering drafting a bankruptcy law for small and mediumsize financial institutions. Developing RCCs into rural cooperative banks is an important step of the reform, which would allow the RCCs to have a combination of a joint-stock structure and cooperative mechanisms and thus would lift many geographic and business-related restrictions previously imposed on them. In 2003, the State Council approved a pilot reform of RCCs, Announcement of the Pilot RCC Reform Plan. This document stipulates that a wide range of financial resources should be explored on the basis of a joint-stock structure; governments must not use public funds to purchase banking shares; and sound management will be essential to future RCCs.21 As part of the reform, RCCs are required to increase their share capital.

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The amount of loans provided to shareholding farmers must account for at least 50 percent of each RCC’s loan portfolio. Other reform actions include hardening budget constraint, reducing government intervention, facilitating professional service and advisory networks, and training personnel. To restore the trust of the rural clientele, the RCCs are making efforts not only to restructure their NPLs, but also to implement transparent regulations and policies. To relieve poverty and promote small businesses in the rural sector, RCCs must improve service and attract funds scattered in the hands of rural households. The government and the central bank, meanwhile, must devise tax and industrial policies that encourage deposits into the RCCs and improve microfinancing directly to lenders. Many believe that RCC reform is likely to achieve good results, given their stringent regulations with respect to management and some ability in avoidance of government intervention. Moreover, since RCCs are faced with competition from more financial resources, both domestic and abroad, improving performance is the only way to survive. Finally, the new joint-stock structure provides both monitoring and incentives for good operation. TRANSITION OF THE SECURITIES MARKET

Investment in stock markets officially started in 1992. According to NBS, the stock market raised capital worth 9.4 billion RMB or $1.7 billion (at the same year’s exchange rate). In 2007, market capitalization reached 868 billion RMB or $137.5 billion. Despite losses in recent years, China boasts the second-largest emerging stock market in the world, behind only South Korea. By 2009, close to 2,000 firms have become publicly listed companies. As a result, two things are in need: (1) an enormous supply of capital, and (2) an efficient capital market in which people can secure their savings. Analysts predict that overall China will need to invest more than $1.5 trillion to improve infrastructure alone. At the same time, the new pension system is expected to send out paychecks to

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the fast-aging population. In 2005, 7.6 percent of China’s population was over the age of 65, projected to hit approximately 14 percent by the year 2025.22 To address these needs successfully and, hence, sustain the economy, China must build a reliable securities market. Currently, Chinese securities are composed of tradable shares—A, B, and H shares (A and B shares are traded domestically; H shares include shares listed abroad and nontradable shares held by central and local governments, state asset management companies, investment companies, and legal persons who are primarily industrial SOEs). Nontradable shares could account for as much as two-thirds of an SOE’s total stock, ensuring strong control. China’s securities markets have been in transition like other sectors. Lack of transparency has been identified as a major drawback that generates irregular trading patterns. Professor Chen Aimin points out that by way of controlling the majority of the shares, the government may exercise a strong influence behind the scenes. Because of that, however, the significance of market signals is dampened and the relationship between the securities market and firms’ incentive structures is weakened as well.23 China began selling Treasury bonds (T-bonds) in 1981. The domestic bond market has since expanded significantly, both in terms of participants and financial functions. Government bodies have been the major underwriter for shares issued by the MOF in the form of T-bonds. Domestic bond issues have been medium to long term (3 to 20 years) for the purpose of financing government deficits. In the early 1980s, government bonds often were promoted under political themes, such as ‘‘patriotic bonds.’’ Contributions were deducted from individuals’ monthly pay on a per capita basis. Compared with the U.S. market, Chinese T-bonds have not reached the level of influencing interest benchmarks; the latter is primarily under the control of central government. The quota of bond issuance is set each year by the State Council. The Chinese government has issued bonds in overseas markets denominated in U.S. dollars, the Japanese yen,

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and euros. During the 2008–2009 financial crisis, the Chinese government issued more T-bonds to finance recovery programs than in the past. China issued billions RMB worth of government bonds in 2003 to finance the 319.8 billion RMB deficit, or 2.6 percent of the GDP. In 2008, the government issued 30 billion RMB worth of bonds. Premier Wen Jiabao indicated in a press conference that there is room to issue more bonds to deal with the 950 billion RMB central government budget deficit and the 200 billion RMB local government budget deficit in 2009.24 Large SOEs tapped into the bonds market in early years of reform. In recent years, however, they have increased issuance of bonds to finance capital needs. The Chinese government first allowed companies to issue bonds in 1983. In 1987, the State Council published Provisional Rules on Management of Corporate Bonds, later amended in 1993, which led to a fast expansion of the bond market. In the early 2000s, the government required corporate bonds to be guaranteed by banks. This restriction was soon left out when the Three Gorgeous Project Corporation issued bonds without bank guarantee in 2007. In the same year, however, PBOC’s chief Guo Xiaochan raised alert on irregular fund-raising that risked tipping the market balance. However, China’s corporate bond market continued its race to raise one trillion yuan in 2009, most in the short to medium term.25 Corporate bonds make up about 5 percent of public offerings. Chinese bonds are traded on a secondary bond market as part of the Shanghai and Shenzhen stock exchanges. Some interbank trading also occurs.26 In April 2003, the CBRC was established, followed by the founding of China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC). These organizations work in coordination, while each has its own responsibilities. This cooperation was necessary to manage the additional funding resources that were made available to private firms, whose share had risen to 30 percent of the GDP by 2002. SOEs remain more accessible to loans, however, because

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of the nature of the socialist system and the fact that SOEs are still the largest employers. The Chinese government viewed its banking system as a forbidden zone to foreign investors. This view has changed gradually as reform has deepened. Since its WTO entry in 2001, China has gradually granted foreign banks market access. In December 2006, the Chinese government made an important change—per its fifth-year WTO commitments, it permitted foreign banks to set up operations across China to offer services to domestic consumers. Many foreign banks applied to fully register in China to conduct RMB business with domestic clients. Several have been approved, including Citigroup, Hong Kong and Shanghai Banking Corporation (HSBC), Standard Chartered PLC, Bank of East Asia, Wing Hang, JPMorgan Chase, Hang Seng, Mizuho, Tokyo-Mitsubishi, and United Overseas.27 Since 2006, the CBRC has made several reforms, including devising a system for deposit insurance and reviewing more than 100 city commercial banks. With respect to foreign banks, CBRC requires these banks to incorporate in China rather than operate through branch offices; thus, foreign banks are fully bound by Chinese regulatory policies. Foreign banks are required to pay higher insurance deposits to operate. Strict regulations may not always be the answer to loopholes. On the surface, the economic reform has made the CBRC the principal regulatory authority over the entire Chinese banking system, rendering it far more independent. Redundancy then becomes a haunting problem that arises to offset effectiveness. Although CBRC is the leading authority in implementing banking reform, the PBOC, CIRC, CSRC, and the State Administration of Foreign Exchange (SAFE) have overlapping responsibilities. Policy discrepancies are often a major source of confusion. For foreign investors, in particular, interpreting rules has become a daunting and routine challenge. Bureaucracy and language barriers have made the situation even worse. The Chinese government has lately floated the idea of establishing a super-coordinating agency. Whether this would be a viable solution remains to be seen.

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TAXATION REFORM

Since the start of the economic reform, China’s government spending has been on the rise, and so too has been its budget deficit, or the difference between government expenditure and revenue. During the 1980s, deficits were relatively small. The deficit of 1989 was 15.9 billion RMB. Deficits rose markedly after the 1994 tax reform. A tax law prohibiting the MOF from overdrawing money from the PBOC was passed in 1993. As a result, the government started to finance budget deficit by issuing bonds. After the 1997 Asian Financial Crisis, the government adopted an expansionary fiscal policy whereby the deficit increased from 58.3 billion RMB in 1997 to 247.3 billion RMB in 2001.28 By 2006, the total government debt had reached 350 billion RMB.29 To finance budget deficit, the Chinese government typically issues government bonds. China’s T-bond sales were an average of about 760 billion RMB each year from 2004 to 2006. The country still looked to pursue other more conservative monetary policies to contend with the economy. T-bond issues jumped to 2.35 trillion RMB in 2007, but this was due to a 1.55 trillion RMB special bond, which was issued to counterbalance excessive bank liquidity. Excluding the special issue, sales would have been about 800 billion RMB in 2007, which represents approximately 3 percent of the year’s GDP of about 25 trillion RMB.30 While the government is unquestionably sovereign, a hidden deficit problem is incurred by local governments. According to Dr. Lin Shuanglin, professor of economics at the University of Nebraska, the debt owed by township governments has widened severely, and governments at local levels are not permitted to issue bonds to service their debt. A survey of 100 townships in Sichuan in 2000 indicated that 82 percent had debt outstanding, 46 percent had debt higher than 1 million RMB, and some had debt higher than 12 million RMB. Some government townships had used up the budget revenue of 2015.31 The total local government debt is unknown, but the figure is estimated to be significant. One obvious solution is to raise taxes.

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Before the economic reform, the centralized economy followed the budgetary principle of uniformity—that is, the central government is behind tax planning and spending. After 1978, tax policy had to be changed to give private enterprises incentives and reduce SOEs’ dependence on government budget. Hence, tax structure had to be reinvented. Overall, tax revenue has increased dramatically along with economic boom. In 1978, the national tax was roughly 52 billion RMB. By 2006, the figure jumped to about 3.5 trillion RMB.32 Tax reform went through multiple stages, the goal of which was to let people keep more so they would produce more. The reality seems to have been that the taxes were repackaged, so they would be shifted around more easily.33 The first change in tax structure was made around 1979, whereby the government raised prices of agricultural products by 20 percent, raised government and SOE employees’ wages, lowered enterprise taxes, and permitted enterprises to give out bonuses. Despite the resulting rise in government deficit, the economy experienced a boost. To reduce reliance of SOEs on government support, further reform was done in 1983 known as ‘‘substituting tax for profits.’’ Under this rule, SOEs paid 55 percent in taxes and shared the after-tax profit with the state. In 1984, this system was modified to eliminate the sharing of the after-tax profit, such that enterprises keep the entire after-tax profit. The previous uniform tax of 55 percent was replaced by 11 kinds of taxes. The incentives lie in the fact that profit and tax are separated. Additionally, enterprises that suffer losses may negotiate with the state for a lower tax rate. In 1986, the CRS was implemented, whereby the SOE remits a contractual share to the state and keeps the excess, which is taxed at a low rate. The catch is that the enterprise has to make up the remittance even if it suffers a loss. The remittance level is normally set by the state based on the previous year’s record plus an estimate of growth. The government soon found its revenue reduced, however, because of regional differences and inaccuracies in setting remittance levels.

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The current tax system, known as ‘‘Tax-sharing System,’’ was first implemented in 1994 based on the reality that (1) decentralization had resulted in stronger local management, and (2) local business is managed more effectively by local governments with their own budget, and the central government could no longer manage local economic development to achieve maximum incentives and responsibilities. Additionally, it provided a solution to let local governments take more responsibility for their spending. The Tax-sharing System is modeled after tax systems of Western countries, such as the United States, where taxes are divided into local, state, and federal taxes, in addition to sales tax. The Chinese system has three taxes: state tax, joint tax (shared between local governments and the central government), and local taxes. The Chinese system has five levels: the central government, the provincial government, the city government, the county government, and the subcounty regional government. Tax distribution is based on expenditure coverage. For the central government, for example, its expenditures cover education, railway and highway construction, and telecommunication. Thus, the corresponding proportion of tax revenue goes to the central government. In general, the Tax-sharing System has been an improvement over previous tax policies. In 2006, the tax income was approximately 3.5 trillion RMB compared with 512 billion RMB in 1994. Many loopholes have been identified over the years, however; major weaknesses include the following: 1. Multiple levels of taxing governments result in competition among governments. Under such circumstances, there is a strong barrier to effective supervision. 2. Distribution of tax remittance remains a complicated procedure that is often unreliable. 3. Costs of tax collection are high, approximately 6 percent, whereas the costs are less than 1 percent in Western countries.

Future reforms are expected to involve reducing governments that have taxing authority, upgrading collection and distribution training, and adopting better technology in this area.34

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Before 1978, apartments were constructed by SOEs and assigned to employees based on years of service. With the restructuring of SOEs, a housing market was launched. According to a document published by Hangseng Bank, there are three types of housing: public rentals, subsidized flats, and private housing. The government provides subsidies to low-income families, including encouraging developers to invest in lowincome housing. Private housing takes the largest portion of the residential property market in China.35 The current housing situation contrasts drastically with both the prereform era and the early postreform era. China’s housing boom came a long way, and primarily was a result of a government push. Additionally, the housing market benefited from reforms in other areas. Dr. Song Shunfeng, professor of economics at the University of Nevada-Reno, views China’s housing reform as a a beneficiary and powerful stimulus source: Without banking reform, real estate enterprises would not have development loans, and individuals could not purchase houses with mortgages. Without the tax reform (especially property tax), China would not have had much room to lower the high housing prices. Without the SOE reform, separating housing provision from SOEs would have been impossible. Without the Open-Door Policy, no foreign funds would have entered the housing market to provide capital resources or to construct housing directly. Therefore, China must treat housing reform as an integral part of its overall economic reform.36 In retrospect, throughout China’s housing reform, the government has provided the ultimate driving force. From 1949 to 1979, China implemented a socialist system of urban housing provision, which let the SOEs take the primary responsibility for housing investment, construction, and allocation. Public housing, together with other benefits, was assigned to workers as an in-kind benefit. Housing quality was poor as it was viewed as a ‘‘nonproductive’’ investment by Chinese planners and thus received declining investment. According to NBS data, urban

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per capita living space was only 6.7 square meters or about 72 square feet in 1978. Then, in 1979, China started its urban housing reform. The goal of this reform was to establish a new system in which production, distribution, and consumption of urban housing would be driven by the market. The onset was generated by the SOE reforms that made the previous housing system no longer sustainable. The reform went through several stages and involved a variety of programs. In 1979, China started to reform the urban housing sector by selling newly built public housing to individuals at full construction cost in four designated cities: Xi’an, Liuzhou, Wuzhou, and Nanning. By the end of 1981, housing sales were extended to more than 60 cities in 23 provinces. This experiment did not last long because few urban families could afford to buy homes at full-cost rates. Later in 1982, China tried another housing commercialization experiment in four mediumsize cities (Changzhou, Shashi, Siping, and Zhengzhou) and reform strategy became a ‘‘three-three’’ scheme wherein the state, the work units, and the individual each pay one-third of the sale price. This program ultimately did little to relieve the government’s financial problems, and work units did not want to share the costs. The program was shut down. To stimulate the stagnant housing market, the government came up with a new initiative. In February 1986, the State Council formed the first official agency to promote urban housing reform, the Leading Group for Housing Reform. The group immediately recommended a program that aimed to convert hidden in-kind subsidies into open monetary subsidies and to change urban housing from a welfare giveaway to a market commodity. Hidden in-kind subsidies were provided for low-rent public housing; open monetary subsidies were provided as housing vouchers to pay higher rents. On average, the value of housing vouchers equaled the rise in rent. In 1987, the State Council designated three cities (Bengbu, Tangshan, and Yantai) for the new comprehensive reform program. This effort took the form of increasing rents and promoting house sales, and increasing

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rents and issuing housing vouchers. With these changes and the increase in rent, many households were interested in buying a home. By the end of 1988, for example, more than 5,000 families bought homes in Yantai, scoring a moderate progress. Housing reform entered a new stage in 1988, with the focus of reform shifting from increasing rent to promoting homeownership. Unlike the scheme in the early 1980s that involved only sales of new housing, the new strategy was to sell existing public housing at subsidized rates. The late 1980s was also an important period in terms of lawmaking for the urban housing sector. The State Council held the First National Housing Reform Conference in January 1988, during which ‘‘The Proposal to Implement Nationwide Urban Housing Reform by Groups and Stages’’ was adopted. The State Council also issued ‘‘The Opinion on Encouragement to the Staff and Workers to Purchase Old Public Housing Units.’’ In the same year, the Congress amended the Land Law, providing better legal protection for urban real estate and thus promoting housing development. With these changes, China began housing reform in all urban areas. Urban housing started to grow rapidly only after Deng Xiaoping’s south tour in February 1992 where he affirmed that, despite the 1989 incident, the reform would continue. Investment in real estate reached 73 billion RMB in 1992, increasing 117 percent from the level in 1991. In mid-1998, the Chinese government ended the welfare urban housing system. Reform measures included ending the allocation of welfare housing for employees, promoting mortgage financing, developing the secondary housing market, and liberalizing rental rates. By the end of 1999, all Chinese cities discontinued the practice of employers providing housing for their employees. Thus, urban housing in China has been transformed from a redistributive welfare good to a marketized commodity. In 2006, NBS survey shows that the per capita living space has increased to 27.1 square meters or about 291 square feet in cities such as Beijing and Shanghai, and 30.7 square meters or about 330 square feet in rural regions. As of now, housing prices in big cities are rising again, after a brief decline due to the 2008–2009

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global recession. The average purchasing price per square meter (11.75 square feet) hovers at the 15,000 RMB level in east coast cities including Beijing and Shanghai despite the government’s repeated warning of an overheated housing market. Many believe, however, that the price hikes are likely to continue, because enriched farmers and successful provincial entrepreneurs are looking for a space in the capital city and other larger municipalities. It is their turn to live a little, as some say. RURAL REFORM

Land rights have been at the heart of China’s struggles throughout its history. The Communist victory was a solution by the majority of the people to land rights inequality. A thorough Land Reform that started in the mid-1940s and ended in the early 1950s achieved the promised egalitarian system. The Land Reform, often violent due to its nature of redistributing the property of the few to the masses, and in conjunction with Communist education, lifted people’s morale and hence agricultural productivity in the 1950s. However, Communism was not just about shifting property ownership, it was also about eliminating private ownership once and for all. The subsequent collectivization amid the Great Leap Forward in 1958 resulted in the People’s Commune system for the next 20 years. It was nevertheless a profound reform, but the shortfall was obvious. Dr. Yang Yao, professor of economics at Peking University and a senior researcher at Peking University’s China Center for Economics Research, points out that although China’s agriculture in this period did not fall below the international average, the commune system failed to improve the living standard of China’s rural population. It seriously deprived people of many basic economic and political rights. Therefore, it was not a surprise that the economic reform first started in rural areas.37 For farmers, land ownership is the core of their pursuit. Chinese farmers are liberals, very much like American farmers, in that they are strong supporters of a market economy. After decades of communal farming, farmers began to think of restoring family farming.

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The dynamism of the post-Mao era rejuvenated long-faded dreams. A number of southern villages had started to dismantle communes in the late 1970s. By 1984, the People’s Communes had been disbanded, and the Household Responsibility System (HRS) was instituted, whereby land was allocated to households based on headcount. Households could keep extra-quota grains and sell the products on the market. The 1984 Constitution also granted ownership of farmland to village collectives. Thus, HRS led to a mixture of collective ownership and individual farming. From 1979 to 1984, the gross value of agricultural output reached a real annual growth rate of 7.6 percent, and grain output increased by an annual rate of 4.9 percent. HRS worked to lift morale. By 1984, China had found for the first time in its history that it had a large grain surplus. More important, HRS provided a kind of social security to the rural population, and that was the family plot. Some scholars speculate that the family land was actually the base for China’s cheap migrant labor, because instead of falling on urban welfare, migrant workers always have a home to return to. Professor Yang Yao believes that by raising the income of the farmers and solving China’s food problem, the rural reform perhaps was the only reform that succeeded without any losers.38 However, HRS had its shortfalls. Professor Yang Yao indicated three weaknesses in particular. First, land reallocation became a constant process due to household changes. When babies are born or wives are married in, each new member of the community has a right to a piece of the village’s land. As a result of the constant readjustments, farmers cannot invest in their land for the long term. Additionally, frequent reallocations open up opportunities for corrupt village cadres to seek personal gains. Secondly, farmers’ use rights were encumbered. Local governments often impose their planned crop-mix on farmers. Thirdly, given that land sales were prohibited, as it still is today, inheritance was seriously limited by periodic land reallocations. Land rentals were also banned in the early years but have been permitted since the early 1990s. However, with the increase in rural

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economic activities, it was obvious that land tenure would be more beneficial if it were more flexible. In regions with fast industrial growth or where there is a significant supply of migrant labor, villages find ways to consolidate land use. Certain approaches resemble the past communal system. For example, in Guangdong Province, villagers pool family land and delegate the management to a village committee that directs land use for industrial development or for farming. The management committee is formed by representatives elected by groups of families as shareholders. Another innovation, originated in central China, is called fanzu daobao or ‘‘reverse lease,’’ whereby households may rent their land to the village, which in turn rents it to tenants who tend to be migrant farmers from less developed regions. Both kinds of operations effectively combined individuals’ land usage rights with the benefit of joined efforts, and take advantage of the market mechanism. To avoid corrupt leaders from trading people’s land for private gains, which had indeed occurred at a significant level of severity, the National People’s Congress passed a law in 2002, The Agricultural Lease Law, to limit power of village cadres. The law, promulgated on March 1, 2003, brought fundamental changes to land tenure. In particular, it put a stop to land reallocations, allowing inheritance of land rights, including the right to transfer land use rights. Although farmers’ right to the land is one defined via the contract between them and the village collective, the law nevertheless transformed land tenure into a permanent lease system that grants farmers de facto private ownership of land. The government’s move is widely seen as heading in the right direction in filling the deep gap in social protection received by the urban versus rural residents. Rural industrialization has been an indispensable part of China’s economic development in the last quarter-century. According to research by Yang Yao and Justin Lin, from 1978 to 1996, the number of rural enterprises increased from 1.52 million to 23.36 million; and the number of workers increased from 28.27 million to 135.08 million, or in terms of the percentage of the

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total rural labor force, increased from 9.5 percent to 29.8 percent. As a result, the gross rural industrial output went from 21.2 percent of the total gross rural output in 1978 to 77.2 percent in 1995. The output value of the rural industrial sector accounted for only 9.1 percent of the national total in 1978; after 20 years, this figure became 57.9 percent in 1997. In 1996, nonfarm income accounted for 34.2 percent of all rural income as compared with only 7.6 percent in 1978.39 NBS data show that the number of workers hired by TVEs had reached 150 million in 2007. The significance of industrialization of rural China cannot be underestimated. If the traditional Chinese civilization was created in feudalism (a land-based social system), its very basis finally has been shaken. Throughout Chinese history, periodic peasant rebellions started with land ownership discrepancies and ended with bloody land redistribution, as a pattern. Each reform, however, only led to more of the same. Industrialization is a new kind of reform, and its impact on China’s culture and society is just beginning to pan out. Several factors have contributed to the fast growth of rural industry. According to Professor Yang Yao, the most important factor is the rural reform itself, which freed a large portion of the rural labor and enabled capital accumulation as well to run industry. The planning era left a large unfilled market for consumer goods, which rural enterprises filled effectively. In coastal regions, an influx of FDI boosted TVEs. Many companies in the Greater China Region moved their factories to the Pearl River and Yangtze River deltas seeking cheap land and labor.40 The arrival of those companies instantly transformed traditionally rural villages into booming industrial towns. Compared with SOEs, rural enterprises use more labor and less capital. According to Yang Yao’s research, per worker net capital stock of rural enterprises never passed 20 percent of that of the SOEs in the period from 1978 to 1997. With this light capitallabor structure, rural enterprises became an important contributor to China’s export market. Their share of export was only 9.2 percent in 1986; but after that year, they kept an average annual growth rate of 20.6 percent over the next 10 years and reached

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47.9 percent of the country’s total export by 1996.41 An immediate positive effect of the labor-intensive approach has been the enhanced income distribution at the local level. Provinces with a larger rural industrial sector tend to have narrower income gap or smaller Gini coefficients. Rural industry has served as an equalizer, reducing the rural-urban divide to a large extent. The flipside, however, is that as polluting factories relocate to rural regions, because of more stringent environmental regulations in cities, pollution has taken a toll on the rural environment. Rural industry has not always lagged behind its urban counterpart. Quite the contrary, over the years, rural industry has become increasingly competitive, to the level of pushing SOEs to reform and underperforming private sectors to improve. For the time being, the rural industrialization process has been largely uneven. The share of industrial output in total rural output varies from 86 percent in Shanghai to 4 percent in Tibet. As of 2010, rural industrialization is mainly in the coastal areas and the suburban areas in inland provinces. The most successful areas of rural industrialization are in provinces located in coastal areas, where work is more abundant relative to natural resources than in inland provinces. Many enterprises have moved from villages to towns and small cities to get access to better infrastructure, markets, and information. This trend has profound implications for urbanization, environment, and the rural society. POLICYMAKING IN REFORM

Before 1978, policymaking was a matter of political decision by a small group of politicians who served at the pleasure of Chairman Mao. Things got much more complex during the postreform era. One kind of complexity lies in the growing local power. As a result, central planning is becoming increasingly ‘‘macro.’’ Lately, the ‘‘Five-Year Plans’’ have been replaced with ‘‘Five-Year Projections’’ (wu nian guihua), with the intention of leaving more space for micromanaging to local governments. The planning style has also changed. The role of ‘‘think tanks’’ is rising to a higher status. Essential government organs have their

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own group of advisors, some of which are government funded, while others are independent private firms. These think tanks cover a wide range of specialty areas, from economic, political, and military issues to social disturbance handling. Key government policy research centers include the Central Party School (CPS), State Council Development Research Center (DRC), and Ministerial Policy Institutes. These institutions provide consultations with respect to ideological matters. CPS, for example, offers workshops to CCP officials and conducts research on such issues as how to define socialism with Chinese characteristics. At a more practical level, the CAS and the China Academy of Social Sciences (CASS) are government-funded think tanks, housing approximately 3,000 researchers each and both reporting directly to the State Council. The China Center for International Economic Exchange (CCIEE), established in 2009 and headed by former China Deputy Premier Zeng Peiyan, crafts policies related to global economic crises. The Shanghai World Trade Organization Affairs Consultation Center, founded in 2000 and headed by former WTO negotiator Wang Xingkui, provides consultations with WTO-related matters. Nationallevel universities and large SOE and POE firms also serve as think tanks to government agencies. Some scholars expect that think tanks will proliferate and gain influence as China’s policymaking becomes more sophisticated.42 China’s economic reform has been a chain reaction wherein the application of market mechanism has resulted in abundant productivity in every economic corner. The interdependence of sectors has contributed to easing the rough competition at the beginning stage and has constantly pushed the Chinese economy toward a more balanced development. In the process, S&T has come to the foreground amid challenges of in-depth economic development. On the ideological front, democratization is no longer a political mercy, but a growing part of the infrastructure to the modern Chinese society. One may say with confidence that the economic reform has brought about the most profound change ever in China’s history.

Chapter 6

The China Model and Sustainability That things do not have meaning in and of themselves but rather acquire meaning from the system they are in is an enlightening view of the 19th-century Swiss linguist Ferdinand De Saussure.1 Thus, on the chessboard of 64 squares, the value of the knight is defined by the other pieces on the board, rather than by the material of which it is made. Moreover, chess players know well that, as the game progresses, the value of the remaining pieces change; the final checkmate may be the glory of a humble pawn. Putting a Go (a game played with black and white stones on a 19x19 line board) stone on a chessboard makes no sense, at least, not unless the rules of the game change. The structuralist concept reminds us of two things—in making judgment one must consider the context; and, systemic integration is essential to the function of an element. With this in mind, the market economy with Chinese characteristics is a legitimate concept. Assessing China’s economic sustainability involves identifying China’s economic model first. The ‘‘China Model’’ has been a much debated issue. Overall, three schools of opinions have attracted more attention. They are (1) Washington Consensus,2 (2) Beijing Consensus,3 and (3) views of the CPS. These views are briefly introduced as follows.

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THE CHINA MODEL IN LIGHT OF THE WASHINGTON CONSENSUS

John Williamson coined the term in 1989 in a paper describing a set of 10 economic policies considered by many in the West as principles of the free-market economy. These policies have been bundled with reform packages for developing economies and serve as criteria for policy evaluations by Western governments and financial organizations. The 10 principles include fiscal deficits, public expenditure priorities, tax reform, interest rates, exchange rates, trade policy, FDI (foreign direct investment), privatization, deregulation, and property rights. Williamson indicates that Washington does not always practice what it preaches, and practicing what it preaches does not guarantee prevention of corruption and fraud. Thus, the recommended policies would be best taken as a ‘‘moral admonition to purity.’’ Williamson’s fiscal policy stresses adoption of a fiscal discipline that maintains a balanced budget. Williamson recommends that in the areas of subsidies, education, health, and public investment, government expenditures must bring people real benefits, especially to the poor and disadvantaged. Misallocation of expenditures in these areas results in waste and corruption, and thus must be avoided. In tax policies, Williamson recommends a broad tax base with a moderate tax margin. With respect to interest rate and exchange rate policies, Williamson supports the market orientation—that is, although adjustments are done to control capital flight and promote growth in trade, the rates should be fundamentally competitive. The principle of market orientation underpins Williamson’s outward-oriented trade policies in which he advocates liberalized import policies rather than resorting to protectionism to offset export weakness. Thus, import and export must be a way of economic development and a solution to imbalance. Therefore, opening up the domestic market to foreign goods and services is recommended, because it brings in the needed capital, technology, and goods, which eventually promotes export. In the Washington model, for these ideals of

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open competition to function, a thoroughly privatized system is a prerequisite. Without private ownership, accountability and effective management are hardly achievable. Moreover, deregulation is key to free competition. Above all, Williamson stresses the power of personal property rights that are well entrenched in the West and to which he attributes a ‘‘fundamental importance for the satisfactory operation of the capitalist system.’’4 In summary, the Washington Consensus depicts an ideal capitalist system whereby free-market competition and guaranteed personal rights to property motivate efficiency and responsibility and lift the overall well-being as a result. In the West, the Washingtonian principles are worshipped as they are ‘‘generally judged to have been successful within the United States, and it is generally assumed that it could bring similar benefits to other countries.’’5 Hence, the International Monetary Fund (IMF) and the World Bank stick to these principles as conditional to lending. Scholars who stick to Washingtonian principles tend to be doubtful about the sustainability of the Chinese economy. For them, the Chinese are struggling with ‘‘the economic impossibility of the halfway house.’’6 Notwithstanding, Williamson is quick to point out that Washington does not typically score well in some aspects, such as budget discipline and balanced budget. The subprime mortgage crisis in 2008 revealed some of the drawbacks of an excessive deregulation. To the Chinese, a lesson learned is that the pro-regulation socialist market economy does have an advantage. This view is backed by the fact that, due to lack of regulation, the U.S. national debt climbed up to $11 trillion by the end of 2008, or more than 70 percent of the U.S. GDP after a brief budget surplus in 1998. Out of this debt, China owns $681.9 billion or more than 20 percent of the foreign-owned portion of $3 trillion.7 The lack of oversight resulted in Wall Street scandals, such as Bernie Madoff’s Ponzi scheme, and Robert Allen Standford’s investment scam,8 and the disastrous mortgagelending irregularities. Moreover, Chinese media generally approve of the opinion that the 1997 Asian Financial Crisis and the

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2008–2009 global financial crisis have not only dampened China’s enthusiasm in modeling the West, but also, and more important, rallied confidence in China’s own system. One article points out that the Chinese have learned that there is actually an advantage in the state-controlled currency valuation system, which has been profusely criticized by the West. In both crises, China demonstrated strengths in preventing encroachment of the world financial crisis thanks to its currency valuation control. For example, one opinion holds that Western economic Darwinism pays little attention to the well-being of other countries; hence, given that the ‘‘American model is vanishing; China must learn to take care of itself.’’9 Hutton’s ‘‘Halfway House’’

The Washington Consensus constitutes a powerful theoretical base for those who believe that China’s economic development is unsustainable, because what China does is far apart from the Washingtonian ideals. An influential critic of China’s economic and political policies and a strong defender of the Washington Consensus, Will Hutton offers his view on China’s dilemma in his book The Writing on the Wall—Why We Must Embrace China as a Partner or Face It as an Enemy. Hutton’s skepticism is first derived from his perception of China’s structural differences from the Washingtonian logic. In his view, ‘‘communism is a doctrine of revolution, class war, and authoritarianism’’ that is not in line with the fundamental values of the market economy. If a market mechanism is adopted in China, it is only of a makeshift nature. He predicts that economic contradictions, structural defects, and sheer economic waste will lead to worsening decline in China’s economic and political structures. Hutton has little confidence in the current system that relies on ‘‘sage-emperor’’ President Hu Jintao and his party-state to save the country from corruption and to straighten out inequalities for the grassroots folks. He argues that the current system only works as long as the economy works. However, economic troubles are doomed to happen

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because of the ‘‘halfway house’’ nature of the economy in which the market mechanism is overshadowed by state control, and this control is only for a matter of time.10 Nevertheless, the Chinese economy has grown to become the third largest in the world, and the boom is unparalleled. So, ‘‘if it’s so bad, how come it’s so good?’’11 Hutton’s explanation is that the growth was generated primarily by assembly industries. Cheap labor and the Open-Door Policy led to gigantic growth in exports channeled by Hong Kong and its subcontractors in Taiwan who have the first-world infrastructure. On the other hand, state-controlled banks drove capital accumulation in the cities, and rural China provided the much needed cheap labor from migration. Hutton’s view is that, short of self-sustaining entrepreneurial maturity, a sharp deceleration lies ahead. He believes that reform, liberalization, and modernization are virtually puppets under the control of the grand puppeteer—the party-state—just as China’s banking system bids according to communist hierarchies with the SOEs enjoying the priority. Moreover, a spider web–like control system stifles competition, constantly putting a chokehold around the neck of the private sector, while one-third of the SOE workforce sits idle.12 Despite Deng Xiaoping’s reformism and Jiang Zemin’s populism, Hutton believes that China’s ideological system lacks an infrastructure that propels genuine economic progress and appreciation for capitalist moral facets. More specifically, China is not a society based on such elements as liberty, pluralism, diversity, equality, transparency, justification, free press, rule of law, and so on. Hutton refers to these as enlightenment legacy and attributes America’s economic success to these spiritual values. Therefore, the China Model is not really a valid economic structure in Hutton’s eyes. The system lacks elegance compared with that of the Washington Consensus. China has grown tremendously in the post-Mao era; however, this growth would be a short-lived coincidence rather than a prolonged elation, because there is no logic in it. Sound market capitalism involves the fuller

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participation of a knowledge economy, a rigorous institutional structure, a welfare system, and property rights; but these elements contradict China’s one-party communist rule. Hutton states, My argument is that China is caught in a dilemma. It is beset by mountainous contradictions and which sooner or later will fail, because of a banking crisis or simply a crisis of overinvestment and excess supply, or some combination of both. The consequent social reaction will provoke a political crisis, with the risk that the party will resort to nationalism, and perhaps a military adventure in Taiwan, to keep the genie of protest bottled up.13

Hutton describes communism and nationalism as an ‘‘uneasy coalition’’14 that may propel China to behave according to its own terms, thus, jeopardizing the interests of the United States. Thus, while the United States should use leverage to promote capitalism and democracy in China, it had better be prepared for an unhappy ending. The dichotomist view of either Washingtonian ideals or an impasse is manifested with a lesser degree of pessimism in at least two other voices, those of Callick and Shambaugh. Callick’s ‘‘Controlled Freedom’’

Rowan Callick, a Beijing-based China correspondent for The Australian newspaper, does not understand why many Asian, Latin American, and African countries are admiring to the point of emulating the China Model, which he suspects will not be sustainable. Callick describes China’s economic model as follows: On the one hand, China copies successful elements of liberal economic policy by opening up much of the economy to foreign and domestic investment, allowing labor flexibility, keeping the tax and regulatory burden low, and creating a first-class infrastructure through a combination of private sector and state spending. The second part is to permit the ruling party to retain a firm grip on government, the courts, the army, the

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internal security apparatus, and the free flow of information. A shorthand way to describe the model is: economic freedom plus political repression.15

Callick’s view is similar to Hutton’s in several aspects. Callick categorizes the Chinese regime as a variation of the classical totalitarian communism. The difference lies in its implementation of free-market economics. There is no doubt, as Callick puts it, that the mix has worked in getting its citizens richer. In fact, people are encouraged to do everything possibly imaginable to lift their standard of living. The government puts a firm hand, however, on critical economic sectors such as utilities, transportation, telecommunications, finance, and media. PBOC, for example, implements the government’s policies on exchange rates, keeps the rates in line with its political agenda, and deploys a foreign reserve of $1.3 trillion ($2.2 trillion in 2009). The government uses a large pool of cheap labor from rural areas and from restructured SOEs to control inflation. Moreover, in the international front, China has found that its domestic economic growth has produced a favorable spillover effect—the Chinese market has provided space for neighboring countries to grow, and in the process, to become enmeshed in the China-centered economic network. Callick quotes Kevin Hassett, director of economic policy studies at the American Enterprise Institute: Being unfree may be an economic advantage. Dictatorships are not hamstrung by the preference of voters for, say, a pervasive welfare state. So the future may look something like the 20th century in the reverse. The unfree nations will grow so quickly that they will overwhelm free nations with their economic might.16

Callick admits that although transparent governance, independent courts, enforceable property rights, and free information are not present in the Chinese system, the absence of these pillars of the Western democracy has not triggered crisis. China, however, does have a convertible currency, a one-country-two-system structure, a much better living standard than in the past, and in fact, a more

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tolerant political environment. China has an impressive adaptability that is substantiated in part by the Open-Door Policy of the Communist Party that is now willing to enroll entrepreneurs. Callick notes that the party’s policy has attracted, for example, many overseas scholars; some are U.S. Ivy League trained. Not all returnees are ready to apply Western-style democracy, however. An example Callick believes to be striking is the story of Li Qun. After studying in the United States, and serving as an assistant to the mayor in New Haven, Connecticut, Li became mayor of Linyi City of Shandong Province. Once in power, Li reversed his position to guarding the Chinese system as his peers had. Despite the economic boom, as Callick points out, China is unfree for a number of reasons. Chinese citizens cannot form a political party; they cannot choose their leaders; phone calls and text messages are screened; many Web sites are blocked or filtered; media are owned by the government; films and books are reviewed by agencies and sometimes by retired revolutionary cadres; sex and politics are sensitive topics; people do not trust the courts; ordinary people have to report when a friend or family member comes to stay with them; files are kept on all citizens, who cannot review their records; church schools are not permitted; the only two legal churches that the Chinese can join are the Catholic and the Three Selfs (Protestant) organizations; and the leaders of churches are ultimately responsible to the party. Callick questions, ‘‘This is the China Model: half liberal and international, half authoritarian and insular. Can it last?’’17 Callick approves of Will Hutton’s opinion that China must accede to Enlightenment values or it will fall back again; and that the party-state control, if it continues to build, will sooner or later accumulate enough contradictions to force itself out of control. ‘‘The clock is ticking,’’ Callick quotes Hutton’s words.18 However, he seems to be more cautious in recognizing the risk in attempting to offer a judgment call. Gordan Chang, Callick noted, in his book The Coming Collapse of China (2001), gave Beijing five years to correct mistakes. Instead of a doomed state,

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what Chang witnessed was a China chugging along, becoming more prosperous year by year. Moreover, leaders from the developing world gathered in Beijing to learn about the China Model. In 2007, 41 state heads of Africa arrived in Beijing, with Asian and Latin American leaders implementing the China Model at home. Callick’s opinion is that, in the long run, China will show its real face as that of a dictator. He quotes Kurlantzick, the author of Charm Offensive: How China’s Soft Power Is Transforming the World: ‘‘As China becomes more powerful, other nations will begin to see beyond its benign face to a more complicated reality. They will realize that despite China’s promises of non-interference, when it comes to core interests, China—like any great power—will think of itself first.’’19 In summary, Hutton’s and Callick’s views both portray the China Model as a planning economy with the implementation of a free-market mechanism under strict control. Such a mix is more likely to result in economic chaos sooner or later than in a sustainable economy. SHAMBAUGH’S ‘‘HYBRID MODEL OF QUASI-STATE CAPITALISM AND SEMI-DEMOCRATIC AUTHORITARIANISM—SOMETIMES DUBBED THE ‘BEIJING CONSENSUS’ ’’

David Shambaugh, professor and director of the China Policy Program at George Washington University in Washington, D.C., nonresident senior fellow at the Brookings Institution, and currently a visiting scholar at the CASS in Beijing, defines the China Model not as traditional authoritarianism, not as democracy, and not as capitalism, but rather as something in between—that is a ‘‘hybrid.’’ The following observations are behind Shambaugh’s definition: Instead of being a totalitarian party dominated by a single leader, the CCP today is an authoritarian party with a collective leadership. The leaders themselves—at least those I have witnessed—are now remarkably selfassured and relatively sophisticated. Marxist-Leninist ideology plays little, if any, role in their decision-making. The policy process is more consultative, although still lacking in transparency. Much emphasis is put on

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governance and officials at all levels undergo required training in public administration.20

Shambaugh remarks that the CCP is remarkably open in learning from different countries and political systems. On the other hand, this regime was capable of quelling the Tiananmen Event in 1989. ‘‘As a result,’’ Shambaugh writes, ‘‘it is becoming a hybrid party with elements of East Asian neo-authoritarianism, Latin American corporatism and European social democracy all grafted to Confucianist-Leninist roots.’’21 The China Model certainly does work. Shambaugh is impressed with China’s economic achievement, which includes advancements in biotechnology and electronics; provision of most of the world’s cell phones, photocopiers, and DVDs; and 75 percent of the world’s toys. Additionally, China consumes 16 percent of the world’s energy, 37 Chinese multinational firms figure in the Fortune 500 list, and 450 firms on that list are doing business in China. Shambaugh points out that it is a fact, although less visible, that ‘‘China is the first major economy to recover from the global recession and, indeed, is leading the world out of it.’’22 Will the CCP’s ability to adapt and the nation’s continuing economic growth be enough to sustain the party in power indefinitely? Shambaugh’s answer is ‘‘perhaps.’’23 He has reservations about whether the CCP will continue to be adaptable and whether people’s lives will continue to improve. Unlike some critics in the West who are troubled by China’s hybridism, and clearly reluctant to approve, Shambaugh’s attitude is one of an observer. He believes that because the country’s strengths have been tested during the past 60 years, have survived all sorts of isolations and conflicts, and have allowed China to emerge stronger every time, the China Model should be given the benefit of the doubt. ‘‘One thing is certain,’’ Shambaugh writes, ‘‘China will remain a country of complexity and contradictions—which will keep China watchers and Chinese alike guessing about its future indefinitely.’’24

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The ‘‘Beijing Consensus’’

If China’s sustainability has defied Washingtonian predictions time and again, then, might it be that it is valid? Countering the Washington Consensus and its derivative theories is the Beijing Consensus coined by Joshua Cooper Ramo,25 who speaks Mandarin Chinese and works as a managing director and partner at the Beijing office of Kissinger Associates. Ramo believes that, if predictions fail, it will be because predictors wear tainted glasses. His theory interprets China’s economic phenomena as part of a dynamic process, the essence of which would be best described by Deng Xiaoping’s concept of crossing the river by groping the stones under the feet. Rather than a jumbled mess or a doomed failure that Hutton perceives, Ramo sees a rapid transition and adaptations that are creative, asymmetrical, pragmatic, and ideologically adventurous. The whole process appears to be too fast to follow not only by foreigners but by domestic thinkers as well. Although not everything is working and there is a pile of contradictions, as Ramo indicates, the Chinese definitely are turning every rock and following every path to find the right solution. Jiang Zeming, in his farewell to the 16th Party Congress in the fall of 2002, used the word ‘‘new’’ 90 times in a 90minute speech.26 The Chinese are not making forced moves in response to outsiders’ pushes and pokes; they are enthusiastically following internal dynamics. The Chinese are aware of the Washington’s prescriptions for the world, but they simply feel more comfortable cherry-picking according to what fits. To repeat the economic failures of Argentina and Indonesia would be na€ve, and the Chinese are not willing to follow those experiences. To understand China, it is best to abandon theories, because theories shape the way we observe, as Ramo quotes Einstein’s words. What Ramo observes is that China’s changes must not be measured simply with GDP figures, but with changes in quality of life and the country’s role in the global balance of power. Thus, the prolonged rise of GDP in double-digit figures and the low per capita GDP do not accurately reflect the essence of the

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progress being made. The fact that 1.3 billion people are living a ‘‘relatively comfortable life,’’ a goal set by Deng Xiaoping and achieved in 2003 featuring the annual national per capita income of $1,000, is the real scorecard. Ramo’s Beijing Consensus has three theorems: (1) focus on innovation; (2) focus on sustainability and equality; and (3) focus on leveraging world hegemonic powers with relatively low-cost strategies. The first component, innovation, is most easily observed by outsiders. Ramo argues that the Chinese now rely on innovation and technology to cure their growing pains. The Chinese have developed a liking for a knowledge-led economy, because it has the advantage of yielding abundant Total Factor Productivity (TFP) growth. TFP was identified by Nobel Prize winner Robert Solow in 1957 who defines the concept as ‘‘output growth not accounted for by the growth in inputs.’’27 As such, the Chinese farmers have stepped to the frontline in adopting scientific farming; China’s computing market is opting for the latest chips; and China’s telecommunication has skipped the copper-wire infrastructure to leap into wireless. The Chinese are fast and determined in absorbing state-of-the-art S&T and in abandoning traditional clunkers. Innovation is reflected in the government’s leadership structure, as Ramo sees it. Leaders with revolutionary backgrounds have been replaced largely by those who have educational backgrounds. While only 20 percent of China’s provincial leaders had attended college in 1982, this number was 98 percent in 2002. The number with postgraduate degrees grew from 12.9 percent in 2001 to 29 percent in 2003; and two-thirds of the leaders under age 54 hold master’s or doctoral degrees.28 Moreover, modern Chinese leaders are more adapted to Western-style management than ever. Li Rongrong, chairman of the powerful State Asset Commission, once chastised managers with a Jack Welch–like warning: ‘‘If you cannot be one of the top three in your sector, be ready to be acquired by some other firm.’’29 Ramo believes, however, that the challenge to the system is whether more equality could be guaranteed, because sustainability

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and equality are intertwined. Chinese leaders are sober with the various dangers in growing GDP in double digits. However, it is the widening gap of incomes and regional discrepancy that are of central concern. With only three decades of reform, China has been progressing in the direction of unequal distribution too fast and too soon, according to Ramo. ‘‘Balanced development’’ has since become the economic moniker. Achievements in economic transition have made China a model for developing countries. On the one hand, China has firmly adopted a trade-based strategy, which is reflected in its export orientation and FDI policy. Ramo describes this change as: ‘‘Once practicing ‘Communism with Chinese characteristics,’ China is now practicing globalization with Chinese characteristics.’’30 On the other hand, China maintains a tough stand in sticking to self-determination based on its culture and market dynamics rather than following Western prescriptions such as the 10 principles of the Washington Consensus. Ramo is particularly appreciative of the Chinese view that any foreign experience must be localized before it can be useful. This principle was first put forward during the post–Opium War era when Chinese intellectuals ventured into Western learning. An exemplary implementation was the Special Economic Zones (SEZ) set up in 1979 in coastal cities to experiment with Western management. The principle of controlling the national destiny proves to be an economically sound strategy, as Ramo sees: the control of exchange rates, for example, was an important shield that prevented the Chinese economy from sinking into the quicksand of the 1997 Asian Financial Crisis. Hence, while broadly encouraging individualism and risk-taking, maintaining the collective spirit is an integral part of the Beijing Model. This is reflected in Jiang Zemin’s ‘‘Three Represents’’: the party must represent the people, the advanced productive force, and the advanced culture; and in Hu Jintao’s ‘‘Three Closeness’’: to be close to reality, people, and life. Ramo indicates, ‘‘Chinese development has a certain kind of prideful, internal energy that helps the nation’s confidence.’’31

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Self-determination is reflected in China’s diplomacy as well. Deng’s ‘‘peaceful rising’’ and Jiang Zemin and Hu Jintao’s ‘‘seeking friends and avoiding troubles’’ are diplomatic policies showing a consistent strategy of seizing the moment to develop the country’s economy. And here lies the economic validity, as Ramo discovers, of China’s defense strategy: developing an asymmetric defense system. Going asymmetric instead of mirroring the costly weaponry production of the West, and targeting weak spots of the Western military systems by developing a set of asymmetric weaponry may likely be cost-effective. Such strategies may have only limited use in the actual warfare, but the concept is important. Ramo estimates that China’s hundreds of billions of dollars in U.S. currency reserve could be used to do more harm than aircraft carriers that cost that much money to buy. How should the United States and other industrial nations deal with China? Ramo argues that the ‘‘China threat’’ theory is outdated and must be replaced by ‘‘China opportunity.’’ The postreform China is not the same as China of 150 years ago. As Ramo puts it, China has become the center of East Asia. China is seeking good neighborliness in the name of mutual trust, mutual benefit, equality, and cooperation. It has cultivated multilateral ties and endeavors to bring about free trade areas in Asia by 2010. Working with China will open up a treasure trove of opportunities. To contain or constrain China could only harm its ability to improve. An imploded Chinese economy will not be in anyone’s interest. Ramo believes that a new framework should be built beyond the ‘‘threat-opportunity binary paradigm and instead begin to build a more environmental approach to improve relations.’’32

DEVELOPMENTAL PERSPECTIVE

Kishore Mahbubani, a former ambassador of Singapore to the United Nations, sees freedom growing in China where many in the West fail to pick it up. Mahbubani writes,

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The fundamental layer of human freedom is freedom from want. A human being who cannot feed himself or his family cannot possibly be free. Famine is more damaging to human freedom than a politically closed society. To tell people who are struggling to stay alive that they are ‘‘free’’ because a distant despotic ruler has been removed will appear meaningless to them. In terms of their daily lives, ‘‘freedom’’ will come with liberation from the fight for survival. In this sense, the Chinese people have never enjoyed greater human freedom.33

Mahbubani adds that along with freedom from want, Chinese citizens also have acquired freedom of security and freedom of choosing one’s job, and the citizens of Beijing have never enjoyed as much personal security as they do now.34 Indeed, ample evidence supports this view that the Chinese enjoy an increasing freedom to choose their jobs. The 150 million annual migrants are but one example: the Chinese no longer feel tied to the harsh working conditions of farm work. They are finding their way to a better life in cities. The freedom of choosing one’s occupation has been one of the most powerful factors that has raised productivity. Mahbubani points out that the freedom of travel is an important right that the West tends to ignore. Before the reform, the Chinese were tied to their birthplaces by the Hukou system. Even traveling for sightseeing was uncommon, due to financial means and residential restrictions. Reform has changed it all. Mahbubani relates an interesting story: In January 1979, Deng Xiaoping paid an official visit to the United States. He was received by President Jimmy Carter, who told him that the Congress had passed the Jackson-Vanik Amendment in 1974, which allowed normal trade relations only with countries that allowed free emigration. Congress had passed this legislation in an effort to put pressure on the Soviet Union to allow free emigration of Jews. Deng listened impassively as President Carter made his passionate case for the right of free emigration. When President Carter finished, Deng asked him, ‘‘How many Chinese would you like me to allow to emigrate to the U.S.? One million? Ten million? A hundred million? You can have as many

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as you want.’’ President Carter did not push his point any further.35 NBS data show that in 2006, 10 million tourists traveled abroad spending $10 billion. By 2020, China is likely to become the country with the largest number of people traveling abroad, according to Xie Guozhong, senior economist of Morgan Stanley.36 Mahbubani points out that China lags behind in ideological freedom and rule of law. Progress in these areas, as he indicates, typically takes a long time to achieve. Americans justifiably can take pride in having the longest surviving democracy. The U.S. Declaration of Independence, written in 1776, spoke eloquently of the equal rights of ‘‘men.’’ Yet it took Americans almost a century after it declared independence to free those it had enslaved, and it took another century for the United States to recognize that its black population should have the full set of civil rights promised in the Constitution. He writes: The Chinese people have never been freer. . . . They are much freer than they have ever been. Relative to their ancestors, they are the freest people China has ever had. As they look ahead to their future, they are confident and optimistic that things will improve. Can the West say the same?37

On the global stage, China actively extends its influence to surrounding countries of the Association of South East Asian Nations (ASEAN), which shows its openness and confidence. At the ASEAN-China Summit in November 2001, Chinese Premier Zhu Rongji stunned the ASEAN leaders by offering a free trade agreement (FTA). To demonstrate concretely that its offer was serious, China even presented unilateral concessions to the ASEAN countries, such as duty-free access to the Chinese market on 600 agricultural products, including meat, fish, dairy products, live trees, vegetables, fruits, and nuts. A year after the proposal, the final FTA was signed by the Chinese and ASEAN leaders at the 8th ASEAN Summit in Phnom Penh, Cambodia. The document declares an FTA with Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Laos, Cambodia, and Myanmar

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by 2015. China also accorded the three non-WTO ASEAN members, Vietnam, Laos, and Cambodia, most-favored-nation status. According to Mahbubani, the China-ASEAN FTA, when fully implemented, will constitute a common market of 1.7 billion people, with a combined GDP of $1.5 to $2 trillion.38 In Mahbubani’s view, China’s maneuver has a further goal to secure its borders, so that it builds a safe neighborhood that will be necessary for a prolonged domestic economic growth. This is similar to the U.S. decision to offer Mexico trade access through the North American Free Trade Agreement (NAFTA), according to Mahbubani, in that both are driven by a cold calculation. In the case of the United States, Mexico possibly could send more illegal immigrants across the border if America did not strengthen the Mexican economy, even if it involved outsourcing jobs to Mexico. In the case of China, helping to preserve political and economic stability at its borders by strengthening the ASEAN economies is a far-reaching strategic plan. Mahbubani believes that China is acutely aware that its steady rise could one day wake up the United States, causing it to attempt containment by forming an alliance with ASEAN countries to encircle China. Hence, China has implemented a preemptive strategy against any possible U.S. encirclement. ‘‘China’s soft power in Southeast Asia is now so potent,’’ Mahbubani states, ‘‘that for the first time since 1945, . . . that ASEAN countries would not be disposed to help U.S. contain China.’’39 Mahbubani believes that the United States remains on high alert when dealing with China, instead of trusting China as a regular trade partner. In 2003, the state-owned Chinese oil company, China National Offshore Oil Corporation (CNOOC), tried to purchase Union Oil Company of California (UNOCAL), in competition with a U.S. oil company, Chevron. Under U.S.drafted rules on investment, this should have been seen as a purely commercial transaction, which the United States in particular should have welcomed because it championed the right of major U.S. oil companies to purchase oil companies

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all around the world. Instead, in a dramatic reversal, the U.S. government intervened to block the sale of UNOCAL to CNOOC. This left a deep impression on Chinese leadership.40 CHINA MODEL VIEWED BY THE CENTRAL PARTY SCHOOL

Probably no one puts more emphasis on studying the China Model than the CCP. On the one hand, as the leading political party the CCP is under pressure to elucidate the neo-communist cause and the party’s role with respect to the market economy. Conversely, there is an increasing domestic demand to examine China’s admirable modernization progress during the past three decades. Additionally, China’s success in weathering two financial storms while leading Western economies sank into recession has convinced many that China’s experience must be studied. To facilitate research and exchange of views, the People’s Daily hosts a dedicated Web forum at http://theory.people. com.cn with an archive of related articles, with most of the opinions coming from the CPS. The 17th CCP Congress held in October 2007 characterizes the China Model as ‘‘three one’s’’ (san ge yi), or ‘‘one banner,’’ ‘‘one road,’’ and ‘‘one system.’’ ‘‘One banner’’ refers to the ideological principle of ‘‘upholding the banner of socialism with Chinese characteristics.’’ ‘‘One road’’ refers to ‘‘the socialist road with Chinese characteristics;’’ and ‘‘one system’’ refers to ‘‘the Communist ideological system with Chinese characteristics.’’41 Yu Keping, deputy chief of the CCP Bureau of Translation, explains that the China Model clearly differentiates from the Russian Model and Western models with respect to ownership, political system, and ideology. China adopts a mixed-ownership system. While private ownership is expanding, the government owns natural resources, such as forests, rivers, and mines. The government typically exercises more influence over the economy than Western systems. With respect to the political system, China does not implement multiparty parliamentary democracy; and it does not practice ‘‘responsible government’’ in the form of the

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nominal division of state power. Ideologically, China adopts Marxism as guiding principles, but it remains accessible to other ideological systems in the meantime. The 17th CCP Congress associates the ideological framework of ‘‘three ones’’ with a guiding principle for the practice named ‘‘four determinations.’’ China is determined to (1) engage in ideological liberalization, (2) reform and open up, (3) promote S&T and develop a harmonious society, and (4) improve people’s material well-being by building in a comprehensive manner a ‘‘relatively comfortable life’’ (xiao kang).42 This theoretical framework is coherent, according to Yu Keping, in that the system allows the government to exercise a strong influence on social stability, distribute resources, and curb extreme polarization. All this is much needed at the start of a new market economy. Additionally, all of this is managed based on the ‘‘country’s special reality’’ (juti guoqing). As such, according to Yu, the system has led to China’s booming economy, increased its international influence, and thus, contributed greatly to world peace. Professor Yang Yao of Peking University amended Yu’s description of the China Model by adding that the Chinese government has been a ‘‘neutral government’’ in reality.43 When it comes to assessing the role of the Chinese government, probably most people would be reluctant to describe it as a government of ‘‘neutrality.’’ Professor Yang Yao believes, however, that neutral government is a key feature to the China Model. ‘‘Neutrality’’ means that the government puts national interests above all, without favoring any particular section of the society and without bending to short-term interests of social groups. The first evidence, according to Professor Yang, is the government’s flexibility or pragmatism. In the early 1980s, had China continued to entangle itself in ideological debates on picking which way to go, capitalism or socialism, the economic reform never would have taken off. Deng Xiaoping avoided such classical and nonsensical debates by calling on the CCP to simply focus on the economy, thus rallying people

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of all backgrounds to support one practical target—achieving the ‘‘relative comfort.’’ The second evidence is the temporary dual-pricing system installed in 1984 to facilitate urban reform. It allowed SOEs to first satisfy the state quota by selling products to the state at state-fixed prices, and then, to sell beyond-quota products on the market at market prices. At the beginning of the economic reform when the planning economy was still on many people’s mind, this makeshift policy was an inspiring deviation. This policy eventually led to the booming village and township industries in the 1990s. The third evidence is the in-depth SOE reform. Had the government failed to maintain neutrality, it would not have given up its privilege in the old centralized system and forced the SOE buddies to reform or die. And, ‘‘reform or die’’ was what the government handed to SOEs. In the early 1980s, SOE employees as well as many cadres were scared of reform, fearing the consequences of disturbed job security. The Chinese government allowed unproductive companies to restructure, including going bankrupt. Tens of thousands of people lost jobs as a result. However, according to Professor Yang’s research, restructured companies eventually hired more employees than those that refused to restructure. He explains that the new companies were more productive and competitive, and thus they needed more workers. The gradual economic reform has deeply transformed the traditional planning economy. Many experts believe that it is the gradual but steady pace that has guaranteed continuity. According to The Guangming Daily, market mechanisms currently control 95.6 percent of retail sales, 91.9 percent of allocation of production resources, and 97.7 percent of government purchase of agricultural and related products, such that China has turned into ‘‘a new world market where market competition reaches the highest intensity.’’44 A December 2008 survey conducted by the official government newspaper The People’s Daily and its affiliate People’s Tribune asked 5,162 participants the question, ‘‘How do you

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understand the China Model?’’45 The survey listed 12 descriptors for participants to rank with respect to their representation of the nature of the China Model. These descriptors are as follows: creative, experimental, tolerant, gradual, reform-focused, fair and just, efficient, stable, growth-focused, self-reliant, open, and common-sharing. Participants picked ‘‘reform-focused,’’ ‘‘growth-focused,’’ ‘‘gradual,’’ ‘‘experimental,’’ ‘‘open,’’ and ‘‘stable’’ as the most descriptive of the China Model, with ‘‘reform’’ and ‘‘growth’’ taking the highest scores. Results showed that 74.55 percent believed that, while the China Model is indeed a valid concept, the model is in transition and has many imperfections. Some 63.7 percent of the participants perceive the China Model as essentially referring to the Chinese-style market economy characterized with government guidance, gradual reform, and openness to the outside world. Additionally, 56.28 percent believe that China’s economic achievement is primarily due to a prolonged period of social stability, gradual economic reforms, and the government’s pragmatic approach. Furthermore, 74.56 percent of the participants believe that the current world financial crisis will be a test to the China Model, and may further lead to its refinement. When asked ‘‘How should the China Model improve?’’ 81.34 percent listed the following as the first to be improved: (1) reforming the social distribution system and narrowing the gap; (2) accelerating health care, education, and housing reforms; (3) making the government more effective in areas such as public finance and public service; and (4) reducing the current urban-rural divide and working toward urban-rural integration. Obviously, these priorities suggest that with the improvement of material life people are becoming more aware of individuals’ rights. For the China Model to be an inspiring path for other developing countries, as most participants in the survey wish, improving individual rights and social justice will be critical. Despite the fact that ‘‘economic growth’’ is ranked second to ‘‘reform’’ as one of the most characteristic features of the China

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Model, critics have pointed out that the fast economic growth during the past three decades is actually seriously deficient in several aspects. Qiu Gengtian, a professor of the CPS, criticizes China’s fast growth as irrational and unscientific, because it generates high damage to the environment as well as to the wellbeing of people’s lives. As such, the economy is entangled in a vicious cycle in which higher growth parallels higher costs. Eventually, these high costs will eat away much of the growth; and this is part of the reason why China’s economic boom has been considered by environmentalists as ‘‘threatening.’’ Professor Qiu writes: Our economy is exemplary in both high investment and high side-effects. Overall, we have been following the traditional model left by the Industrial Revolution, one of high investment, high production, and high pollution. Hence, our high growth bears high costs. Meanwhile, due to the fact that China’s production ramped up at a stunning speed within a brief period and for a rather narrow purpose, the human nature has suffered distortion and alienation. Behind the fast economic growth, there has been no shortage of damages to morality and to the ecological environment.46

Contrary to many Chinese theoreticians who embrace the nationalist view and who insist on China’s specificities, Professor Qiu recognizes global commonality both in human rights and in economic principles. Professor Qiu argues that refusing to follow the road that other nations are pursuing by invoking the excuse that China has special conditions will mean in effect that China denies its citizens the civilization that other nations already have achieved.47 Professor Qiu points out that if China wants a sustainable economic growth, it must urgently reduce costs and implement the principle of balanced growth. At any rate, high costs must not have a place in the China Model, in Professor Qiu’s view. Hu Angang, a professor at Tsinghua University, believes that the GDP accounting method must not only record growth in terms of wealth increase, but also reflect damage caused by

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economic activities. Thus, growth minus damage equals the ‘‘Green GDP.’’ Professor Hu believes that the real GDP growth is accounted for by the Green GDP, not by the ‘‘Black GDP’’ (‘‘black’’ for carbon emission). Professor Hu writes, We believe that the Green Development is China’s way to stronger economy. China must stick to green development, producing green products, making green contributions, and bringing about a green peace. Therefore, the green way is China’s way of peaceful rising.48

In an interview with Phoenix TV, Professor Hu recommends that by 2050 China reduce its CO2 emission by half from its 1990 level. China’s current CO2 emission levels account for 17 to 18 percent of the world’s total. If not well managed, this figure could climb to 27 percent by 2030. Professor Hu states that if China is not committed to reducing CO2 emissions, the world’s efforts will fail, which may turn China into a ‘‘public enemy of the world.’’49 On the other hand, if China actively reduces carbon emission, China not only will benefit from producing the green GDP, but also will become a leader in the future green economy. Professor Hu urges the following: We must conduct a green Industrial Revolution in which China is not only for a participant, but the initiator, the leader, and most important of all, China will become a new ground breaker. By constantly making green consumptions, creating green-technology, putting in place green development models, this, in itself, will be a big contribution of China to the mankind.50

Those who have visited China on multiple occasions may have witnessed changes in people’s environmental awareness. In large cities, recycling has been integrated into daily life, schoolchildren routinely engage in cleaning up the community, the Kyoto Protocol features in student debates, polluting and wasteful behaviors are openly criticized by the media, and fewer chimneys gush dark smoke. A green environment is on everyone’s

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mind. Luo Qiang, a high-level manager of Golden Concord Non-Ferrous Metals Holdings Limited, says that China must reform its current industrial structure from simple value-added processing to a knowledge-based and high-tech-based economy. In his opinion, if this does not happen in the next 10 years, China’s environment will be seriously damaged and its resources exhausted, and as a result, the economy will collapse. But he is hopeful of significant changes sooner rather than later. These interpretations of the China Model reflect the reality in a certain way. Based on these opinions, the China Model could be defined as the union of the following components: (1) a government that is reform-minded, pragmatic, and capable of strong interventions; (2) a stable and relatively tolerant social environment that provides increasing latitude for business opportunities; (3) a gradual economic reform that keeps problems within manageable limit; and (4) a strong focus on improving people’s material well-being and reducing economic gaps. PERSPECTIVES OF SUSTAINABILITY

Since the start of the 2008–2009 global economic crisis, the Chinese economy has demonstrated a great resilience. Will China’s economy survive the impact of the current global crisis? Economic data thus far point to a positive future. Plentiful hurdles lie ahead. Indeed, there have been a few bright spots: during the first half of 2009, the stock markets in Shanghai and Shenzhen regained 75 percent and 95 percent, respectively. Investment in fixed assets increased by 33.5 percent. Housing space sold went up by 31 percent, which led a moderate recovery in the sale of furniture and automobiles. The Consumer Confidence Index shows improvement from the same months in 2008. The GDP grew only by 7.1 percent, the lowest rate since 1992. Because China is experiencing the peak of its employment, a GDP growth below 8 percent results in unemployment pressure and other adversary effects. Production continues to exceed demand, putting pressure on economic growth. The rise in the

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stock market therefore may reflect bubbles in the market. Some speculate that the stimulus package may have been diverted to the stock market. A similar situation exists in the housing market in which sales oddly rose even though incomes did not change.51 In foreign trade, negative growth continues to accrue in double digits.52 Trade with Europe, Japan, and the United States went down by 29.9 percent, 23.1 percent, and 16.6 percent, respectively. Trade protectionism has been constantly on the rise in Western economies, causing great damages to Chinese goods. One example is iron ore; China relies on imports for more than 50 percent of its need. Because 70 percent of the world’s iron mines are controlled by Western countries, China’s cost of import has risen to $95 per metric ton as of July 2009, compared with $60 per metric ton just four months earlier, lowering profits for the iron industry. In the meantime, demand for iron has been decreasing because of the world recession. The situation is devastating for China’s iron industry, which has a critical role in China’s economic recovery.53 The preliminary year-end figures released on January 21, 2010, indicate that the 2009 GDP grew by 8.7 percent over 2008.54 While NBS chief Ma Jiantang expressed guarded optimism with the future of recovery, he pointed out a number of concerns, one of which is signs of inflation. The CPI number turned positive in December, raising alert on rising prices. Another is caused by the continued overheating in the housing market, which is now understood as a side effect of the stimulus package. A third concern is income discrepancy maintaining its upward trend. Urban income increased by 9.8 percent in 2009 while rural income’s rate of increase was 8.5 percent. In 2005, urban income was 3.22 times as large as rural income; according to Mr. Ma, that figure rose to 3.31 in 2008. The solution he proposed is to raise migrant workers’ salaries and raise the purchasing prices of agricultural products; both measures, however, may have an inflationary effect. Looking forward, the NBS chief expects the economy to maintain a steady to relatively fast pace.

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The advantage of the China Model is manifested in its capacity to mobilize national resources, allocate resources, and implement solutions that are beyond the capacity of the current market system. It is a fact that the market mechanism works the best in affluent regions, but less so in poor regions. For example, to effectively develop remote regions, the government has to step in with incentive policies. Because of low income levels, the high demand for socioeconomic improvement in poor regions would hardly attract significant attention from the market. Only government efforts could leverage investments to needy provinces. The strong intervention of the government has played an important role in trade recovery. In foreign trade, for example, the government has renewed export tax refunds multiple times since January 2009. In the reform of product mix, the Chinese government has been channeling funding into both high-tech and labor-intensive products, with an emphasis on products that are patented with national brand names. To eliminate redundancy, the government has retired many outdated and polluting production facilities and has supported new strategic industries to rise. In times of economic downturn, reducing the urban-rural gap becomes a critical matter. Here, the Chinese government has worked simultaneously on two fronts: (1) accelerating support to rural regions by providing subsidies for agricultural products, helping farmers find jobs in urban areas, providing health coverage to farmers, and integrating these measures with the grand plan of stimulating domestic demand; and (2) reducing corruption. The government achieves this through law enforcement and through ideological campaigns hinting at patriotism and nationalism. Both measures have achieved results. The global recession has tested the legitimacy and popularity of the government. Given its record of quelling the 1997 Asian Financial Crisis, the government seems to enjoy more support in the 21st century. Additionally, despite its many imperfections, no better economic structure comparable to the China Model enjoys popular support, maintains an upper hand on financial

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and social disturbance, and demonstrates an admirable capability of raising the living standard of 1.3 billion people. As time passes, more developing countries find in the China Model an answer to their sufferance from the failure of a Western financial system that had allowed greed to take its toll on the global economy. ‘‘Enlightened self-interest,’’ coined by Adam Smith in describing capitalism as the pursuit of profit with public benefit in mind, have lost much of its glare in China. Instead, support is rising for more control. In the short term, the China Model, with its government intervention, social control, gradual economic reform, and social welfare programs, is likely the only way to sustain the Chinese economy through the global recession. Notwithstanding, signs of ‘‘turning inward’’ have raised concerns among Western political analysts.55 While there is no apparent benefit for the Chinese government and the CCP to slow down economic reform and open-up, an adversary force exists historically, such as hardliner nationalism that may take the opportunity to seek expansion. However, such a trend has always lacked popular support. The sustainability of the China Model in the long run is widely believed to be optimistic. In essence, its ability to succeed ultimately will depend on whether China will continue with its economic and political reforms. More particularly, the key to sustainable growth lies in whether China could successfully convert its current industrial model from one of high production and high waste to one of a knowledge-based, energy-efficient, and environment-friendly industry. Chinese industrialists have a strong commitment to making this change. The mining industry is a good example. Luo Qiang of Golden Concord is particularly concerned about the disadvantage that many Chinese metal firms face. Foreign companies typically leave Chinese firms with a thin profit margin, simply because they possess the technology. In some cases, foreign firms transfer technologies that are banned in their own countries, not being able to qualify for

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environment standards there. As a result, foreign technologies are not pollution free. One example Luo Qiang provided was the treatment of raw mining materials (iron ore, in this case). The ground mineral rocks are chemical-washed, and the process generates large quantities of waste debris that eventually is trucked away and dumped on farmlands, hillsides, and other ‘‘empty’’ spaces; the chemical detergent then seeps into local surface water. He believes that China must stop making bad deals such as these; that China must have its own technology and hopefully a better one. On this issue of reforming China’s industrial model, the government and the people are united, and determination is strong. From this perspective of unity and under the umbrella of the China Model, long-term sustained growth is highly likely and the chance of economic collapse is unlikely. In addition to encouraging environmentally friendly industries, socioeconomic equality must be addressed. For example, ethnic tensions are high as suggested by the Xinjiang riot in July 2009. China must urgently build a safety net of social security and social welfare for its residents in rural areas and hinterland provinces. The legal system must be strengthened to better protect individual rights. Property rights need to be further reformed such that farmers’ land will not be conveniently seized by corrupt officials in their money-for-power swaps. Assuming that progress in these areas is achievable, then, according to OECD researchers, China likely could surpasses the United States to become the biggest economy in the world in terms of GDP by 2015, and could account for about one-quarter of the world GDP by 2030.56 Projection of long-term economic sustainability is a broadly encompassing effort. De Saussure’s structuralist view argues that the value of a component is endowed by the system. Judgment based on misunderstanding or lack of understanding of the background system leads to partiality. In assessing the sustainability of an economic model, one cannot afford to ignore history, cultural traditions, and current development, because these

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form the components of the system. Therefore, it is a risky matter to apply the same standard to all systems. Thus, the opinion that the China Model is unsustainable because it departs from the Washington Consensus is likely biased. It fails on these grounds at the least: 1. It fails to perceive that the modern Chinese economy is one of gradual transition. As such, foreign learning may take a longer time to be an integral part of the system. Here, localization is a prerequisite to appropriate function. 2. Rooted in the Chinese tradition in which profit-seeking historically despised and social control the norm, the China Model may differ from Washingtonian ideals at least in some aspects, such as the levels of deregulation and private property ownership, and may differ for a long time to come. 3. The Chinese system is no longer deadlocked in any ideological or economic structure. It is a dynamic process searching for optimum solutions. The fact that the CCP has opened up its membership to entrepreneurs proves that the communist movement is geared toward diversity. In fact, it is a reality that the diversification of the CCP has generated growing representation, despite traditional implications. Moreover, in-party diversity has the potential to give rise to political forces that eventually would lead to a democratic plurality, and whether the new political entities are named ‘‘Communist Party A’’ and ‘‘Communist Party B’’ is not important. It is not in the name. For one thing, the 21st-century CCP will not forego the market mechanism. It is there to stay. 4. Ideological control exists and at times is shown in the traditional forms of brainwashing. However, China’s ideological control has taken up a new orientation—the control of extremism, including hard-line communism, radical nationalism, and separatism, all of which could derail the economic progress.

On the global stage, understanding is prerequisite to making sound decisions. Understanding may even save lives. Lao-zi (sixth century BCE), who founded Daoism, stressed the importance of keeping one’s mind open. He said, ‘‘Knowing others is wisdom; knowing the self is enlightenment.’’57 Learning from one another may be a better way to generate a sustainable model for

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everybody, whereas a closed mind seldom helps. Yet, leaders in China and the United States tend to adopt a defensive attitude. The following two examples support this view. The first example is related to China’s attitude. In his speech given on January 29, 2009, during the annual gathering of political and economic leaders in Davos, Switzerland, Premier Wen Jiabao blamed the United States for an ‘‘excessive expansion of financial institutions in blind pursuit of profit,’’ a ‘‘failure of government supervision of the financial sector,’’ and an ‘‘unsustainable model of development, characterized by prolonged low savings and high consumption.’’58 For decades, while criticizing the U.S. model, China failed to encourage its own consumer spending, such that its underdeveloped domestic market suddenly turned into the center of concerns when exports collapsed in the global recession. As a result, the government is now using the stimulus package to ramp up social benefits and provide all kinds of incentives to stimulate consumer spending. The second example deals with American attitude. Dwelling on the triumph of market economy and overreliance on market mechanism is a lesson that the United States has learned. In defending the Federal Reserve’s lack of intervention, former Chairman Alan Greenspan sees human greed as uncontrollable except by the market mechanism itself. He would strongly disagree with the level of state intervention that China applies to its economy, as he sees little merit in raising regulation at all, but takes the cycle of boom and bust as the deal of a great economy. Chairman Greenspan states during a CNBC interview, ‘‘Nobody is going to pass a legislation to outlaw that (greed). Try it. I firmly believe in it (power of the free market), because I know of nothing in the evidence of alternatives. . . . It will not be for quite a period of time, but it will occur (again), because the flaws in human nature are such that we can’t change them. It doesn’t work.’’59 The consequence is that because of regulatory failure, one of the worst recessions broke out and wiped out much of the gains earned in decades and had a worldwide impact. The recession has led people in the United States to

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reassess its economic model. Any responsible government has a duty to install effective measures of regulatory control to prevent human flaws from taking their toll on the economy, as they did in the 2008–2009 recession. The world may have developed too fast and too soon for many policymakers to catch up. It is unthinkable, for example, that within merely three decades China has turned from a poverty-stricken country into the third-biggest economy in the world, and it is aggressively pursuing a green economy through technology and innovation. China is transitioning further from an export country into an import country. It is unthinkable that communist China and the United States are helping one another as they sail the waters of recession, and that China has become the biggest U.S. financial ally. Jim O’Neil, global head of research at Goldman Sachs, had the following to say on China’s role in the world economy: ‘‘The story of the global recovery here, the story into the next decade, is the story of the emergence of the Chinese consumer. It continues to astonish me how few people in the West realize that this is starting. This is a huge huge story.’’60 Observations are often shaped by theories. What has happened in China calls for a revision of the theories, for example, those of market economy and communism. New observations may lead to effective policies and new opportunities; the old framework will produce more of the same. Even more unthinkable, however, is China’s unpredictability. Even ‘‘insiders’’ of the CPS are constantly guessing. For the Chinese, the model belongs to the past; ‘‘the shoes must be made to fit the feet, rather than the feet be shaped to fit the shoes,’’ as an old Chinese saying goes. Deng Xiaoping phrased this in a formal way: ‘‘There are no fixed models, and there can’t be any. Sticking to a set path will only result in falling behind or even failure.’’61 The Chinese learned this truth after following Confucianism for more than 2,000 years, communism for more than 50 years, and capitalism for three decades. None of these models are free from costly deficiencies. What is to be done, then, is to set a goal, carefully work toward it, and not worry about the model.

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The process of the economic transition has reflected this mentality all along. Letting the citizens live a better life and live with more dignity will be the country’s priority in the years to come, as Premier Wen Jiabao expressed in his 2010 New Year’s wishes. In fact, a stable, peaceful prosperous, and versatile China benefits the whole world. Yet, looking ahead, crossing the river of challenges will not be an easy task. The waves are high; the world will be watching China’s every step with the utmost interest.

Notes

CHAPTER 1

1. ‘‘National Economy: Steady and Fast Growth in 2008,’’ National Bureau of Statistics, January 22, 2009, http://www.stats.gov.cn/english/ newsandcomingevents/t20090122_402534173.htm (accessed September 23, 2009). 2. David Dollar, ‘‘New PPPs Reveal China Has Had More Poverty Reduction Than We Thought,’’ March 4, 2008, http:// blogs.worldbank.org/eastasiapacific/new-ppps-reveal-china-has-had -more-poverty-reduction-than-we-thought (accessed October 17, 2009). 3. Hu Jintao, ‘‘Full Text of Hu Jintao’s Speech at 2005 Fortune Global Forum,’’ People’s Daily, May 16, 2005, http://english.people.com .cn/200505/17/eng20050517_185302.html (accessed June 7, 2009). 4. ‘‘Women Enjoy Good Employment Environment—The Tertiary Sector Sees Relatively Fast Growth,’’ Shandong Bureau of Statistics, June 26, 2008, http://www.stats.gov.cn/ (accessed July 25, 2008). 5. The State Council, ‘‘Decision of CCP Central Committee and State Council on Ramping up Tertiary Industry,’’ Xinhua Net, June 16, 1992, http://news.xinhuanet.com/ziliao/2005-02/17/content_2586400 .htm (accessed June 3, 2009). 6. Allison Cui and Kheehong Song, ‘‘Understanding China’s Middle Class,’’ China Business Review (January-February 2009): 39. 7. Ibid.

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8. ‘‘Passenger Car and Motorcycle Fuel Consumption and Travel,’’ U.S. Bureau of Transportation, http://www.bts.gov/publications/ national_transportation_statistics/html/table_04_11.html (accessed July 21, 2008). 9. Associated Press, ‘‘China Surpasses US in 2009 Auto Sales,’’ NPR.org, January 8, 2010, http://www.npr.org/templates/story/story .php?storyId=122353603 (accessed January 19, 2010). 10. Jonathan Unger, ‘‘China’s Conservative Middle Class,’’ in Global Studies—China, ed. Suzanne Ogden, 12th edition (New York: McGrawHill Companies, 2008), 125. 11. Ma Jiatang, ‘‘National Economy: Steady and Fast Growth in 2008,’’ National Bureau of Statistics, January 22, 2009, http://www .stats.gov.cn/enGliSH/newsandcomingevents/t20090122_402534173 .htm (accessed February 23, 2010). 12. Ian Johnson and Loretta Chao. ‘‘Painful Lunar New Year for China’s Migrant Workers,’’ January 23, 2009, http://online.wsj.com/ article/SB123265353594507099.html (accessed January 28, 2009). 13. Chen Xiwen, ‘‘Press Conference Regarding the Number 1 Document of 2009,’’ Bureaus of Finance and Economy and Agricultural Administration of the PRC, CCTV, February 2, 2009. 14. Don Lee, ‘‘Migrant Factory Workers at a Loss as China’s Economy Slumps,’’ Los Angeles Times, January 23, 2009, http:// www.latimes.com/business/la-fi-chinamigrant23-2009jan23,0,3404505 .story (accessed January 28, 2009). 15. Louisa Lim and Renee Montagne, ‘‘China’s Economy Slows to 6.8 Percent Last Quarter,’’ Morning Edition, NPR, January 22, 2009, http://www.npr.org/templates/story/story.php?storyId=99721501 (accessed January 24, 2009). 16. Reuters, ‘‘China Approves Universal Healthcare Plan, 850 bln RMB Expenditure,’’ Thomson Financial News, January 21, 2009, http://www.forbes.com/feeds/afx/2009/01/21/afx5948841.html (accessed February 1, 2010). 17. Chen Xiwen, ‘‘Press Conference Regarding the Number 1 Document of 2009,’’ February 2, 2009. 18. ‘‘U.S. Exports to China: 2000–2008,’’ U.S.-China Business Council, March 25, 2009, http://www.uschina.org/public/exports/ congressional/2000_2008/ (accessed June 7, 2009).

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19. ‘‘U.S. Exports to China: 2000–2008,’’ U.S.-China Business Council, March 25, 2009, http://www.uschina.org/public/exports/ congressional/2000_2008/2008_top_us_state_exporters_to_china (accessed June 7, 2009). 20. John Ward, ‘‘Chinese Health Care Market Is Focus of U.S. Trade Mission,’’ U.S. International Trade Administration, http://trade.gov/ press/publications/newsletters/ita_0608/china_0608.asp (accessed July 25, 2008). 21. ‘‘Paulson Urges More China Talks,’’ CNN–Washington, DC, October 21, 2008, http://cnnwire.blogs.cnn.com/2008/10/21/paulson -urges-more-china-talks/ (accessed October 22, 2008). 22. Lu Hong, ‘‘Reporting Premier Wen Jiabao during the International Trip,’’ People’s Daily, http://www.people.com.cn/GB/ shizheng/1024/2289584.html (accessed June 7, 2009). 23. China Daily, ‘‘New Poverty Line Raises Number of Poor,’’ China.org, December 23, 2008, http://www.china.org.cn/business/ news/2008-12/23/content_16992948.htm (accessed June 7, 2009). 24. Xiao Jingjian, ‘‘Consumption Patterns and Statistics of Living Conditions,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 93. 25. Xinhua News Agency, ‘‘Engel Coefficient Declining in Urban Beijing,’’ China.org, April 13, 2007, http://www.china.org.cn/english/ China/207089.htm (accessed April 7, 2009). 26. Emily Chang, ‘‘Fast Food Reigns in China,’’ CNN–Beijing, June 7, 2009, http://www.cnn.com/video/#/video/world/2009/06/ 05/chang.ctw.china.fast.food.cnn (accessed June 7, 2009). 27. Ed Wing, ‘‘Engel Coefficient Not Efficient in Measuring Chinese People’s Livelihood,’’ December 4, 2006, http://www.newsgd .com/culture/culturenews/200612040085.htm (accessed April 7, 2009). 28. Gordon G. Liu, ‘‘Health Care Reform,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Santa Barbara, CA: Greenwood Publishing, 2005), 246–247. 29. Zhou Tingyu, ‘‘City/Township Resident Health Insurance System Likely to Be Broadly Implemented in 2009,’’ Xinhua Net, February 21, 2009, http://www.china.com.cn/policy/txt/2009-02/21/ content_17313412.htm (accessed June 9, 2009).

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30. James A. C. Sinclair, ‘‘China’s Healthcare Reform,’’ China Business Review Online (July-August 2009), http://www.chinabusinessreview.com/ members/0907/sinclair.html (accessed February 1, 2010 [subscription required]). 31. The State Council Information Office, ‘‘The State Council’s Opinions on Deepening Healthcare System Reform,’’ China.org, April 18, 2009, http://www.china.org.cn/government/scio-press-conferences/ 2009-04/09/content_17575378.htm (accessed August 9, 2009). 32. ‘‘Implementation Plan for Immediate Priorities in Healthcare System Reform,’’ The Ministry of Health, April 7, 2009, http://www .moh.gov.cn/publicfiles/business/htmlfiles/mohzcfgs/s7846/200904/39876 .htm (accessed August 9, 2009). 33. Qianlong News, ‘‘10 Hundred-Millionaire Party Members Taking the Lead in Getting Rich,’’ Financeun.com, August 19, 2008, http://financing.financeun.com/news/2008819/1613009982_0.shtml (accessed June 10, 2009). 34. Editorial, ‘‘CNNIC Declares Important Internet Network Events of 2008,’’ CNNIC, April 22, 2009, http://www.cnnic.net.cn/ html/Dir/2009/04/22/5578.htm (accessed May 7, 2009). 35. Staff writer, ‘‘There Were 555 Million Internet Game Users,’’ People’s Daily, March 25, 2009, http://paper.people.com.cn/rmrb/ html/2009-03/25/content_218745.htm (accessed May 7, 2009). 36. Su Wanming, ‘‘Focus on Migrant Workers: From a Migrant Labor to NPC Representative,’’ China Labor Market, September 5, 2006, http://www.lm.gov.cn/gb/employment/2006-09/05/content_131630 .htm (accessed May 7, 2009). 37. Nicolas Kristof, ‘‘The Educated Giant,’’ New York Times, May 28, 2007, http://select.nytimes.com/2007/05/28/opinion/28kristof .html?_r=1 (accessed May 4, 2009). 38. Tang Hui, ‘‘Tang Ruiren and Her Mao’s Family Kitchen,’’ Xiangtan Evening, September 1, 2009, http://www.xtda.gov.cn/ HTML/2009/9/2693.html (accessed December 28, 2009). 39. Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (New York: Public Affairs, 2008), 56. 40. Xiaoping Deng, Selected Works of Deng Xiaoping (Beijing: People’s Publishing House, 1993), 3:321. 41. Reference: CNN, ‘‘Chinese Premier Zhu Rongji: Differing on Human Rights,’’ April 14, 1999 (accessed February 21, 2010).

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42. Staff writer, ‘‘China Hails Three-Billion-Dollar Oil Deal with Iraq,’’ Energy Daily: The Power of Earth and Beyond, August 28, 2008, http://www.energy-daily.com/reports/China_hails_three-billion -dollar_oil_deal_with_Iraq_999.html (accessed August 28, 2008). 43. Joshua Cooper Ramo, The Beijing Consensus (London: The Foreign Policy Center, 2004), 53. 44. Hu Jintao, ‘‘Why China Loves Globalization,’’ June 7, 2005, http:// www.theglobalist.com/StoryId.aspx?StoryId=4606 (accessed February 1, 2010). CHAPTER 2

1. Xinhua News Agency, ‘‘China’s GDP Grows 9 Percent in 2008,’’ China.org, January 22, 2009, http://www.china.org.cn/business/ news/2009-01/22/content_17169174.htm (accessed May 30, 2009). 2. Editorial, ‘‘China’s GDP Growth Rate Was 9 Percent in 2008, Annual CPI Went Up by 5.9 Percent,’’ People’s Daily, January 22, 2009, http://finance.people.com.cn/GB/1037/8712210.html (accessed May 16, 2009). 3. Financial News, Central China Television, June 20, 2009. See also ‘‘The Ministry of Environmental Protection Monitors Two Illegal Dams on the Jinsha River,’’ China.com, June 19, 2009, http://www .china.com.cn/news/env/2009-06/19/content_17982785.htm (accessed June 20, 2009). 4. Staff writer, ‘‘Focus: Economy—Economic Recovery in the Works?’’ China Business Review Online (May-June 2009): http://www .chinabusinessreview.com/public/0905/economic-recovery.html (accessed May 16, 2009). 5. Daily Business News, ‘‘Financial Storm Dampens Employment Perspective: Migrant Workers Return Home Earlier from Many Provinces and Cities,’’ Yahoo!, November 14, 2008, http://biz.cn .yahoo.com/08-11-/137/s9z5.html (accessed May 16, 2009). 6. Ibid. 7. Guo Xue for Xinhua News Agency, ‘‘Toy Tycoon Collapses; Workers Seeking Back Pay; Dongguan County Government Advances Payment,’’ October 17, 2008, http://china.huanbohainews.com.cn/ system/2008/10/19/010178224.shtml (accessed May 19, 2008). 8. Reuters, ‘‘China’s Rate Decisions Depend on Own Data—Zhou,’’ December 18, 2008, http://www.reuters.com/article/naturalResources/ idUSPEK21971720081218 (accessed June 20, 2009).

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9. Michael Pettis, ‘‘China’s RMB Appreciation Is Going to Slow Temporarily,’’ July 26, 2008, http://www.rgemonitor.com/asia-monitor/ 253112/rmb_appreciation_is_going_to_slow_temporarily (accessed June 20, 2009). See also Russell Hsiao, ‘‘China Wrestles Its Moment of Opportunity,’’ Asia Times, October 29, 2008, http://www.atimes .com/atimes/China_Business/JJ29Cb01.html (accessed June 20, 2009). 10. Chen Jihong, ‘‘A Survey on Problems of Migrant Workers Who Returned Home Due to the Financial Storm,’’ Yingshan County Employment Office, December 9, 2008, http://www.ysjyxx.cn/ E_ReadNews.asp?NewsID=121 (accessed May 16, 2009). 11. Pieter Bottelier, ‘‘China’s Economic Downturn: Employment Is the Critical Issue,’’ China Brief 9, no. 3 (March 7, 2009), http://www .jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D= 34456&tx_ttnews%5BbackPid%5D=414&no_cache=1 (accessed May 16, 2009). 12. Geng Zhaojun and Guo Qibang, ‘‘A Report on Losses of Chinese Companies during the Financial Crisis,’’ October 30, 2008, http:// Money.163.com/08/1030/17/4PH4VK3B00251LJJ.html (accessed May 25, 2009). 13. Ibid. 14. ‘‘Wen Jiabao’s Press Conference of This Morning to Chinese and Foreign Journalists,’’ Eefoo Net, March 13, 2009, http://news.eefoo.com/ cjxw/cjdd/200903/13-1268683.html (accessed May 17, 2009). 15. Willy Lam, ‘‘Beijing’s Stimulus Plan: Preemptive Crisis Management,’’ China Brief 8, no. 22, November 24, 2008, http://www. jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D= 34165&tx_ttnews percent5BbackPid%5D=168&no_cache=1 (accessed May 19, 2009). 16. ‘‘Major Foreign Holders of Treasury Securities,’’ U.S. Treasury, http://www.treas.gov/tic/mfh.txt (accessed May 19, 2009). 17. ‘‘Value-Added of the Industrial Enterprises above Designated Size Expanded from January to April,’’ National Bureau of Statistics of China, May 13, 2009, http://www.stats.gov.cn/english/newsand comingevents/t20090513_402558516.htm (accessed May 18, 2009). 18. ‘‘Economists Claim That China’s Economy Scale Will Surpass Japan by End of Year: Part III,’’ People’s Daily, http://finance.people .com.cn/GB/70392/9312757.html (accessed May 18, 2009).

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19. ‘‘Economists Claim That China’s Economy Scale Will Surpass Japan by End of Year: Part I,’’ People’s Daily, http://finance.people .com.cn/GB/1045/153585/9312743.html (accessed May 18, 2009). 20. Zhang Yi, ‘‘Stimulus Plan Revives Domestic Market, Leading to 6 Major Positive Changes,’’ Xinhua Net, May 18, 2009, http:// finance.people.com.cn/GB/9320603.html (accessed May 18, 2009). 21. ‘‘Economists Claim That China’s Economy Scale Will Surpass Japan by End of Year: Part II,’’ People’s Daily, http://finance.people .com.cn/GB/70392/9312756.html (accessed May 18, 2009). 22. ‘‘Economists Claim That China’s Economy Scale Will Surpass Japan by End of Year: Part V,’’ People’s Daily, http://finance.people .com.cn/GB/70392/9312759.html (accessed May 18, 2009). 23. David Barboza, ‘‘China Urges New Money Reserve to Replace Dollar,’’ New York Times, March 23, 2009, http://www.nytimes.com/ 2009/03/24/world/asia/24china.html (accessed June 12, 2009). 24. Xu Jieyun Cui Ye, ‘‘Experts Differ on Second Wave of Financial Crisis: Third and Fourth Waves Are Possible,’’ Shanghai Academy of Sciences, http://www.sass.org.cn/newsarticleshow.jsp?dinji=52&sortid= 1524&id=35018 (accessed May 17, 2009). 25. Chen Jian, ‘‘Be Vigilant on Second Wave of Financial Storm,’’ Shanghai Committee of China National Democratic Construction Association, May 15, 2009, http://www.mjshsw.org.cn/new_look .asp?mingjian_id=4020 (accessed May 17, 2009). 26. Financial News, China Central Television, June 22, 2009. 27. ‘‘Focus: Economy—Economic Recovery in the Works?’’ China Business Review (May-June 2009), http://www.chinabusinessreview .com/public/0905/economic-recovery.html (accessed May 19, 2009). 28. Ibid. 29. Ibid. 30. Ibid. 31. NBS, ‘‘Press Conference by Ma Jiantang, Commissioner of National Bureau of Statistics, on the Economic Situation of 2009,’’ January 21, 2010, http://stats.gov.cn/tjdt/gjtjjdt/t20100122_402615835 .htm (accessed January 23, 2010). 32. Associated Press, ‘‘Stocks Fall as China Clamps Down on Bank Lending,’’ http://cbs3.com/business/stocks.market.dow.2.1434857.html (accessed January 23, 2010).

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1. Renee Montagne and Anthony Kuhn, ‘‘Will Beijing’s Efforts Clear Air for Olympics?’’ Morning Edition, NPR, July 29, 2009, https://www.npr.org/templates/story/story.php?storyId=93018383 (accessed on June 23, 2009). 2. Xinhua News, ‘‘Official: Air Quality for Olympics Beijing’s Best in a Decade,’’ August 29, 2008, http://2008.sina.com.cn/en/js/ 2008-08-19/15027635.html (accessed June 23, 2009). 3. Ibid. 4. ‘‘Beijing Fulfills Commitment to Air Quality for Hosting Olympics,’’ Beijing Daily, August 26, 2008, http://www.beijingdaily .com.cn/beijingnews/200808/t20080826_479235.htm (accessed June 23, 2009). 5. ‘‘China Data: The Environment,’’ China Business Review (January-February 2008): 20–32. 6. Zhiming Zhao, ‘‘Environmental Protection, Policies and Practices,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:155–158. 7. Ibid. 8. Xia Mengqun, ‘‘Beijing Set to Collect Pollution Fees, State Emission Standards to Be Followed,’’ Beijing Times, January 31, 2009, http://auto.sina.com.cn/news/2009-01-31/0920453469.shtml (accessed June 14, 2009). 9. China Environmental News, ‘‘Provinces Adopt Tougher Measures to Stop Automobile Exhaust Pollution,’’ China.com, April 20, 2009, http://www.china.com.cn/environment/2009-04/20/content_17633750 .htm (accessed June 14, 2009). 10. Keith Bradsher, ‘‘China Is Said to Plan Strict Gas Mileage Rules,’’ New York Times, May 27, 2009, http://www.nytimes.com/2009/05/28/ business/energy-environment/28fuel.html (accessed August 31, 2009). See also ‘‘Green Power Takes Root in the Chinese Desert,’’ July 2, 2009, New York Times, http://www.nytimes.com/2009/07/03/business/energy -environment/03renew.html (accessed October 15, 2009). 11. Environmental Protection Law, 1989, http://www.china.org .cn/english/environment/34356.htm (accessed March 26, 2009). 12. Law on Prevention and Control of Environmental Pollution by Solid Waste, 1995 (amended 2005), http://www.gov.cn/ziliao/ flfg/2005-08/05/content_20932.htm (accessed March 26, 2009).

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13. Law on Prevention and Control of Atmospheric Pollution, 1995 (amended 2000), Law http://www.asianlii.org/cn/legis/cen/ laws/pacoap494/ (accessed March 26, 2009). 14. Law on Prevention and Control of Water Pollution, 1996, http://www.china.org.cn/english/environment/34325.htm (accessed March 26, 2009). 15. Law on Prevention and Control of Pollution from Environmental Noise, 1997, http://www.asianlii.org/cn/legis/cen/laws/ pacopfen632/ (accessed March 26, 2009). 16. Energy Conservation Law, 1998 (amended 2008), http://new .hbsyepb.gov.cn/Detail.aspx?id=182 (accessed March 28, 2009). 17. Renewable Energy Law, 2006, http://www.gov.cn/ziliao/flfg/ 2005-06/21/content_8275.htm (accessed March 28, 2009). 18. Administrative Measures on the Control of Pollution Caused by Electronic Information Products, 2007, http://english.mofcom.gov .cn/aarticle/policyrelease/domesticpolicy/200605/20060502132549.html (accessed March 28, 2009). 19. Circular Economy Law, 2008, http://www.mep.gov.cn/law/law/ 200809/t20080901_128001.htm (accessed March 28, 2009). 20. Yan Sun, ‘‘Corruption, Growth, and Reform: The Chinese Enigma,’’ Current History (September 2005), http://web.nps.navy.mil/ ~relooney/00_New_112.pdf (accessed February 1, 2010), Research Library Core. 21. Public Service Law 1984, http://www.sxxdj.gov.cn/article_show .asp?id=56 (accessed July 3, 2009). 22. Wang Lin, Anti-corruption—A War between Rule of Law and Rule of Man (Guangzhou, China: Zhongshan University Press, 2008), 30. 23. Editorial, ‘‘Wait to See How Many Government Officials Fall after the Collapsed Building,’’ July 2, 2009, http://opinion.nfdaily .cn/content/2009-07/02/content_5318921.htm (accessed July 3, 2009). 24. Yan Sun, ‘‘Corruption, Growth, and Reform,’’ 258. 25. Will Hutton, The Writing on the Wall—Why We Must Embrace China as a Partner or Face It as an Enemy (New York: Free Press, 2006), 121. 26. ‘‘Verdict by The People’s High Court on Chen Xitong’s Case,’’ GoDist.com, http://www.godist.cn/History/4003.shtml (accessed September 12, 2008). 27. Craig S. Smith, ‘‘Senior Chinese Official Sentenced to Death in Corruption Case,’’ New York Times, August 1, 2000.

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28. David Barboza, ‘‘Ex-Chief of China Food and Drug Unit Sentenced to Death for Graft,’’ New York Times, May 30, 2007. 29. ‘‘Final Sentencing: Death Penalty with 2-Year Delay,’’ Legal Daily, January 21, 2009, http://www.legaldaily.com.cn/zmbm/2009-01/ 22/content_1025397.htm (accessed June 23, 2009). 30. Yan Sun, ‘‘Corruption, Growth, and Reform,’’ 259. 31. Ji Jianming, ‘‘Tracking Down the Falling Path of High-Level Official Liu Zhihua,’’ Chinanews.com, February 10, 2009, http://www. chinanews.com.cn/kong/news/2009/02-10/1557436.shtml (accessed June 24, 2009). 32. Keith Jarett and Lie Huihan, ‘‘Understanding China’s Civil Service,’’ China Business Review (May-June 2009), http://www .chinabusinessreview.com/members/0907/jarrett.htm (accessed February 1, 2010 [subscription required]). 33. Ibid. 34. Ibid. 35. Wang Lin, Anti-corruption—A War between Rule of Law and Rule of Man. 36. Walt Bogdanich and Jake Hooker, ‘‘From China to Panama, a Trail of Poisoned Medicine,’’ New York Times, May 6, 2007, http://www .nytimes.com/2007/05/06/world/americas/06poison.html?scp=1&sq= from%20China%20to%20panama&st=cse (accessed September 18, 2008). See also Legal Daily, http://www.legaldaily.com.cn/0705/2008 -10/19/content_963365.htm (accessed November 2, 2008). 37. ‘‘Tainted Milk Powder Sickens 1,253 Babies in China,’’ China Daily, September 15, 2008, http://www.chinadaily.com.cn/china/2008 -09/15/content_7028268.htm (accessed September 15, 2008). 38. ‘‘China Quality Chief Quits over Milk Scandal,’’ CNN–Beijing, September 22, 2008, http://www.cnn.com/2008/WORLD/asiapcf/09/ 22/china.tainted.milk/index.html (accessed September 22, 2008). 39. Patti Waldmeir in Shanghai and Kathrin Hille in Beijing, ‘‘China Milk Scandal Duo Sentenced to Death,’’ FT.com, January 23, 2009, http://www.ft.com/cms/s/0/fc134a1c-e8ee-11dd-a4d0-0000779fd2ac .html?nclick_check=1 (accessed January 29, 2009). 40. Fang Zhouzi, ‘‘Protein Booster Had Long Been a Trade Secret,’’ September 17, 2008, http://news.qq.com/a/20080917/000866 .htm (accessed June 24, 2009).

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41. ‘‘ ‘High Level of Melamine’ in Two Cadbury Products,’’ CNN– Hong Kong, October 5, 2008, http://www.cnn.com/2008/WORLD/ asiapcf/10/05/china.milk/index.html (accessed October 5, 2008). 42. Peng Yining, ‘‘US Anti-Graft Law Pricks Chinese Conscience,’’ Huanqiu Shibao (Global Times), June 30, 2009, 12–13. 43. Ibid. 44. Suzanne Fox, ‘‘China’s Changing Culture and Etiquette,’’ China Business Review (July-August 2008), http://www.chinabusinessreview .com/public/0807/fox.html#top (accessed July 10, 2008). 45. Yan Sun, ‘‘Corruption, Growth, and Reform.’’ 46. Gu Ruizhen, ‘‘China’s Private Enterprises Grew by 15% to 4.94 Million, Weighting 65% of GDP,’’ Xinhua Net, January 31, 2007, http://finance.sina.com.cn/g/20070131/19113300494.shtml (accessed September 19, 2008). 47. Du Wenjuan, ‘‘China Dairies See Investors Dump Stocks,’’ China Daily, September 23, 2008, http://www.chinadaily.com.cn/ china/2008-09/23/content_7052470.htm (accessed September 23, 2008). 48. Xinhua News Agency, ‘‘CNN Apologizes for Jack Cafferty’s Remarks on China,’’ China Daily, May 15, 2008, http://www .chinadaily.com.cn/china/2008-05/15/content_6688594.htm (accessed September 23, 2008). 49. Willy Lam, ‘‘CCP Campaign for a New Generation of ‘Red and Export’ Officials,’’ China Brief, June 24, 2009, http://www.jamestown .org/programs/chinabrief/single/?tx_ttnews[tt_news]=35170&tx_ttnews [backPid]=25&cHash=a0aad095c4 (accessed June 25, 2009). 50. Wang Lin, Anti Corruption—A Duel between Rule of Man and Rule of Law, 213–215. 51. Wei Cheng, Zhongguo Nongmingong Diaocha (A Survey of Migrant Workers) (Beijing: Law Press China, 2008), 9. 52. Ibid., 65 53. Ibid., 83. 54. Ibid., 79. 55. Ibid., 64. 56. Russell Hsiao, ‘‘CCP Provincial Committees’ Reports Highlight Growing Wealth and Urban-Rural Inequality.’’ China Brief 9, no. 2, January 22, 2009, http://www.jamestown.org/programs/chinabrief/ single/?tx_ttnews%5Btt_news%5D=34139&tx_ttnews%5BbackPid%5D= 168&no_cache=1 (accessed May 16, 2009).

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57. Ibid., 43. 58. Xinhua Net, ‘‘China Sees Soaring Population,’’ China Economic Net, October 29, 2006, http://en.ce.cn/National/Rural/200610/29/ t20061029_9179748.shtml (accessed September 26, 2008). 59. Wei Cheng, Zhongguo Nongmingong Diaocha, 46–50. 60. Hu Jintao, ‘‘Speech at the 17th CCP Congress,’’ March 25, 2008, http://www.whetc.com/xgc/Article_Show.asp?ArticleID=243 (accessed June 26, 2009). 61. Wei Cheng, zhongguo nongmingong diaocha, 44. 62. Ibid., 11. 63. Ibid., 103–107. 64. Ibid., 109. 65. Ibid., 29–30. 66. Ibid., 59. CHAPTER 4

1. ‘‘A Guideline to Short- and Long-term Science and Technology Development (2006–2020),’’ The State Council of the People’s Republic of China, February 9, 2006, http://www.cas.cn/ html/Dir/2006/02/09/13/70/88.htm (accessed December 26, 2008). 2. Hu Jintao, ‘‘Report at 17th CCP Party Congress,’’ October 15, 2007, http://news.xinhuanet.com/english/2007-10/24/content_6938749 .htm (accessed December 17, 2008). 3. ‘‘Hu Highlights China’s Progress, ‘Large Gap’ in Sci-Tech Development,’’ People’s Daily, June 23, 2008, http://english.people .com.cn/90001/90776/90785/6435413.html (accessed December 17, 2008). See also Anthony Faiola and Zachary A. Goldfarb, ‘‘China Tops Japan in U.S. Debt Holdings; Beijing Gains Sway over U.S. Economy,’’ Washington Post, November 19, 2008, http://www.washingtonpost.com/ wp-dyn/content/article/2008/11/18/AR2008111803558.html (accessed December 19, 2008). 4. ‘‘Premier Wen Stresses Steady, Relatively Fast Growth, Control of Inflation,’’ People’s Daily, July 21, 2008, http://english.people.com .cn/90001/90776/90785/6454201.html (accessed July 21, 2008). 5. Joseph Schumpeter, The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934). 6. ‘‘OECD Finds That China Is Biggest Exporter of Information Technology Goods in 2004, Surpassing US and EU,’’ Organisation

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for Economic Co-operation and Development, http://www.oecd.org/ document/8/0,3343,en_2649_33757_35833096_1_1_1_1,00.html (accessed December 20, 2008). 7. John G. Spooner and Michael Kanellos, ‘‘IBM Sells PC Group to Lenovo,’’ Cnet News, December 8, 2004, http://news.cnet.com/ IBM-sells-PC-group-to-Lenovo/2100-1042_3-5482284.html (accessed December 24, 2008). 8. Application Center for National Science and Technology Projects, http://program.most.gov.cn/ (accessed December 27, 2008). 9. Duan Zhiwen, Transformation of Modern China’s S&T Culture (Hangzhou: Zhejiang University Press, 2006), 166–173. 10. ‘‘A Guideline for Short- and Long-term Science and Technology Development (2006-2020),’’ The State Council of the People’s Republic of China, February 9, 2006, http://www.cas.cn/ html/Dir/2006/02/09/13/70/88.htm (accessed December 26, 2008). 11. Introduction to Key National S&T Projects, http://gongguan. jhgl.org/important12.htm (accessed June 29, 2009). 12. 863 Program Web site, www.863.org.cn (accessed June 29, 2009). 13. China Spark Program, http://www.cnsp.org.cn/ (accessed June 29, 2009). 14. China Torch Program, http://www.ctp.gov.cn/ctp-eng/index .htm (accessed June 29, 2009). 15. 973 Program, http://www.973.gov.cn/English/Index.aspx (accessed June 29, 2009). 16. Key National S&T Industrial Program, http://www.most.gov .cn/eng/programmes1/200610/t20061008_36198.htm (accessed June 29, 2009). 17. National S&T Program for Social Development, http:// newyork.china-consulate.org/chn/kjsw/zgkj/t31157.htm (accessed June 29, 2009). 18. Regulations Regarding National Technology Innovation Management, http://ctixm.smexm.gov.cn/2002-10/20021029165411 .htm (accessed June 30, 2009). 19. Recommendations Regarding Improvement of the Knowledge Innovation Program, http://ctixm.smexm.gov.cn/2002-10/20021029 165411.htm (accessed June 30, 2009). 20. Knowledge Innovation Fund, www.innofund.gov.cn (accessed June 30, 2009).

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21. Organization for Economic Co-operation and Development, OECD Reviews of Innovation Policy—China Synthesis Report, OECD, 2007, http://www.oecd.org/dataoecd/54/20/39177453.pdf (accessed February 1, 2010). 22. David M. Lampton, ‘‘The Growth of Chinese Power and Its Implications,’’ (opening speech given at The People’s Republic of China at 60: Internal and External Challenges—An International Conference, Bucknell University, Lewisburg, PA, October 1–2, 2009). 23. Martin Schaaper, ‘‘Measuring China’s Innovation System, National Specificities and International Comparisons’’ (Science, Technology, and Industry working paper 2009/1, Organization for Economic Co-operation and Development), http://www.oecd.org/ sti/working-papers (accessed July 29, 2009). 24. Ibid. 25. Chang Jiang Scholars Program, http://www.changjiang.edu .cn/news/16/16-20070319-136.htm (accessed December 27, 2008). 26. Martin Schaaper, ‘‘Measuring China’s Innovation System.’’ 27. Organization for Economic Co-operation and Development, OECD Reviews of Innovation Policy—China Synthesis Report, OECD, 2007, http://www.oecd.org/dataoecd/54/20/39177453.pdf (accessed February 1, 2010). 28. Lenovo Company History, http://www.pc.ibm.com/ca/ about_lenovo/companyhistory.html (accessed May 31, 2009). 29. CNBC, ‘‘The People’s Republic of Profit,’’ Hulu.com, 2008, http://www.hulu.com/watch/74337/cnbc-originals-made-in-china -the-peoples-republic-of-profit#x-0,vepisode,1 (accessed May 31, 2009). 30. New Oriental Education & Technology Group Web site, http://english.neworiental.org/Default.aspx?tabid=3483 (accessed May 31, 2009). 31. Baidu, Inc., Company Profile, Yahoo!, http://finance.yahoo .com/q/pr?s=BIDU (accessed May 31, 2009). 32. CNBC Original Production, ‘‘The People’s Republic of Profit,’’ CNBC, 2008, http://www.hulu.com/watch/74337/cnbc-originals-made -in-china-the-peoples-republic-of-profit#x-0,vepisode,1 (accessed May 31, 2009). 33. Ibid.

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34. CNBC Original Production. 35. The People’s Daily Online, ‘‘3.48% of GDP Invested in Education Last Year,’’ November 30, 2009, http://english.peopledaily .com.cn/90001/90781/90879/6828063.html (accessed January 26, 2010). 36. Zhao Ana, ‘‘There were 10.2 Million College Entrance Examination Takers, or 400,000 Fewer Than 2008,’’ People’s Daily, June 3, 2009, http://www.jyb.cn/gk/gksx/200906/t20090603_278766 .html (accessed July 15, 2009). 37. Guangzhou Daily, ‘‘Most Provinces Saw Fewer College Applicants, Non-Traditional Candidates on the Decline, too,’’ Xinhua Net, June 1, 2009, http://www.yn.xinhuanet.com/topic/ 2009-06/01/content_16681027.htm (accessed July 15, 2009). 38. David Faber, House of Cards, CNBC Original Documentary Television Program, CNBC, February 12, 2009. 39. China Trade Mark Law (Amended), Standing Committee of the National People’s Congress, China.org, January 7, 2008, http://www .chinaorg.cn/zcfg/zcfg/2008-01/07/content_5161986.html (accessed July 10, 2009). 40. ‘‘China Revokes Weige Dedicated Function Patent,’’ Youth News, July 13, 2004, http://news.sina.com.cn/c/2004-07-13/ 10043690437.shtml (accessed January 1, 2009). 41. Erin Ennis and Robert Alaimo, ‘‘China’s 2006 IPR Review,’’ China Business Review (March-April 2007): 16–18. 42. ‘‘Weige Patent Deemed Effective, Domestic Companies May Not Duplicate,’’ Beijing Law Evening News, October 28, 2007, http://news .163.com/07/1028/03/3RS21Q910001124J.html (accessed January 1, 2009). 43. Pfizer–China, ‘‘Chinese High Court Validates Pfizer Viagra Use Patent,’’ September 7, 2007, http://www.pfizer.com.cn/htmls/ news/english/200797173900.htm (accessed January 1, 2009). 44. Erin Ennis and Robert Alaimo, ‘‘China’s 2006 IPR Review,’’ 17. 45. ‘‘Beijing Court Opens Copyright Violation Case Brought by 482 Graduate Students against Wanfang Data,’’ China Publication News, September 23, 2008, http://www.cnbm.net.cn/information/ info25049538.html (accessed February 23, 2010). 46. He Chunzhong, ‘‘Who Is Devouring the Hard Work of Our Dissertations?—Thousands of Dissertations Are Investigated in a Copyright Violation Case,’’ China Youth News, November 27, 2008,

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http://www.mediawatch.cn/GB/channel8/31/200811/27/1370.html (accessed January 4, 2009). 47. An Rong Shi Yan, ‘‘Verdict Reached on the Violation of 482 MA and Ph.D. Theses—Court Orders Compensation Paid to 361 Plaintiffs,’’ China Court, October 17, 2008, http://rmfyb.chinacourt .org/public/detail.php?id=122970 (accessed January 26, 2010). 48. Huang Lei, ‘‘Influence of GPA Membership on China’s Economy,’’ January 7, 2010, http://www.jjxww.com/html/show.aspx?id= 161247&cid=21 (accessed February 1, 2010). 49. Martin Schaaper, ‘‘Measuring China’s Innovation System, National Specificities and International Comparisons,’’ STI Working Paper 2009/1, OECD, http://www.oecd.org/dataoecd/15/55/42003188 .pdf (accessed February 1, 2010). 50. Ibid. 51. NBS, Statistical Yearbook, 2008. 52. Schaaper, ‘‘Measuring China’s Innovation System, National Specificities and International Comparisons,’’ 58. 53. ‘‘Interview of President Chen Talks about Education Management,’’ Youku.com, June 20, 2008, http://v.youku.com/v_show/ id_XMzIwNzE3Mjg=.html (accessed July 15, 2009). 54. ‘‘Research Assistant Hiring System: From Life Tenure to Contractual Hiring in Higher Education,’’ January 28, 2010, Guangming Daily, http://www.edu.cn/gao_jiao_news_367/20100128/ t20100128_445819.shtml (accessed February 20, 2010). 55. ‘‘Life Tenure Vanished at Shanghai University,’’ November 30, 2001, http://www.edu.cn/gao_jiao_news_367/20060323/t20060323 _20386.shtml (accessed February 20, 2010). 56. ‘‘The Birth of China’s Postdoctoral System,’’ China Postdoctor, http://www.chinapostdoctor.org.cn/program/issue/pop_win.asp?id=1842 (accessed October 22, 2009). 57. ‘‘Statistics of Enrollment of Postdoctors in 2007,’’ China Postdoctor, http://www.chinapostdoctor.org.cn/program/issue/pop_win .asp?id=5511 (accessed October 22, 2009). 58. Ibid. 59. ‘‘Comparison of Chinese and American Postdoctoral Systems,’’ China Postdoctor, http://www.chinapostdoctor.org.cn/program/issue/ pop_win.asp?id=2074 (accessed October 22, 2009).

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60. Li Yanying, ‘‘Establish a Secure Personnel System, Seek Talents, but Not ‘Jail’ Talents,’’ Guangming Daily, May 19, 2005, http://theory .people.com.cn/GB/40540/3400313.html (accessed October 22, 2009). CHAPTER 5

1. Thomas P. Lyons, Economic Integration and Planning in Maoist China (New York: Columbia University Press, 1987). 2. Yi Feng, ‘‘Central Planning,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:62. 3. Aimin Chen, ‘‘State-owned Enterprises,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 2:585–586. 4. Ibid. 5. Yi Ming, ‘‘China’s Private Enterprises Grew by 15 Percent to 459,000 Companies, Contributing 65 Percent of GDP,’’ June 3, 2008, http://www.interscm.com/news/data/200806/03-3864.html (accessed July 16, 2009). 6. Editor, ‘‘Liu Yonghao: Seize Opportunity, Get Ready,’’ Mxm, December 17, 2003, http://www.51tr.com/articles/107164866043438-2 .html (accessed October 4, 2009). 7. Geely Holding Group, ‘‘Major Company Events,’’ http:// www.geely.com (accessed March 18, 2009). 8. Hu Jintao, ‘‘Report at 17th Party Congress,’’ Xinhua Net, October 15, 2007, http://news.xinhuanet.com/english/2007-10/24/ content_6938749.htm (accessed December 17, 2008). 9. Peter Fairly, ‘‘China’s Coal Future,’’ Technology Review (JanuaryFebruary 2007): 56–61. 10. Jason Yin, ‘‘Energy Industries,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:148–150. 11. Fairly, ‘‘China’s Coal Future.’’ 12. Xinhua News Agency, ‘‘Shenhua Group’s Coal-to-oil Project Goes into Production in May,’’ February 2, 2009, http://www.cs .com.cn/gz/04/200902/t20090227_1771930.htm (accessed January 28, 2009).

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13. Tingting Si, ‘‘Shenhua Shows the Way to Make Gas from Coal,’’ China Daily, January 1, 2009, http://www.chinadaily.com.cn/bizchina/ 2009-01/22/content_7419616.htm (accessed March 21, 2009). 14. China Financial Stability Report 2008, The People’s Bank of China, http://www.pbc.gov.cn/english//detail.asp?col=7000&ID=4 (accessed March 29, 2009). 15. By September 2009, China’s foreign exchange reserves had reached $2.27 trillion [Liu Shengjun, ‘‘How to Better Use Forex Reserves,’’ January 13, 2010, http://www.chinadaily.com.cn/opinion/ 2010-01/13/content_9311658.htm (accessed January 28, 2010)]. 16. C. K. Richard Burdekin, ‘‘Banking and Financial System Reform,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:52–55. 17. Aimin Chen, ‘‘Corporate Governance,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:95. 18. Commercial Bank Law of the People’s Republic of China, 1995, http://www.fdi.gov.cn/pub/FDI_EN/Laws/Banking/t20060620_51997 .jsp (accessed April 1, 2009). 19. Aimin Chen and Junqi Liu, ‘‘Rural Credit Cooperatives (RCCs),’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 2:522–525. 20. ‘‘Country Partnership Strategy, 2009–2010,’’ Asian Development Bank, http://www.adb.org/Documents/CPSs/PRC/2008/CPS-PRC -2008-2010.pdf (accessed May 10, 2009). 21. ‘‘Announcement of the Pilot RCC Reform Plan,’’ PBC Yichun Branch, October 19, 2009, http://xxgk.yichun.gov.cn/xxgk/ rmyh/xxgk/fgwj/0202/2008-10/200810191416319539.html (accessed May 10, 2009). 22. David Strongin, ‘‘Tapping into China’s Securities Industry,’’ China Business Review (May-June, 2006), http://www.chinabusinessreview.com/ members/0605/strongin.html (accessed April 8, 2009). 23. Aimin Chen, ‘‘Corporate Governance,’’ 1:95. 24. Wen Jiabao, ‘‘Press Conference Transcript,’’ March 13, 2009, http://news.eefoo.com/cjxw/cjdd/200903/13-1268683.html (accessed April 8, 2009).

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25. Lu Jianxin, ‘‘Timeline-Major Events in China’s Corporate Bond Market,’’ April 3, 2009, http://www.reuters.com/article/ idUSSHA26539620090403 (accessed January 29, 2010). 26. Chen Ji and Stephen Thomas, ‘‘China’s Bond Market Matures, Slowly,’’ China Business Review (January-February, 2005), http://www .chinabusinessreview.com/members/0501/bonds.html (accessed April 8, 2009). 27. ‘‘China Data: Foreign-Invested Financial Institutions,’’ Chinese Business Review (November-December 2007): 40. 28. Shuanglin Lin, ‘‘Domestic Government Debt,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:125. 29. China Statistic Yearbook, 2007, Online Edition, http://www .stats.gov.cn. 30. Liu Jie and Cheng Yunjie for Xinhua News, ‘‘No ‘Crowding Out’ Seen in China’s Treasury Bond Sales Plans,’’ Xinhua Net, March 17, 2009, http://news.xinhuanet.com/english/2009-03/17/content_11027435 .htm (accessed April 3, 2009). 31. Shuanglin Lin, ‘‘Domestic Government Debt,’’ 1:125. 32. China Statistic Yearbook, 2007. 33. Shuanglin Lin, ‘‘Fiscal Policy and Tax Reforms,’’ 193–195. 34. Wu Liujie, ‘‘Problems with the Tax-sharing System and Recommendations for Strategies,’’ China Accounting Net, March 9, 2009, http://www.chinaacc.com/new/287_291_/2009_3_9_wa4780555 221193900225960.shtml (accessed April 4, 2009). 35. Thomas Shik and Joanne Yim, ‘‘Mainland China’s Housing Market Outlook,’’ September 9, 2008, http://www.hangseng.com/ ermt/eng/fxmv/pdf/ecof_e_sept08.pdf (accessed April 9, 2009). 36. Song Shunfeng, ‘‘Housing Reform,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:256. 37. Yao Yang, ‘‘Land Policy,’’ and ‘‘Rural Industrialization,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:345–348; 2:525–527. 38. Ibid. 39. Justin Lin and Yang Yao, ‘‘Chinese Rural Industrialization in the Context of the East Asian Miracle,’’ in Rethinking the East Asian

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Miracle, ed. Joseph Stiglitz and Shahid Yusuf, Ch. 4 (World Bank and Oxford University Press, 2001). 40. Ibid. 41. Yang Yao, ‘‘Rural Industrialization,’’ in China Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport, CT: Greenwood Publishing, 2005), 2:525–527. 42. Staff writer, ‘‘The Role of China’s Think Tanks in Policymaking,’’ China Business Review (July-August, 2009): 11. CHAPTER 6

1. Ferdinant de Saussure, Course in General Linguistics (London: Open Court Publishing Company, 2000). 2. John Williamson, ‘‘What Washington Means by Policy Reform,’’ Peterson Institute for International Economics, November 2002, http://www.iie.com/publications/papers/paper.cfm?researchid=486 (accessed February 7, 2009). 3. Joshua Cooper Ramo, The Beijing Consensus (London: The Foreign Policy Centre, 2004). 4. Williamson, ‘‘What Washington Means by Policy Reform.’’ 5. Ibid. 6. Will Hutton, The Writing on the Wall—Why We Must Embrace China as a Partner or Face It as an Enemy (New York: Free Press, 2006), 135. 7. ‘‘Major Foreign Holders of Treasury Securities,’’ U.S. Department of Treasury, http://www.treas.gov/tic/mfh.txt (accessed February 7, 2009). 8. Agencies, ‘‘Standford Scandal Spreads,’’ China Daily, February 21, 2009, http://www.chinadaily.com.cn/world/2009-02/21/content_7499139 .htm (accessed February 26, 2009). 9. ‘‘Italian Media: China Stops Worshipping Western Financial System,’’ Chinanews.com, February 23, 2009, http://www.chinanews .com.cn/gj/hwkzg/news/2009/02-23/1574693.shtml (accessed February 25, 2009). 10. Hutton, The Writing on the Wall, 114. 11. Ibid., 149. 12. Ibid., 116. 13. Ibid., 314. 14. Ibid., 215.

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15. Rowan Callick, ‘‘The China Model’’ In Global Studies— China, ed. Zhu Zhiqun, 13th ed., 140–148 (McGraw-Hill Higher Education, 2010). 16. Ibid., 142. 17. Ibid., 144. 18. Ibid., 146. 19. Ibid., 147. 20. David Shambaugh, ‘‘China at 60: The Road to Prosperity,’’ Time, September 28, 2009, http://www.time.com/time/magazine/ article/0,9171,1924366-4,00.html (accessed October 8, 2009). 21. Ibid. 22. Ibid. 23. Ibid. 24. Ibid. 25. Joshua Cooper Ramo, The Beijing Consensus (London: The Foreign Policy Centre, 2004). 26. Jiang Zemin, ‘‘Report to the 16th Party Congress,’’ People’s Daily, http://www.people.daily.com.cn. 27. Solow, Robert. ‘‘Technical Changes and the Aggregate Production Function’’ in Review of Economics and Statistics 39 (August 1957): 312–320. 28. Cheng Li, ‘‘Educational and Professional Backgrounds of Current Provincial Leaders,’’ China Leadership Monitor no. 8 (2003): 3. 29. Barry Naughton, ‘‘The State Asset Commission: A Powerful New Body,’’ China Leadership Monitor no. 8 (2003): 5. 30. Joshua Cooper Ramo, The Beijing Consensus (London: The Foreign Policy Centre, 2004), 33. 31. Ibid., 33. 32. Ibid., 59. 33. Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (New York: PublicAffairs, 2008), 134. 34. Ibid., 135. 35. Ibid., 137. 36. ‘‘China Will Have the Most Tourists Traveling Abroad in Asia,’’ National Travel Bureau, http://www.nre.cn/index.php/ action_viewnews_itemid_8507.html (accessed April 20, 2009).

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37. Mahbubani, The New Asian Hemisphere, 144. 38. Ibid., 230. 39. Ibid., 232. 40. Ibid., 39. 41. Yu Keping, ‘‘The China Model and Ideological Liberation,’’ CCP Translation Bureau, November 19, 2008, http://theory.people .com.cn/GB/49150/49152/8365627.html (accessed May 25, 2009). 42. Xinhua Net, ‘‘Theory of Socialism with Chinese Characteristics: Latest Results of Integrating Marxism with Chinese Reality,’’ People’s Daily, November 8, 2007, http://politics.people.com.cn/GB/1026/ 6501851.html (accessed July 25, 2009). 43. Yao Yang, ‘‘The China Model and the Neutral Government,’’ People’s Daily, October 13, 2008, http://theory.people.com.cn/GB/ 49154/49155/8162904.html (accessed May 25, 2009). 44. Chang Xiuze, ‘‘China Model and Diverse World Development,’’ Guangming Daily, August 19, 2008, http://theory.people.com.cn/ GB/49154/49155/7687604.html (accessed May 26, 2009). 45. Ai Yun, ‘‘Over 70 Percent of the Public Recognize that Financial Crisis Will Test China Model,’’ JRJ. Com, December 19, 2008, http:// finance.jrj.com.cn/2008/12/1914223115689.shtml (accessed May 26, 2009). 46. Qiu Gengtian, ‘‘China Model and the Road to Low Cost Development,’’ People’s Daily, August 1, 2008, http://theory.people .com.cn/GB82288/122865/122866/7600380.html (accessed May 26, 2009). 47. Ibid. 48. Hu Angang, China’s Way of Rising (Beijing: Peking University Press, 2007), 55. 49. Qiu Zhenhai, ‘‘Hu Angang: Black Development Will Be Disastrous to the World,’’ An interview on Phoenix TV, Ifeng.com, November 11, 2008, http://news.ifeng.com/opinion/phjd/zh/200811/ 1106_1925_866154.shtml (accessed May 29, 2009). 50. Ibid. 51. Zhu Xinwu, ‘‘Commentary on the Economy of the First Half of 2009, Part 1: Climbing up the Slope, Steadiness Is Key,’’ China Information News, July 21, 2009, http://stats.gov.cn/tjfx/ztfx/ 2005sbnjjsp/t20090721_402573601.htm (accessed July 25, 2009).

Notes

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52. Gao Yuan, ‘‘Commentary on the Economy of the First Half of 2009, Part 2: Stabilize Foreign Trade and Get Ready for a Long Term Struggle,’’ China Information News, July 22, 2009, http://stats.gov.cn/ tjfx/ztfx/2005sbnjjsp/t20090722_402573947.htm (accessed July 25, 2009). 53. Wu Laixiong, ‘‘Commentary on the Economy of the First Half of 2009, Part 3: Protecting the Economy from Unusual Fluctuations of Primary Industrial Products,’’ China Information News, July 24, 2009, http://stats.gov.cn/tjfx/ztfx/2005sbnjjsp/t20090724_402574735 .htm (accessed July 25, 2009). 54. Ma Jiantang, Press Conference, January 21, 2010. 55. Fareed Zakaria, ‘‘What’s Really at Stake in Google vs. China?’’ January 21, 2010, http://www.cnn.com/2010/OPINION/01/21/zakaria .google.china/index.html (accessed January 28, 2010). 56. Angus Maddison, Chinese Economic Performance in the Long Run, 2nd ed., rev. 960–2030 (Development Center of OECD, 2007), 93, http://books.google.com/books?printsec=frontcover&vid=ISBN9789264 037625&vid=LCCN2008359134#v=onepage&q=&f=false. 57. Feng Gia-fu and Jane English, Lao Tsu Tao Te Ching: Thirtythree (New York: Vintage, 1972). 58. Jason Dean, James T. Arredy, and N. G. Sarena, ‘‘Chinese Premier Blames Recessions on U.S. Actions,’’ January 29, 2009, http://online.wsj.com/article/SB123318934318826787.html (accessed July 25, 2009). 59. David Faber, House of Cards, CNBC, February 12, 2009. 60. Squawbox: Interview with Jim O’Neil, CNBC, October 8, 2009, http://www.cnbc.com/id/15840232?video=1288018067?play= 1 (accessed October 24, 2009). 61. Deng Xiaoping, ‘‘Put an End to the Past and Start the Future, May 16, 1989,’’ in Selected Works of Deng Xiaoping (Beijing: People’s Press, 1993), 3:292.

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BOOKS

Bergsten, Fred C., Charles Freeman, and Nicholas R. Lardy. China’s Rise: Challenges and Opportunities. Washington, DC: Peterson Institute for International Economics, 2009. Deng, Xiaoping. Selected Works of Deng Xiaoping. Beijing: Foreign Languages Press, 1994. Gifford, Robert. China Road: A Journey into the Future of a Rising Power. New York: Random House, 2008. Huang, Yasheng. Capitalism with Chinese Characteristics: Entrepreneurship and the State. New York: Cambridge University Press, 2008. Lampton, David M. The Three Faces of Chinese Power: Might, Money, and Minds. Berkeley: University of California Press, 2008. Luo, Jing. China Today—An Encyclopedia of Life in the People’s Republic. 2 vols. Westport, CT: Greenwood Publishing, 2005. ———. Over a Cup of Tea—An Introduction to Chinese Life and Culture. Lanham, MD: University Press of America, 2004. Mahbubani, Kishore. Beyond the Age of Innocence, Rebuilding Trust between America and the World. New York: Public Affairs, 2006. Ramo, Joshua Cooper. The Age of the Unthinkable: Why the New World Disorder Constantly Surprises Us and What We Can Do about It. New York: Little Brown and Company, 2009.

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The following Web sites were accessed on August 10, 2009. General Resources

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American Chamber of Commerce in China http://www.amchamchina.org/ Central Intelligence Agency https://www.cia.gov/ China Central Television http://www.cctv.com/default.shtml China Court http://www.chinacourt.org/ China Daily http://www.chinadaily.com.cn/ China Education and Research Network http://www.cernet.edu.cn/ China Insurance Regulatory Commission (Chinese language only) http://www.circ.gov.cn/web/site0/

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Index

*Note: t represents tables and f represents figures in index entries A share, 109, 146 accident insurance, 22, 23 Administrative Measures on the Control of Pollution Caused by Electronic Information Products, 2007, 57 Agricultural Bank of China (ABC), 140, 142, 143 Agricultural Development Bank of China (ADBC), 140, 142 agricultural modernization, 91 Association of Southeast Asian Nations (ASEAN), 31, 176, 177 automobiles export, 42 B share, 146 backpacking travelers, 7 bad loans, 118, 130, 142 143, 144; Chinese banks limitation of, 141–42 Baidu.com, Inc., 105, 108–9 Balanced development, 160, 173 bank losses, 38, 39t Bank of China (BOC), 39t, 140, 142 banking reform, 139–48

banking systems: policy discrepancies of, 148 basic medical insurance schemes, 21 Beijing: annual per capita household, 16t; banking reform in, 142; ‘‘Drive One Day Less (per week),’’ 53; education in, 110; farmers’ migration, 78; as host of Olympics, 49–50; and migrant workers, 76; per capita living space in, 154; on pollution control, 52–53; relationship with neighboring countries, 30; relationship with U.S., 30; security in, 174–75; spending of residents, 18, 19; and technology venture, 89; as trillionaire province, 77 Beijing Consensus, 161, 169–72 Beijing Consensus (Ramo), 31 Bergius approach, 137 ‘‘brain drain,’’ 120 budgetary principles, uniformity in, 150 building socialism, with Chinese characteristics, 127

224

Index

Bureau of Agricultural Administration, 12, 13 burning coal, energy, 135 Bush era: relationship with China, 30 business travelers, 7 Cai Fang, director of Demographics and Labor Economics Research Center at the Academy of Social Sciences of China: in removing Hukou system, 82 Callick’s ‘‘Controlled Freedom,’’ 166–69 capital market, 92, 93, 109, 145 capitalism, 10, 51, 91, 134, 165, 166, 169, 179, 187, 191 car sales, 8, 43 carbon dioxide (CO2) emission, 52, 136 Central Party School (CPS), 64, 160, 161, 178, 182, 191; China Model, 178–84 Chen Jian, economist: explanation of multiple-wave theory, 45; six step sequence, 45–46 Chen Xitong, mayor of Beijing, in corruption case, 61–62 Cheng Kejie, former vice chairman of the National People’s Congress, in bribery case, 62 China-ASEAN FTA, 176–77 China Banking Regulatory Commission (CBRC), 139, 147, 148; and regulation of PBOC, 144 China Center for International Economic Exchange (CCIEE), 160 China Construction Bank (CCB), 140 China Import and Export Bank (CIEB), 140 China Insurance Regulatory Commission (CIRC), 147 China Model, 161; Beijing Consensus, 161, 171–74; Callick’s ‘‘Controlled Freedom,’’ 166–69; components of, 184; developmental perspective,

174–78; failure of, 189; Hutton’s ‘‘Halfway House,’’ 164–66; improvements of, 181; Shambaugh’s Model, 169–70; sustainability perspective, 184–92; viewed by Central Policy School, 178–84; and Washington Consensus, 162–64 China National Offshore Oil Corporation (CNOOC): and UNOCAL (Union Oil Company of California), 177 China National Petroleum Corp (CNPC), 31 ‘‘China opportunity’’ theory, 174 China Postdoctor, 122–123; comparison with American system, 123–24 China Securities Regulatory Commission (CSRC), 147 China Torch Program, 100, 106. See also Torch Program China’s economic model: Callick’s views on, 166–69 China’s GDP, versus U.S. GDP, 33 China’s new procurement policies: with the WTO’s Government Procurement Agreement (GPA), 119 China’s S&T framework, limitations of, 109–10; competition, 113–14; education, 110–13; IPC protection, 114–17 Chinese Academy of Engineering (CAE), 89 Chinese Academy of Science (CAS), 89, 105, 160; ‘‘Hundred Talents Program,’’ 104; National Knowledge Innovation Experiment Program of, 101 Chinese Academy of Social Sciences (CASS), 160, 169 Chinese Communist Party (CCP), 3, 10, 160; and Confucianism, 170; against corruption, 71; toward diversity, 189; in economic prosperity, 9, 24

Index Chinese leaders: attitude during recession, 42; education of, 172 ‘‘Chinese renaissance,’’ 82 Chinese system, levels of, 151 Chongqing: annual per capita household, 16t; economic structural reform in, 131 Circular Economy Law, 2008, 58–59 civil service corruption, 59–65 Cold War: territory sector, rise of, 3 Commercial Bank Law, 142 Communism, 3, 10, 24, 59, 125, 155, 166, 167, 173, 189, 191–92; and Western economies’ reliance on, 43–44 competitive corruption, 63 Confucian-Daoist ethics, 59 Confucianism, 59, 112, 191 Consumer Confidence Index, 184 Consumer Price Index (CPI), 48; and inflation, 139 Contract and Responsibility System (CRS), 25, 80, 129, 150 corruption, 58–59; civil service corruption, 59–65; factors for, 59; grassroots-level corruption, 65–68; gray areas, 68–70; and growth, 70–71 cost-sharing solution, 20–21 cultural traditions, for economic sustainability, 188–89 current development, for economic sustainability, 188–89 Daoism, 189 Daqing Oil Field, 136 The Decision of Accelerating S&T Progress, 95 The Decision of Reforming the S&T Framework, 94 The Decision of Strengthening S&T Innovations, Developing High-tech and Industrialization, 95–96 The Decision of the CCP Central Committee and the State Council

225

on Ramping up Tertiary Industry: Article 1, territory sector development of, 5; Article 4, on employment opportunities, 6; Article 5, on living conditions, 6 The Decision on Issues Regarding the Improvement of the Socialist Market Economic System, 96–97 defense modernization, 91 defensive attitude: American attitude, 190–91; China’s, attitude, 190 Deng Xiaoping: and economic reform, 1, 16, 95–96, 129; and ‘‘Household Responsibility System,’’ 28; and Open Door Policy, 130–31; and relative comfort, 17; in rising economy, 29; and S&T, new era for, 91; and socialist market economy, 9; on urban housing, 154 ‘‘Developing the Northwest,’’ economic movement, 15 diplomatic adeptness, for economic growth, 31 direct investments, Chinese banks limitation of, 141 domestic stability, socialist market economy, 29 double-digit growth, 1, 12, 47, 48 ‘‘Drive One Day Less (per week),’’ 53 ‘‘Driven Businesspeople,’’ in middle class, 7, 8 ‘‘Early Heavy Buyers,’’ in middle class, 7, 8 economic crisis, 10–11, 12, 13, 39, 74, 186 economic polarization, 4–5 economic reform, 125–26; banking reform, 143–45; and China’s plan, 52; country’s productivity, 1; by Deng Xiaoping, 126; economic structural reforms, 127–33; energy industry, revamping of, 135–39; housing reform, 152–55; industrial

226

Index

reform, 134–35; policymaking in reform, 159–60; rural reform, 155–59; securities market, transition of, 145–48; taxation reform, 149–51 economic structural change: reasons for, 4 economic structural reforms, 127–33 economic structural shift, 5–6 education modernization, 110; communicative skill, 111; improving problem-solving skill, 110–11; increasing creative thinking, 111; understanding cultures, 112 education: and economic growth, 23, 27, 85 863 Program (1986), 92, 99–100, 101, 103. See also National High-Tech Development Program Einstein’s words, aptness for Beijing Consensus, 171 Energy Conservation Law, 1998 (amended 2008), 56 energy consumption, 98; and Circular Economy Law (2008), 57–58; and Energy Conservation Law, 1998 (amended 2008), 56; energy supply, shortage of, 137; structure of, 136 energy industry, revamping of, 135–39 energy saving, 133; 11th Five-Year Plan (2006–2010), 99; and Circular Economy Law (2008), 57–58; SOEs versus POEs, 86–87 energy source: annual fuel production, 138; coal into synthetic oil, 137–38; coal reliance of, 136; consumption categories, 136–37; consumption demand, 137; industrial water reuse of, 138–39; natural gas, for transportation, 136; and oil price, 138 Engel’s Coefficients (EC), 15; on food expenditures, 19; on living conditions, 17–18 ‘‘enlightened self-interest,’’ 187

entrepreneurs: rise of, 23–32; and CCP, 133; and competition, 113–14; encouraging of, through education, 96–97; as innovative system, 91–92, 105; in POE definition, 132; and Spark Program, 100; and urbanization, 81–82 environmental consequences, 49, 52 Environmental Protection Law, 1989, 53–54; Article 24, on pollution control, 53 equal distance diplomacy, 30 equality, 4–5; in Beijing Consensus, 172; fighting for, 26; Hutton’s view on, 165; in reformation, 188 erectile dysfunction (ED); sildenafil citrate, 115–16 export market: contributors to, 158; losses, 39 export sector, exposure to U.S. submarine market, 34–35 fanzu daobao (reverse lease), 157 farming technology, expansion of: on rural China, 4 first atomic bomb (1964), 126 first satellite (1969), 126 Fischer-Tropsch approach, 137 Five-Year Projections, 159–60 flipping stocks, 61, 92 floating population: and migrant population, 78 ‘‘forced rebalancing,’’ 47 foreign trade: to GDP, 131; government’s role, 185; growth of, 11; and international economic development, 42; negative growth, 185; and R&D, 114; and trade recovery, 186 foreign trade sector: growth of, 11 Fortune Global Forum, 2–3 Four Asian Dragons: and Shanghai’s export, 44 ‘‘four determinations,’’ 179

Index ‘‘Four Modernizations,’’ 91. See also agricultural modernization; defense modernization; industrial modernization; S&T modernization free-market economics, 29, 167, 169 Fujian: annual per capita household, 16t; ‘‘Minjiang River Scholar Program,’’ 104; as trillionaire province, 77 Funding for S&T Small and MediumSize Enterprises, 102–4 Gansu: annual per capita household, 16t; economic structural reform in, 131; and trillion mark, 77 Geely Corporation, 133 ‘‘gender-equal’’ sector, 4 Germany, coal-liquefaction technology, 137 global economic crisis, 73–74, 184; on economy of, 10–11 global financial crisis, 1, 11, 32, 48; and Asian financial crisis, 33, 163–64; and banking system, 130; and China’s manufacturing firms, 44; and natural calamity, 71; transitional economic structures, 43 global recession, government’s role in, 186–87 ‘‘Google of China,’’ 108. See also Baidu.com, Inc. Government Insurance Program (GIP), 20 government projects, priority fields, 40 grassroots-level corruption, 65–66 Great Cultural Revolution (1966–1976), 9, 28, 51, 90–91, 126, 129 Great Leap Forward, 19, 51, 128, 134, 155 Green GDP, 64–65, 183 gross domestic product (GDP): under Energy Conservation Law, 1998 (amended 2008), 56; and import

227

and export ratio, 11; and purchasing power parity (PPP), 1 Guangdong: annual per capita household, 16t; banking reform in, 142; leader in GDP growth, 77; rural reform in, 157; ‘‘Zhujiang River Scholar Program,’’ 104 Guangzhou: invasion, from other countries, 75; and migrant workers, 76; and railway passengers, 35 guanxi (connection): and corruption, 68–69; in market competition, 113–14; in younger generation, 69–70 The Guideline of Mid- to Long-Term Development of Science and Technology 2006–2020, 97–98; goals of, 98 Guizhou: economic condition in, 131; education in, 110 H share, 109, 146 halfway house, 163, 164, 165 Han Dynasty (206 BCE–220 CE), on education, 112 health care system, 20; for retired population, 20 high-level corruption cases, 61–63 high-tech exports, rising of, 104–5 high-tech products, export of, 89 history, for economic sustainability, 188–89 home appliance sales, 43 hosing space, 19–20 Household Responsibility System (HRS), 156; shortfalls of, 156–57 housing reform, 152–55; home ownership, 154; new initiative of, 153–54; on urban housing, 153; urban housing reform, 153 Hu Angang, professor at Tsinghua University: on abolishing Hukou System, 80; views on China’s GDP, 182–83; views on urbanization, 73

228

Index

Hu Jintao, President: next phase of development, 79 Hubei: as trillionaire province, 77 Hukou System, 79–80, 82, 175 Hunan: as trillionaire province, 77 ‘‘Hundred Talents Program’’ of the CAS, 104 Hutton’s ‘‘Halfway House,’’ 164–66 Hybrid Model of Quasi-State Capitalism and Semi-Democratic Authoritarianism, 169–70 income gaps, 15, 159; in eastern and western regions, 16t; and fast food business, 19; rural and urban life, comparison of, 18–19 Industrial and Commercial Bank of China (ICBC), 140 industrial modernization, 91 industrial reform, 134–35 inflation, 1, 9, 42, 48, 135; and consumer price index (CPI), 139; and SOEs, 167; signs of, 185 innovation: and government’s leadership structure, 172; and intellectual property, 87; Premier Wen Jiabao’s views on, 85–86; President Hu Jintao, 86 innovation nation, 83; education modernization, 110–13; market competition, 113–14 innovative companies, sprouting of, 105; Baidu.com, Inc., 108–9; Lenovo, 105–7; New Oriental Education and Technology Group, 107–8 intellectual property rights (IPR), 32, 88, 90; improving of, 96; protection of, 114–17; to protect registered products, 94 international business connections, 31 International Monetary Fund (IMF), 163 interpersonal relationships, 68

Jackson-Vanik Amendment (1974), 175 Japan, energy consumption, 136 Jason Chi, former president of Lucent China, in corruption case, 68–69 Jiangsu: annual per capita household, 16t; leader in GDP growth, 77 joint tax, 151 ‘‘jumping into the sea,’’ 91 Kevin Hassett, economic policy: Callick’s views on, 167 Key National S&T Industrial Program, 101 Korean War (1951–1953), 134 Labor Insurance Program (LIP), 20 Lao-zi (sixth century BCE), 189–90 Law on Prevention and Control of Atmospheric Pollution, 1995 (amended 2000), 54–55; Article 37, on control measures, 55 Law on Prevention and Control of Environmental Pollution by Solid Waste, 1995 (amended 2005), 54; Article 17, in recycling, 54 Law on Prevention and Control of Pollution from Environmental Noise, 1997, 55–56; Article 3, ambiguous, 56 Law on Prevention and Control of Water Pollution, 1996, 55; Article 14, on preventing pollutant discharge, 55; Article 15, on fee paying, 55 Law on Public Service: Article 53, prohibition from profit-sharing scheme, 60 Legend Group, 105–6. See also Lenovo Lehman’s Brothers: U.S. mortgagebacked securities (MBS), 38 leisure travelers, 7 Lenovo, 105–7. See also Legend Group

Index Li Fuxiang, director of China’s State Administration of Foreign Exchange, in illegal trade, 62 Liaoning: annual per capita household, 16t; economic structural reforms in, 127–28 Liu Zhihua, former deputy mayor of Beijing, in bribery case, 62 loan-making decisions, Chinese banks limitation of, 141 local taxes, 151 Longkaikou Dam project, on Jinsha River, 34 low-cost housing, 47–48 Ludila Dam project, on Jinsha River, 34 Mao Zedong, 4; and China’s economy, 85; and Communism, 125–26; and education, 110; era (1949–1978), turmoil for S&T, 85, 90–91; hero worship of, 28; post-Mao era, 156, 165 market economy, with Chinese characteristics, 127 market mechanism: in economic take-off, 3 MasterCard Worldwide, Asia Pacific: on middle class income, 6–7 middle class, 6–10: political tendencies on, 9 migrant population: and floating population, 78 migrant workers, 35 mining industry, sustainability of, 187 Ministerial Policy Institutes, 160 Ministry of Agriculture (MOA), 89 Ministry of Commerce (MOC), 64, 65, 90 Ministry of Finance (MOF), 89, 146, 149 Ministry of Industry and Information Technology (MIIT), 89; in creating Internet policies, 90

229

Ministry of Personnel (MOP), 90 Ministry of Science and Technology (MOST), 89, 90, 92 ‘‘Minjiang River Scholar Program,’’ 104 modernization and urbanization, 76 Monitor Group, 7 multiple-wave theory, 45, 46 National Bureau of Statistics (NBS), 2f, 3; data on S&T, 88; on gross domestic product (GDP), 1; on high-tech export, 104; on import and export, 11; on patent application, 87; per capita annual household, 16t; per capita annual income, 15f; on private car ownership, 8; on stock market, 145; on studying abroad, 121f; about technical school graduates, 113f; on tourists, 176; on urban areas, 72 National Development and Reform Commission (NDRC), 56–57, 94, 89, 90, 138 National Development Bank of China (NDBC), 140 ‘‘National Distinguished Young Scholars Program,’’ 104 National Essential Drug List (NEDL), 22 National High-Tech Development Program, 99–100. See also 863 Program National Key Basic Research Program, 100. See also 973 Program National Knowledge Innovation Experiment Program, 101–2 ‘‘National Natural Science Foundation’’ (1986), 92 National S&T Innovative Program, 101 national S&T program, system of, 99; China Torch Program, 100; Funding for S&T Small and Medium-Size

230

Index

Enterprises, 102–4; Key National S&T Industrial Program, 101; key technology R&D program, 99; National High-Tech Development Program (863 Program), 99–100; National Key Basic Research Program (973 Program), 100; National Knowledge Innovation Experiment Program, 101–2; National S&T Innovative Program, 101; National S&T Program for Social Development, 101; Spark Program, 100 National S&T Program for Social Development, 101 National Science Foundation of China (NSFC), 89, 104; ‘‘National Distinguished Young Scholars Program,’’ 104 ‘‘neutral government,’’ 179; government’s flexibility, 179–80; in-depth SOE reform, 180; temporary dual-pricing system, 180 The New Asian Hemisphere (Mahbubani), 29 New Oriental Education and Technology Group, 107–8 New Rural Cooperative Medical Insurance (NRCMI), 21 973 Program, 100, 101. See also National Key Basic Research Program 1989 Tiananmen Event, 9, 107, 120 1997 Asian Financial Crisis, 34, 44, 149, 163–64, 173, 186 1997–1998 Asian Financial Crisis, 11, 33 Ningxia: annual per capita household, 16t; economic structural reform in, 131; and trillion mark, 77 nonperforming loans (NPLs), 38, 46, 130, 144, 145 nontradable shares, 146

Obama, Barack: mass ideological campaigns, 46; in saving China’s asset, 42; on wind turbines, 53 ‘‘oil diplomacy,’’ 136 oil price, 138 ‘‘one banner,’’ 178 ‘‘one country two systems,’’ 91 ‘‘one road,’’ 178 ‘‘one system,’’ 178 one-country-two-system structure, 167–68 one-party Communist rule: and ‘‘halfway house,’’ 165 Open-Door Policy: by Deng Xiaoping, 130–31 open mind, 189–90 ‘‘Opening the Great West,’’ 131 ‘‘Opinions on Deepening Healthcare System Reform,’’ 21 Opium War, 9, 125 out-going economy, rise of, 10–14 ‘‘patriotic bonds,’’ 146 peaceful rising: Deng’s view, 174; socialist market economy, 29 Peng Xizhe, director of the Institute of Social Development and Public Policy at Fudan University: views on urbanization, 81 pension, 20, 22, 72, 145 People’s Bank of China (PBOC): comparison with U.S. Federal System, 139–40 people’s living conditions, rise of, 15–19; housing space, 19–20; social welfare, 20–23 ‘‘people-owned enterprises.’’ See stateowned enterprises (SOEs) personal property rights, power of, 163 Pfizer Inc.: and trademark cases, 115 policy-lending, 118 policymaking in reform, 159–60 political reforms: by Deng Xiaoping, 128

Index pollution, 49–53; Administrative Measures on the Control of Pollution Caused by Electronic Information Products, 2007, 57; Circular Economy Law, 2008, 58–59; Energy Conservation Law, 1998 (amended 2008), 56; Environmental Protection Law, 1989, 53–54; Law on Prevention and Control of Atmospheric Pollution, 1995 (amended 2000), 54–55; Law on Prevention and Control of Environmental Pollution by Solid Waste, 1995 (amended 2005), 54; Law on Prevention and Control of Pollution from Environmental Noise, 1997, 55–56; Law on Prevention and Control of Water Pollution, 1996, 55; Renewable Energy Law, 2006, 56–57 population growth: on economic growth, 16–17; and environment, 51–52 postdoctoral research centers, 122–23 poverty-stricken country, 191 power-money trade, 60–61; and high-level corruption cases, 61–64; improving transparency, 64 Premier Wen Jiabao: about Beijing’s recovery plan, 40; on domestic market, 41; views on innovation, 85–86 President Hu Jintao: on country’s goal, 2; views on economic growth, 31–32; views on innovation, 86 primary sector (agriculture), 3, 127, 130 private housing, 152 private owned companies (POEs), 23–24; definition of, 134; and Korean War (1951–1953), 134; and national projects, 87; and SOEs,

231

discrimination of, 132–33, 160; and SOEs, in urban areas, 127 property rights, for farmers, 188 Provisional Rules on Management of Corporate Bonds, 147 psychological trauma, and unemployment, 37–38 public rentals, 152 purchasing, power, parity (PPP) theory, 1 Qinghai: annual per capita household, 16t; economic structural reform in, 131; education in, 110; and trillion mark, 77 Qiu Gengtian, a professor of the CPS; views on China’s growth, 182 ‘‘Quality-Oriented, the,’’ in middle class, 7, 8 Ramo, Joshua Cooper, 171; theorems of Beijing Consensus, 172 rapid urbanization: on rural China, 4 real estate development, 36, 46 ‘‘Red capitalists,’’ success stories, 24; of Chen Tianqiao, 25; of Lu Guanqiu, 24–25; of Lu Zhigang, 24; of Tang Ruiren, 27–29; of Wang Yuancheng, 25–27 Renewable Energy Law, 2006, 56–57 renminbi-dollar peg, 11 ‘‘Republic of Profits,’’ 24 retired population: health care system for, 20 rising price, impact on economy, 2 Robert Solow: Total Factor Productivity (TFP), definition of, 172 Rural Credit Cooperatives (RCC): history of, 143; operation of, 143–44; reform of, 142; to rural cooperative banks, 144; and SOCBs, 143 rural industrialization, 157–58; factors of, 158

232

Index

rural reform, 155–59; HRS, shortfalls of, 156–57; land rights inequality, 155 rural troubles, causes of, 13 rural-urban divide, 77, 78, 82 S&T framework transition, 93–94; Break-Ice (1985–1992), 94–95; Localization (1999–2003), 95–96; Market Integration (2003–2006), 96–97; Reassuming Direction (2006–2020), 97–98; Weighttrimming (1993–1998), 95 S&T modernization, 91 ‘‘safeguarding 8 percent,’’ 47 safety net, 35, 41, 47, 188 ‘‘sage-emperor,’’ President Hu Jintao, 164–65 Scandal of Sanlu Milk Powder, 66–67 science and technology (S&T): for economic growth, 85–89; in economic take-off, 3; in human resource management, 119–24; national programs, 99–104; policies and innovative system, 87, 89–93; as productive force, 86 secondary sector (manufacture and construction industries), 3, 127, 130 securities market, transition of, 145–48 ‘‘seeking friends and avoiding troubles,’’ 174 self-determination, in China’s diplomacy, 173, 174 service sector dominance: in developed economies, 5 Shambaugh’s Model, 169–70 Shandong: annual per capita household, 16t; leader in GDP growth, 77; migrant workforce in, 26 Shanghai, 78; annual per capita household, 16t; banking reform in, 142; education in, 110; farmers’ migration, 78; and Hukou System,

79; and migrant workers, 76; per capita living space in, 154; and rural reform, 159; stock market in, 147, 184 Shaanxi: annual per capita household, 16t; economic structural reform in, 131 Shenhua Group, 138 Shenyang Smelter and the Shenyang Cable Factory case, 127–28 Sichuan: annual per capita household, 16t; earthquake hit on, 13, 71; economic structural reform in, 133; ‘‘Sichuan Scholar Program,’’ 104; taxation reform in, 149; and trillion mark, 77 sildenafil citrate, 115–16 single-party ruling system, and corruption, 58–59 small and medium-size enterprises (SMEs): and bankruptcy, 35–36; new funding mechanisms, for banks, 118; S&T human resource management, 119–24; in securing loans, 117–18 ‘‘smart growth,’’ 64–65. See also Green GDP ‘‘Smarts, the,’’ in middle class, 7, 8 Smith, Adam, ‘‘enlightened selfinterest,’’ 187 social discrimination, 4–5, 80 social welfare, 5, 20–21, 64, 80, 188 socialist market economy, 9, 29, 43–44, 91 Socialist Transformation Campaign, 134 socioeconomic equality, 188 Soviet model: and China’s industrial development, 134 Spark Program (1986), 92, 100 Special Economic Zones (SEZ), 173 State Administration of Foreign Exchange (SAFE), 148

Index State Automobile Emission Standards, 52; Green Sticker vehicles, 53 State Council Development Research Center (DRC), 160 State Intellectual Property Office (SIPO), 90 State Planning Commission, 127 state tax, 151 state-owned commercial banks (SOCBs): Construction Bank of China (CBC), 142; ICBC, 142 state-owned enterprises (SOEs), 128; Gross Value of Industrial Output (GVIO), 128–29; loans to, 141; and POEs, discrimination of, 133–34, 160; and POEs, in urban areas, 127; reform of, 4; restructuring of, 61 Statistics Bureau of Shandong: on gender equality, 5 strategic investments, 41–42 Strike Hard Campaigns, anticorruption campaign, 61, 114 subsidized flats, 152 Sun Lijian, view on economic crisis, 44–45 Sun Zhongshan: founder of Republic of China, 9 ‘‘sunset industry,’’ 135 Tang Dynasty (681 CE–960 CE), on education, 112 Tang Guoqiang, International Trade Research Center of the State Council: on international and national economic environment, 42 Tao Wang predictions: and economic growth, 48; and media observations, 35; on safety net, 47; on stimulus plan of work, 46 taxation reform, 149–51; first step changes in, 150; substituting tax for profits, 150; Tax-sharing System, 151 Technology Spreading Program (1990), 92

233

10 Things to Avoid, 37–38 tertiary sector (service industries), 127, 130; middle class, 6–10; rise of, 3–6 textiles export, 42 ‘‘think tanks,’’ 159–60 Three Gorgeous Project Corporation, 147 ‘‘three one’s’’ (san ge yi), 178 ‘‘Three Represents,’’ 173; Jiang Zemin’s theory of, 10 Tian Wenhua, former head of Sanlu, in adulteration case, 67–68 Tianjin: annual per capita household, 16t Tianjin Chemical Plant, and pollution, 52 Tibet: annual per capita household, 16t; economic structural reform in, 131; industrial output in, 159 ‘‘to be rich is glorious,’’ 91 Torch Program (1988), 92. See also China Torch Program Total Factor Productivity (TFP), 172 town and village enterprises (TVEs), 140, 142, 158; loans to, 144; and toy industry contract, 36 toy industry, 36 trade recovery, government’s role, 186 trade sector, growth of, 13–14 Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), 114 traditional planning economy, transforming of, 180 travelers class, 7. See also middle class Treasury bonds (T-bonds), 146; to finance budget deficits, 149; and finance recovery programs, 147 ‘‘Trend Followers,’’ in middle class, 7, 8 trillionaire provinces, 77 Troubled Asset Relief Program (TARP), 45 Tsung-Dao Lee, Nobel Prize laureate, 122

234

Index

‘‘two-bombs-and-one-star project,’’ 89 2006 Action Plan on IPR Protection, 114–15 uneasy coalition, 166 unemployment insurance, 22, 23 unemployment pressure: ease of, 12–13 Unger, Jonathan, views on: middles class political stance, 10 unpredictability, of China, 191 urban air quality, 50–51 Urban Employed Basic Medical Insurance (UEBMI), 21 urban industry, against rural industry, 159 Urban Resident Basic Medical Insurance (URBMI), 21, 22 urban water pollution, 51 urbanization, growth of, 72–83; and economic development, 83; and industrialization, 73; and migration, 72–73; quitting farming, reasons for, 76–77; ‘‘Village in the city’’ (VITC), 74–75; Wen Tiejun’s view on, 76 urban-rural gap, government’s role in, 186 U.S. Declaration of Independence, 176 U.S.-China Business Council: exporters’ to China, list of, 14t Value Seekers, in middle class, 7, 8 Viagra, 115 Wanfang Data Co., Ltd.: Dissertations of China, 116–17 Wang Guiping, cough syrup, 65–66 Wang Xuebing, former president of Bank of China, in fraudulence case, 62 Washington Consensus, 161; 10 principles of, 162, 173; Callick’s

‘‘Controlled Freedom,’’ 166–69; and China Model, 162–64; Hutton’s ‘‘Halfway House,’’ 164–66; Shambaugh’s Model, 169–70 Wen Tiejun, head of the Institute of Rural Development of the People’s University in Beijing; on slum deterioration, 75; on urbanization and ecological environment, 76 Williamson, John, fiscal policies, 162–63 World Bank, 163 world economy, China’s role in, 191 Xinjiang: annual per capita household, 16t; economic structural reform in, 131; ethnic tensions in, 188 Yan Sun, views on corruption, 59 Youngtze River Scholars Program (YRSP), 103–4 Yunnan: annual per capita household, 16t; economic structural reform in, 131; revamping energy industry in, 138 zero tolerance, 75 Zhejiang: annual per capita household, 16t; in trillion business, 77 Zheng Xiuyu, former chief of China Food and Drug Unit, in bribery case, 62 Zhou Chunshan, director of Urban and Regional Research Center of Sun Zhongshan University: in removing Hukou system, 82 Zhu Rongji, view on internal affair, 30–31 Zhu Xiaohua, vice governor of the People’s Bank of China, in fraudulence case, 62 Zhujiang River Scholar Program, 104

About the Author Jing Luo is a professor in the Department of Languages and Cultures at Bloomsburg University of Pennsylvania. He received BA and MA degrees from Peking University and a PhD from The Pennsylvania State University. Luo was chief editor and contributor of China Today—An Encyclopedia of Life in the People’s Republic, and author of Over a Cup of Tea—An Introduction to Chinese Life and Culture.