China into the Hu-wen Era: Policy Initiatives And Challenges (Series on Contemporary China)

CHINA INTO THE HU-WEN ERA Policy Initiatives and Challenges

i-ilitul by

John Wong & Lai Hongyi

CHINA INTO THE HU-WEN ERA Policy Initiatives and Challenges

Series on Contemporary China (ISSN: 1793-0847) Series Editors Joseph Fewsmith (Boston University) Yongnian Zheng (East Asian Institute, National University of Singapore) Advisory Board Members Tun-jen Cheng (College of William and Mary) Jane Duckett (University of Glasgow) James Tang (University of Hong Kong) Gungwu Wang (East Asian Institute, National University of Singapore) Lynn White (Princeton University) Dali Yang (University of Chicago) Ji You (University of New South Wales)

Published Vol.1 Legitimacy Ambiguities of Political Success or Failure in East and Southeast Asia edited by Lynn White Vol.2 China Under Hu Jintao Opportunities, Dangers, and Dilemmas edited by Tun-jen Cheng, Jacques deLisle & Deborah Brown Vol.3 China's Compliance in Global Affairs Trade, Arms Control, Environmental Protection, Human Rights by Gerald Chan Vol.4 Political Civilization and Modernization in China: The Political Context of China's Transformation edited by Yang Zhong and Shiping Hua Vol.5 China into the Hu-Wen Era: Policy Initiatives and Challenges edited by John Wong and Lai Hongyi

Series on Contemporary China - Vol. 5

CHINA INTO THE HU-WEN ERA Policy Initiatives and Challenges

edited by

John Wong East Asian Institute, National University ofSingapore

Lai Hongyi East Asian Institute, National University ofSingapore

\IJP World Scientific NEW JERSEY • LONDON • SINGAPORE •

BEIJING • SHANGHAI • HONGKONG

• TAIPEI • CHENNAI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

Library of Congress Cataloging-in-Publication Data Wong, John, 1939China into the Hu-Wen era : policy initiatives and challenges / [edited by] John Wong, Lai Hongyi. p. cm. — (Series on contemporary China ; vol. 5) Includes bibliographical references. ISBN 981-256-732-1 1. China-Politics and government-2002- 2. China-Fxonomic policy-2000- 3. China-Social conditions-2000- I. Lai, Hongyi, 1965- II. Title. III. Series. DS779.26.W665 2006 320.6095 l-dc22 2006040096

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Copyright © 2006 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

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Table of Contents

List of Editors and Contributors

ix

Part I. Introduction The Hu-Wen New Deal John Wong and Lai Hongyi

3

Part n. Strengthening Governance and Rule of Law 1. Hu Jintao's Consolidation of Power and His Command of the Gun Youji

33

2. Deciphering Hu's Leadership and Defining New Elite Politics Li Cheng

6l

3. Hu Jintao's Approach to Governance Joseph Fewsmith v

91

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4. Re-making the Party's Image: Challenges for the Propaganda Department Zheng Yongnian and Lye Liang Fook

119

5. Reforming the Party and the State Under Hu Jintao Hsu Szu-chien

153

6. Rule of Law and Governance Zou Keyuan

191

Part m . Sustaining Economic Growth and Reform 7. New Patterns of Economic Growth Wu Yanrui

219

8. Changes and Reform in Financial Markets Howard Davies

243

9. Strengthening Corporate Governance: Completing the Unfinished Business of SOE Reform Sarah Y. Tong 10. The Effects and Implications of Foreign Direct Investment in China for Other Developing Economies: Hollowing Out or Filling in? Busakorn Chantasasawat; K.C. Fung; Hitomi Lizaka; Alan Siu 11. Changing Land Policies: Ideology and Realities John Wong and Liang Ruobing

259

277

301

Part IV. Coping with Social Issues and Tensions 12. Income Inequalities, Limited Social Mobility and Remedial Policies Lai Hongyi

323

13. Labor Market Reforms Under Hu-Wen Administration Zhao Litao

351

Table of Contents vii

14. Managing Social Unrest Cat Yongshun 15- From Social Insurance to Social Assistance: Welfare Policy Change Edward Gu 16. Governments, Markets, and the Health Care Sector Ake Blomqvist 17. Population Development Strategies: The New Thinking Peng Xizhe

379

405 437

467

Part V. Managing China's External Relations 18. Bush's Asia Policy and US-China Relations Zhao Quansheng

485

19- China and Northeast Asian Cooperation: Building an Unbuildable? Jae Ho Chung

519

20. China and Southeast Asia Cooperation: New Developments and Challenges Zhang Haibing

541

Index

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List of Editors and Contributors

Ake B l o m q v i s t A. Blomqvist taught at the University of Western Ontario until 2002. From 2002, until now, he has been Professor of the Economics Department at the National University of Singapore (NUS). He also served as the head of the department till February 2006. His two principal areas of research have been the economics of developing countries and the economics of health care. He has published articles in leading field journals in health economics namely Journal of Health Economics, Journal of Public Economics, and Pharmacoeconomics, as well as in several books, the most recent one being Canadian Health Care in a Global Context (CD. Howe Institute Benefactors Lecture, 2002). Cai Y o n g s h u n Cai Yongshun teaches in the Division of Social Science at the Hong Kong University of Science & Technology and had previously taught at the NUS. He has researched on resistant movements of workers and peasants. He has published his papers in academic journals such as China Quarterly and Political Science Quarterly. Recently, his book has been published by RoutledgeCurzon. B u s a k o r n Chantasasawat Busakorn Chantasasawat was a Visiting Research Fellow at the East Asian Institute (EAI) of the NUS. Her research focuses on trade and ix

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foreign direct investment in China and their effects on China's growth as well as their impacts on other East Asian countries. Jae H o C h u n g Jae Ho Chung is Professor and Chair of the Department of International Relations at Seoul National University, Korea. Professor Chung is also the Head of the Center for International Studies' China Area Program (CIS-CAP) and Coordinator for the Federation of Korean Industries' China Forum. He is the author of Central Control and Local Discretion in China (Oxford University Press, 2000) and Between Ally and Partner-. Korea-China Relations and the United States (Columbia University Press, Forthcoming). H o w a r d Davies Howard Davies is the Director of the London School of Economics and Political Science. Prior to his current appointment, he was the Chairman of the Financial Services Authority, UK's single financial regulator in 1998. Howard Davies had previously served for two years as Deputy Governor of the Bank of England and for three years as Director General of the Confederation of British Industry. He received his MA from Merton College, Oxford and MSc in Management Sciences from the Stanford Graduate School of Business, California. Joseph Fewsmith Joseph Fewsmith is a Professor of International Relations and Political Science as well as the Director of the East Asia Interdisciplinary Studies Program at Boston University. He is the author of China Since Tiananmen (Cambridge University Press, 2001), Elite Politics in Contemporary China (M.E. Sharpe, 2001), The Dilemmas of Reform in China (M.E. Sharpe, 1994), and Party, State, and Local Elites in Republican China (University of Hawaii Press, 1985). His articles have appeared in journals such as Asian Survey,

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Comparative Studies in Society and History, The China Journal, The China Quarterly, Current History, and Modern China. He is also a research associate of the John King Fairbank Center for East Asian Studies at Harvard University.

K. C. Fung K.C. Fung is a Professor of Economics at the University of California, Santa Cruz. He is also a Co-Founder of the Santa Cruz Center for International Economics (SCCIE). He was a Senior Staff Economist at the White House Council of Economic Advisers during the Bush and Clinton Administrations and had received a letter of commendation from the President. He was a consultant to the World Bank, the Asian Development Bank Institute and the WTO. He has also trained senior government officials from 31 countries on the economics and law of the WTO.

Edward Gu Edward Gu is a Professor at the Institute of Social Policy and Public Policy, Beijing Normal University. Prior to this, he served as a Research Fellow at the East Asian Institute (EAI) of NUS for three years. He also assumed post-doctoral fellowships at Harvard University and the University of California (UC) at Berkeley. His publications have appeared in many international journals such as Economy and Society, Development and Change, The Journal of Asian Studies, and The China Quarterly.

H s u Szu-chien Dr. Hsu is an Assistant Research Fellow of the Institute of Political Science at Academia Sinica. He earned his M.A. and Ph.D. in Political Science from Columbia University. His research interests include Mainland China's political reform, China's "developmental state" in high-tech economic sectors, and cross-strait relations.

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H i t o m i Iizaka Iizaka is Research Associate, University of California, Santa Cruz and Research Fellow of Hong Kong Institute of Economics and Business Strategy (HIEBS), University of Hong Kong. Lai H o n g y i Dr. Lai has been a Research Fellow at the EAI since 2001. Having received his Ph.D. from the University of California at Los Angeles, Dr. Lai researches on China's political economy, regional development, and external policies. He has ten published or forthcoming peer-refereed English articles on journals such as Modern China, Third World Quarterly, Issues & Studies, American Asian Review, Asian Journal of Political Science, and China Review. His recent works include a book on politics under Hu Jintao—Hu-Wen under Full Scrutiny (Hu Wen Quan Toushi) (Hong Kong: Wenhua Yishu Chubanshe, 2005) and a forthcoming manuscript on China's reform strategy. Li C h e n g Dr. Li is William R. Kenan Professor of Government at Hamilton College, New York and Non-resident Senior Fellow at the Brookings Institution in Washington, D.C. He is the author of Rediscovering China: Dynamics and Dilemmas of Reform (1997) and China's Leaders: The New Generation (2001) and the editor of the recently published book, Bridging Minds across the Pacific: U.S.-China Educational Exchanges, 1978-2003 (2005). He is a member of the National Committee on U.S.-China Relations, a member of the U.S. National Committee of the Council for Security Cooperation in the Asia Pacific, and serves as a member of committees for several academic institutions. Liang R u o b i n g Dr. Liang completed his Doctoral Research on service industry at the School of Economics, Peking University. He has also researched

List of Editors and Contributors xi i i

on geographic economics, regional economic development, and agricultural economics. Formerly a research associate at the EAI, he is now a post-doctoral fellow at the Center of China's Transnational Relations, Division of Social Science, Hong Kong University of Science and Technology. Lye Liang F o o k Liang Fook Lye is a researcher at the EAI and has researched on China's central-local relations, technocratic leadership, political stability and legitimacy, and the mass media. He is also interested in China's relations with ASEAN. Liang Fook was part of the EAI research team that completed a study on the Suzhou Industrial Park—the flagship project between China and Singapore. P e n g Xizhe Dr. Peng is currently a Professor of Population and Development and the Dean of the School of Social Development and Public Policy at Fudan University. He has been a member of the Population Advisory Committee of China's National Population and Family Planning Commission. Dr. Peng is Vice-Chairman of the Population Association of China. His research covers a wide range of populationrelated issues. He has written and edited 16 books and published more than 100 academic journal articles. Alan Siu A. Siu is Deputy Director of the Hong Kong Institute of Economics and Business Strategy and Associate Professor at the School of Economics and Finance of the University of Hong Kong. Sarah Y. T o n g Dr. Tong is an Assistant Professor from the Department of Economics and Research Fellow at the EAI, NUS. Her research focuses on various issues on Chinese economy, including reforms

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and transition, industrial structure, as well as trade and foreign investment. John Wong Professor Wong is Research Director of the East Asian Institute (EAI) of the NUS. He was formerly the Director of the Institute of East Asian Political Economy (IEAPE), Singapore (1990-1996) and had taught Economics at the University of Hong Kong (1966-1970) and later, at the NUS (1971-1990). He held visiting appointments with Harvard's Fairbank Center, Yale's Economic Growth Center, and Oxford's St. Anthony College. In 1996, he was the Chair of ASEAN studies at the University of Toronto. He also served as a consultant to many international organizations. He has written and edited over 18 books, and published numerous articles and papers on development of China and other East Asian economies in learned journals. Wu Yanrui Wu Yanrui is an Associate Professor at School of Economics and Commerce, University of Western Australia. He specializes in development economics, international trade and applied econometric modelling. He has researched and published extensively on the Chinese and Asian economies, productivity analysis, economic growth and international economics. He is the author of Productive Performance in Chinese Enterprises (Macmillan, 1996), China's Consumer Revolution (Edward Elgar Publishers, 1999), The Macroeconomics of East Asian Growth (Edward Elgar Publishers, 2002) and China's Economic Growth (RoutledgeCurzon, 2004). Youji Dr. You is Senior Lecturer in School of Political Science, the University of New South. He has published widely on China's political, economic, military, and foreign affairs. He is author of In Quest of High Tech Power: the Modernisation of China's Military in the

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1990s (1996); China's Enterprise Reform (1998), The Armed Forces of China (1999), as well as numerous articles. His recent works include "Nationalism, Defence Culture and The PLA", in Wang Shaoguang and Leong Liew (eds), The Chinese Nationalism (Routlege, 2004) and "China's Aircraft Carrier Ambitions", The Naval War College Review, Fall 2004 (with Ian Story).

Z h a n g Haibing Zhang Haibing received her Ph.D. from Shanghai Academy of Social Science. Dr. Zhang is now the Deputy Director of the Department of World Economy Studies, Shanghai Institute for International Studies (SIIS).

Z h a o Litao Zhao Litao is a research fellow at East Asian Institute (EAI), NUS. He received his Ph.D. in sociology from Stanford University. His research interests include social stratification and mobility, economic sociology, and industrial relations. Currently, he is working on China's labor market reforms and labor market outcomes. He has published in Research in Social Stratification and Mobility. With Andrew G. Walder, he has co-authored a paper (Forthcoming) in the China Quarterly.

Zhao Quansheng Zhao Quansheng is Professor and Division Director of Comparative and Regional Studies at the School of International Service at American University (AU) in Washington, DC, and Director of AU's Center for Asian Studies. Professor Zhao is Associate-in-Research at the Fairbank Center of Harvard University. A specialist in comparative politics and international relations focusing on East Asia, he is the author of Interpreting Chinese Foreign Policy (Oxford University Press) and Japanese Policymaking (Oxford University

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Press/Praeger). His books have been translated into Chinese, Japanese, and Korean. Zheng Yongnian Zheng Yongnian is Professor and Head of Research at China Policy Institute, the University of Nottingham, United Kingdom. He is a coeditor of China: An International Journal. He studies China's political economy and external relations. His articles have been published in Comparative Political Studies, Political Science Quarterly, and Third World Quarterly. Zheng has also written ten books, including Discovering Chinese Nationalism in China (Cambridge, 1999) and Globalization and State Transformation in China (Cambridge, 2004). He has also co-edited 11 books on China. He was a consultant to United Nation Development Program on China's Rural Development and Democracy. He has been a columnist on China for Hong Kong Economic Journal for many years. Zou K e y u a n Dr. Zou is a Senior Research Fellow at the EAI, NUS. His specialty is International Law and Chinese Law. He has published Law of the Sea in East Asia (London: Routledge, 2005), China's Marine Legal System and the Law of the Sea (The Hague: Martinus Nijhoff, 2005), and numerous refered journal articles. He is a member of the Editorial Boards of the International Journal of Marine and Coastal Law, Ocean Development and Lnternational Law, and Journal of International Wildlife Law and Policy. He is also the Deputy Editorin-Chief of the Chinese Journal of International Law.

Parti Introduction

I ntroduction

The Hu-Wen New Deal John Wong and Lai Hongyi

i Hu Jintao has significantly shaped China's politics in the recent three years. Along with his political partner Premier Wen Jiabao, Hu unfolds a set of policies that bears his own political trademark. Hu and Wen dismissed incompetent senior officials during the severe acute respiratory syndrome (SARS) epidemic, projected an image of caring for commoners, and polished the leadership image at home and abroad. Hu-Wen new policy initiatives have even earned a positive term, i.e., the Hu-Wen New Deal (.i^fmWJMiX What Hu has achieved politically has come as a big surprise to many overseas observers. 1 Before and even soon after the Sixteen 1

For a critical analysis of succession at the Sixteenth Party Congress, see Joseph Fewsmith, "The Sixteenth National Party Congress: The Succession That Didn't Happen," The China Quarterly, No. 173 (March 2003): 1-16. Richard D. Ewing argued that Hu had a poorly-defined political view. See "Hu Jintao: The Making of a Chinese General Secretary," ibid., pp. 17-34. David Bachman suggested that Jiang was likely to continue to hold on to power. See, "New Leaders, New Foreign Policymaking Procedures?" in China after Jiang, eds. Gang Lin and Xiaobo Hu (Washington, D.C.: Woodrow Wilson Center Press, 2003), pp. 115-36. 3

A John Wong and Lai Hongyi

Party Congress in late 2002, many Western analysts were mystified by Hu's political enigma and lamented his tendency to toe the line set by his predecessor Jiang Zemin and his lack of political followings. Hence the familiar headlines of "Who's Hu?", "Who/Hu's in charge?", and "Is Hu going to be lame-duck leader?".2 They had predicted that Hu would have a feeble tenure, would be much constrained by Jiang's followers at the Politburo and the ministries, and could even be reduced to a Jiang's puppet at best, if not replaced by Jiang's favorite choice of successor Zeng Qinghong. Many of these predictions have turned out to be not true. Even when Jiang still served as the Chairman of the Central Military Commission (CMC), Hu was able to introduce his own policy agenda and fought the SARS decisively during April-June 2003. Contrary to accusations about his obsession with power, Jiang handed the CMC Chairmanship over to Hu in September 2004. This marks the first real smooth power transfer in the People's Republic of China. Succession prior to Hu has been fraught with purges. Three of Mao's hand-picked successors, namely, Liu Shaoqi, Lin Biao and Hua Guofeng, fell from grace. Two of Deng's favorite heirs apparent, namely, Hu Yaobang and Zhao Ziyang, were also purged due to their disagreements with Deng over political reform. Jiang, who was Deng's third and reluctant choice, was nearly replaced in early 1992 and managed to succeed Deng only after he vowed to follow Deng's marketization course. Hu's surprisingly rapid power consolidation can be explained by the following three key reasons — ongoing institutionalization of China's leadership succession,3 factional balance among the political elites and Hu's effective skills to smooth leadership transfer and establish his authority. 2

See Reuters, 15 November 2002; Times (Asia), 25 November 2002; International Herald Tribune, 21 November 2002; The Sunday Times (Singapore), 17 November 2002. 3 For an earlier discussion on institutionalization of leadership succession, refer to John Wong and Zheng Yongnian, eds. China's Post-Jiang Leadership Succession, Singapore: World Scientific, 2002. For a brief and recent discussion, refer to LAI Hongyi. 2004. "Institutionalization of China's Power Transfer behind Dramatic Reports," HsinPao (Hong Kong Economic Journal), October 11, p. 23-

The Hu-Wen New Deal 5

Institutionalization of China's leadership succession started in Deng's later years, especially after the 1989 Tiananmen movement. Before 1989, Deng, along with chief conservative Chen Yun, had been pushing for leadership renewal by retiring of veteran leaders and promoting younger technocratic leaders. New selective criteria were set for young leaders — high education, young in age, professional training, and political reliability.4 Meanwhile, Deng also favored young leaders embracing his market liberalism, with coastal working experience, and having served in both local and national posts. 5 However, leadership transition was incomplete, as a few top veteran leaders such as Deng and Chen continued to determine policies and even sack or pick young leaders from behind. These trends of institutionalization of retirement and promotion were accelerated under Jiang. The age and two-term limits have also been rigidly imposed on top posts (including State President, Premier, and General Party Secretary) in the late 1990s. In 1997, Qiao Shi, the powerful No. 2 of the CCP, retired as he reached 70. In 2002, Jiang also retired from State Presidency and Party General Secretary after he had served in both posts for two terms (another secondary reason was that he well exceeded 70 in age). 6 Another crucial component in the institutionalization of leadership succession which has been ignored by many China observers is the designation and two-step installation of the core leader. Deng indeed helped institute this arrangement after the 1989 Tiananmen Movement. First, he suggested that each generation of leadership should have a core leader and that he was the core leader of the second generation and Jiang Zemin the third generation. 4

For a study of promotion of young cadres in the 1980s, refer to Melanie Manion, 1993, Retirement of Revolutionaries in China. Princeton: Princeton University Press. 5 For a study on Deng's promotion of young leaders, refer to Hongyi H. LAI, Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies, Palgrave MacMillan, forthcoming, Chapter 4 ("Installing Technocratic Young Leaders"). 6 For discussion on quasi-institutional "rules" for succession, refer to Frederick Teiwes, "The Politics of Succession," in Wong and Zheng, China's Post-Jiang Leadership Succession, pp. 21-58.

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Second, he helped the politically fragile Jiang to become the core of the post-Deng leadership by persuading Premier Li Peng and Vice Premier Yao Yilin to accept Jiang's leadership. Third, he proposed that the core leader should control three posts at the same time and become the first among the equal. However, he also suggested that the new core leader could assume the post of the Chairmanship of the Central Military Commission (CMC) sometime after he took over the State Presidency and the General Party Secretary. Deng himself handed over this post to Jiang in November 1989, about several months after Jiang became the General Secretary.7 Obviously, Jiang followed Deng's arrangement of phrased succession. He handed over to Hu the posts of State Presidency and the General Party Secretary first at the Sixteenth Party Congress in November 2002. Less than two years later, he passed the CMC Chairmanship to Hu. The second factor is balance of factions among top leadership. Among the members of the 16th Central Committee of the Party, at least the following groups of factions can be identified — the Shanghai Gang (formerly Jiang's associates from Shanghai), tuanpai (associates of Hu's Communist Youth League), economic technocrats groomed by Zhu Rongji and further developed by Wen Jiabao and Wu Yi, and the princelings.8 As Cheng Li suggests in his chapter in this volume, there is a balance of power among leaders of the state, the NPC, the State Council, the Chinese People's Political Consultative Conference, and the military between the Shanghai Gang (or the elitist faction) on the one hand and the 7

For detailed discussion on China's leadership succession and Hu's power consolidation, refer to LAI Hongyi. 2005. Hu-Wen quan toushi: Hu-Wen shizheng neimu quan jiedu ji Zbongguo weilai zhanwang (Hu-Wen under full scrutiny: a comprehensive inside story of governance under Hu and Wen and prospects for future China). Hong Kong: Wenhua yishu chubanshe, pp. 16-41, 64-66, 319-64. 8 Clear-cut labels are convenient in theoretical discussion, but hazardous in empirical analyses and forecasts. There are some overlaps among these factions. Li Yuanchao, Jiangsu Provincial Party Secretary and a prominent tuanpai member, was also a princeling. Wang Qishan, Beijing Mayor and an economic technocrat promoted by Zhu and then by Wen, was also a princeling.

The Hu-Wen New Deal 7

populist faction on the other. While Li regards the tuanpai as the only pillar of the populist coalition, Wen-headed economic technocrats can also be viewed as the other echelon of this pro-populism coalition.9 Jiang's associates can thus influence but cannot dictate major policies. This gives Hu and Wen considerable room to introduce their own policies. Lastly, Hu displays great skills in political maneuvering. Hu skillfully managed his relations with Jiang and earned Jiang's trust and cooperation in leadership succession. In addition, Hu carefully and adroitly finds alliance at the Standing Committee of the Politburo. Hu forged a partnership with Wen upon coming into power and especially in the anti-SARS campaign.10 During the anti-corruption campaign Hu also worked closely with Wu Guangzheng, his acquaintance at Qinghua University. Later, as Jiang stepped down, Hu has also built a coalition with Zeng Qinghong. Hu also has a relatively smooth relation with low-keyed Wu Bangguo, the No. 2 Chinese leader, or the head of the NPC. In addition, as Cheng Li argues in his chapter, Hu seized opportunities amidst calamities and moved to assert his authority. For example, Hu decisively led an open and intense fight against the SARS during mid April and June 2003 and as a result saw his popularity soar and his authority installed.11 The above three factors combine to explain why Hu could quickly emerge as the new core leader amidst much naysay on his political fortune among China observers. To be sure, when China enters the Hu Jintao era, numerous new challenges await the leadership. Jiang Zemin has left behind a fastgrowing, prosperous economy along with a slowly transforming Communist Party, one that is ideologically flexible enough to embrace capitalists. Jiang has thus built a creditable legacy for the 9

We choose to avoid equating the tuanpai with the populist coalition and the Shanghai Gang with the elitist coalition. For example, the western development program, a regional policy that helped out the underdeveloped west, was initiated chiefly by Jiang Zemin himself. 10 Refer to You Ji's chapter for a discussion on Hu's relations with Jiang and Wen. 11 For a detailed analysis of how Hu and Wen established their authority, refer to Lai, Hu Wen Quan Toushi.

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"Jiang Era" and ultimately, Hu Jintao, too, will have to leave a legacy for himself. The task before Hu is admittedly not an easy one. For the Communist Party of China, he will have to step up its renewal and internal reform program, while at the same time, strengthen its governing capacity. Will the Party eventually decline and decay in the long run? What can he do to prevent this? The Chinese economy, having chalked up breakneck rates of growth for 25 years, is beginning to experience many structural shortcomings — its current over-heating is just one of these manifestations. In any case, the pattern of economic growth has to be changed or modified in order to address such burning issues as rising income inequality, widening regional economic disparity, open urban unemployment, and rural poverty. Furthermore, Hu has to tackle huge macroeconomic problems without significantly slowing down the momentum of economic growth, which remains the key to the Party's legitimacy and the country's political and social stability. Similarly on the domestic political front, there are many issues and problems that are crying out for attention. Pari passu with rapid economic and social development is the call for better and more efficient governance, less corruption, and greater transparency for many public affairs. Hu has started off by projecting a "pro-people" image. He will be under increasing pressure to deliver more effective public policies that will affect the daily economic and social life of the common people. Externally, Hu's diplomatic priority is to minimize frictions with China's neighboring countries and at the same time to gain greater international acceptance, in line with his "peaceful rise" principle. Although only mid-way into their first tenure, Hu and Wen have established their distinctive style of governance. On the political front, they have established their popularity, consolidated their power, overhauled the government and the Party institutions for better governance, and promoted rule of law. At home, Hu and Wen project a pro-people image and have introduced many measures to improve the welfare of low strata and disadvantaged social groups and to support the development of underdeveloped regions.

The Hu-Wen New Deal 9

They have also renewed reforms of social welfare, healthcare and demographic policies, and introduced rural and land policy reforms to defuse peasants and re-settlers protests. The Hu-Wen leadership also continues with China's high economic growth through upgrading technology, improving energy efficiency, deepening financial reform, improving land use policies, and furthering SOE reform. On the diplomatic front, they have maintained stable and operating relations with major powers especially the United States and developed cordial relations with most of China's neighbors. They have also proposed peaceful rise and peaceful development and actively participated in regional integration and cooperation schemes. In short, the Hu-Wen leadership has breathed new air into China's politics, economy, governance, and diplomacy. Nearly three years after the Sixteenth Party Congress and midway into the first Hu-Wen administration, it is high time for us to reflect on how Hu has addressed the above challenges. The East Asian Institute (EAI) sponsored a conference in Singapore in the second half of 2005. Knowledgeable China scholars from different disciplines and from Singapore, the United States, Australia, South Korea, mainland China, Hong Kong and Taiwan discussed and assessed Chinese political, economic, social and external policies in the recent years, especially between 2002 and 2005 that were introduced by the Hu-Wen leadership. This volume is the product of this international academic collaboration. The following section presents the theme of the remaining chapters of the book contributed by these scholars. It identifies common threads in the discussion on the challenges, achievements and shortcomings of the Hu-Wen New Deal and sums up their main findings.

II CONSOLIDATING POWER AND IMPROVING GOVERNANCE First of all, as a new leader Hu had to consolidate his power, control the military and assert his authority within the Chinese Communist Party (CCP) and over the country. Drawing on his inside knowledge

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on politics in Beijing You Ji sheds light on Hu's strategy of succeeding Jiang and consolidating his power within the military. He suggests that Hu has skillfully managed his relations with Jiang and Jiang's associates at the Politburo Standing Committee (PSC) and used his political popularity to control the military. According to You, the most risk-fraught problem in China's leadership succession has been a two-lined leadership, where the outgoing and incoming top leaders coexist, resulting in potential clashes of personalities and visions. Hu successfully bypassed this problem by gradually phrasing out the two-lined leadership. First, Hu won Jiang's trust and support by persuading him to remain the Chairman of the Central Military Commission (CMC) and continuing to promote Jiang's "three-represents" theory after the Sixteenth Party Congress. Then Hu gradually took over key posts from Jiang and ran daily external, Party, and state affairs. Hu has also found a crucial ally, namely, Premier Wen Jiabao. Hu and Wen work well together in implementing crucial policies, including SARS and macro-economic management, as well as anti-corruption. Having built his legitimacy among the populace and the Party through commanding the anti-SARS campaign, Hu starts to consolidate his power within the military. Jiang also turned out to be a friend rather than an opponent in this course. During his short stay after the Sixteenth Party Congress Jiang strove to complete the difficult tasks of military modernization and dismissal of many generals and senior officials. Jiang finally passed the CMC Chairmanship to Hu in September 2004, as agreed upon by the Party prior to the Sixteenth Party Congress. Hu thus takes charge of crucial military appointments, yet continues to embrace military modernization and emphasize civilian control of the gun. Meanwhile, Li Cheng implies, Hu manages to install his followers into key posts and share power and enjoy truce with rival faction. This enables him to pursue policies that he favors. Li Cheng identifies two contrasting factions in the Politburo, namely, the elitist versus the populist coalition. The elitist and princelings coalition is headed by the Shanghai Gang that was groomed by Jiang Zemin. This coalition emphasizes economic

The Hu-Wen New Deal 11

efficiency, coastal and the GDP-centered development, and interests of entrepreneurs. On the other hand, the populist coalition coalesces around the tuanpai, or the Communist Youth League faction led by Hu. The populist coalition is concerned about social cohesion, balanced regional development, and environmentally friendly and sustainable growth. It endorses a people-centered rhetoric (tUA^J^O and pays greater attention to the low class and commoners. On the basis of considerable research, Li demonstrates with great clarity that after the 16th Party Congress, both factions have been at a par at the Politburo and have shared power among the top offices of the state. Yet the Hu-Wen populist coalition seems to earn a greater support among the people and legislators. Hu-Wen introduced a set of populist policies to help out disadvantaged groups and to earn popular support. This is a deliberate act to gain influence to counter the elitist coalition. Hu has also groomed an echelon of tuanpai officials as future leaders. Li's conceptualization offers great insights into policy orientation and interaction of China's leadership. Some leaders, nevertheless, may have murky and mixed characteristics. Thus, it is difficult to assign them to either faction; so it is to equate the tuanpai with the populist faction and the Shanghai Gang with elitist faction. Once Hu consolidated his power, his next political task is to carry out policies and governing the nation in their own fashion. Joseph Fewsmith provides an overall view of Hu's approach to governance. He argues that Hu has chosen a three-pronged approach. The first prong is the illiberal or disciplinarian state which is essentially an authoritarian approach. The Hu-Wen leadership increases the role of security forces and uses laws as a Party's tool to enforce control over internet posting and religious activities, as well as petitions and demonstrations by citizens. Hu also encourages a conservative ideological campaign to denounce neo-liberalism, i.e., "market fundamentalism" and the Washington Consensus, as well as public intellectuals, namely, liberal-minded intellectuals. The second prong is the ameliorative state. Chinese new leadership recognizes the need to help out of those left behind in a booming economy. The third prong is to address the issues of governance within the

12 John Wong and Lai Hongyi

Party and between the Party and the citizenry. The local government has adopted more responsive mechanism of governance, as exemplified in democratic consultation in Wenling City and the active Chamber of Commerce in Wenzhou City, Zhejiang Province. These three-pronged policies serve one common goal — maintain the rule of the CCP. According to Fewsmith, China's leaders have realized that three tasks have to be undertaken to avoid the fiasco of the Soviet Communist Party. First, the CCP needs to renew its ideology (hence Hu's populist stance). Second, in line with the ameliorative approach the leadership wants to address largely-economic concerns of the populace. Third, the leadership wants to improve the internal organization of the Party such as cadre promotion and relations between the Party and the people. However, there remains a tension between preempting liberal trends of thought and liberalizing measures needed for grass-root governance. Fewsmith's framework helps us to make sense a mosaic of political and economic issues in the Hu-Wen New Deal that are discussed in the book. In line with Fewsmith's proposal that the CCP tries to update its ideology, Zheng Yongnian and Lye Liang Fook examine the Party's efforts in the past decades to reform the Department of Propaganda (DOP) and the media- and ideology-related institutions. The DOP is the foremost Party organization responsible for portraying the Party in the best possible light so as to maintain the Party's legitimacy. Under Hu Jintao's leadership, the DOP has projected the image of a Party that understands the concerns of the common people and that is keen to fight for their interests. Hu announced three new people's i.e. power to be used by the people, concern to be showered on the people and benefits to be enjoyed by the people. The state media was instructed to report daily lives of the people as well as stories of top leaders caring for the common people. The DOP also launched an educational campaign to bolster the Party's image in early 2005, urged cadres to emulate role-modeled cadres by dedicating themselves to serving the people. Zheng and Lye argue that the Party's DOP still confronts its set of challenges. A pro-people Party image may backfire if the Party fails to deliver what it promises. The DOP also faces societal demands

The Hu-Wen New Deal 13

for a more liberal society for timely and accurate information. Furthermore, an increasing number of mass media players in China will not only complicate the DOP's tasks in serving the Party, but also place the DOP under closer public scrutiny. For decades, the Chinese state has suffered from low efficiency, rampant corruption, and ineffectual institutions. For example, between 1997 and 2002, 846,000 Party members and 98 provincial or minisetrial level officials were disciplined due to corruption, up by 26% from the previous five years. Hsu Szu-chien takes a detailed and empirical look at China's endeavors to overhaul the Party and state organization and to improve governance. The Hu-Wen leadership have moved gingerly forward in three major areas. First, the Party has reformed cadre recruitment by spelling out proper and more open institutional procedures for promoting cadres. It allows participation by lower-level cadres, permits limited competition, and favors collective decision by leaders. Second, reform is introduced to constrain local leaders' power. Major measures include regularizing the Party representatives' congress, promulgating administrative approval law to enhance administrative legalization, and disclosing information within the Party. Third, supervision of cadres has been stepped up to enforce their responsibilities. A set of Party supervision regulations has been formulated, the role and the independence of the Party Disciplinary Commission has been enhanced, governmental auditing agency has assumed a greater role, media has been employed to supervise officials, and resignations of incompetent officials are increasingly mandated. Hsu suggests that these reforms have only introduced limited rule by law, accountability, participation and competition. These reforms do move the Party-state in a progressive direction. However, Hu's reforms, Hsu notes, are severely restricted by the monopoly of the Party's political power and their effectiveness is thus curtailed. Compared with his predecessor, Hu has made much louder calls for respecting the constitution and law. Zou Keyuan examines the efforts by new leadership to promote the rule of law. First, the state promulgated "Implementing the Program of Comprehensively

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Pushing forward Administration in Accordance with Law" in 2004 ("the Program" thereafter), declaring its goal to build a rule-of-law government around 2014. As a result, law-based administration is being promoted. Law of administrative licensing has been put into effect, the number of items that require administrative approval has been cut by half, official resignations due to flawed performance have been institutionalized and greater transparency in administration has been mandated. Second, the Party has attempted to establish a preventive system to curb rampant corruption and has taken several major measures. In 2005 a number of prominent officials were arrested for implication in corruption, auditing of officials has been stepped up, revenue collection is separated from expenditure and officials are shuffled in various posts. Finally, as the public resorts to administrative litigation to challenge governmental decisions and seek compensation, judicial remedies limit the power of the government. Zou argues that the transformation of China's government from a management- to a service-oriented not only serves requirements of China's WTO entry and for developing a market economy, but also is driven by the pro-people policy of the new leadership. The main question is whether the Party and the governmental officials will fully comply with laws. Zou argues that China's current legal reform can be best characterized as "the rule of the Party by law". The development towards rule of law, however, is irreversible. SUSTAINING ECONOMIC GROWTH AND REFORMS A primary economic task for the Hu-Wen leadership is to sustain high economic growth that China has enjoyed for most of the past two decades. Given that the state has placed much of its claim to legitimacy on providing for jobs and decent income for the populace, this task has profound political implications. China's pattern of economic growth in the past decades, according to Wu Yanrui, has its strengths as well as weaknesses. First, China's growth concentrated in cities and the coast. China's growth approach has been also "extensive" and based on massive inputs of

The Hu-Wen New Deal 15

capital and labor; it has also depended heavily on trade and foreign investment. A new pattern of growth, Wu suggests, is emerging in China. First, China is deepening its economic reforms by promoting the dynamic private sector. The government is withdrawing itself from direct involvement in business activities. China has joined the World Trade Organization (WTO) and signed free trade agreements (FTAs) with other countries. Second, China is experiencing structural transformation where the secondary and tertiary sectors are expanding. However, China will have to address its low level of urbanization. Third, China is making technological progress by increasing share of hi-tech in output of products and exports and by improving energy efficiency. Fourth, China is promoting balanced development. China has stepped up the development of its western region and northeast, has reduced or abolished taxes in the farming sector, and has subsidized farming. Fifth, China has made strides in global economic integration. Wu concludes on an optimistic note that further economic reforms, dramatic structural changes, and a transition from an "extensive model" to an "intensive model" will result in the second wave of high growth for China. One of the weakest components of China's economy is its financial system, as reflected in long-noticed non-performing loans (NPL). Howard Davies, drawing on his experience on advising China Banking and Securities Regulatory Commissions, provides an overview of China's financial markets and outlines the reform tasks ahead. China's financial assets, according to Davies, have been growing twice as fast as the world average. China's financial system has four special features — a small number of banks, dominance by corporate lending, few bank products for retail customers who make most of the deposit, and low profits of Chinese banks. NPL, poor records of the equity markets, and small private bonds markets weaken the financial system. Davies argues that several reforms of China's financial markets are needed. The first is reform of the banking system. In addition to addressing the issue of NPL capital injections and setting up asset management companies, China needs to significantly change the

16 John Wong and Lai Hongyi

management, culture and reporting practice of the banks. The second is reform of capital markets. The state's predominant holdings of share of SOEs need to be reduced and Chinese companies need stronger corporate governance. Reforms of the bond market are also needed. The third area is regulatory reform. The Chinese have made strides by establishing three separate regulatory commissions for banking, securities and insurance and by consulting international advisory councils. However, the three Commissions need to collaborate more closely and address regulatory inconsistencies. China needs to upgrade staff skills, recruit able staff, and foster a climate in which their staff can challenge the institutions in their charge. Davies concludes that Chinese financial system has changed dramatically in recent years and that the prospects of its future are bright. Another daunting economic task for China is to reform SOEs, where strengthening of their corporate governance is the key. Sarah Tong examines and assesses the SOE reform. She starts with a review of SOEs reform in the 1980s and the 1990s. The reform significantly cut the total number of state-owned and state-holding industrial enterprises down to 30,000. In April 2003, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) was formed to regulate SOEs and to represent government investment. This body also directly controls nearly 200 industrial firms called Centrally Administrated Enterprises (CAEs) which are the largest and most important SOEs. Since its establishment in 2003, the SASAC has pushed for a number of initiatives to restructure SOEs. It formulates rules to facilitate SOE restructuring and prevent asset stripping in the process. It tries to sell out the non-circulating state shares. In addition, the SASAC aims to enhance its role as representatives of enterprises' owners. To push CAEs to become modern corporations and to encourage external investment, a significant portion of high-quality assets has entered the domestic and overseas capital markets. Even with these initiatives, SOEs and state-assets have yet to be efficiently and effectively managed. Chinese companies, for example, are hampered by inadequate qualification, incompetence, and lack of

The Hu-Wen New Deal 17

authority of the board of directors, as well as ineffective performance verification. Without formal privatization, Tong concludes, the ownership restructuring is still incomplete. Most of China's SOEs, even the largest CAEs, have a way to go before getting to the top of world's large corporations. As widely noted, China has attracted substantial inflows of foreign direct investment (FDI). In 2003 China replaced the United States as the world's largest destination of FDI. K.C. Fung, along with Busakorn Chantasasawat, Hitomi Iizaka, and Alan Siu, surveys the profile of China's FDI and investigates its external implications. They suggest that until 2002 FDI inflows in China came primarily from Hong Kong. Fung and his colleagues also address the question on the minds of many researchers as well as policymakers — whether China successfully attracts foreign firms at the expense of other Asian and Latin American economies. Drawing on statistics and existing studies, they find a positive association of FDI to China and FDI to other Asian economies. They attribute this association to the production-networking activities among various Asian economies as well as increased resource demands by a growing China. They conclude that there is no absolute diversion of FDI by China in East and Southeast Asia as well as in Latin America and that instead China has contributed to greater FDI inflows in other Asian economies. However, there have been relative FDI diversions. The shares of FDI going to Asian and Latin American economies decline as more FDI flows into China. This in general, however, should not warrant an alarm. The best way to attract FDI, Fung and his colleagues suggest, is to follow standard economic prescriptions by pursuing low corporate tax rates, ensuring a high degree of openness, combating corruption and creating a booming domestic market. Along with labor and capital, land is a basic production input. In China, land use has become a prominent economic and social issue in the recent years. John Wong and Liang Ruobing shed light on this inadequately studied issue by providing an overview of the evolution of land policies in China. Inappropriate land acquisition and land use policies are seen as a culprit for China's economic

18 John Wong and Lai Hongyi

overheating. Many large capital projects and new housing estates were been put up without due regard to proper land use procedures, contributing to economic overheating. The land misuse has severe social consequences. In the urban areas the existing land users or occupiers are evicted without adequate compensation, giving rise to many cases of disputes; in rural areas peasants can also fall victim to eviction without adequate compensation. The government, according to Wong and Liang, falls back on direct administrative means to reduce unauthorized large investment projects. It has selectively used land policy and issued new regulations and directives to regulate land use and to contain widespread land abuses and related official corruption at the local level. The authority, however, is yet to take on one of the root causes of China's recent economic overheating, namely, the lack of clear-cut and transparent property rights provisions and effective land use regulations as well as ineffectual policy implementation. Over the longer run, the Chinese government needs to reconsider its land use rights in the rural areas by privatizing the land or transferring the ownership rights to peasants. This will enable low-income and poverty-stricken peasants to have a stake in the growing economy. COPING WITH SOCIAL ISSUES AND TENSIONS The most noticeable trademark in the Hu-Wen New Deal is the leadership's open and strenuous efforts to address outstanding social issues and reduce social tension. Although China's rapid economic growth in the past decades has lifted up the living standards of most of the population, the extent of material improvement varies across strata and regions. Some groups, including unemployed workers and grain-producing peasants, are lagging further behind the general rising living standard. A host of social problems, including income inequalities, stagnant rural income, cross-regional migration, inadequate social securities, and rising social disturbances have come to the political forefront. As these issues pose a genuine threat for China's political stability and legitimacy for the regime, they become the top priorities for the Hu-Wen leadership.

The Hu-Wen New Deal 19

Lai Hongyi looks at rising income inequality, new social stratification and limits in social mobility, as well as Hu-Wen policies remedying these problems. He surveys existing research on these issues and finds that both income inequality and social mobility are rising steadily in China in the reform era. The Gini coefficient of per capita resident's income, for example, rose from a very low 0.288 in 1981 to a high 0.459 in 2001. China's social surveyors identify ten major social strata. China's middle class appears to be considerable, yet still small in size. It accounted for only 14% of the population in 2001 or 47% of the urban residents in 2002. Upward social mobility also remains limited due to a prominent influence by one's residency and parents' background. Increasing income inequality and restricted social mobility combines to produce social polarities and generates popular propensities for protests or conflict, constituting the most daunting social challenges for Hu and Wen. According to Lai, in order to address rising income inequality and help promote upward mobility, Hu and Wen try to aid the very poor in the countryside and cities, increase financial inputs and support for grain-producing peasants, protect migrant workers in resettling and getting their pay on time. They also develop the western region and revive the northeast. Hu and Wen have also emphasized open procedures and merits in official promotion. These efforts have moderated at best the trend toward income inequalities and limited upward mobility, but have not reversed the rising trend. In the reform era, China has witnessed a steep rise in labor mobility, which helps produce phenomenal growth in China's coast and urban areas. Zhao Litao examines labor market reform and related household registration (or the hukou system) in recent decades, especially under the Hu-Wen leadership. According to Zhao, there have been two approaches to reforming the hukou system. During 1984-1997, efforts were made to de-link urban employment from urban hukou status and to grant temporary resident permit to rural migrant workers. However, the de-link approach resulted in segmented labor market and limited labor mobility. During 1997-2002 the authorities followed the hukou

20 John Wong and Lai Hongyi

reform approach by making urban hukou status increasingly accessible to rural residents, talents, and investors. Dictated by their "pro-people" policy, the Hu-Wen leadership has acted to de-link social services from hukou status. The government also urges cities to lift unreasonable restrictions on rural migrants' employment. It has cracked down on defaults on 'wage payments to peasant workers, emphasized respects for labor contract, mandated local inspection for migrants' social security, stepped up vocational training of peasant workers, and asked local schools to admit their children of peasant workers. These pro-people policies may have kind intentions. However, their implementation, as Zhao suggests, may be hindered by weak rule of law and local governments that are pro-business and are selective in enforcing central orders. The most explosive form of social tension the Hu-Wen leadership has to cope with are the increasing incidents of disturbances. Estimates suggest that instances of unrest grew from 8,700 in 1993 to 58,500 in 2003. Cai Yongshun zeroes in on the issue and examines ties between citizens' disruptive action and policy outcomes. Cai argues that citizen resistance is triggered by not only the government's rights-violating practices, but also by risks and opportunities that government policies entail. The Chinese government clearly cannot tolerate disruptive action of a political nature. But its response to citizens' non-political action has a mixed message. This invites disgruntled people to turn to a persistent, coordinated, and disruptive non-political action. In this case, the state's technical responses of "divide-and-conquer" and a mix of sticks and carrots may not suffice and its policy responses addressing the sources of popular resentment are needed. Cai suggests that the key causes of mass protests may be removed or weakened with the help of policy responses and progress of reforms. For example, completion of SOE reforms means no rapid expansion in the number of laid-off workers; rural-fee-fortax reforms and phrase-out of agricultural tax undertaken by Hu and Wen have reduced peasants' fiscal burdens and their discontent. Since the early 2000s, the major cause for conflict in China has been

The Hu-Wen New Deal 21

land use. Through mandating local government to compensate re-settlers, the central government has alleviated, if not eliminated, grievances. Ironically, Cai concludes, the Chinese government's solid reputation for not allowing political action may help it to maintain political stability. Disruptive action in China is thus manageable, instead of regime-threatening. A major item of social policy priority for Hu and Wen is social welfare, security, and protection. The new leadership is clearly aware that an adequate social safety net can help to ease much of the discontent by groups that go under the market competition, ensure a secure life for citizens of all ages and maintain political stability. Edward Gu provides a comprehensive overview on various welfare regimes in China since the late 1970s and highlights the one under Hu. According to Gu, China's old social welfare regime was composed of workplace-based urban welfare and marginalizedgroups-oriented social welfare. China's social welfare reform has gone through two stages. From the mid-1980s to the mid-1990s, social policy reforms aimed to dismantle the mini-welfare state and re-build a social security system in order to cope with the fallouts from economic reforms. The state moved away from labor insurance for employees of SOEs and in the public sector and emphasized social insurance. The second stage of reform began in the mid-1990s, as the state built social assistance and social insurance in order to reduce new poverty. This trend thickens in the Hu-Wen era. Under Hu and Wen, the government has increased coverage of social assistance, social pension insurance, social health insurance, job injury insurance, and maternity leave insurance in the cities. The government has also significantly increased funding for social assistance and tries to improve health care for peasants. Meanwhile, the government maintains its responsibility for social insurance to urban employees, has consolidated some social insurance schemes, and continues to strive for universal coverage in urban areas. At present, as in any country social insurance expenditures are much higher than social assistance expenditures in China. The ratio between the two expenditures,

22 John Wong and Lai Hongyi

however, has declined since 1999, signifying the rising significance of social assistance. Health care profoundly affects the well-being of the population. China's health care reform has stirred up much controversy. In 2005, the media in China even characterized the reform with unusual candor as failed. Ake Blomqvist, an economist who has specialized in health care, provides a diagnosis of China's health care reform, discusses the respective roles of the government and markets, and proposes policy options. Blomqvist outlines the health care reform in China in the recent years. In December 1998, China decided to establish a new urban social insurance program in order to replace the former schemes that covered government and SOEs employees. Enrollments in the program have been growing rapidly in recent years, with membership in 2003 exceeding 100 million, constituting more than 36% of urban employees. In rural areas, the central government wants to encourage a Cooperative Medical System (CMS), a rural equivalent of urban social insurance, but has made much less progress. Blomqvist argues that since the health care sector is prone to market failure, the Chinese belief that free markets could work well for the health care system is flawed. He surveys a variety of effective and recommendable health care institutions. He recommends specific measures (such as utilizing private insurance and individual medical saving accounts) for China to strengthen the urban health insurance system, expand its coverage while maintaining its viability, and exercise price controls. He also suggests that health care for rural residents can follow a model based on CMSs with insurance that is built around township health centers and marketed to villages. Finally, as the most populous country, China's demographic policies deserve attention. Peng Xizhe, a demographer and policy adviser for the Chinese government, provides a glimpse at demographic changes, and new demographic policies in China. According to Peng, China has achieved positive records in bringing down the population growth and increasing urbanization. China also has its own demographic problems, including a huge

The Hu-Wen New Deal 23

1.3 billion population, rapid population aging, a migrant population of 140 million, a rapid spread of AIDS, and an unbalanced sex ratio. Against these new changes, China is remaking its demographic policies in several ways. First, the Hu-Wen leadership has treated the population issue in a much wider socioeconomic and environmental context. For example, national and local research projects on China's population strategy have been launched through which demographers participate in the drafting of the 11th developmental plan. Second, population policy is implemented in closer association with other social policies. The state has conducted pilot programs in 15 provinces to reward peasants for obeying family planning in the past, earmarking the state's efforts to enforce family planning through carrots instead of sticks. Third, local governments are granted more authority over regulation of local population. Fourth, the state has started to tackle the sex ratio imbalance that stood at 120 in 2000 by introducing a program known as "care for girls" and banning pre-birth sex identification and sex-selective abortion. Fifth, the state also protects the rights of rural migrants in the cities. Peng predicts that China's current family policy will remain at the national level while provincial modification may occur.

MANAGING RELATIONS WITH THE UNITED STATES AND NEIGHBORS The staggering political, economic, and social issues discussed above mean that the Hu-Wen leadership needs to focus on domestic affairs. In order to have the leisure of putting their "house" in order, they need a peaceful and smooth external environment. Thus, Hu and Wen need to manage well China's relations with the United States, the sole superpower, as well as China's neighbors. Zhao Quansheng discusses Bush's Asia policy in his second administration, as well as China's foreign policy and the United States-China relations under Hu. The United States Asia policy, Zhao argues, only seconds to its policy toward the Middle East. Its Asia policy aims to fight terrorism, maintain peace and stability, and ensure trade and prosperity in the region. It also tries to

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maintain a "hub-and-spokes" alliance in Asia and couch China into a pro-status-quo power. China, especially under Hu and Wen, has also adopted external strategies to facilitate its peaceful rise. It maintains close economic exchanges with the United States and assists with the United States over anti-terrorist campaigns, the North Korean nuclear crisis, and non-proliferation. Furthermore, it actively promotes regional economic integration, especially with the ASEAN. It utilizes the United States leverage over Taiwan to prevent the latter's formal independence. United States's currently amicable policy toward China, however, does have its limits. It can be affected by change in perception about China, downturns in bilateral political relations, major setbacks in China's domestic political and economic development, and Beijing's cozy relations with "rogue states". Thus "wary interdependence" best characterizes the relations between the existing super power and a rising one. In terms of economic and political geography, China's most important neighbors are in Northeast Asia. This topic is under close examination by Chung Jae Ho. He notes that since the early 1990s China has become increasingly open-minded, proactive and forthcoming towards regional cooperation in Asia. It has adopted the "good neighborly diplomacy". Since the late 1990s, it has endorsed "great-power diplomacy with responsibilities" (fu zeren de daguo waijiad) and has been inclined toward agenda-setting. It has joined a dazzling series of regional initiatives, including the Greater Mekong Region Summit (GMS), the ASEAN Regional Forum (ARF), the Treaty of Amity and Cooperation, the China-ASEAN Free Trade Agreement (CAFTA), East Asian Think-Tank Networks (NEAT) and the Shanghai Cooperation Organization (SCO). China also played a leading role in resolving the North Korean nuclear issue. Nevertheless, in contrast to regional cooperation involving Southeast Asia, regional cooperation in Northeast Asia, Chung observes, is hampered by functional, historical and structural limits and obstacles. Despite China's proactive efforts to promote "peaceful development", particularly under the helm of Hu Jintao, regional cooperation in Northeast Asia can hardly overcome its painful

The Hu-Wen New Deal 25

memories and history. As a key player in the region the United States can also affect regional schemes and initiatives. Compared to Northeast Asia, China's regional integration initiatives with Southeast Asia have proceeded much more smoothly. Zhang Haibing documents the new development in this area and frankly points out daunting challenges ahead. The year 2004 is of significance. ASEAN and China had started to decrease tariff rates on agricultural products, bilateral trade surpassed the US$100 billion, and in November, the China-ASEAN Agreement on Trade in Goods was concluded. As a result, regional market integration has accelerated. In addition, institutional arrangements for regional economic cooperation have been formed. They include one highest cooperation mechanism, namely, the China-ASEAN Summit, as well as five working mechanisms. Moreover, their cooperation has now covered many areas, including agriculture, information and communication technology, human resource development, exploitation of the Mekong River, mutual investment, and the Pan-Asia railway. China-ASEAN cooperation, Zhang argues, still faces daunting challenges. First, external risk exists in member nations' development model. Growth of China and most of ASEAN countries mainly depend upon FDI inflows from and exports to the United States and Western Europe. Second, most ASEAN countries and China have only limited capability to facilitate the full realization of benefits of Free Trade Area. Third, China-ASEAN Free Trade Area lacks a strong converging force.

in CONCLUSION: FUTURE CHALLENGES FOR HU In less than three years into their first administration, the Hu-Wen leadership has established a new and distinct style of governance. It projects a pro-people image and proclaims that the Party serves mainly the need of the populace. It has paid greatest attention to socio-economic issues, such as income inequality as well as plights of migrant workers and grain-producing peasants, land-losing

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peasants, resettled urban residents and laid-off workers. It has also overhauled the Chinese bureaucracy and legal system and tried to make them more responsive to popular demands through introducing greater official accountability and limited democratic measures. Meanwhile, it has sustained China's high economic growth by deepening economic reform and integration with the world economy and pursuing an intensive and balanced model of growth through technological innovation and social equity. On the external side, it has declared to the world that China pursues peaceful rise and development. Hu and Wen have upheld multilateral and proactive diplomacy. It emphasizes building smooth and stable relations with its neighbors (with the only exception of Japan) and relies more on cooperative, confidence-building and pragmatic measures. The Hu-Wen New Deal has earned the leadership high marks at home and much attention abroad. Overseas observers, however, have reservations about China's lack of meaningful democratization measures and high-handed measures against popular legitimate protests and calls for faster political reform. A question that naturally arises is what the prospects for the Hu-Wen leadership are, and what its future tasks and outlook may be. Here we are venturing into the unknown and treacherous territory for social scientists, i.e., predicting the future. However, given our knowledge about Chinese politics in recent decades and the findings summarized above and in light of the discussion of our contributors, several outstanding tasks and challenges can be identified. The leadership will remain pragmatic but may become more diversified in the coming years. Having gone through the Cultural Revolution, China's new leaders are less ideological. Chinese leaders will continue to focus on domestic affairs. It will continue to pursue its New Deal by emphasizing social harmony, developing backward regions, helping out the poor, and making the government more responsive. Specifically, it may also push ahead with political reform without undermining the one-party regime. The Party may want to introduce some form of checks and balance into the political system and

The Hu-Wen New Deal 27

continue to improve transparency and enhance accountability. However, the leadership will find mounting political challenges in this process. It will have to maintain the legitimacy of a ruling party that is plagued by widespread corruption and will confront vested interests that have been firmly entrenched. Local agents of the state know better what is happening locally and are inclined to hide the negative information from their superiors. The leadership will strive to maintain the one-party rule, instead of moving at full throttle toward democracy. One option for reforming the regime is to legitimize factions and turn some of them into political oppositions. The Party, however, may deem this option too radical to embrace it. Without democracy especially electoral democracy these changes may not address fundamental flaws of the political system. Ideologically, the Party may denounce westernstyle democratization and reject Washington Consensus as a fundamentally wrong economic agenda. The leadership, however, obviously lacks the skills to undertake necessary political changes. The leadership as well as the Party, however, is not insecure. Even catastrophes like SARS could not topple the regime. The regime is thus quite capable of surviving adversities. Chinese leaders and their advisors are very history-conscious and are inclined to prepare for the worst. Past performance and experience suggests that outside analysts have constantly underestimated the CCP's ability to adapt to new challenges and containing immediate crises. Hu may move to increase his power. He may do so without arousing opposition from other factions. One of the pressing issues for Hu in the coming years is to pick his successor. From our understanding, his successor is likely to have served as a provincial and central leader, would have college-level education or above, and would be under 60 when he replaces Hu in 2012. Tensions between strata and within the society may rise and pose to disrupt social order. The leadership will continue to deal with rapid social changes, including aging population, income inequalities, the urban-rural divide, and inadequate social protection. It may continue to develop the backward regions and improve the state institutions in provisioning social welfare for the population.

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China's leaders will also need to maintain economic growth in order to release economic stresses on the political system, such as unemployment and stagnant income growth for some groups and areas. The Party appears to have entered a social contract with the population — it will deliver high growth of 7%-8% a year in exchange for the population's support of its rule. The Hu-Wen leadership will continue to pursue reform of the land use, financial system, and SOEs, upgrade technology and R&D, and develop backward areas. Japan appears to provide a negative example for China whose rapid growth is based on rapid expansion of manufacturing sectors. Japan is an international leader in hightechnology. However, weakness in its banking and financial sectors has caused Japan's economy to plunge into a decade-long recession from which it is crawling out. China surely encounters the risk of slipping into economic recession, similar to Japan. The Chinese, however, have learnt a lesson from Japan and have started to reduce non-performing loans to avoid banking crisis. China will also have to contain the problem of possible unemployment, especially the structural one. Furthermore, China will have to reduce the reliance of its growth on foreign trade and heavy investment and promote growth that is based primarily on domestic demand, secondarily on domestic investment, and to some extent FDI and foreign trade. One increasingly urgent economic task for China is to fulfill China's WTO commitments. As China's 5-7 years of transition period for its WTO accession will expire in a few years, it has to ensure that its domestic producers and services sectors are ready to compete against strong counterparts from abroad. While this adjustment will yield positive economic gains in the long run, it is fraught with dangers in the short term. China will also have to face increasing competition from other developing countries, such as India which has sound corporate governance, stronger rule of law, better English mastery, and younger population. To be able to concentrate on domestic affairs, the Hu-Wen leadership would continue to strive for a peaceful and friendly external environment. The most important pair of bilateral relations for China is its relations with the United States. China will strive for a stable

The Hu-Wen New Deal 29

and strategic relationship with the United States and will try to ensure that crucial differences between them will not explode into direct confrontation. Recently, China has scored major progress in relations with Taiwan, reflected in visits by Taiwan opposition leaders to the mainland. China will also try to work with the United States to deter Taiwan dejuri independence. Nevertheless, the risks for war across the strait still exist. Beijing also needs to figure out how to win hearts of the Taiwan people. China will try to maintain friendly relations with its neighbors. China is likely to use six-party talks as a forum to discuss the Korean nuclear crisis and other major issues in Northeast Asia and institutionalize the six-party talks as a platform for Northeast Asian cooperation. Overall, China would like to advance multilateralism not only in the economic but also security arenas. The other trouble spot is China-Japan relations which may continue to be strained by Japan's atonement of its past war crime and its close military alliance with the United States targeting at a rising China. China may continue to advance cooperation with ASEAN nations. The United States may stay out of the East Asian Community building. However, its influence will continue to be felt and it can balance China's influence in the region. India may also become a new and important member in Asian regional integration. China is poised to walk down the path towards a great power. It has the will to achieve the goal, is developing its capacity through rapid development and building its soft power, and is nurturing a positive perception from its neighbors through the discourse of peaceful rise or peaceful development. The Beijing Olympic Games in 2008 and the Shanghai World Expo in 2010 will provide China a great platform to project its high international status. However, to become a great power, China may need to overcome a previous great power's mistakes and avoid sacrificing small nations and applying double standards in its conduct of foreign policy. It needs to manage rising nationalism and prevent chauvinistic and victimized complexes in managing external affairs. Finally, it also needs to overcome structural flaws in its closed political system by introducing some form of election starting from the local level.

Part II Strengthening Governance and Rule of Law

Chapter

Hu Jintaos Consolidation of Power and His Command of the Gun YouJi

Hu Jintao's consolidation of power has been closely linked to the process of the transfer of power from the third generation leadership to the fourth. Since the transfer has been the smoothest in the history of the Chinese Communist Party (CCP), Hu's consolidation has also been the most uneventful. There are a number of reasons for this success. First, visible progress has been made in the institutionalization of leadership interaction since the 1990s when party elders gradually passed away. Institutional positions increasingly underlie the authority of individual leaders and set the purview for them to exercise personal clout. Although it is too early to predict that CCP strong-man politics that characterized Mao and Deng has gone forever, power relations at the top are largely checked and balanced by different groupings formed from the Party's recent factional legacies. This paves the way for the party principle of collective leadership to be implemented. The relative power equilibrium at the top helps elite politics to be regulated more by an institutional process than by an individual's dominance. The most vivid 33

34 YouJi

proof for this statement is that, again for the first time in CCP history, the successor was not hand-picked by the incumbent party boss. On the other hand the departing third-generation leaders compensated Jiang's failure of nominating his own confidants to fill the two most powerful posts in China (the party general secretary and premiership) by their early resignation before retirement age. 1 They were also willing to allow Jiang to place four of his people in the Standing Committee of the Politburo (PSC). The trade off would not make everybody happy but it worked well for Hu. Another important factor contributing to Hu's relatively quick consolidation is his right strategy for succession and consolidation thereafter. For Hu, this is about how to minimize any negative effect during the time-lag after his confirmation as the number one party leader in 2002 and his assumption as chair of the Central Military Commission (CMC) in 2004. This chapter argues that Hu has carried out a smart strategy with the following features. First, he maintained good working relationship with Jiang and his appointees in the Politburo. This has helped prevent major unwanted events at the final stage of power transfer. Second, Hu has chosen to consolidate his party position and win public support as a way to establish his authority with the People's Liberation Army (PLA). This outsidein method of commanding the gun turned to be a more effective take-over plan than hasty penetration into the armed forces through creating a pro-Hu personal network. Traditionally the latter way is a common factional practice to control the gun. It may be a short cut for power accumulation but may bring about negative consequences: the disunity of the top brass and increased military influence in domestic politics. With an undisputed position in the Party the road for Hu to the August-First Building (the CMC office) would be much easier. Third, Hu has implemented a number of pro-people economic and social policies since 2002. This has resulted in achieving 1

Qiao Shi's retirement in the 15th Party National Congress in 1997 set up an unwritten rule for the top leaders, except for the commander-in-chief, that they should quit at the age of 70. See for instance, Lowell Dittmer, "Leadership Change and Political Development", China Quarterly, 2003, p. 912.

Hu Jintao's Consolidation of Power and His Command of the Gun 35

a high level of his popularity among the masses, which has helped lay a firmer civilian foundation to control the military. Finally, Hu takes good care of PLA interests all along and is thus welcome by the military. Certainly, Hu's authority-making is also based on performance, patience and gradual acceptance by the armed forces. It is true that he still confronts many challenges in commanding the gun, e.g., lack of concrete internal support and ultimate reshaping Party/military relations in China. So far, Hu has done an impressive job in obtaining a leadership height vis-a-vis the PLA. This chapter is an attempt to review the evolution of Party-military interaction at the final stage of power transfer against the backdrop of Jiang-Hu interaction. CMC CHAIR: SYMBOL OF THE TWO-LINED LEADERSHIP The Fourth Plenum of the Sixteenth Central Committee of the Party in September 2004 finally ended the lingering suspense of when and how Jiang passed his helm of the CMC onto Hu. An early transfer of power, namely within two years after his relinquishment of the Party position, or after a full term of the CMC chair of five years, does make tremendous impact on China's political development. It is a test on the commitment the CCP to institutionalize its leadership process. A commander-in-chief without any civilian portfolio is indicative of an abnormal civil-military relationship. That Jiang finally stepped down within a two-year framework demonstrated some real progress in the rectification of this situation. However, the "perceived need" for him to stay on after the 16th Congress also vividly showed that political succession was still an unresolved problem in China's domestic politics. Deng set the precedent to retain the CMC chair as a way to tackle the uncertainties in the postsuccession period (after his giving up the civilian positions). For this the Party even revised its Charter in 1987. Jiang followed the suit. Acquiescence has thus emerged in the CCP that the CMC chair symbolizes the two-lined leadership with the general secretary running the front line national affairs and the CMC chair sitting in the back

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watching and providing support. Yet Jiang's approach was markedly different from Deng's. The following analysis on this difference addresses a question: did Jiang's retention of the CMC chair really create the two-lined leadership? More seriously, was there any "twopower-centre" phenomenon in the CCP in the lead-up to the fourth plenum in September 2004?2

The Rationality for t h e Two-Lined Leadership The difficulty in executing political succession in a party/state is obvious. Legitimacy based on heredity is no longer acceptable but democratic election is out of question. Therefore, the process of transfer of power is imbued with factional strife and power politics. The final candidate has to be a choice of compromise, luckily going through a narrow filter of elite negotiation. Naturally he is weak in legitimacy and is subject to the influence of party heavyweights who help him to succeed. He needs to cope with his predecessor whose departure cannot automatically erase his huge influence, as his followers still are in leading posts and his policies still in force. The heir-apparent also needs to cope with his peers, some of whom may seek opportunity to unseat him. Mao recognized this dilemma through learning from Stalin's failed succession plan. He proposed a solution: creating a two-lined leadership to prepare the final passage of power. In this process, a successor was "nurtured" to gain experience and authority through running the first line of leadership, while the incumbent leader sat behind to guide and support him. When he passed away, the successor would come to the central stage smoothly as the first among his equals. This "was thought to be a feasible way to reduce the level of power struggle among the elites.3 2

See, for instance, James Mulvenon, "Party-Army Relations since the 16th Party Congress: the Battle of the Two-Centres", in Andrew Scobell and Larry Wortzel (eds), Civil-Military Change in China, US Army College, 2004. 3 For more on China's two-tier leadership system, see Frederick Teiwes, "The Paradoxical Post-Mao Transition: From Obeying the Leader to "Normal Politics", The China Journal, No. 34 (July 1995), p. 82 and Ian Wilson and You Ji, "Leadership by Lines: China's Unresolved Succession", Problems of Communism, Vol. 39, No. 1 January 1990.

Hu Jintao's Consolidation of Power and His Command of the Gun 37

Secondly, the termination of life-time tenure means that even the top leader has to quit while alive. This leads to a cycle of generation change of guard, normally in every ten years. This makes the succession a regular event, subjecting the whole political system to periodic shocks. The selection/fostering process becomes a constant factor of crisis inducer. This opens the door for ambitious party leaders to attempt their bid to the top job. And their collective efforts for influence are embedded on personnel groupings formed around key leaders. The redistribution of power can never be entirely fair and just. Under these circumstances, there is always a period of transitional uncertainties, which can be settled down only when the successor firmly consolidates his authority, largely through controlling state institutions of power (quanli humeri), especially, the gun. In the meantime, if the departing leader can act as a guarantor for party stability, it would reduce the risk of a vicious power struggle. In a sense, the chronological succession necessity underscores the design of the "two-lined leadership" and works against the CCP's institutionalization reform.

The Faster C o n v e r g e n c e i n t h e Two-Lined Leadership Deng's retention of CMC chair in 1987 became the symbol of arranged political succession in China. He further pushed Mao's formula of "the two-lined leadership". In fact, the arranged succession has unique national characteristics and can be found in all dynasties in the Chinese history. The question is why it was the post of the CMC chair rather than that of the Party general secretary that held the ultimate line of defense. When picking up Zhao Ziyang as replacement of Hu Yaobang in 1986, Deng said that the Party portfolio was more important than premiership. When he chose to keep the CMC chair after semi-retirement, he apparently believed the gun was more important than anything else. Deng's death once led many people to believe that such a succession formula would come to an end. The CCP's institutional reforms since the 1980s have generated pressure to terminate such an overt practice of rule of man. Proper channels for orderly transfer of power, although still limited, have been constructed for this to happen.

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Analysts bet that when Jiang departed, he would quit completely. This was why Jiang's retention of the CMC chair in 2002 saddened many proponents of political reforms. Moreover, they saw Jiang's full retirement as an expression of his political wisdom. 4 Jiang's wielding power without any civilian positions may have held back China's political development in a right direction for a few years. On the other hand, if the "gradual succession with the two-lined leadership" is still a valid way of achieving political stability, Jiang's copy of Deng's precedent was just a matter of how to secure full retirement: at one stroke or in few small steps. The former option was not impossible in 2002. Many party members seemed to expect this to occur. The argument that Jiang's stay might enhance leadership stability and served the best party interests might have been deliberately exaggerated.5 China's political environment makes it increasingly more difficult to produce another paramount leader with lasting personal authority. One individual leader has to exercise his authority within the institutional purview and is balanced intensively by his peers. The result is that the pace of convergence between the two lines has been much faster than the two previous succession processes, from Mao to Liu Shaoqi, Lin Biao and Hua Guofeng, and from Deng to Hu Yaobang, Zhao Zhiyang and Jiang Zemin. Each of these took decades to complete. In the case of Jiang and Hu, the convergence took only two years. This has been a course of convergence of the two-lined leadership, indicated by policy adjustment, personnel reshuffle and power redistribution in favor of the successor. While the two-lined leadership symbolizes acute systemic weakness of an authoritarian regime in transition, the trend

4

Among other reports, see David Shambaugh's paper to the CAPS/RAND PLA conference in Taipei, 12 November 2002. 5 This was the typical view of Li Ruihuan who was against Jiang's continued stay in office after the Congress following the model of power transfer from Deng to Jiang. He firmly believed that Hu and Wen Jiabao were capable of maintaining good governance. Information from cadres of the Party Propaganda Department in 2002.

Hu Jintao's Consolidation of Power and His Command of the Gun 39

of quickened convergence testifies the depth of China's political change since the reform.6 The Peril o f t h e "Two-Lined Leadership" The biggest problem for the two-lined leadership is that it may give rise to emergence of two power centers and elite politics would thus become inherently unstable. Basically, this is because there is no clear-cut institutional provision of what the departing leader should not do. As such Jiang's stay reversed the Party's institutionalization of power in the last five years when the two lines finally merged. Any successful planned transfer of power requires the involved leaders to abide by a number of mutually-accepted rules of game. On the part of the departing leader, he must first of all be sincere in removing himself from the center of the power, as reflected by his effort to help the successor to establish his own authority. Second, he must refrain himself from impulse for intervention, observe norms of collective leadership and respect decisions made by the Politburo. This is the best way of avoiding major policy differences. Third, the parallel power processes have to be relatively short in duration. The longer the "two-lined leadership" lasts, the graver the succession uncertainty becomes. Jiang's eventual quit in two years may be just right in time before further damage was done to the Party. Despite the faster convergence mentioned above, the CMC operating under the dual leadership divided the Party's control over the gun. The position of the Party General Secretary is the symbol of the Party's absolute control of the gun. This, however, clashes with the commander responsibility system at the CMC. If Hu signed most CMC documents as deputy chief before September 2004, in terms of procedures he breached the spirit of this system. He could be For a recent volume on this institutionalisation, see Francois Godement (ed.), China's New Politics, Centre ASIE IFRI, Institute francais des relations internatioales, August 2003. See also the articles in the book edited by Jonathan Unger, The Nature of Chinese Politics: from Mao to Jiang, Armonk: ME Sharp, 2002.

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You Ji

authorized by Jiang to do so. There are historical precedents in the CMC that could be followed by Jiang and Hu. In the case of Deng and Jiang, Jiang signed most documents of strategic importance after consulting with Deng before he took over the CMC. Yet the time-lag was less than half a year. The institutional confusion passed quickly. In addition, General Wang Ruilin, Deng's political secretary and a CMC member, also played a crucial role in liaison. Was this pattern of interaction between the two lines of leaders copied by Jiang and Hu? If so, this was against the Party's effort of institutionalization. The bitter lesson of Mao Yuanxin (Mao's nephew and liaison officer in 1976 who misled Mao on key political issues, such as reporting to Mao Deng's anti-Cultural Revolution remarks) forever indicates the inherent danger in such an arrangement. A more fatal flaw of this "two-lined leadership" is the confusion of chain of command. More concretely, were China to encounter a national crisis (domestic chaos or an acute external threat), who has the authority to mobilize the military? The Party boss in his capacity as state president is legitimate national leader. He is the person to declare the state of war. Yet under the arrangement of the "twolined leadership" and by institutional provisions, he is only a top adviser to the CMC chair and has no authority to deploy PLA units and touch the nuclear button. In a sense, it was China's good fortune that during the two years of split party leadership over the PLA, no grave military crisis took place. One thing Hu probably can do in terms of political reform during his term in office is to revise the 1987 Party Charter that allows the phenomenon of "two-lined leadership" to persist. This would represent major progress in institutionalizing authority relations at the apex of power. When this happens, Hu can proudly leave all his positions when he retires. The nation may long remember him for such a contribution.

The Two-Lined Leadership vis-a-vis t h e Two P o w e r Centers The quick convergence of the two lines of leadership forces us to think about whether there was actually real existence of two power

Hu Jintao's Consolidation of Power and His Command of the Gun 41

centers between 2002 and 2004. Conceptually, the phenomenon of two power centers indicates persistent policy differences. More often than not this leads to uncontrollable factional struggle. None of these seems to have happened. The CCP's guiding principle of the two-lined leadership requires the second-lined leader providing support to the first, as in the case of Deng to Jiang and in the case of Jiang to Hu. Certainly, the two-lined leadership can evolve into two centers of power, as the two leaderships have their own governing strategies. Deng's South China Inspection Tour in 1992 was clearly meant to pressure the first-lined leaders to quicken the pace of reform.7 More dangerously, the way Deng put the first-lined leadership to test was to use the military through support of Yang brothers. This shows that the defining line between the two-lined leadership and two power centers can be thin. Deng was fortunate in a sense that during his reign most of his peers were not power hungry and were mild in personal characters, such as Chen Yun. This helped the Party avoid any serious power struggles but further highlighted the role of the PLA in party-military interaction. Therefore, the key for the two-lined leadership not to evolve into two power centers is the maintenance of a level of consensus on the mainstay political line by the two headquarters. Furthermore, the selection of the heir-apparent must exclude those aggressive leaders who may jeopardize leadership unity. These are important criteria based on which successors are selected. The party elders dumped Hu Yaobang and Zhao Ziyang, as they failed to meet these requirements. Hu Jintao may be the best choice for the top job. He has a strong sense of Party discipline. This means that he may not deviate from the Party line of the third generation leadership. His personality is mild so that he tends to exercise self-restraints in dealing with policy differences among top leaders, a key precondition for the unity at the apex of power. The concept of arranged succession has its rationality and logic in China's particular political culture. 7

See for instance, Wang Ganwu and Zheng Yongnian (eds.), Deng Xiaoping's Nanxun and its Impact on China's Political Development, Singapore: World Scientific, 1998.

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In comparison, the idea of two power centers is negative in any political system. It is self-destructive and short-lived. Yet despite all the positive elements associated with the concept of the "two-lined leadership" and the two successful cases of the power transfer in the last 15 years, the arranged succession still has fatal flaws. The success depends on luck, as there is no institutional guarantee to assure that the successor will not be a dictator, the political consensus is maintained and fierce power struggle is avoided. HU JINTAO'S SUCCESSION/CONSOLIDATION STRATEGY Under the two-lined leadership Hu's consolidation of power was linked to a clever succession strategy. This can be seen from the points listed below. D e a l i n g w i t h Jiang's Legacy Hu had to work with Jiang from a position of relative weakness at the beginning of his reign. In fact, Hu dealt with this weakness with far-sightedness. It was Hu who proposed to the Politburo that Jiang should retain the CMC chair for a period of time beyond the l6th Congress. Hu's unusual initiative may be his response to the collective pressure from Jiang's supporters, or he was advised that his plea for Jiang to stay on was a good strategy of consolidation for an incomplete party boss. 8 If Jiang was eager to hang on for a while after the l6th Congress, Hu's reluctance to support him would have complicated his eventual takeover and his relations with Jiang's followers. The emerging CCP culture against holding office at an advanced age made it difficult for Jiang to express his willingness to stay by himself. Hu was the best suitable person to do so and to pre-empt the opposition to the arrangement. It is said in Beijing that Hu persuaded the PSC that his top priority would be to familiarize 8

On Hu's proposal for Jiang to stay on, and on Jiang's supporters' request for Jiang to stay on, see Robert Kuhn, The Man Who Changed China: the Life and Legend of Jiang Zemin, Shanghai, Horizon Media, 2004, p. 427 and 407.

Hu Jintao's Consolidation of Power and His Command of the Gun 43

himself with national economic management and government administration, the two areas that he had least experience. Jiang's continued CMC chair could help him avoid a predicament where he had to cope with economic management, state administration, command of the armed forces and foreign policy formulation all at the same time, and all at a time when international situation was complex. The management of Sino-US relations and Taiwan/Hong Kong affairs may require Jiang's expert advice. Hu's reasoning was politically astute. It had surely reduced personal distance between the two top leaders. Hu's positive support to Jiang was reciprocated by Jiang's willingness to act as a shield to protect Hu when he was making tough decisions. The mutual understanding was that in this phased-succession process Jiang should hand over his other key posts to Hu before the top military job, which Jiang obliged in good faith. He first let go the leadership of foreign affairs, Taiwan affairs and personnel affairs. Then Hu was charged to oversee the daily operation of the CMC. In due time, Jiang quitted the CMC chair altogether. Orderly transfer of power in these phases may be more advantageous than that at one stroke. For Hu, he at least had time and patience to wait for a couple of more years, a necessary quality of a statesman. On the policy side, Hu has faithfully implemented the major decisions reached by the previous leadership prior to the 16th Congress. For instance, he continues to promote the study campaign of the "three represents". Hu does this not only according to the party consensus of the 16th Congress but also in agreement with a Confucianist practice/culture that "the new emperor should not change the policies of his predecessor for three years". On the other hand, while observing the principle of wuwei erzhi (rule without major change) on key party consensus, Hu has not failed to take initiative on matters that he deems to be important, in a style differing from Jiang's. He has created a new leadership image, stressed more on social justice and equality and adjusted some of key foreign policies, i.e. on the issue of North Korea. He has given full support to Wen's economic retrenchment policy that promotes balanced development in comparison with Jiang's that was centered on growth.

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Coping w i t h Uneven Power Distribution at t h e Top One challenge to Hu is to handle the legacies of his former superiors like Jiang, Li Peng and Zhu Rongji whose self-interests need to be respected. One precondition for their departure was to place their comrades in senior posts. The 16th Congress paid good attention to this issue, paving the way for the execution of the succession plan. But distribution of power was far from even with the number of Jiang's appointees being the largest. Only 2.5 years since the Congress, it is too early to tell in detail how this top body of power operates. But one thing is clear: Hu has not had his own man in this top body. Therefore Hu has to answer this challenge of how to achieve a "correct balance" between key groupings at the apex of power. A weak leader is bound to fail this test. Yet the successor lacks seniority and personal following to be powerful at the beginning of the process. Theoretically this period of his power consolidation is one that may brew personal conflicts with his predecessor and his followers still inside the Party. Another dilemma is that equilibrium depends on the new leader's fair treatment of all groupings in the leadership, including the followers of his predecessors. Yet this obstructs the building of his own factions and delays the establishment of his authority. The longer the transition lasts, the more uncertainty his leadership arouse. During this period of time, the successor has to pass a number of tough tests: how to handle the relations with his mentors properly, whether he is capable of working with his colleagues as the number one boss, what kind of personal network he has to construct — not too conspicuous but with a clear factional structure. The uneven distribution of factional interest in the l6th PSC may slow Hu's own effort of power consolidation and will certainly affect his running of the CMC.

Capitalizing o n t h e Party Consensus As a weak leader it is natural then for Hu to place institutional authority above personal authority, something that Jiang tried to do

Hu Jintao's Consolidation of Power and His Command of the Gun 45

in his early years of his rulership.9 No matter what purpose it is for Jiang and Hu to take advantage of the trend of institutionalizing power in the CCP, they have good reasons to do so and this exerts profound impact on China's political development. Firstly, one of the CCP's top priorities since the l6th Congress has been to ensure that Hu assumed Party leadership as smoothly as possible. This has been the consensus of the whole Party, as his consolidation takes place at a time when China is under serious internal and external threats. A well-executed succession plan will help lessen this pressure. 10 In a way, consolidation of Hu is consolidation of the CCP. To this end, the Party has granted more institutional power to Hu in the lead-up to the Fourth Plenum of the 16th Central Committee. Hu had taken over from Jiang several key posts of importance, such as the chair of the CCP Foreign Affairs Leading Small Group and the chair of the CCP Taiwan Affairs Leading Small Group. 11 More importantly, Hu had already presided over the daily running of the PLA since the beginning of 2004 and signed most of key CMC documents. 12

Controlling the Party Prior to the Controlling of the Gun One year in military position it is too early to conclude that Hu's command of gun is now firm. Yet his power consolidation in the Party is beyond doubt. The latter control can be translated into his effort of leading the PLA. Mao, Deng and Jiang have all proved that with dominant authority in the Party, it is highly unlikely they would be challenged by the PLA. However, in building these two 9

One vivid example is that Hu devoted the first study session of the 16th Politburo on China's Constitution and constitutional government, which highlighted the formal political process. 10 You Ji, "Profile: The Heir Apparent", China Journal, Vol. 49, July 2002, pp. 125-139. 11 Speech by a Chinese delegate at the conference on China's political development organized by Asia-Pacific Centre of Security Studies, 23 May 2003, Hawaii. 12 Information from a senior PLA officer in Canberra in April 2004.

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mutually-supporting mechanisms of control Hu's sequence is unusual. All Hu's predecessors used the PLA to command civilian politics. Probably Hu is the first leader in CCP history to reverse the practice. Certainly, what Hu has done was not his choice. The arranged succession denied his control over the gun at the same time he became Party leader. Yet that he was able to turn something negative into positive shows his political maturity. In a way, this also reflects the changing nature of China's civil-military relations. The civilians try to reshape their symbiotic ties with the military. They want to have effective control, not necessarily in absolute terms. Put in another way, the control will be increasingly not by way of subjective control based on personal dominance, as Huntington described the authoritarian systems. It will be through institutionalized safeguards between the civilians and the generals and by military professionalism that induces non-interventionist behavior.13 Will this pave the way for a new trend of the PLA's nationalization to emerge? 14 Over time will this lead the Chinese military to seek neutrality in the country's political development? The changing sequence in Hu's consolidation plan is indicative of changing mentality of both party and military leaders of the new generations. The significance needs to be carefully studied.

W i n n i n g Popularity as a Means t o Controlling t h e Gun Hu's relatively quick consolidation of power is also due to his clever strategy designed to win hearts and minds of ordinary people. The rulership principle of Hu-Wen is humanism (renben zhuyt),

13

On subjective and objective control, see for instance, Samuel Huntington, Soldiers and the State, Harvard, MA: Belknap, 1957. 14 Andrew Scobell argued about an inevitable development of the PLA becoming nationalized (Guojiahua). See his paper to the specialist workshop Leadership and Political Change in China, Asia-Pacific Centre for Security Studies, Hawaii, 28-30 May, 2003.

Hu Jintao's Consolidation of Power and His Command of the Gun 47

namely governing through promoting close ties with the ordinary people. 15 They have realized that increased state-society conflict will eventually trigger a revolution from below. So they try to release the tension through making concession to the people in social and economic areas, while keeping effective political control. In the last two years dismissal of senior Party and military officials due to their "administrative errors" has given the masses a fresh impression on the new leadership. Since Hu assumed the office, he has proposed a number of policies to protect social groups of the underdogs, increasing taxation on the new rich and sustaining the campaign against corruption. His political program is centered on promoting economic growth, 16 but places more emphasis on social justice and equality. He uses every opportunity to approach ordinary citizens when traveling around the country. His plain life style and clean image draw comparison with other senior CCP officials. All this lifts level of popular acceptance to his anointment. 17 Indeed his astuteness is rightly reflected by his understanding that popularity as a means of legitimation is more powerful and reliable than developing a large personal following at this crucial conjuncture. With strong social support he can lead the military with greater ease. Indeed, a leader's popularity is more useful than his ability to solicit military support in power consolidation in the post-Mao era. The logic is clear: it is more costly and risky to oppose a beloved leader, as this may be amounted for as opposing the people. Mao constantly used this weapon to control the gun and CCP politics. The difference between Mao and Hu lies in the fact that Mao commanded huge personal cult while this is 15

Tu Min, "Pinmin zhengfu liuda xinzheng" (The government of ordinary people and six new policy programs), Zhongguo gage (China Reform), No. 12, 2003, pp. 8-11. 16 This point has been repeated numerous times, seen from his first news brief after becoming the Party boss and his New year message on 31 December 2003. 17 The most convincing evidence for this remark can be seen from the attitudes of Beijing Taxi drivers toward him. These drivers are the most picky group of people toward government officials. I have talked to many of them and found that the majority of them have a favorable view on Hu.

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unavailable to Hu. The latter has to adopt real pro-people strategies to receive genuine popular support. Building P o l i c y Alliance at t h e A p e x o f P o w e r Hu and Wen have formed a policy alliance, if not yet an organizational one. Hu firmly supported Wen's economic retrenchment policy, while Wen backed up Hu's idea of building a harmonious society. The emerging Hu-Wen power structure places them in a favorable position in power consolidation. Wen's power lies in the State Council's premier responsibility system that allows the premier to exercise dominant authority. And in the State Council Wen's first deputy, PSC member Huang Jiu, has weak power base. As technocrats, Jia Qinglin and Wu Bangguo lack deep political ambition. In a way they can be Li Ruihunised in the NPC and National Political Consultative Conference.18 As far as Hu and Wen are concerned, they make great effort to maintain good working relations with them. Hu and Wen have won credits in winning a relatively quick victory over SARS and the battle over the Hui River flood in 2003. In addition, they have handled diplomacy and the Taiwan issue effectively. Sino-US relations remain stable. This has substantially enlarged China's influence in world affairs. Hu's new Taiwan policy is particularly impressive. Through acknowledging the ROC as the symbol of the status quo, Hu has taken the initiative in directing the cross-Strait relations. This has not only offset the international backlash against the Anti-Secession Law but also united the thinking of the mainlanders in regard to Beijing's future Taiwan policy.19 These have demonstrated the competence of the Hu-Wen power structure, making it increasingly more difficult for any potential challenger to emerge. The 18

The word Li Ruihanised means that one key party leader is politically isolated and marginalized in the policy-making process, largely due to his relatively detached ties with the mainstay party grouping. 19 You Ji, "The Anti-Secession Law and the Risk of War in Taiwan Strait", Contemporary Security Policy, Vol. 27, No. 2, 2006.

Hu Jintao's Consolidation of Power and His Command of the Gun 49

new political image of Hu and Wen does not guarantee them to carry out all their preferred policy agenda. Their initial success has been accompanied by their policy failures. For instance, Hu's anti-corruption campaign has not achieved desired results. His promotion of a harmonious society has encountered great resistance from a web of vested interests. Wen's economic retrenchment efforts have intensified central-local government relations. Nevertheless, a Hu-Wen alliance is the foundation for them to initiate major policy adjustments. THE ROAD FOR HU TO GET TO THE AUGUST FIRST BUILDING In the lead-up of the Fourth Plenum, the pressure within the Party was mounting on Jiang to let go his last post. And how soon Jiang would depart became an international issue. World leaders were confused about the situation of "two-lined leadership" and world media constantly speculated on Jiang's intensions. What was less mentioned was the fact that the authority of the semi-retired was far from being firm. His source of influence was more institutionally attached than personally based, as compared with Deng. Without institutional posts this influence diminished visibly. In the 10th NPC in 2003 Hu was elected state president with 99-8% of the votes. This not only represented popular acknowledgment of his governance after four months in office but made a contrast with Jiang who received 92% of vote for his chairmanship of the State Military Commission. Jiang's Final M i s s i o n i n t h e CMC According to Beijing sources, when would Hu take military command had been possibly discussed in an overall package of power transfer prior to the 16th Congress. It was both ethically correct and even politically necessary for Jiang not to exceed Deng's time as the CMC chair without other Party portfolios. In a way, Jiang's timetabled-tenure confined his influence to military affairs. Shortly before the 16th Congress the PLA initiated a new round of reform in 2002 under a new national defense strategy that stipulated

50 YouJi

the armed forces to undergo a simultaneous transformation of mechanization and informatization. This reform led by information technology-driven revolution in military affairs (IT-RMA) has not only affected the deeply embedded conservatism but also its personnel structure of vested interests.20 For instance, a key component of the reform is to streamline the command structure and reduce the force levels. In the process, several dozens of army-level units would be removed and the job of over 100 generals was on the line. The resistance was bound to be fierce. Under these circumstances, Jiang was better positioned to push the reform than Hu was. After years of servicing PLA interests, Jiang was well regarded by top brass. 21 This was the best capital of Jiang in promoting controversial military reforms. A smoother path would be paved for Hu's final takeover if the hardest part of the reform, namely removing a large number of senior officers from their posts, was done by Jiang. This might be his strongest personal support to Hu. On the other hand, after retreating to the background, Jiang gradually detached himself from detailed command of the gun. In his last two years as the CMC chair his involvement may have progressively become more directional than dominant. Tentatively a question is raised about whether Jiang's retention of the CMC chair after 2002 was due to the Party entrusting him to take care of an important mission within a time framework. If this is true, the concept of "two-lined leadership" needs to be assessed from a new angle. The argument that Jiang's role after 2002 was more functional than political questions the two-power-center claim. No convincing examples exist to show Jiang's intrusionist impulse vis-a-vis Hu's

20

Cang Yetin, "Miaozhun junshi biange qianyan zhuangbian sixiang guannian" (Targeting the frontier of the RMA and changing our mentality accordingly), The PLA Daily, 2 July 2003. 21 You Ji, "Jiang Zemin: in Struggle for the Post-Deng Supremacy", in Maurice Brosseau, Suzanne Pepper and Tsang Shu-ki (eds.) China Review 1996, Hong Kong: The Chinese University of Hong Kong Press, 1996.

Hu Jintao's Consolidation of Power and His Command of the Gun 51

management of state affairs.22 Still less was the evidence of Jiang's veto against Hu's decisions.23 To Hu Jiang's usefulness lied in his commitment to commanding the gun on behalf of Hu (the Party). Jiang had basically filled his role as such. More concretely, this was seen from his effort to mobilize the PLA to meet the global challenge of the IT-RMA.24 Jiang once said to CMC members that his remaining task was to set the IT-RMA as the guiding principle for PLA transformation.25 His remarks reflected his concerns that the transformation was hard to sell in the PLA. China's continental political culture, army-dominated tradition and technological inadequacies pose tremendous obstacles in implementing IT-RMA concepts in the PLA. Resistance has come from two schools of thoughts within the PLA: people's war under modern conditions and hightech limited regional wars. The former clings to the idea that war on the ground remains the key to any ultimate victory. This is especially true when the war is fought against the attempt of regime change (the Iraqi scenario). The latter advocates military modernization through generational upgrading. Put in another way, it is about realizing modernization through, first, mechanization (hardware building up), and then, informatization (software and IT integration).26 Jiang represents the third school in the PLA, namely the IT-RMA school that believes the RMA is a global and historical trend of military development. Whether the PLA can catch up with this

22

There are situations where Jiang indeed intervenes but he largely exercised constraints on major policies of Hu. For instance, Jiang personally ordered to terminate the showing of the TV series entitled Zuoxiang gonghe (To fight for the Republic) that criticizes the rule behind the bamboo screen in the late Qing period and calls for political reform along the lines of constitutional division of power. 23 Robert Kuhn's biography of Jiang Zemin reveals that on many occasions Jiang voiced his firm support to Hu's succession. 24 Jiang's speech to the 2003 session of the National People's Congress, 14 March 2003, Xinhua News 15 March 2003. 25 Information from a retired general of the PLA National Defence University. 26 For more detailed analysis on this, see You Ji, "Learning and Catching Up: China's RMA Initiative", in Emily Goldman and Tom Mahnken (eds.), The Information Revolution in Asia, Palgrave Macmillan, 2004.

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trend will decide its future. The PLA is right in the middle of two simultaneous transformations: mechanization and informatization. For the PLA its primary task for the time being is to use IT revolution to uplift the level of mechanization. This is the biggest challenge it is facing at the moment. 27 In a way, Jiang tried to use his great influence to overcome the inertia of the first two schools. 28 After the 16th Congress, Jiang's efforts of promoting the idea of the IT-RMA have been doubled. One of his agendas is to iron out a Party consensus on the RMA as a way to unify the thinking of the PLA. External pressure is brought to bear on the PLA to effect its internal change. This resulted in a rare study session in the Politburo earmarked to learn the IT-RMA in May 2003. Hu's speech on the IT-RMA reflected his commitment to Jiang's military idea and the consensus of the civilian leadership on PLA transformation. 29 Concretely, it sets PLA modernization in the direction of generation leap (a simultaneous transition of mechanization and informatization). Clearly this has signaled a new stage of PLA reform. Hu's embrace of the IT-RMA is no doubt response to Jiang's insistence but in time it can become his own new deal of military leadership. HU'S COMMAND OF THE GUN Doubtlessly, a lot of political wisdom was required for him to complete the transition successfully. Prior to the 16th Congress, he had already been strategically placed in all key political institutions, the Party, the government and the PLA.30 Both Jiang and Hu understood that any policy dispute from the semi-retiree would hurt Jiang more than it would to Hu. This may be the reason why there had not been many "surprises" in Hu's final take-over of CMC leadership.

27

"Military Forum", The PLA Daily on line, 12 July 2003More on the PLA's internal debate, see You Ji, "Learning and Catching Up: China's RMA Initiative". 29 See Hu Jintao's speech on RMA to the enlarged Politburo meeting on 24 May 2003. The PLA Daily, 25 May 2003. 30 You Ji, "Profile: the Heir Apparent", The China Journal, Vol. 49, July 2002, pp. 125-39. 28

Hu Jintao's Consolidation of Power and His Command of the Gun 53

We still do not know about how Hu commands the gun. What is certain is that Hu has enjoyed many more advantages in assuming military leadership than Jiang did in 1989. In addition to his growing political influence at Party headquarters and in society, his institutional control over the PLA is accompanied by his ideational control, as he promotes China's long-held cultural tradition in subordinating soldiers to civilian control. 31 Jiang's experience in commanding the gun as an amateur offers useful roadmap for Hu to follow. Last but not the least, Hu has started to lay down a new personnel structure in the PLA taking advantage of his CMC authority to appoint officers above the divisional levels and of the inevitable change of guard in the military. I n c r e a s i n g I n v o l v e m e n t i n Military Affairs Jiang has established a role model for his successor to survive Beijing's intricate politics.32 What exactly has Hu learned from Jiang? Primarily, he has timed his execution of control over the PLA right. For instance, Hu has been careful about what he should not do prematurely. Although as part of the succession plan he oversaw the PLA's daily management since beginning of 2004, he inspected its Strategic Command Center only a few days after he was confirmed as the CMC chair. This means that he avoided taking the top operational command (i.e., the nuclear button) which should be the privilege of the CMC chair under the CMC commander responsibility system that gives the chair undivided power in deciding on key military issues.33 Similarly, Hu has waited for more than a year to issue 31

Huang, Ray, 1587, A Year of No Significance, New Haven, Yale University Press, 1981. 32 As for the discussion of Jiang's command of the gun, see You Ji, "The Supreme Leader and the Military", in Jonathan Unger (ed.) The Nature of Chinese Politics: from Mao to Jiang, Armonk: ME Sharp, 2002, pp. 279-296. For the analysis of his early relations with the PLA, see You Ji, "Jiang Zemin's Formal and Informal Sources of Power and China's Elite Politics after June 4", China Information, Vol. 5, No. 2, 1991, pp. 1-22. 33 Hu Jintao inspected PLA Strategic Command in late September according to the PLA Daily, 26 September 2004.

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his first strategic guidance for PLA development. This is summarized by General Xu Caihou as "three supplies and one key mission": supply the CCP with political guarantee for it to continue its monopoly of power, supply the state with the security guarantee for its longterm development, and supply the nation with military capabilities to protect its best interests. The one-key mission is to play a major role in maintaining world peace and regional stability.34 Prior to September 2004, Hu as Jiang's first deputy but his party boss was in a delicate position. Hu handled bilateral relations well. Since he entered the CMC in 1999 as the deputy commander-in-chief, the CMC has reported key military issues to Hu and has assigned him a high-ranking liaison officer who accompanies him constantly. He has attended most of the important meetings of the CMC at which key military decisions are reached. When he inspects provinces, regional PLA leaders brief him on the military situation in the localities. Through this he has familiarized himself with the PLA and has established personal contacts with top and local generals. Hu's Support t o t h e PIA's Doctrinal R e f o r m The Party's consensus on the IT-RMA is important for Hu's consolidation of power. If the PIA's new national strategy can help unify the minds and hearts of PLA officers, it will make Hu's job of commanding the gun easier, as a united PLA can save him a lot of trouble. Therefore, Hu's promotion of the IT-RMA is hard and specific. He is making great efforts to construct a pro-IT-RMA culture in the PLA. An intensive IT-RMA study campaign in the PLA has been launched almost to the degree of brainwash in PLA research and education institutions where the future PLA leaders are trained. Now the teaching programs in these institutions are completely reformulated to include IT-RMA contents. He also involves himself in formulating RMA-driven military R&D programs. The Chinese space program is a typical example. PLA generals have come to realize

34

Xinhua, 20 September 2005.

Hu Jintao's Consolidation of Power and His Command of the Gun 55

that the PLA's current weapons systems are backward, but their battlefield effectiveness can be magnified if they are networked by IT assets. A sophisticated military satellite system is indispensable for this to be achieved. 35 Jiang was instrumental in key military space programs, especially the Shenzhou Project. Now it is Hu who will push it through. He went additional length to see Yang Liwei to board the spaceship on the day of launch as a gesture of his support to the PLA's IT transformation. A pro-RMA culture is being facilitated through organizational means in order to change the personnel structure of the PLA. Promotion opportunities are granted to officers versed in trendy Western military concepts. Hu has appointed generals committed to the IT-RMA to head headquarters departments and military regions. At the rank of file, Hu carries out Jiang's decision to send large numbers of officers to study abroad and to recruit post-graduates from top civilian universities. More recently, he has launched another force reduction of the army.

Employment of Personnel Power What has given Hu a good level of authority over the PLA is his institutional power to coordinate the generation change in PLA leadership. As the Party's organization boss chairing personnel matters for the l6th Congress, he was closely involved in the selection of the PLA's new CC members who are now commanders for military regions and Services. Although professional soldiers in the CMC presided over the selection, the final say belonged to Jiang and Hu. The responsibility for deciding on shortlists gave Hu chances to interview key candidates. This helped him build a useful network with the PLA's new leaders, a means for him to exercise personal influence over them. 35

Wang Xinwang, "Fazhan taikong wuqi shi wojun zhuangbei kuayueshi fazhan de guanjian" (The R & D of space weapons systems is the key to realizing generational leap strategy of the PLA), The Journal of the PLA National Defence University, No. 10, 2002, p. 83.

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Hu will eventually place his own trusted generals in the CMC. The dynamics of personnel realignment will again be felt in the years to come. It is not clear as who the candidates are at the moment. The new CMC still bears the mark of the Jiang era, as Generals Guo Boxiang and Cao Guangchun, the top two professional soldiers in the PLA were chosen by Jiang. Cao will retire in about two years in the 17th Congress but General Xu Caihou, the new deputy vice chair of the CMC and also a Jiang's pick-up, will replace him in the Politburo then. In a way Hu has to deal with Jiang's legacy for a few more years from now. However, this does not have to be a major problem for Hu. Personally, Hu is on good terms with them. When their vested interests are well taken care of, the top brass would prefer to support their new boss. Likewise there is no reason why Hu would upset the post-Deng pattern of civiliansoldier interaction of a give-and-take nature (more on this later). Leadership reshuffle is inevitable, following a cycle of PLA succession politics. At the moment, Hu has strategized on maintaining an ideal level of personnel stability. Functionally, this means to retain the bulk of Jiang's CMC membership in order to let them complete the difficult IT-RMA reforms. Therefore, Generals Cao and Xu will likely stay in the Politburo after the 17th Congress. Politically, they would help Hu to conclude the power transition from Jiang to Hu. On the other hand, younger generals will enter the top command continuously. Over half of chiefs and deputy chiefs in PLA headquarter departments have now reached the age of retirement. The selection of their substitution has gone on for some time. In Dadanwei (headquarters departments, Services and military regions) below, the CMC generals born after 1945 are groomed to take over the overall charge. Those born in the early 1950s have been given posts of great importance and are nurtured as the new successors. Air Marshal Xu Qiliang (born in 1950) and General Wu Shengli (born in 1949) were promoted to deputy chief of staff. They serve as the representatives of the new blood in PLA top command. Hu is overseeing this round of reshuffle, although the selection is done by professional soldiers in the CMC. Thus, Hu has enlarged his say to the management of personnel affairs of the PLA. In five years from

Hu Jintao's Consolidation of Power and His Command of the Gun 57

now, when the Dadanwei are all headed by new chiefs, Hu's personal authority with the PLA. will be at least on a par with Jiang at his peak, a duration shorter than Jiang's case. HU'S DIRECTIONAL LEADERSHIP OVER THE PLA On the other hand, Hu's consolidation depends on PLA support. So far, he has followed several key guiding principles. First, he has continued Jiang's practice of "reign without overt rule" in managing PLA affairs. This is about a fine division of power between civilian commander-in-chief and the top brass. The former is responsible in deciding on the strategic policies, basically proposed by the military, such as the national defense strategy and key personnel nominees. The latter takes care of the matters of military administration and operations. Therefore, the CMC chair is not involved in managing the armed forces in any way that can be interpreted as intrusive. This draws a line between Mao-Deng and Jiang-Hu. The role of the CMC chair is in a sense a kind of directional leadership in the postDeng era. Thus Hu has to define what he should do in exercising duties of the commander-in-chief and what he should leave for officers corps to manage themselves. This is crucial for his consolidation of power. The key for this is to cherish the tradition and norms of the PLA concerning the PLA's autonomy, ranging from proposing promotion of senior officers, maintenance of internal discipline, allocation of budget between Services and PLA representation in the Party's central bodies. Fundamentally, directional leadership dictates that the civilians respect the generals' professional judgment and a certain level of their administrative and operational autonomy. This is the key to the success of smooth civil-military relations in postMao-Deng era. Certainly "reign without overt rule" does not mean "hands-off" on the part of CMC chair. For instance, he retains the final say to the matters of fundamental importance, such as promotion of top officers. The directional leadership can also be concrete over some strategic issues, such as troops redeployment, budgetary allocation and key weapons development programs.

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For directional leadership to work the CMC chair has to have the PLA's full support. To this end Hu has shown to the PLA that he is a nice boss. Such an image is indispensable for his acceptance by two million PLA soldiers, the most powerful weapon for Hu to deal with any potential challengers. He has dumplings with ordinary foot soldiers on every Spring Festival. He has signed several decrees, granting the PLA a privileged position in the dispute with civilians.36 He has also made constant effort to improve the standard of living of officers. A substantial increase of military wages was made in 2004. This is the other side of directional leadership, which can be further defined as "give and take" interaction between the commander-inchief and his men: the party boss serves the PLA's interests the best he can in exchange for the military's support for his major policy initiative in non-military field, a post-Deng element of CCP-PLA relations introduced by Jiang. Hu has fully committed himself to China's military modernization as the way of his consolidation of power. Winning the next war is the ultimate form of PLA strategic interests. To this end, Hu continues to enlarge military budget according to the National Defense Law that stipulates that military spending should keep up with the growth rate of national economic development. 37 He has faithfully implemented the Politburo's decision in 1999 that the whole Party and nation should accelerate preparation for the "military struggle".38

36

For instance, Hu has sponsored a series of central documents to the local governments regarding their disputes over land use by the PLA. The central theme of these degrees is to protect military interests in these disputes. 37 Wu Xiuyong and Lie Jingdong, "Jianchi xietiao fazhan shi Jiang Zemin guofang zhanlie lilun de zhongyao tese" (Upholding Coordinated Development is a Key Element of Jiang Zemin Theory), Guofang daxue xuebao (Journal of the PLA National Defence University), No. 5, 2000, p. 8. 38 General Qian Guoliang (commander of the Shenyang MR), "Quanmian luoshi 'silinbu jianshe gangyao', gaobiaozhun zhuahao silingbu jiguan jianshe" (Comprehensively implement the guideline of headquarters construction, and do a good job in headquarters construction), Journal of the PLA National Defence University, No. 6, 2000, p. 4.

Hu Jintao's Consolidation of Power and His Command of the Gun 59

This is an enormous task with a clear objective of dealing with the worsening Taiwan situation with possible US intervention. The AntiSecession Law is indicative of this great support. The war preparation decision creates practical measures to raise the PLA's preparedness against a crisis. In recent years the PLA has made visible improvement in its combat capabilities. Also in this regard, Hu has taken suitably stronger foreign policy, especially in the areas of safeguarding China's national security interests and territorial sovereignty.39 On the other hand, Hu's relations with the PLA are subtle. There are potential problem areas in between them. The first is that the PLA can still be interventionist at invitation of politicians. This was vividly reflected by its support for Jiang to retain the post of CMC chair after the l6th Congress.40 In a way, this could be counted as the PLA's second major intervention in domestic politics since the Yang Baibin incident in 1992. Now this possibility has been substantially reduced with Hu in full command. Yet as in the PSC, Hu still needs to maintain delicate relations with top officers appointed by Jiang in the CMC in the years to come. Another potential contradiction is between upholding economic development as the top priority and making war preparation to parallel this priority. In his first speech to the media right after the end of the l6th Congress, Hu expressed his governing principle in terms of taking economics in command. 41 It is

39

Talk with senior researcher from China Institute for International Strategic Studies, in University of New South Wales on 24 July 2003. 40 The military played a key role to the arrangement for Jiang to occupy the CMC chair for some time beyond the 16th Congress, on the grounds that the current domestic and international situation was too tough for a newcomer to handle. This was the view expressed by Zhu Chenghu, director of the Institute for Strategic Studies of the PLA National Defence University in his speech to the Beijing Institute of Contemporary International Relations on 15 October 1999. This Major Gen. Zhu made controversial remarks about using nuclear weapons against US intervention in a Taiwan war in Hong Kong in July 2005. 41 The CCP Organisation Department (ed.) The Documents of the 16th Congress, Beijing: Remin chubanshe, 2002, p. 42.

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not clear how Hu reconciles this principle with the Politburo's decision to accelerating war preparation in 1999. The predictable evolution of Taiwan's long-term political trend has hardened the PLA's resolve to use force against any move toward de jure independence. The internal and external pressure on Hu is mounting and will generate new uncertainties.

Chapter

Deciphering Hu's Leadership and Defining New Elite Politics Li Cheng

An optimist sees an opportunity in every calamity; and a pessimist sees a calamity in every opportunity. - Winston Churchill

Perhaps it is too early to assess Hu Jintao's leadership and its implication for China's future, but Hu has already demonstrated his optimism — and remarkable political wisdom — by seizing "an opportunity in every calamity."1 Soon after he became the general secretary of the Chinese Communist Party (CCP) in November 2002, China experienced the severe acute respiratory syndrome (SARS) epidemic, a devastating health crisis that paralyzed the urban life and economic state of the country for several months. The Chinese regime survived this so-called "China's Chernobyl" largely due to the fact that President Hu, along with his principal political ally Premier 1

The author thanks Sally Carman, Hongyi Lai, David Sands and Jennifer Schwartz, and Suzanne Wilson for suggesting ways to clarify the chapter.

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Wen Jiabao, effectively took charge and confronted the challenge. By exhibiting his effective leadership skills in a time of crisis, Hu Jintao quickly moved out of his predecessor Jiang Zemin's shadow and emerged as a populist leader in the most populous country in the world. What are the main characteristics of Hu's leadership? What do the recent political succession and policy changes tell us about the new pattern of elite politics in China? How do we explain the drastic policy changes that resulted from the leadership transition? How do we interpret the apparent dynamism of political coalition and factional compromise within a supposedly stagnant Leninist one-party system? Will Hu's populism lead to a fundamental change in the relationship between state and society in China? What are the restraints and limitations on Hu's power? Can we expect, based on Hu's vision and ability, bolder and more systemic political reform in the years to come? It will take time for complete answers to emerge. This chapter presents an evaluation of Hu Jintao's leadership and has two objectives. First, it aims to understand Hu Jintao by analyzing his leadership style, policy orientation, and political power, with special attention paid to his strengths and weaknesses. Second, the chapter tries to link dynamic changes under Hu's new leadership to the broader transition in Chinese elite politics, especially the new trend towards factional checks and balances. CONSOLIDATING HU'S POWER AND HERALDING A NEW ERA OF ELITE POLITICS When Hu succeeded Jiang in the posts of general secretary of the CCP and president of the state in fall 2002 and spring 2003, respectively, students of Chinese elite politics often characterized him as a "mysterious leader" whose values, views and policies were ambiguous. A British journalist, for example, once called him "famous for being unknown." 2 Many observers considered Hu to be a "figure 2

Financial Times, 21 February 2002, p. 13.

Deciphering Hu's Leadership and Defining New Elite Politics 63

head" and doubted his ability to effectively take over power from Jiang. Some analysts in the West expected that, due to his relatively young age, Hu might push for political reforms and democracy. In the China-watching communities in the West, the most frequently asked question regarding Hu has been: "Will Hu Jintao become China's Gorbachev?" To a certain extent, these speculations are understandable. It has been widely noticed that Hu did not have many allies on the ninemember standing committee of the Politburo (where Jiang's cronies occupied two-thirds of the seats) of the l6th Central Committee. As a new top leader with no revolutionary experience, no economic expertise, no foreign policy credentials, no strong military ties, and no solid power base in the highest decision-making body, Hu Jintao did not possess much political capital. The nature of China's political environment did not give him the liberty to make any major mistakes, but at the same time required this new boss at Zhongnanhai to demonstrate his new vision and mandate. For Hu Jintao, however, the worst possible comparison would be to be called "China's Gorbachev." This reference generally implies failure rather than success in the eyes of the Chinese public today, and especially in the view of the political establishment of the CCP. Under these circumstances, Hu Jintao made four interrelated and wise political moves as he took the driver's seat in the Chinese leadership, holding all three of the top posts in the Party, the state, and the military. First, he has undertaken some seemingly contradictory — and sometimes surprising — actions and policies, deliberately confusing his potential critics both at home and abroad. No one seems to have full confidence in Hu, but at the same time, very few have completely lost hope that he will make some positive changes. Second, in contrast to Jiang, who was more interested in demonstrating achievements rather than admitting problems, Hu has been willing to discuss challenges. Systemic problems in Chinese political institutions, possible economic and financial crises (including the threat of a real estate bubble), rural grievances and urban protests, and overwhelming demographic pressures are now more openly

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discussed in the official media than ever before. The number of protests has continued to increase and some recent protests involved several thousand participants or even more. 3 In making these statistics available to the Chinese public, Hu Jintao has recognized and tried to reverse calamities in a way that clearly distinguishes him from his predecessor. Third, Hu has reached out to the general public for support. Hu has identified himself as a populist leader who understands the socioeconomic problems faced by the Chinese people, especially among so-called vulnerable social groups such as peasants, migrant workers and the urban unemployed. Hu has formed a political coalition with Premier Wen Jiabao, one of the most popular leaders in the PRC history. Hu's populism, rather than a speculated endorsement from the late paramount leader Deng Xiaoping, has become his real mandate. Hu turned away from the single-minded focus on coastal development at the expense of the vast inland region and an obsession with GDP growth without regard for employment, the environment, or social issues, which characterized Jiang's elitist approaches. Instead Hu has stressed the need to achieve more balanced regional economic development, social harmony, and political institutionalization. Fourth, with a firm commitment to the development of the western, northeastern and central provinces, Hu has gained broad support from the political establishment of the CCP, most notably from officials in these inland provinces. Hu recently appointed many like-minded officials to top ministerial and provincial posts to carry out his new economic and social initiatives. Many of Hu's long-time associates, especially those who advanced their careers through the Chinese Communist Youth League (CCYL), known as tuanpai, were the most noticeable appointees. For example, Minister of Justice Wu Aiying, Chongqing Party Secretary Wang Yang, Shanxi 3

According to the Chinese official media, in 2004, Shenzhen had three major worker strikes, each including over two thousand strikers. Zhongguo xinwen zhoukan (China Newsweek), 28 December 2004. It was also reported that about 50,000-100,000 peasants in Sichuan Province's Hanyuan County participated in a protest in October 2004 demanding fair compensation for land use. Shijie ribao (World journal), 2 November 2004, p. C. 1.

Deciphering Hu's Leadership and Defining New Elite Politics 65

Party Secretary Zhang Baoshun, and Fujian Governor Huang Xiaojing, all former officials of the CCYL, were all appointed to their current posts in 2005. All these political moves have consolidated Hu's power. In a broader perspective, they contributed to an emerging political system with a collective leadership in which Hu is largely the "first among equals." In this new era, the decisive role of the "strong-man" in decision-making and the zero-sum games in elite politics have gradually been replaced by "Chinese-style checks and balances" among competing factions. Political negotiation and compromise are taking place far more often than before because no individual, no faction, no institution, and no region can become the dominant power. 4 Hu Jintao's power has apparent limitations. His tuanpai officials are probably well-prepared in terms of organizational and propaganda skills. They often have had experience in rural administration, primarily in poor inland regions, but they fall short on skills in the areas of foreign trade, investment, and finance. They are forced to cooperate with other elite factions, especially the Shanghai Gang, which consists of officials who have advanced their careers from Shanghai and is now led by Vice President Zeng Qinghong. Neither the tuanpai nor the Shanghai Gang is willing or able to defeat the other. This is partly due to the mutual recognition that they are in the same boat, and partly because they are complementary to each other in terms of leadership skills and professional expertise. Consequently, these two factions sometimes correct each other's mistakes, thus preventing single-minded political approaches. They also sometimes cooperate with each other, ensuring the CCP's survival at home and maintaining China's status as a major international player abroad. Factional politics is, of course, not new in China. What is new is the emergence of two informal and almost equally powerful 4

This is largely due to institutional developments implemented during the past two decades, such as term limits, age-based retirement, intra-Party election, and a more even regional allocation of membership seats of the Central Committee. See Cheng Li and Lynn White, "The Sixteenth Central Committee of the Chinese Communist Party: Hu Gets What?" Asian Survey Vol. 43, No. 4 (July/August 2003): 553-597.

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factions, or coalitions, within the CCP that compete with each other for power, influence, and policy initiatives. These two coalitions, which may be identified as Hu's populist coalition and Zeng's elitist coalition, broadly represent different regional and socioeconomic interests and divergent policy priorities. They have constantly engaged in coalition building, political negotiation and compromise. The tension and interaction between these two factions will likely beget further transformation of China's political system. Based on their respective strengths and weaknesses, these two factions will most likely pursue new initiatives in economic policy and socio-political development. This trend will likely be reinforced by a growing demand for change by societal forces in China. HU'S LEADERSHIP STYLE: CONTRADICTORY MOVES Mysteries about Hu Jintao have largely endured since he has become the top leader. This fact can mainly be attributed to a leadership style that involves making contradictory political moves. These actions have surprised many people both at home and abroad. Here are some examples. •

•

Hu Jintao presents himself as a populist leader who represents the interests of the Chinese people. His main political agenda is to consolidate what the Chinese call "the intra-party democracy," which is "democracy" enjoyed only by party elites and not by the general public. Hu said repeatedly that China would not follow the model of Western democracy. At the same time, however, he invited Chinese scholars to lecture at Politburo study sessions on Western culture, social welfare systems and political institutions. He has also endorsed the Western concept "power corrupts and absolute power corrupts absolutely." These study sessions would have been inconceivable only a decade ago because they would have been criticized as "spiritual pollution" and "bourgeois liberalization" by the Politburo.

Deciphering Hu's Leadership and Defining New Elite Politics 67

•

•

•

•

Hu has apparently pushed for legal reforms and promoted the rule of law, civil society, and non-governmental organizations (NGOs), but his priority is to improve the "governing capacity of the ruling party." Maintaining CCP rule is a far greater priority than the need to instate the ultimate authority of the Chinese constitution. Under Hu's initiatives, the Central Committee of the CCP decided to enhance the transparency of the decision-making process. Party and government agencies have been encouraged to make information more accessible to the press and the public through a new system of spokespersons for various government organs as well as regular press conferences. At the same time, Hu Jintao has not allowed expressions of discontent in what he perceives as sensitive issue areas. During the past two years, several editors of newspapers and magazines were fired, and their media outlets were banned for devoting media attention to sensitive issues. The police control over the Internet has been particularly evident since Hu assumed the top leadership. In China's foreign policy, Hu is wise enough to understand the great need to maintain a constructive and respectful relationship with the United States, but he is believed to have said in an internal meeting that China should learn from North Korea and Cuba in dealing with pressures from the United States. Similarly, Hu advocates a good neighborhood policy (.muling, anling, filling), but Sino-Japan relations have deteriorated on his watch. Hu's decision to approve the "anti-secession law" in March of 2005 greatly exacerbated tension across the Taiwan Strait, which caused much criticism from international communities. Several months later, however, Hu's initiative to invite the leaders of opposition parties in Taiwan to Beijing won him recognition for reducing cross-Strait hostility and undermining the Taiwanese independence movement.

Hu's confusing signals make sense if one considers two factors. First, in the Politburo, Hu is surrounded by leaders who do not

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belong to his faction and are suspicious of his new initiatives. Therefore, Hu is forced to constantly adjust his position in order to avoid making too many enemies. To a great extent, the factional checks and balances that are part of the new elite politics in today's China shape Hu's seemingly contradictory policies and political moves. Second, the most daunting challenge for Hu Jintao and his colleagues is arguably not a specific one, but a general test to see whether he has the leadership skills required to achieve the best possible equilibrium between China's contradictory needs and concerns. The new leaders need to accelerate the market reforms required for China's growing integration into the global economy, but at the same time they must use policy mechanisms to assist vulnerable areas and establish a social safety net. They need to deal seriously with rampant official corruption, but at the same time must not undermine CCP rule. They need to broaden the power base of the CCP by recruiting entrepreneurs, but at the same time avoid portraying the party as an elitist body that represents only the interests of the rich and powerful. They need to show the Chinese public that the new leadership acts firmly to protect China's national interest and territorial integrity, but at the same time they should demonstrate their diplomatic ability to use the carrot and stick approach. They need to dismiss the pessimistic forecasts of internal tensions and external pressures giving rise to chaos, but at the same time must curb the arrogant and ultra-nationalistic views of emerging Chinese militarists. HU'S POPULIST POLICIES: ENABLING CALAMITIES TO BECOME OPPORTUNITIES The aforementioned contradictory statements and actions do not mean Hu Jintao is an opportunist who lacks the sense of the direction needed for the country. On the contrary, he understands his mandate very well and is quite articulate about his new and populist vision for China. In the first two or three years of his leadership, Hu has arguably already shifted the course of China's development in

Deciphering Hu's Leadership and Defining New Elite Politics 69

line with his perceived new mandate. The concern for social cohesion has now outweighed the priority of economic efficiency. A more balanced regional development has replaced the previous coastal development strategy, and a people-centered rhetoric Qyiren weiberi) has downplayed the GDP-centered drive. One of the most important changes in China under Hu's new leadership has been the trend towards acknowledging economic and socio-political challenges within Chinese society. Systemic problems in Chinese political and economic institutions, possible environmental disasters (including their enormous impact on public health), and overwhelming demographic pressures, are now more openly discussed in the official media than ever before. These problems are real. For example, the amount of tension as a result of urban protests, rural grievances, and the persistently high unemployment rate has been compounded, as shown by many alarming statistics: •

•

5

According to a recently released report by China's Academy of Social Sciences (CASS), in 2004, China had a total of 114 million migrant workers, accounting for 23% of total rural laborers and 50% of urban workers. 5 Although many of them have already lived and worked in urban areas for many years, they are still often treated like second-class citizens with no permanent residency permits, no insurance, and no social welfare benefits. It is expected that 300 million people will move from rural areas to cities in China over the next 20 years. This is probably the largest and most drastic urbanization that has taken place in human history. According to a Chinese official source, about 58,000 protests were noted in China in 2003, and an increase of about 15% compared to the 2002 data.6 The number of public protests has further increased to 74,000 in 2004,7 and some involved a large number of participants. For example, it was reported that about

Ru Xin, Lu Xueyi, and Li Peilin, eds. 2005 Zbongguo shehuixingshifenxiyuyuce (Analysis and forecast on China's social development, 2005), pp. 184-85. 6 Ibid. 7 See http://www.chinesenewsnet.com. 29 September 2005.

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•

•

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Li Cheng

50,000-100,000 peasants in Sichuan Province's Hanyuan County participated in a protest in October 2004 demanding fair compensation for land use. 8 In 2004 Shenzhen had three major worker strikes, each including over two thousand strikers.9 The number of labor dispute cases increased from 1,909 in 1994 to 22,600 in 2003, the number of workers involved in these cases increased from 77,704 in 1994 to approximately 800,000 in 2003; both were ten-fold increases within a decade. 10 In particular, the frequency of coalmine incidents and the high death rate of China's mineworkers have been widely publicized. In recent years, gas explosions and other incidents at China's coalmines have taken about 6,000 lives annually. China produces 35% of the world's coal, but contributes an alarming 80% to the world's coalmine-related casualties. 11 As calculated by some Chinese scholars, the death rate of mineworkers in China is 100 times higher than that in the United States.12 The dearth of natural resources and growing environmental degradation constitute long-term challenges for China. Approximately 300 million people in the country have no access to clean drinking water, and 400 million people suffer from air pollution. Nine of the ten most polluted cities in the world are located in China.13 One-third of China's land has been polluted by acid rain. The loss caused by environmental pollution accounted for 8% of China's GDP in 1995. This percentage increased to 15% in 2003. According to a Chinese official source, among the 45 kinds of principal mineral reserves that China possesses, only six will be sufficient to meet the country's needs in the year 2020.14 Pan Yue, the outspoken deputy director of the State Bureau of

Shijie ribao (World journal), 2 November 2004, p. C. 1. Zhongguo xinwen zhoukan (China newsweek), 28 December 2004. 10 Zhongguo laodong tongji nianjian 1994-2003 (China labor yearbook, 1994-2003), Beijing: China Statistics Press, 2004; and "2003 niandu laodong he shehui baozhang shiye fazhan gongbao" (Report on labor and social welfare development in 2003). 11 Xinshiji (New times weekly), 21 December 2004, p. 22. 12 See http://www.chinesenewsnet.com. 14 November 2004. 13 See http://business.sohu.com. 19 June 2005. 14 Ma Ling and Li Ming, Wenjiabao, Taibei: Lianjing chubanshe, 2003, p. 44. 9

Deciphering Hu's Leadership and Defining New Elite Politics 71

Environmental Protection on the State Council, recently claimed that China's development strategy in the past two decades, which emphasized GDP growth without paying attention to the environment, was wrong. 15 It should be noted that all these incidents, statistics and statements have recently made headlines in the Chinese media.16 Issues of governmental accountability, economic equality and social justice have dominated recent political and policy discourse among Chinese intellectuals.17 Such discourse was inconceivable only a few years ago under the rule of Jiang Zemin when such statistics would have been classified as state secrets. By making these statistics available to the Chinese public, Hu Jintao has attempted to recognize and tried to reverse calamities and problems in a way that clearly distinguishes him from his predecessor. As a matter of fact, encouraging news regarding China has been abundant since Hu has risen to the top leadership. In 2004, for example, China had the highest recorded foreign trade ($1,100 billion), highest recorded foreign reserves ($540 billion), highest recorded tax revenues (2,550 billion yuan, an increase of 500 billion yuan compared to 2003), and 9% GDP growth. 18 But the official media

15

For Pan's speech, see http://www.chinadaily.com.cn/fortune/en/doc/2005-04/ 07/content_432232_3.htm. 16 For example, a large Chinese official on-line news site announced that by 14 July 2005, floods in China had already caused 764 deaths and severely affected the lives of 90 million people since the beginning of the year. See http://www. chinanews.com, and http://www4.chinesenewsnet.com/MainNews/ EntDigest/Life/ zxs_2005-07-15_599787.shtml. 17 For example, Sun Liping, professor of sociology at Qinghua University, argues that the Chinese government should improve its institutional mechanism for economic redistribution. The State's enterprise tax, income tax, and state investment in social welfare should all be improved. Caijing (Economy and finance), special report on the World and China, 2005, January 2005, p. 71. 18 Liaowang dongfang zhoukan (Oriental outlook weekly), 30 December 2004, p. 44; and also http://xinhuanet.com. 28 December 2004. In June 2005, China's foreign reserves further increased to $711 billion. Baokan wenzhai (Newspaper and magazine digest). 20 July 2005, p. 1.

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has not highlighted these accomplishments. 19 Further, under Hu's initiatives, the main agendas of Politburo meetings and State Council meetings are open to the public. These meetings usually focus on ways to respond to problems or prevent crises. All these changes reveal a strategic shift in policy priorities under the new Chinese leadership. These policy changes are highly political. Since his power base in the highest decision-making body has not been solid, Hu has had to reach out to the general public for support. One of the most frequently used terms in the Chinese official media during the past two years has been "a harmonious society" (hexie shehui).20 Top leaders, especially President Hu and Premier Wen, have often used the term to refer to the need to reconcile the growing tensions between social groups in China, particularly the need to be more compassionate toward so-called vulnerable groups such as farmers, migrant workers, urban unemployed, etc. On 19 February 2005, Hu gave an important speech at a meeting of ministerial and provincial leaders. In his speech, Hu added a new objective — social development (.shehui jianshe) — to Deng Xiaoping's three objectives (economic, political and cultural development) for China's future.21 According to Hu, at a time when China faces serious challenges such as environmental degradation, energy scarcity, employment pressure, and economic disparity, the government should pay more attention to the issue of social fairness.22 While many critics, both in China and abroad, are suspicious of how much the Hu administration can really achieve, no one seems to doubt the necessity for this new initiative. A quarter-century-long economic reform effort has not only created a wealthy entrepreneurial class, but also produced many "losers" in China. The number of "losers" has, in fact, increased in recent years; and economic 19

Liaowang dongfang zhoukan (Oriental outlook weekly), 30 December 2004, p. 44; and also www.xinhuanet.com. 28 December 2004. 20 Xinmin wanbao (Xinmin evening news), 29 December 2004, p. 26. 21 Liaowang dongfang zhoukan (Oriental outlook weekly), 11 July 2005. 22 See http://wwwf.sina.com.cn. 11 July 2005.

Deciphering Hu's Leadership and Defining New Elite Politics 73

disparity has become one of the most pressing issues in Chinese society. It has been widely noticed that Chinese society lacks a social safety net. In rural areas, only 10% of the population have any sort of pension, and in the country as a whole, only about 25% of the labor force have any kind of pension or retirement plan. Most of these pensions and retirement plans are inadequate to meet the financial needs of the recipients. Arguably the most important source for social disturbance in China today is the growing number of landless migrants. During the past decade, China has been engaged in probably the largest "enclosure" movement (quandi yundong) that the world has ever seen. A vast area of agricultural land has been "enclosed" for commercial and industrial use and for building of new campuses coined as "university cities" (daxuecheng). This has forced a large number of people, in both urban and rural areas, to relocate. According to a Chinese official source, from 1996 to 2004, China's arable land decreased by 150 million mu, about 5% of the country's total arable land. 23 Meanwhile, about 40 million people have become "landless migrants" during the past two years. 24 While approximately onethird of these landless migrants have found new ways to make a living, the rest live in poverty.25 The percentage of poor peasants and migrant workers in the total population did not decline, but instead increased in 2004.26 The compensation for previous residents has often been astonishingly inadequate. Zhang Xiaoshan, director of the Rural Development Research Institute of China's Academy of Social Sciences, observes that when capitalists exploit laborers local governments often side with stronger groups, such as foreign companies and real estate developers, at the expense of laborers. 27 Zhang's 23

Liaowang dongfang zhoukan (Oriental outlook weekly), 30 December 2004, p. 35. 24 Ru, Lu, and Li, eds. 2005 Zhongguo shehui xingshifenxiyu yuce, p. 177. 25 Ibid., p. 178. 26 Lu Xueyi, Dangdai Zhongguo shehui liudong (Social mobility in contemporary China). Beijing: Social Sciences Academic Press, 2004, p. 18. 27 Shangwu zhoukan (Business weekly), 20 December 2004, p. 35.

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observation is also supported by the fact that the representation of workers and farmers in the National People's Congress decreased from 27% and 21% in the early 1980s, to 11% and 8% in the late 1990s, respectively.28 Furthermore, the population of migrant laborers, which includes 114 million people, really does not have any representatives in the decision-making bodies of the country. Like all citizens, they 'want to have a decent salary, a safe work environment, basic social welfare rights, education for their children, and respect from society, but in reality, they can get few of these. 29 They are the second-, or even third-, class citizens in the PRC, as some Chinese scholars have noted. 30 But as Liu Kaiming, director of the Shenzhen social research institute, observed, China's migrant laborers are also experiencing a generational change. The new generation of migrant laborers is better educated and is more conscientious about protecting their interests.31 They often use cell phones to disseminate information and are potentially more interested in political participation. In fact, they were the main participants in worker strikes in Shenzhen and other coastal cities in recent years. It has become clear to Hu and other new Chinese leaders that unless some policy changes are made the country is on the verge of social revolution led by vulnerable groups such as farmers, migrant workers and the urban employed. That threat is the main reason the Hu administration has called for the establishment of a more "harmonious society" that pays more attention to issues of social justice and the interests of vulnerable groups. Hu and Wen have recently made some important policy changes in light of these concerns. •

28 29 30 31

In the beginning of 2004, the central committee of the CCP issued an order that local governments should make a concerted effort to reduce taxes and other burdens on farmers. In addition,

Ru, Lu, and Li, eds. 2005 Zhongguo shehui xingshi fenxi yu yuce, p. 234. Zhongguo xinwen zhoukan (China news weekly), 28 December 2004, p. 1. www.chinesenewsnet.com. 28 December 2004. Zhongguo xinwen zhoukan (China news weekly), 28 December 2004, p. 1.

Deciphering Hu's Leadership and Defining New Elite Politics 75

Premier Wen stated that China would reduce or waive the agriculture tax for five years.32 This new policy resulted in an increase in the average income of Chinese farmers by 11.4% in the first three quarters of 2004, the highest rate of increase since 2997.33 •

•

•

The State Council ordered business firms and local governments to pay debts to migrant workers. Over the next ten years the central government also plans to establish special funds to provide occupational training for unemployed migrants so they have a better chance of finding jobs in urban areas. In the wake of the tragic death of Sun Zhigang, a 27-year-old migrant worker who was beaten to death in Guangzhou, Premier Wen announced the abolishment of "The Regulation for Internment and Deportation of Urban Vagrants," bringing two decades of legal discrimination against migrants to an end. The central government ordered a reduction in land leases for commercial and industrial uses and a reduction in the number of special economic zones, which often receive favorable tax breaks and other benefits. As a result, a total of 4,735 special economic zones were abolished, accounting for 70.2% of the total number of special economic zones in the country.34

These policy initiatives set forth by the new leadership have received a very positive reaction from Chinese society, especially from public intellectuals. According to a survey of experts in the fields of sociology, economics, law and management conducted by the CASS in December 2004, 56.8% of respondents believed that the Chinese leadership has made important progress in improving the lives of vulnerable social groups, compared to 9.2% of respondents who felt this way in the 2003 survey.35 Some Chinese scholars argue that the greater attention paid to the interests of vulnerable social 32

Lianhe zaobao (United morning news), 28 December 2004. liaowang dongfang zhoukan (Oriental outlook weekly), 30 December 2004, p. 39. 34 Ibid., p. 25. 35 Lu Jianhua, ed., 2005 nian Zhongguo shehui lanpishu (Bluebook of Chinese society in 2005). Beijing: China's Academy of Social Sciences Press, 2004. 33

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groups can be interpreted as the real beginning of China's political reform because this signifies a profound change in state-society relations.36 Hu's populist approach primarily aims to enhance the so-called "governing capacity" of the CCP in order to consolidate its own power. Under Hu's leadership, elite promotion has also significantly changed. Technocrats dominated the Chinese leadership during both the Deng and Jiang eras. To a certain extent, technocrats' experiences and expertise in science, technology, finance, and foreign trade has contributed to China's economic expansion in the past two decades, as exemplified by the cases of Shanghai and other coastal cities. In light of his perceived new mandate, Hu seems to be interested in promoting elites with different kinds of leadership skills and expertise. This change is particularly evident in the recent rapid rise of tuanpai officials. TUANPAI LEADERS: SUPPORTERS OF HU'S NEW INITIATIVES Officials of the CCYL have long been a major recruitment source for the party and government leadership in the PRC. The mission of the CCYL states explicitly that this political organization is the "reserve army" (houbeijuri) for the CCP. Its purpose is to "add new blood" to the party and to produce successors at all levels of political leadership. 37 The CCYL is one of the largest political institutions in the PRC. In 2002, the CCYL had a total of over 68 million members, including 181,000 full-time CCYL cadres. 38 In the history of the PRC, 36

Shangwu zhoukan (Business weekly), 20 December 2004, p, 37. For more discussion, see Cheng Li "Hu's Followers: Provincial Leaders with Backgrounds in the Communist Youth League." China Leadership Monitor, Issue 3 (Summer 2002). Cheng Li, "Hu's New Deal and the New Provincial Chiefs." China Leadership Monitor, Issue 10 (Spring 2004) and Cheng Li, "New Provincial Chiefs: Hu's Groundwork for the 17th Party Congress." China Leadership Monitor, Issue 13 (Winter 2005). 38 Shijie ribao, 3 May 2002, sec. A, p. 7, and http://cyc7.cycnet.com/zuzhi/works new/80year/introduce/index.htm. 37

Deciphering Hu's Leadership and Defining New Elite Politics 77

several prominent leaders such as Hu Yaobang, Hu Qili, and Li Ruihuan, originated from the CCYL. For most of PRC history, the number of leaders with CCYL backgrounds in the Chinese top leadership has been quite small. Liu Shaoqi intended to promote some CCYL leaders, but Mao persecuted them during the Cultural Revolution. Deng promoted Hu Yaobang, Hu Qili and Wang Zhaoguo, but all of them lost favor in the late 1980s. Jiang Zemin did not value leaders with CCYL backgrounds, and very few of Jiang's close associates previously worked in the CCYL. Among the 25 members of the current politburo, only four, including Hu Jintao, have had CCYL leadership experience. Liu Yunshan, head of CCP Propaganda Department, is believed to be closer to Jiang and Zeng Qinghong than to Hu Jintao. Xinjiang Party Chief Wang Lequan and Head of the Workers' Union Wang Zhaoguo advanced their careers through the CCYL, but they do not owe any debts to Hu since he did not promote them. Therefore, no one in the current Politburo is considered to be Hu's protege. This will likely change since Hu is now in charge. While tuanpai officials do not hold many seats in the current Politburo, they do have the largest representation on the 16th central committee of the CCP. Altogether 47 tuanpai officials currently serve on the committee as full or alternate members. 39 Hu will most likely promote his own proteges to the Politburo, perhaps even its standing committee at the 17th Party Congress, scheduled for the fall of 2007. Since Hu became the general secretary of the party in the fall of 2002, a large number of officials with CCYL backgrounds have been appointed to positions in the ministerial and provincial levels of leadership.40 According to a recent study, about 150 tuanpai officials currently serve in the posts of ministers, vice ministers, provincial party secretaries, provincial deputy party secretaries, governors, and vice governors.41 39

See Cheng Li, "The 'New Deal': Politics and Policies of the Hu Administration," Journal of Asian and African Studies. Vol. 38, Nos. 4-5 (December 2003): 329-346. 40 For a comprehensive study of tuanpai officials, see Ding Wang, Hu Jintao yu gongqingtuan jieban qun (Hu Jintao and the successors of Chinese Communist Youth Leagues). Hong Kong Celebrities Press, 2005. 41 Zhongguo shibao (China times). 13 July 2005, p. 1.

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Table 2.1 lists all 22 tuanpai officials who currently serve as provincial chiefs (13), ministers of the State Council (7), and heads of the CCP central departments (2). They account for 21%, 25%, and 50% of the total numbers in these three levels of leadership, respectively. This list includes most, but not all, prominent tuanpai officials. Some rising stars with tuanpai backgrounds currently serve as vice ministers, deputy heads, or deputy provincial chiefs. They include Liu Peng (director of the General Administration of Sport), Ye Xiaowen (director of the State Administration for Religious Affairs), Tian Congming (head of the Xinhua News Agency), Ling Jihua (deputy head of the General Office of the CCP central committee), Cai Wu (director of the Information Office of the State Council), Shen Yueyue (deputy head of the CCP Organization Department), Huang Yaojin (deputy head of the CCP United Front Work Department), Ji Bingxuan (deputy head of the CCP Propaganda Department), Yuan Chunqing (executive deputy Party secretary of Shaanxi), Liu Qibao (executive deputy Party secretary of Guangxi), and Jiang Darning (executive deputy Party secretary of Shandong). Most of them are in their early 50s, and are members or alternates on the 16th Central Committee. Along with those listed in the table below, these prominent tuanpai officials are likely to play a more important role in the years to come. Those who serve as provincial chiefs and ministers in the table certainly have a greater opportunity for advancement to the national leadership in the near future. Li Keqiang (Party secretary of Liaoning), Zhang Baoshun (Party secretary of Shanxi), Li Yuanchao (Party secretary of Jiangsu), Wu Aiying (Minister of Justice), and Liu Yandong (head of the CCP United Front Work Department) are among the candidates for Politburo seats in the next Party Congress. All of them hold post-graduate degrees, and, with the exception of Liu Yandong, all are in their early 50s. Li Keqiang, Zhang Baoshun, Li Yuanchao, and Liu Yandong all served on the 11-member secretariat of the CCYL Central Committee in early 1980s when Hu Jintao was in charge of the organization. Many other tuanpai leaders served as CCYL secretaries at the provincial level in the early 1980s. They were usually members of the CCYL Central Committee in the

Table 2.1 Career Experiences of Tuanpai Officials who Currently Serve as Full Min Year Born

Year Appointed

Education Level

Field

CCYL Years

Rural Exp. X

Li Keqiang

Liaoning Secretary

1955

2004

Ph.D.

Economics

82-98

Zhang Baoshun

Shanxi Secretary

1950

2005

M.A.

Economics

78-91

Li Yuanchao

Jiangsu Secretary

1950

2002

Ph.D.

Law

82-90

X

Qian Yunlu

Guizhou Secretary

1944

2001

College

Economics

82-83

X

Wang Lequan

Xinjiang Secretary

1944

1995

M.A.

Politics

82-86

X

Wang Yang

Chongqing Secretary

1955

2005

M.A.

Management

82-84

X

Ji Yunshi

Hebei Governor

1945

2003

College

Physics

82-84

Huang Xiaojing

Fujian Governor

1946

2005

College

Unknown

81-84?

X

Li Chengyu

Henan Governor

1946

2003

College

Politics

82-85?

X

Huang Huahua

Guangdong Governor

1946

2003

M.A.

Politics

82-87

X

Song Xiuyan (f)

Qinghai Governor

1955

2004

College

Economics

83-89

Yangjing

Neimenggu Governor

1953

2004

M.A.

Economics

83-5, 93-6

X

Ma Qizhi

Ningxia Governor

1943

1998

College

History

81-83

X

Li Dezhu

Minister, Ethnic Affairs

1943

1998

College

Politics

80-85

X

Li Zhilun

Minister, Supervision

1942

2003

College

Law

82-92?

X

Li Xueju

Minister, Civil Affairs

1945

2003

M.A.

Unknown

78-88

X

Wu Aiying ( 0

Minister, Justice

1951

2005

M.A.

Politics/Law

82-89

X

Du Qinglin

Minister, Agriculture

1946

2001

M.A.

Law

78-84

X

Sun Jiazheng

Minister, Culture

1944

1998

College

Chinese

78-83

X

Zhang Weiqing

Minister, Family Planning

1944

1998

College

Philosophy

82-83

X

Liu Yunshan

Head, CCP Organization

1947

2002

College

Politics

82-84

X

Liu Yandong (f)

Head, CCP United Front

1945

2002

Ph.D.

Politics

82-91

Notes: Exp. = Experience, Ind. = Industrial, Org. = Organization.

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early 1980s. Li Xueju was head of the Organization Department of the CCYL Central Committee. Li Zhilun was the director of the Research Office of the Youth Movement of the CCYL Central Committee. Both worked under Hu's leadership during the early 1980s. As a result, all of them have had close contact with Hu Jintao for more than two decades. Two tuanpai officials, Li Yuanchao and Liu Yandong, are princelings, and their fathers served at the provincial or ministerial levels of leadership prior to the Cultural Revolution. After Deng Xiaoping returned to power in 1978, and especially in the early 1980s, a large number of princelings were promoted to leadership posts at various levels as an incentive for veteran leaders to retire. Many princelings first became CCYL officials because this position was perceived as a stepping-stone for further promotion. In the 11th Secretariat of the CCYL Central Committee in the early 1980s, for example, four of the eleven members were princelings, including Li Yuanchao, Liu Yandong, Chen Haosu (former Foreign Minister Chen Yi's son) and He Guangwei (son of revolutionary veteran He Changgong). Since the mid-1980s, however, princelings usually have taken positions with business firms or local governments in coastal cities, which provide more opportunities for financial profits and/or political careers. Yu Zhengsheng (Party secretary of Hubei), Xi Jinping (Party secretary of Zhejiang), and Bo Xilai (Minister of Commerce), for example, went to Qingdao, Fuzhou and Dalian where they served as municipal leaders. According to Ding Wang's study, no princeling at the minister or vice-minister level of leadership has served in the national leadership of the CCYL since 1983. Consequently, CCYL officials usually come from humble family backgrounds, and many from poor inland provinces. Table 2.1 shows that all of the tuanpai officials were appointed to their current posts within the last ten years. Seventeen officials (77%) were appointed to their current posts within the past four years. Many have gained broad leadership experience by taking jobs at different levels of leadership (municipal, provincial and national), in different institutions (party and government), and in different sectors (propaganda, organization, and legal affairs). Li Yuanchao, for example,

Deciphering Hu's Leadership and Defining New Elite Politics 81

served as deputy director of the Office of International Public Affairs of the CCP Central Committee, deputy director of the Information Office of the State Council, vice minister of Culture, and Party Secretary of Nanjing City before taking the post of Party Secretary of Jiangsu. Table 2.1 also lists academic fields based on the highest degree attained by these leaders. Ten (45.5%) officials studied politics or law, six (27.3%) majored in economics, and three (13-6%) received degrees in humanities. Only one leader, Hebei Governor Ji Yunshi, studied natural science. None of them studied engineering.42 This is in sharp contrast with the dominance of technocratic leaders in the late Deng and Jiang eras. Many of these leaders such as Liu Yunshan, Wang Lequan, Li Yuanchao, Huang Huahua, Song Xiuyan, and Wu Aiying, attended a part-time degree program at the Central Party School (CPS). Almost all the younger leaders on the list also attended mid-career training programs at CPS in the 1990s when Hu Jintao was president of the CPS, thus strengthening their ties to him. A majority of these tuanpai leaders (81.8%) come from rural backgrounds. Li Keqiang and Li Yuanchao were "sent-down youths" who worked as farmers during the Cultural Revolution. Liu Yunshan and Qian Yunlu worked as laborers on collective farms. Many served as Party secretaries of the People's Communes early in their careers. They include: Wang Lequan, Qian Yunlu, Li Xueju, Wu Aiying, and Sun Jiazheng. Thirteen (59.1%) had work experience as county Party secretaries. Only two of these tuanpai leaders had leadership experience in the industrial sectors. One of the most astonishing findings of this study of 22 prominent tuanpai leaders is that none of them has had work experience in foreign trade, finance or banking. Of course, some of these leaders previously served as mayors, and some currently serve as governors whose primary responsibility is to promote economic 42

Liu Yandong, however, studied chemical engineering at Qinghua University as an undergraduate in the 1960s. In the 1990s, she continued her graduate-level education at the People's University and Jilin University where she received her Master's degree in sociology and Doctoral degree in politics.

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growth in their cities or provinces. Those who serve as Party secretaries are also required to make important economic decisions. In a way, these tuanpai leaders are not necessarily ignorant of, or incapable of, handling economic issues. Nevertheless, none of the most prominent tuanpai leaders has specialized in economic and financial administration, especially in the international area. Not surprisingly, all seven of the current ministers with CCYL backgrounds usually head the ministries in non-economic or non-industrial fields such as ethnic affairs, civil affairs, supervision, justice, culture, family planning, or agriculture, instead of areas such as finance, construction, railways, information technology, or commerce. Table 2.1 also shows that tuanpai officials usually have had work experiences in Party organization and propaganda. Eleven leaders (50%) previously served as chiefs of propaganda for various institutions, and eight (36.4%) were in charge of organizational affairs in various Party affiliates. Several leaders have had experiences in legal affairs. These credentials may not be valuable in a country that prioritizes foreign trade and economic globalization, but are essential since the Hu administration emphasizes the need to pay more attention to social problems and political tensions among various interest groups. Tuanpai officials' lack of credentials in economics, especially in foreign trade and finance, is an inherent disadvantage for this powerful elite group. This means that Hu's tuanpai officials must cooperate — and share power — with other elite groups. This also reveals that although Hu is in charge, other political forces restrain his power. This is a healthy political situation and may help prevent Hu from wielding excessive power or achieving social fairness at the expense of economic efficiency. POPULIST COALITION VERSUS ELITIST COALITION: NEW PATTERN OF ELITE POLITICS While Hu and other new leaders will not allow any organized opposition groups to compete for political power, they intend to institutionalize checks and balances between opposing interests

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within the CCP.43 For the first time in the history of the PRC, the ruling Party is no longer principally led by an individual strong leader, but instead consists of two almost equally powerful factions or coalitions. These two coalitions cannot be simplistically categorized in ideological terms such as liberals and conservatives, or reformers and hardliners. More appropriate labels would be to call the coalition, led by former Party chief Jiang and his protege, Vice President Zeng Qinghong, the elitist coalition and the other coalition, led by current Party chief Hu and Premier Wen, the populist coalition.44 The Jiang-Zeng coalition and the Hu-Wen coalition represent two different socio-political and geographical constituencies. These differences are largely reflected in their leaders' distinct personal careers and political associations. Many prominent figures in the Jiang-Zeng elitist coalition are members of the so-called Shanghai Gang and they are princelings — children of high-ranking officials. Many have advanced their careers in the areas of finance, trade, foreign affairs, IT industries, and education. Some are returnees from studying abroad. In contrast to the tuanpai officials described earlier in the chapter, these leaders in the elitist coalition often represent the interests of economic and cultural elites and the most economically advanced coastal regions. Both Jiang and Zeng come from the privileged families of highranking officials who worked in the country's key industries for many years and advanced their political careers primarily in Shanghai.45 43

Wang Yuqi, Professor of Public Administration at both the State Institute of Administration and Beijing University, argues that the Western-style division of three branches of power is not applicable to China and that the Chinese Communist Party should experiment with its own system of checks and balances. Nanfeng Chuang (Southern window), 16 December 2004, p. 23. 44 A significant part of this discussion is based on my article on infra-party partisanship in the CCP. For a full discussion of the concept of intra-party partisanship, see Cheng Li, "The New Bipartisanship within the Chinese Communist Party." Orbis, (Summer 2005): 387-400. 45 On the formation and role of the "Shanghai Gang," see Cheng Li, "Shanghai Gang: Force for Stability or Fuse for Conflict?" China Leadership Monitor, No. 1 (Winter 2002).

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Zeng, as a princeling with strong family ties, has been known for his political associations with some powerful networks — first with the influential faction representing China's petroleum industry and then with the emerging Shanghai Gang.46 Zeng has spent almost his entire career working in coastal regions such as Beijing, Shanghai, and Guangdong. This elitist coalition currently occupies more seats on the Politburo than the opposing coalition. Among the current nine members of the standing committee of the Politburo, the highest decisionmaking body in the country, three are members of the Shanghai Gang, two used to work with Jiang at the First Ministry of Machine Building Industry, and one was his long-time political ally. In contrast, neither Hu nor Wen has strong political family ties. Both of them spent many years -working in China's poorest areas. Hu has spent most of his adult life in some of the poorest provinces in China's inland region — 14 years in Gansu, three years in Guizhou, and about four years in Tibet. Similarly, Wen spent 15 years after college graduation working under extremely arduous conditions, also mainly in Gansu. The fact that both President Hu and Premier Wen come from China's poorest region indicates they are more sensitive to the needs and concerns of the inland provinces and weaker social groups. Most of the members of the populist coalition advanced their political careers through local and provincial administrations; many have worked in the areas of youth affairs, Party organization, propaganda, and legal affairs. With similar background to Hu and Wen, they often come from less-privileged families and less-advanced provinces. Like many members of the populist coalition, both Hu and Wen worked in the Party organization for many years. Hu's political association was largely with the CCYL, where he served as a member of the Secretariat and then as first secretary during the early 1980s. While the elitist coalition dominates the Politburo, especially 46

For details on the influential role of the petroleum industry in elite recruitment during the 1970s and the early 1980s, see David M. Lampton, Paths to Power: Elite Mobility in Contemporary China. Ann Arbor: Center for Chinese Studies, University of Michigan, 1986.

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its standing committee, Hu's tuanpai officials occupy 47 seats on the 356-member central committee of the CCP.47 One interesting phenomenon is that, in each of the six most important national leadership bodies within the PRC, the top two positions are filled by one leader from each of the two different coalitions, creating a situation of checks and balances. In the state presidency, we find President Hu Jintao versus Vice President Zeng Qinghong; on the Central Military Commission; Chairman Hu Jintao versus First Vice Chairman Guo Boxiong (who is Jiang's protege); on the Politburo Standing Committee, Secretary General Hu Jintao versus the second highest ranking member, Wu Bangguo (a member of the Shanghai Gang); on the State Council, Premier Wen Jiabao versus Executive Vice Premier Huang Ju (another member of the Shanghai Gang); in the National People's Congress, Chairman Wu Bangguo versus First Vice Chairman Wang Zhaoguo (a long-time colleague of Hu Jintao in the CCYL); and in the Chinese People's Political Consultative Conference (CPPCC), Chairman Jia Qinglin ("who is Jiang's protege) versus First Vice Chairman Wang Zhongyu (who was Zhu Rongji's chief-of-staff). This interesting arrangement is by no means coincidental. It reflects the desire within the Chinese political establishment to maintain a balance of power between opposing interests. Also, the two senior leaders who were dismissed as a result of the SARS crisis in the spring of 2003 were from two different coalitions. Former Minister of Health Zhang Wenkang was a member of the Shanghai Gang and former Mayor of Beijing, Meng Xuenong, was a long-time associate of Hu Jintao in the CCYL. Yet while the tuanpai and the Shanghai Gang are arguably the two most powerful elite factions in present-day China, the number of seats that they occupy in the Politburo and on the Central Committee is still limited. They must actively engage in coalition-building with hopes of expanding their power and influence in the future. Whereas Jiang's proteges dominate the current Politburo, especially its most powerful standing committee, the leaders of the Li, "The 'New Deal'," p. 336.

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Hu-Wen coalition are much more popular in intra-Party elections and among the general public. Hu Jintao, Wen Jiabao, and Vice Premier Wu Yi are the three leaders who stood on the front line in the fight against the SARS epidemic. They are also the leaders who received the highest percentage of votes in the elections for both the Sixteenth Party Congress and the Tenth National People's Congress (NPC) prior to the SARS crisis. Table 2.2 shows the distribution of votes received by the top two leaders of five national institutions in the election for the Tenth NPC and the Tenth CPPCC held in 2003. The electoral votes received by Jiang and his proteges, identified in bold, are not nearly as impressive as those received by members of the Hu-Wen coalition. While Hu lost only seven votes (four "no" votes and three abstentions) out of 2,944 valid votes held at the Tenth NPC to confirm his presidency, Jiang received 98 "no votes" and 122 abstentions out of 2,946 valid votes to confirm his chairmanship of the State Military Commission. Zeng received only 87.5% "yes" votes; out of 2,945 valid votes, there were 177 "no" votes and 190 abstentions. Jiang's protege Jia Qinglin lost 11.5% of votes in the CPPCC election. The delegates of these national leadership bodies used their limited "democratic rights" to express their views and voice their dissent

Table 2.2 Contrast between the "Populist Coalition" and the "Elitist Coalition" (Vote Counts of the 10th NPC & CPPCC Elections) Governing Institutions

No. 1 Leader

Yes Vote

No. 2 Leader

Yes Vote

(%)

PRC State Military State Council NPC CPPCC

Hu Jintao Jiang Zemin Wen Jiabao Wu Bangguo Jia Qinglin

99.8 92.5 99.3 98.9 88.5

Zeng Qinghong Hu Jintao HuangJu Wang Zhaoguo Wang Zhongyu

87.5 99.7 91.8 99.2 98.3

(%)

Notes and Sources: The boldfaced names denote members of the Jiang-Zeng elitist coalition, http://www.bbs.xilubbs.com; and Cheng Li, "The 'New Deal': Politics and Policies of the Hu Administration," Journal of Asian and African Studies Vol. 38, Nos. 4-5 (December 2003): 336.

Deciphering Hu's Leadership and Defining New Elite Politics 87

through their votes. The new Chinese leaders plan to implement regular intra-Party elections at the municipal and prefecture levels of the Party organizations. In addition, the percentage of seats on the 16th Central Committee (both full and alternate memberships) occupied by the "Shanghai Gang" was almost negligible (5.6%). This is largely due to the fact that deputies at the 2002 Party Congress blocked the election of nominees favored by Jiang and Zeng, particularly those from Shanghai.48 Table 2.2 also indicates that Jiang and Zeng's supporters in fact voted for Hu and Wen in the election. It is reasonable to expect that members of the elitist coalition will not do so in future elections partly because of the need to constrain Hu and Wen's power, and mainly because Chinese politicians will become more familiar with the rules of the "new game." If these predictions are correct, one will soon witness a more interesting and dynamic phase of China's intra-Party partisanship. PROSPECTS FOR POLITICAL REFORMS Intra-CCP partisanship may create checks and balances and thereby revitalize its leadership. Factional politics and intra-CCP partisanship, however, are neither transparent nor legitimate at present. The two coalitions may continue to keep their power contention and policy disputes from the eyes of the public in the near future. Fear of chaos or regime collapse, as experienced by many authoritarian parties in other countries during the past two decades, can be a critical factor that pressures political rivals to parley. The populist coalition and the elitist coalition will have to cooperate as they recognize their own limitations in their quickly changing country. They may see a need to share power and save the CCP from collapsing. Because of this concern, they have promoted intra-CCP partisanship along with other institutional developments such as term limits, regional representation, elections of leaders, institutional restraints on 48

Li and White, "The Sixteenth Central Committee of the Chinese Communist Party," p. 591.

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the power of the No. 1 officials in all levels of leadership, the amendment of the Party constitution to broaden its power base, institutional supervision of Party officials, and anti-corruption regulations. The Party cannot survive in its current form indefinitely because societal forces will become increasingly active in the Chinese political process, and intra-Party partisanship itself will beget further political changes. A crucial question is whether or not the CCP will actually legitimate factional politics or even split between the elitist and populist coalitions in the future. We should also explore whether such a split would occur in an evolutionary and peaceful fashion, or as a result of violence. A split within the ruling party of a given country may not necessarily be violent, but it will not be easy. for the most populous country in the world to accomplish a peaceful transition. The next decade or so "will further test Hu Jintao and other Chinese leaders' wisdom and capabilities. During the past three years, President Hu and his close ally, Premier Wen, took popular actions, such as reducing the tax burden on farmers, ordering business firms and local governments to pay debts to migrant workers, shaking hands with AIDS patients, visiting family members of the victims of coalmine explosions, and abolishing some discriminative regulations against migrants. These gestures and policies reflect Hu's recognition that his administration should respond more seriously to the challenges and problems facing Chinese society before it is too late. As the Chinese official media often acknowledges nowadays, triggering factors such as sensational corruption scandals, a large-scale real-estate bubble, a global financial crisis, major industrial accidents, health crises, a war over the Taiwan Strait, and other unexpected events, especially a combination of any of these events, may jeopardize China's future development. Whether or not the Hu administration will pursue political reforms in the years to come is still uncertain. The Chinese public discourse on democracy, the rule of law, human rights, political reforms, governmental accountability, and civil society has arguably been more dynamic during the past two years than at any previous

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time in the PRC history.49 An encouraging sign is that two prominent scholars in this discourse, Yu Keping and Xia Yong, have served as advisors to Hu Jintao, and they have recently been appointed to the posts of deputy director of the Central Bureau of Translation of the CCP and director of the State Bureau of Secrecy, respectively. Both have written numerous books on these subjects.50 Meanwhile, the Hu administration has also been known for its severe control over the media. The recent arrests of outspoken journalists, the banning of some liberal media outlets and policing of Internet chat rooms all seem to indicate that Hu Jintao has no interest in allowing freedom of the press — an important aspect of political reform. Instead Hu has been inclined to fight an uphill battle against the trend toward media autonomy at a time of rapid commercialization of the Chinese media. Hu Jintao may be popular among the Chinese people, but the Chinese Communist Party is clearly not. Hu should be wise enough to understand that his popularity will probably not last forever unless he continues to lead the country in the right direction. The real coming-of-age of China largely depends on whether the country can make substantial political reforms and institutional developments in the years to come. China can never persuade international communities that her rise is peaceful if the country remains undemocratic. Similarly, a peaceful reunification with Taiwan is impossible unless China has made genuine progress towards political democracy. 49

For example, Liaowang zhoukan (Outlook weekly) and Liaowang dongfang zhoukan (Oriental outlook weekly), two official news magazines run by the Xinhua News Agency, frequently published articles on these topics. 50 For example, Yu Keping, Shequn zhuyi (Communitarianism). Beijing: Beijing University Press, 2005; Yu Keping, Zhongguo gongminshehui de xingqi yu zhili de bianqian (The emerging of civil society and its significance for governance in reform China). Beijing: Shehui kexuewenxian chubanshe, 2002; Xia Yong, Yifa zhiguo — guojia yu shehui (Rule of law in governance: State and society). Beijing: Shehui kexue wenxian chubanshe, 2003); and Xia Yong. Zhongguo minquan zhexue (The philosophy of civil rights in the context of China). Beijing: Sanlian shudian, 2004.

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No one should expect that China will have a multi-party system in the near future. The Chinese democracy will, and should, have its own unique features. The recent peaceful and institutionalized transition of power from Jiang to Hu, the drastic changes in socioeconomic policy as a result of the political secession, and the dynamic checks and balances between the populist coalition and elitist coalition, especially the geographic regions and socioeconomic interest groups that these two coalitions represent, are all fascinating and encouraging developments. Time will tell whether Hu Jintao can truly seize the democratic challenge as a great opportunity as opposed to seeing it as a political calamity.

Chapter

Hu Jintao's Approach to Governance Joseph Fewsmith

It is still early in the Hu Jintao Administration, perhaps too early to make a serious evaluation of the governing strategies that will be associated with Hu in the future; after all, Jiang Zemin evolved from his early stress on opposing "peaceful evolution" and forbidding capitalists to join the Party to lead China into the WTO and to admit private entrepreneurs into the CCP under the rubric of the Three Represents. Countries and politicians evolve. Moreover, although Hu Jintao has taken over as head of the Central Military Commission and now holds the three major power positions (the other two being General Secretary of the Party and President of the PRC), there are still many people promoted by Jiang Zemin at the top of the system. No doubt the Seventeenth Party Congress in 2007 will bring considerable personnel change, and that personnel change will enhance Hu Jintao's power and advance his leverage, though by how much is uncertain. Nevertheless, three years after Hu emerged as general secretary, it seems we can begin to make some preliminary assessments about his approach to governance. Three years ago, there was much 91

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speculation that Hu, having spent so many years of his career in the interior of China, would be an advocate for the interior of China, that he would continue to "institutionalize" governmental affairs, and that he would be more liberal than Jiang Zemin, who disappointed many observers by not promoting elections at the township level. Much of the speculation that Hu would be more liberal than Jiang was based on the investigations of democratic socialism and the "third road" carried out by researchers at the Central Party School when Hu was head of that institution. Some of these early speculations have been borne out — Hu has pursued an agenda that addresses the needs of interior provinces and "social fairness" (though the results of these efforts appear limited so far) — but Hu has not proven to be liberal; on the contrary, to date, he has pursued a socially, intellectually, and politically conservative approach to governance that has disappointed many observers. He has, however, proven to be a system builder, albeit of a different sort than many expected. In this, there is much continuity with Jiang Zemin, though Hu appears to be more systematic and meticulous in this regard than his predecessor. Perhaps this should be expected of a person who spent so many years involved in Party work. Hu's approach to governance is largely driven by the challenges that he and other leaders in Beijing face. While the list of challenges can be quite long, basically they can be summed up as those emanating from a rapidly changing society (including greater mobility, more diverse interests, and greater rights consciousness), those that derive from ideological change (either the introduction of new ideas or simply the increasing lack of appeal of Marxism-Leninism), and those that are imbedded in the Party itself — the failure to select the best possible leaders (and, in some cases, some really very bad leaders), the increasingly tense relations between cadres and the population, and the general lack of legitimacy that the Party, as a non-democratic party, suffers. In response, it seems that the authorities in Beijing have chosen basically a three-pronged approach. The first prong is what we might call the illiberal or disciplinarian state. This prong is authoritarian in approach. It demands compliance with Beijing's directives, it increases the role of security forces, and it cracks down on

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intellectuals and others who desire a more liberal state. The second prong is the ameliorative state, the topic addressed by many chapters in this volume. This prong recognizes, at least implicitly, the legitimacy of many of the protests that have pulsated across the country in recent years as well as the need to address, both rhetorically and in deed, the needs of those left behind. The third prong is that which addresses issues of governance, both within the Party and between the Party and the citizenry, particularly at the local level. Unfortunately, these three categories are not mutually exclusive. As we will see below, laws and regulations not only address governance issues by providing regularity and predictability but also are disciplinary measures aimed at reducing threats to the Party-state without threatening the dominance of the Party (indeed they are intended to enhance that dominance). Similarly, ameliorative measures can create institutions that contribute to better governance. Since Hu Jintao became general secretary, much attention has been paid to his efforts to address the concerns of those left behind in the course China's rapid growth and social change. Although the Three Represents theme emphasized by Jiang Zemin — the idea that the Party represents the advanced productive forces, advanced culture, and the fundamental interests of the broad masses of the people — has not been abandoned, its emphasis has been significantly changed. Whereas Jiang emphasized the emergence of new strata of technological specialists and private entrepreneurs (the advanced productive forces), Hu has sounded more populist themes, particularly in his emphasis on the lidang weigong zhizheng weimin (base the Party on the public and rule for the people). This rhetorical shift has been complemented by stepped up efforts to create social security systems, provide minimum support for the urban poor, and unemployment insurance. These are all ameliorative measures designed to address urgent social needs. To the extent that they begin to create a modern welfare state, they are, or will become, part of the fabric of policies designed to enhance the legitimacy of the CCP and provide better governance for the Chinese people. Such ameliorative measures, addressed by many other chapters in this volume, are not the subject of this chapter. Rather, this chapter discusses at least some of the measures intended to maintain order

94 Joseph Fewsmith

(discipline) in society as well as some of those designed to enhance governing capabilities, and to suggest that while these measures seem at first glance to be pointing in opposite directions, they are actually quite complementary (though one might argue that a different mix of policies might be more effective over the long run). THE NON-LIBERAL/DISCIPLINARY STATE The use of harsh measures to maintain political control is nothing new in the PRC, and we see their continuing use in censorship of the Internet and the arrest of political dissidents, sometimes even those who seem to be working for reform within the system.1 Such harsh measures have long been part of the system, though there appears to be an effort, in concert with the idea of "ruling the country through law," both to tighten regulations and to curtail abuses. For instance, on 25 September 2005, the State Council issued new regulations governing the content of information carried on the Internet. These regulations forbid carrying information that "promotes cultist, feudal, or superstitious practices," or "disseminates rumors, disturbs social order, or undermines social stability," or that "instigates illegal assemblies, associations, parades, demonstrations, or the gathering of crowds to disturb social order."2 At the same time, there have been efforts to curb the abuse of authority, including by local police who often resort to torture to "solve" criminal cases. 3 The idea of further elaborating the legal regime to protect the interests of the state has become an increasingly important feature of 1

I am thinking of the strange case of Lu Jianhua. Rules on the Management of Internet News Information Services, Xinhua Wang, 25 September 2005. 3 There have been efforts to stop the use of torture. Many local (and not so local) police officials have long assumed that torture was an acceptable way to break a case; in recent years, there has been a laudable effort to change thinking and practice in this regard. See Murray Scot Tanner, "Torture in China: Calls for Reform within China's Law Enforcement System," testimony presented to the Congressional-Executive Committee on China, 26 February 2002, available at http://cecc.gov/pages/roundtables/072602/ tanner.php?PHPSESSID=c9b95be94f!7ed5bf7881c37be078d33. 2

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post-Tiananmen China; indeed shortly after the Tiananmen incident, the state passed a law that restricted public protest. According to this law, anyone who wanted to take to the streets to protest had to obtain official permission — something not likely to be given. It should be noted that this law has not stopped public protest — there were some 74,000 "mass incidents" in 2004 — but it has prevented political protests of the sort that happened in 1989This sort of legislation appears to be becoming more common under Hu Jintao, who has made "ruling in accordance with law" one of the hallmarks of his administration. But the type of law being passed appears to defend the state — and the Party — from potential challenges more than it binds the state. For instance, in December 2004, the state passed a new law on religion. If implemented strictly, it would stop a good bit of the religious expression now seen in the PRC. All religious groups were expected to register with the state (defining house churches as illegal), cautions were set out on relations with overseas religious groups, and activity not strictly religious (i.e., potentially political) was prohibited. 4 More recently, new regulations have been issued on petitioning. Petitioning for a redress of grievances has been one of the rights of Chinese citizens, but many citizens have found no benefit (and a lot of harm) in petitioning the local officials who are the source of their difficulties, so they have increasingly taken to petitioning higher levels of authority. Noticing that large-scale petitions garner greater attention than simple petitions, citizens have banded together to petition collectively. Seeking to use the legal structure of the PRC to secure their rights, citizens have worked with legal specialists to phrase their petitions in accordance with the law. Such petitioning activity has grown rapidly in recent years, and there have been a constant stream of petitioners coming to Beijing. The new regulations seek to curtail this activity. No more than five people are allowed to present a petition, and gathering "unlawfully" around government buildings or blocking traffic, tactics often used to gain attention, are prohibited. 5 4 5

"Religious Affairs Regulations," Xinhua, 18 December 2004. Xinhua, 17 January 2005.

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Although such regulations appear quite restrictive, it might be argued that having such regulations is better than not having them — that they add to the legal structure that is growing up in the PRC and that they increase the institutionalization of the system, moving it, however gradually, in the direction of legal-rational authority. Perhaps so, but the CCP disputes such notions. Whereas we generally think that the creation of laws and a legal structure decreases the role of the Party, the CCP has argued that the creation of such laws are merely a way of exercising Party rule and in no way diminishes the role of the Party. For instance, following the publication of regulations on religion, Wang Zuo'an, the deputy director of the State Bureau of Religious Affairs, wrote that "Managing religious affairs by law will not weaken Party leadership over religious work. On the contrary, it is an important guarantee for, and a way of, strengthening and improving Party leadership over religious work in the new situation."6 How do we explain how the passing of a law, which should shift religious management more firmly from the Party to the state, is thought to strengthen the Party (whether it does or not is something that should be revisited over time)? The question is ultimately whether or not the Party is restrained by law. Party leaders, including Hu Jintao, have said that the Party should operate within the scope of the constitution and laws, but Party officials have also said clearly that it is the Party that defines the legal framework. For instance, Yu Yunyao, deputy head of the Central Party School, stated, "The basic demand of the Party ruling according to law is to take the proposals of the Party and transform them into the will of the state through legal procedures, so that they become the behavioral standards that the whole society follows."7 As Li Junru, also a vice president of the Central Party School, puts it, "the ruling party 6

Wang Zuoan, "Promote Management of Religious Affairs According to Law and Uphold Party Leadership Over Religious Work," Zhongguo Zongjiao, 26 October 2004, No. 10, pp. 9-11, trans. FBIS CPP20041122000250. 7 Yu Yunyao, "Jiaqiang dangde zhizheng nenglijianshe de ruogan wenti" (Several issues in strengthening the governing ability of the party), Lilun dongtai, No. 1646 (10 September 2004), p. 8.

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is the subject (zhuti) and the government is the object (kett)."8 Although it is gratifying to see the Party adopt legal procedures, clearly those in the Party's leadership see this as a way for the Party to exercise power rather than a way to limit the power of the Party. Clearly, the Party is more interested in "rule by law" than "rule of law," with its implication that all aspects of society, including the governing structure, is subject to legal sanction. This is part of what I mean by the disciplinary state. Another part of this non-liberal state is the very conservative ideological atmosphere that we have seen emerge under Hu Jintao. 9 This was probably the most unexpected aspect of Hu's rule; most people expected him to be more open-minded. On the contrary, Hu was barely in office when his administration expressed support for studies critical of "neo-liberalism," a vaguely defined catch-all phrase that includes not only the "market fundamentalism" of conservative economists but also much of Western economics from Adam Smith to the present. It certainly includes the much derided "Washington Consensus" (which has its problems but the criticism of it has become more ideological than academic). The contemporary critique of neo-liberalism and the Washington consensus grows out of the New Left critique of globalization and Western definitions of modernity that grew up in the 1990s. Rooted in nationalistic discourse, the New Left found expression in popular journals, such as Tianya (Frontier) and Dushu (Reading). Although it made trenchant criticisms, especially of the growing gap between the well-off and the poor, it offered little in the way of practical solutions, and hence found little, if any, reflection in policymaking.10 In the 1990s, the state moved to downsize 8

Li Junru, "Shiliujie sizhongquanhui 'jueding' de lilun gongxian" (Theoretical contributions of the 'decision' of the fourth plenary session of the 16th Central Committee), Lilun dongtai, No. 1650 (20 October 2004), p. 5. 9 This section on the conservative ideological atmosphere under Hu Jintao is largely drawn from my article, "China Under Hu Jintao," available at www. chinaleadershipmonitor.org, No. 14 (Spring 2005). 10 For a survey of this trend, see my China Since Tiananmen (New York: Cambridge University Press, 2001), Chapter 4.

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large state-owned enterprises (SOEs), sell off small or unprofitable SOEs, accept foreign investment in ever greater quantities, and join the World Trade Organization (WTO) — all in disregard of these critics. Since Hu Jintao became general secretary, however, some of the concerns voiced by the New Left, especially concerns with social justice and criticisms of the free market, began to be adopted by the government. In the summer of 2003, the Chinese Academy of Social Sciences (CASS) established a Study Group on Neoliberalism. This was when the crisis over severe acute respiratory syndrome (SARS) had barely passed and when official attention was shifting to an ideological campaign to the study of the "three represents." 11 It was at this time that CASS, Chinese People's University, Qinghua University, and other groups convened a meeting on "Neoliberalism and China's Technological and Economic Security." One speaker, not named but clearly identifiable from textual evidence as Wu Yifeng, a well-known Marxist economist from Chinese People's University, elaborated on neoliberalism as an instrument of U.S. foreign policy. The purpose of neoliberalism, in Wu's view, was quite instrumental: the reason that the United States "wants others to implement neoliberalism is only one — everything for the benefit of the United States." He goes on to say that the West, "especially the United States," spares no efforts to use international economic organizations — the International Monetary Fund (IMF), the World Bank, and the WTO — to advance its agenda. The problem, according to Wu, was that there was no successful instance of neoliberalism helping a developing country: "No matter which country or region neoliberalism is promoted in, that country or region encounters enormous risk and disaster." A year later, at a press conference held to celebrate the publication of the Study Group on Neoliberalism's first work, a book called Neoliberalism: Commentaries and analyses {Xinziyou zhuyi

11

Joseph Fewsmith, "Studying the Three Represents," China Leadership Monitor 8 (Fall 2003), available at www.chinaleadershipmonitor.org.

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pingxi), it was made clear that the "Party center is very concerned about research on neoliberalism" and that the CASS group had been established specifically at the behest of the "center." The press conference was attended by Li Shenming, vice president of CASS; Li Qiqing, deputy director of the Central Bureau of Translation & Compilation; Wu Shuqing, an economist and former president of Beijing University; Fang Ning, deputy head of the Institute of Politics at CASS; He Bingmeng, deputy secretary of CASS and the editor of the book; and "several tens" of others. According to the press release, scholars at the conference stated that the central viewpoints of neoliberalism are its "emphasis on the market mechanism, opposition to state interference, advocacy of the private ownership system, and opposition to the public ownership system." The scholars maintained that the influence of neoliberalism had spread rapidly in China in the 1990s and that it was the "theoretical expression of the ideology of the international monopoly capitalist class with regard to globalization."12 The conference hoped that the book would "play the role it should play" and encouraged that it "be promoted especially among leading cadres." Wu Shuqing, former president of Beijing University, told the group that neoliberalism had influenced not only college students but also economists and leading cadres at various levels. According to Wu, "the evil wave of privatizing SOEs was clear proof that they had been influenced by neoliberalism." Ding Bing, an associate professor at the Party school in Jilin Municipality, added that politically, neoliberalism was aimed at "Westernization," and that it was "an ideological tool used by the United States and other Western countries to promote neocolonialism in the developing and socialist countries." Li Shenming took the opportunity to criticize Hong Kong economist Zhang Wuchang (Steven Cheung) and People's Republic of China (PRC) intellectual

12

Li Ruiying, "Jingti xinziyou zhuyi dui woguo de yingxiang" (Beware of the influence of neoliberalism on China), Guangming ribao, 14 June 2004, accessed at www.cas.cn/html/Dir/2004/06/l4/03l4.htm.

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Cao Siyuan for "wantonly promoting privatization" and leading China's reform in the wrong direction.13 There have been many reports of criticism of neoliberalism since June 2004. On November 9, Guangming ribao published an article called "Beware of the Neoliberal Thought Tide," which gathered the usual suspects — He Bingmeng, Li Qiqing, and Wu Yifeng — to reiterate the routine criticisms of neoliberalism. According to a later report, that article, after being posted on the Xinhua web site, received 9800 hits in three and a half days.14 In addition, there were such articles as "Global Proliferation of Neoliberalism and the Scientific Attitude We Should Take," written by the CASS Study Group on Neoliberalism; Fang Ning's "Financial Meltdown, Government Collapse, Social Unrest — Four Bitter Lessons of Argentina's Four Policies for Comprehensively Introducing Neoliberalism"; Dong Zhenghua's (professor at Beijing University) article "Castro's Critique of Neoliberalism and Globalization"; and Wu Shuqing's article "Two Types of Reform, Two Types of Results" in the Party's theoretical journal Qiushi (Seeking truth).15 These and other articles have linked neoliberalism with the theme of "Peaceful evolution." Another aspect of this opposition to Western thinking has been an assertion of a cultural strategy. Chinese leaders continue to worry about the influx of Western thinking (including "neoliberalism") and 13

"Xinzuo xinqi pipan xinziyou zhuyi kuangchao — 'Xinziyou zhuyi pingxi' chuban zuotanhui jianbao" (The New Left kicks up a storm criticizing neoliberalism — A brief account of the publication seminar for Neoliberalism: Commentataries and Analyses), accessed at www.article.comment-cn.net/show.php?type=guancha& id=1098256735, and He Bingmeng, ed., Xinziyou zhuyi pingxi (Neoliberalism: Commentaries and Analyses) (Beijing: Shehui kexue wenxian chubanshe, 2004). 14 Han Qiang, "Pingxi ziyou zhuyi sichao" (analyzing the neoliberal thought tide), Guangming guancha, 19 February 2005, accessed at http://guancha.gmw.cn/ show.aspx?id=15l4. 15 Chiang Hsun, "China's Intelligentsia Is Facing Yet Another Frigid Winter," Yazhou zhoukan, 2004, No. 51 (December 19), trans. FBIS CPP-2004-1214-000105, and Wu Shuqing, "Liangzhong gaige, liangzhong jieguo" (Two types of reform, two types of results), Qiushi, 2005, No. 4 (February 10).

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they see his as a direct threat to Marxism-Leninism and the legitimacy of the Party. On the one hand, this has brought continuing pressure on liberal-minded intellectuals, such as the criticism of "public intellectuals" in 2004. In response to the publication of a list of the 50 most influential intellectuals by Southern Weekend, the Propaganda Department reportedly submitted on September 30 a report to the Central Committee and then, with the Central Committee's approval, issued "Document No. 29" on November 11. This document reportedly criticized economist Mao Yushi, writer Yu Jie, deceased economist Yang Xiaokai and others, and it cited the journals Zhalue yu guanli (Strategy and Management), Yanhuang chunqiu (Spring and autumn annals), and Tongzhou gongjin (Advancing in the same boat) and the web site Yitahutu (It's a complete mess) for going beyond official guidelines. According to the Hong Kong journal Yazhou zhoukan (Asia weekly), Liu Yunshan, head of the Propaganda Department, toured Henan province from November 9-13 and said that ideology was "an area of strategic importance, contended for by rival forces."16 (The Xinhua report of Liu's remarks did not contain such a sentence, 17 but in an earlier speech on September 22 Liu had said, "If [the ideological and cultural fronts] are not taken over by Marxist ideas, then all kinds of non-Marxist and even anti-Marxist ideas will take over."18) In response, Shanghai's Jiefang luntan (Jiefang forum) published on November 12 an article by the pseudonymously named Ji Fangping (homophone for "Jiefang ribao commentary") titled, "A Delusive Slogan — Response to the 'Theory of Media as Public Institution.'"19 16

Chiang Hsun, "China's Intelligentsia." "Liu Yunshan Stresses the Need to Raise the Ability to Construct Socialist Advanced Culture and Provide Ideological Guidane and Public Opinion Support for Fully Building a Well-Off Society," Xinhua News Agency, 14 November 2004, trans. FBIS CPP-2004-1114-000014. 18 Liu Yunshan, "Earnestly Study and Implement the Spirit of the Fourth Plenary Session of the 16th CCP Central Committee, and Strive to Raise the Party's Ability to Lead Ideological Work," Qiushi, 16 October 2004, trans. FBIS CPP-2004-1019000077. 19 Chiang Hsun, "China's Intelligentsia." 17

102 Joseph Fewsmith

Three days later, Shanghai's Party paper, Jiefang ribao, ran an article under Ji Fangping's byline titled, "See through the Appearance to Perceive the Essence — An Analysis of the Theory of 'Public Intellectuals.'" Employing the harsh language of class struggle, the article declared that the concept of public intellectuals had been touted to "drive a wedge between the intellectuals and the Party and between the intellectuals and the general public." Far from being "independent" and above faction or class, as was often claimed, such public intellectuals, the article asserted, have "certain interest groups" supporting them. 20 Ten days later, People's Daily threw its weight behind the emerging campaign to criticize public intellectuals by reprinting the article. On December 20, Guangming ribao published an article called "Beware of the Intellectual Tide of 'Public Intellectuals'" that repeated the charge that public intellectuals seek to be "independent and critical," but that in fact intellectuals, like everyone else, reflect their social background and interests.21 A more positive aspect of this cultural conflict is an effort to promote Chinese culture. Whereas the CCP has traditionally been quite critical of China's cultural heritage, in recent years it has begun to tout traditional culture as one lever to unify the Chinese people and build legitimacy for the government. As Yu Yunyao, deputy head of the Central Party School, recently put it:22 At the same time that we are building an economically powerful country, we must strive to build a culturally strong

20

Ji Fangping, "Seeing Through the Appearance to Preserve the Essence — An Analysis of the Theory of 'Public Intellectuals'," Jiefang ribao, 13 November 2004, trans. FBIS CPP-2004-1201-000077. 21 Zhan Tianyang, "Jingti 'gonggong zhishi fenzi' sicao" (Beware the intellectual tide of "public intellectuals"), Guangming ribao, 20 December 2004, accessed at www. wyzxwyzx. com/wuezhe/gongxiantian/ShowArticle. asp?ArticlelD=50. 22 Yu Yunyao, "Jiaqiang dangde zhizheng nenglijianshe de ruogan wenti" (Several issues in strengthening the governing ability of the party), Lilun dongtai, No. 1646 (10 September 2004), p. 13.

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country to uphold the overall interests of the state. We can say that some small states in international society do not need to think about cultural issues, but a large country like China must be a culturally strong country. In building a culturally strong country, we must have our own rich cultural resources and cultural exports, must have our own cultural ideals and cultural banner, and must create our own cultural image in the world. Culture is the foundation of institutions and order.... At the present time, China is increasingly being integrated into international society, so it must increase its cultural influence and use its own cultural ideals to influence and remake the irrational or unfair aspects of world order... Domestically, building cultural superiority can strengthen the Chinese people's sense of cultural identity, increase the people's solidarity (minzu ningjuli), and raise the self-confidence and pride of the people. Externally, it can increase the competitiveness of our comprehensive national strength.

BUILDING BETTER GOVERNANCE If the above lays out some of the ways, both positively and negatively, that the CCP is trying to maintain and increase its legitimacy against a rising tide of domestic and international concerns, there are also extensive efforts to create better governance, at least at the local level. These efforts vary tremendously from place to place; indeed, in large areas of the country it seems difficult to speak of the possibility of creating better and more responsive governance. However, there are some areas, especially along the more prosperous east coast, that are doing things that seem to have a positive effect on the lives of citizens. Whether or not village elections improve governance, is a hotly debated topic. In some areas, they appear to curtail corruption and other abuses of power. But according to other research, there is no correlation at all between village elections and the provision of

104 Joseph Fewsmilh

public goods (a measure of better governance). 23 Apart from electoral mechanism, however, there are other mechanisms that have been implemented in some areas that suggest that government can become more responsive if not necessarily more democratic, at least in an electoral sense. Two examples are the development of "democratic consultation meetings" (minzhu ketan but) in Wenling City, Zhejiang Province, and the development of chambers of commerce in Wenzhou, also in Zhejiang.

Democratic

Consultation

The democratic consultation system in Wenling consists of open meetings between cadres and ordinary citizens at the village or township level in which the people are free to raise questions or express their opinions on important public issues, such as proposed capital construction projects, and the leaders try to respond to the questions raised. Sessions end with a recess during which the leadership discusses the proposals raised and then announces the results to the assembled group. Although democratic consultations do not challenge the leadership of the Party, they do appear to constrain the decision making of local leaders. 24 This system of democratic consultation began in June 1996 when one of the townships under Wenling's jurisdiction, Songmen, held a meeting as part of a campaign to carry out "education on the modernization of agriculture and villages." The people expressed no interest in yet another "you talk, we listen" campaign. Confronted with this apathy and resentment, local leaders decided to try something different. Instead of having the cadres on the stage speaking to peasants assembled below, they invited the peasants to take the

23

Lily Tsai, "The Struggle for Village Public Goods Provision: Informal Institutions and Accountability in Rural China," forthcoming in Elizabeth Perry and Merle Goldman, eds., Grassroots Political Reform in Contemporary China, Harvard University Press. 24 This section largely follows my article, "Taizhou Area Explores Ways to Improve Local Governance," available at www.chinaleadershipmonitor.org, No. 15 (Summer 2005).

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stage and express their opinions. The meeting apparently became very lively and there was a direct interchange of views between the "masses" and the cadres. 25 As in most areas of China, there were a variety of tensions and problems that this new form of "political and ideological work" (which is what this forum started out as) addressed. There were tensions between the townships and the villages, between the cadres and the people, between the Party committee and the government at the village level, and among cadres. What the leadership in Songmen Township sensed very quickly was that by involving the people in discussions of public issues, different cadres and different interests were forced to communicate and compromise with each other. Moreover, real misunderstandings as well as a number of real but minor issues that affected relations between the people and the local leadership could be cleared up quickly and on the spot. For such political innovation to occur in China there must be both social circumstances conducive to change and political entrepreneurship. In the case of Wenling, the population was quite prosperous; in the urban areas per capital income is 12,651 yuan per year, and in the rural areas is 6,229 yuan.26 Moreover, it is a population with quite a lot of physical mobility; of the 1.16 million residents in Wenling, some 200,000 are away from the city on a long-term basis. Such people, and those who travel for shorter lengths of time, bring back a greater democratic consciousness. The rapid development of Wenling's economy and the exercise of village autonomy in recent years had similarly stimulated the growth of democratic consciousness. Such developments stood in contrast with the nondemocratic ways of making decisions, increasing tensions with the local cadres and making decisions difficult to implement. 25

Jia Xijin and Zhang Yun, "Zhongguo canyushi minzhu de xin fazhan" (A new development in China's participatory democracy," in Mu Yifei and Chen Yimin, Minzhu kentan: Wenlingren de chuangzao (Democratic consultation: a creation of the people of Wenling) (Beijing: Central Comilation and Translation Press, 2005), pp. 80-93. 26 Dong Xuebing and Shi Jinchuan, "Zhidu, boyi yu quanli chonggou" (System, game, and the restructuring of power), in Mu Yifei and Chen Yimi, eds., Minzhu kentan, p. 107.

106 Joseph Fewsmilh

In the case of Songmen Township and Wenling City, the political leadership was prepared to innovate. Immediately after the first forum in Songmen, the Wenling propaganda department sent someone to "squat" in Songmen for some time and study the issue.27 But only a month and a half later, the Wenling leadership started to promote this and similar systems in other townships. Linchuan Township set up a "service desk for the convenience of the people," Shitang Township opened an "express car for people's feelings," and other places held "discussions of people's feelings."28 Evidently such new forms were not universally welcomed by the local cadres. Some of the early meetings in particular were said to have resembled Cultural Revolution-style "struggle sessions" as people expressed long-pent up resentments, and local cadres felt that such sessions, besides being uncomfortable, were an additional chore and would be useless. Wenling Party Secretary Wang Jinsheng felt differently. He packed off the whole group of leading cadres in Wenling to Zhejiang University, where they spent the whole day listening to professors talking about grassroots democracy. In the evening, the leading cadres spent hours discussing the advantages and disadvantages of democratic consultation, and by 2:0 0 am, when the meeting concluded, the leadership was convinced to go forward.29 The new system was promoted, and in August 2000 the leadership adopted the name "democratic consultation" to describe the innovation. In September 2004, Wenling issued regulations to govern the implementation of these democratic consultations.30

27

Hu Zhen, Chen Jiwei, Li Xiaopeng, Hong Wei, and Zhang Min, "Jiceng minzhu jianshe de yizhong haoxingshi" (A good form for building grassroots democracy), in Mu Yifei and Chen Yimin, Mizhu kentan, p. 158. 28 Jia and Zhang, "Zhongguo canyushi minzhu de xin fazhan," p. 82. 29 Wang Junbo, '"Caogen minzhu': zai zhiduhua de yangguangxia" ('Grassroots democracy': Under the light of institutionalization), in Mu Yifei and Chen Yimin, eds., Minzhu kentan, p. 190. 30 "Zhonggong Wenling shiwei guanyu 'mizhu kentan' de ruogan guiding (shixing)" (Some regulations governing the 'democratc conultations' by the CCP Wenling Party Committee (for trail implementation), pp. 220-226.

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Democratic consultations operate somewhat differently at the village and township levels. At the village level, in 1998 peasant representative congresses (.nongmin daibiao dahut) began to be formed. Each production team (xiaozu) would select one or more representatives, depending on the size of the production team, and members of the village Party committee and the village committee (the government side of village administration) are de facto members. In 1999, this system took on the name of "village assembly" (cunmin yishihui). This system has now spread throughout Wenling; in the villages under Songmen Township, most villages convene an average of two village assembly meetings per month. This system is regarded as an extension of the democratic consultation system.31 Many of these meetings revolve around the issue of public finance, one of the most contentious issues in rural China. In one village under Ruohuang Township, these village assemblies took on a much greater importance after the village head, who had been elected, used over one million yuan of public funds to gamble, which caused anger among the peasants. Previously they had trusted that someone they had freely elected would manage finances honestly, but after this incident they didn't trust anyone and insisted that matters of public finance be handed openly by the village assemblies. In addition to public finances, there are many issues that directly affect the interests of villagers in an area like Ruohuang Township: urbanization brings issues of land requisitions, paving roads, environmental preservation and so forth, all of which are taken up by the village assemblies.32 At the township level, democratic consultations are really a system of open hearings on public policy. When the democratic consultation system began, discussions flowed from topic to topic, 31

Xiao Qing, "Wenling cunyihui: Nituli dansheng Zhongguo xin xingtai minzhu zhengzhi" (Wenling's village assemblies: A new form of democratic politics born from China's soil), in Mu Yifei and Chen Yimin, eds., Minzhu kentan, pp. 179-180. 32 Wang Junbo, "Qiaoran bianhua de 'xiangcun zhengzhi'" (The silent change of 'village polities'), in Mu Yifei and Chen Yimin, eds., Minzhu kentan, p. 193.

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making resolution of any issue more difficult. After a while, it was decided that each democratic consultation should focus on a single issue. The topic for discussion is usually decided by the township Party committee or government, though there are provisions that allow the public to petition to hold a meeting on a particular topic. The topic, time and place of meeting is posted, and anyone is allowed to come, but no one (other than the leadership) is obliged to come. Democratic consultation meetings are generally held once a quarter. At least some democratic consultations do have an impact on public policy and implementation at the township level. For instance, a democratic consultation meeting was held in Wenqiao Township in July 2002 to discuss the leadership's plan to merge two school districts. The leadership believed that the merger would save funds and strengthen the academic level of the remaining school. But such a merger would affect residents in the district of the school being closed because it would increase transportation costs and living expenses for those who stayed in dormitories. Feelings ran very high. In the end, the leadership decided not to merge the two schools right away, but rather allow parents to choose which school to send their children to. Before long, the students enrolled in the weaker school began transferring to the better school, and the decision was effected without public outcry.33 Similarly, a meeting was held in Songmen Township in January 2004 to discuss the creation of a specialized market for products used in the fishing industry. This market was scattered and vendors often crowded into the streets causing traffic problems. Residents were asked to discuss such issues as whether or not to build such a market, where it should be built, and who should invest in it. Several hundred people attended the meeting, and the final decision

33

Xie Qingkui, "Jiceng minzhu zhengzhi jianshe de tuozhan" (The development of grassroots democratic politics) in Mu Yifei and Chen Yimin, eds., Minzhu kentan, p. 24; see the minutes of this meeting on pp. 263-276.

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incorporated public references for the location of the district and the way in which investment would be handled. 34 Chambers

of

Commerce55

Over the past 25 years, Wenzhou City in southeastern Zhejiang province has become known for its early and rapid development of the private enterprise model. With a high population density, little agricultural land, and a long tradition of entrepreneurship (as well as banditry and other dubious activities), Wenzhou turned to private enterprise earlier and more emphatically than any other part of China.36 Local political authorities sometimes opposed this growth, sometimes supported it, and sometimes tried to give it a more "socialist" form or to limit it, but family-based enterprises were tenacious and grew quickly. The "Wenzhou model" was soon contrasted with the "Sunan" (southern Jiangsu province) model of collective enterprise, and the Guangdong model of foreign-invested enterprise, stirring controversy throughout the 1980s.37 Deng Xiaoping's trip to southern China in 1992 and the subsequent endorsement of a "socialist market economy" at the 14th Party

34

Guo Yukuan, "Difang zhenggai chuangxin: Jujiao Zhejiang Wenling 'minzhu kentan hui'" (Innovation in the political reform of localities: Looking at Wenling's "democratic consultation meetings" in Zhejiang), in Mu Yifei and Chen Yimin, eds., Minzhu ketan, pp. 169-170; see the minutes of this meeting on pp. 252-262. 35 This section largely follows my article, "Chambers of Commerce in Wezhou Show Potential, Limitations of 'Civil Society' in China," available at www.chinaleadership monitor.org, No. 16 (winter 2005). 3 ° Wenzhou has drawn considerable scholarly attention. See Alan P. L. Liu, "The 'Wenzhou Model' of Development and China's Modernization," Asian Survey, 32, No. 8 (August 1992): 696-711; Kristen Parris, "Local Initiative and Local Reform: The Wenzhou Model of Reform," The China Quarterly, 134 (June 1993): 242-263; and Yia-Ling Liu, "Reform from Below: The Private Economy and Local Politics in the Rural Industrialization of Wenzhou," the China Quarterly, 130 (June 1992): 293-316. 37 Peter Nolan and Dong Furen, eds., Market Forces in China: Competition and Small Business— The Wenzhou Debate (London: ZED Books, 1989).

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Congress later that same year lent new momentum and legitimacy to Wenzhou's development. 38 In December 1987, the central Secretariat defined the Association of Industry and Commerce as a non-governmental chamber of commerce engaged in united front work. The following year, the Association of Industry and Commerce revised its charter to include the recruitment of collective and private industries as well as stateowned industries.39 This administrative effort to evolve new forms of administration to meet the evolution of China's economy was matched by the needs of business. Although Wenzhou's economic development had been impressive, it was not untroubled. Based on household enterprises, private entrepreneurs in Wenzhou produced low cost goods which were sold locally and throughout the nation. Wenzhou merchants soon found themselves competing with each other as well as enterprises in other localities, and thus counterfeit brands, substandard materials, and shoddy workmanship soon emerged in an effort to undercut competitors. Although such methods were useful for individual businesses, they were not beneficial to the trade as a whole. Soon Wenzhou gained a reputation for low quality goods, which threatened the future development of the local economy. The risks of this reputation to Wenzhou's future development was vividly demonstrated in 1987 when angry citizens in Hangzhou, the capital of Zhejiang province, piled up and burned 5000 pairs of Wenzhou-made shoes. 40 It was under such pressures, which eroded profits, particularly of the larger enterprises, that Wenzhou industries began to organize chambers of commerce. By the mid-1980s, such business leaders had good personal relations with Wenzhou political leaders, and the 38

Yu Jianxing, Huang Honghua, and Fang Liming, Zai zhengfuyu qiye zhijian — yi Wenzhou shanghui wei yanjiu duixiang (Between government and enterprise — looking at Wenzhou's chambers of commerce) (Hangzhou: Zhejiang renmin chubanshe, 2004), p. 37. 39 Ibid, p. 59. 40 Chen Shengyong, Wang Jinjun, and Ma Bin, Zuzhihua, zizhu zhili yu minzhu (Organized, self governance and democracy) (Beijing: Zhongguo shehui kexue chubanshe, 2004), p. 38.

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political leadership was quickly convinced that Wenzhou's continued economic development depended on improving quality control, introducing new designs and technologies quickly, and developing a core of skilled workers. In particular, Wenzhou's Alliance of Industry and Commerce (gongshangliari) was convinced that steps had to be taken to reform local industry. The Alliance of Industry and Commerce, which is under the CCP's United Front Work Department and charged with overseeing non-state business, took the lead in encouraging business leaders to form associations. The shoe industry, directly affected by the 1987 incident, became one of the first industries to organize. The Lucheng District Shoe Industry Association (Lucheng qu xieye xiehui) was established in 1988 and the government, in cooperation with the new association, promulgated the "Management Regulations on the Rectification of Quality of the Lucheng District Shoe Industry" and the "Provisional Regulations on After Sales Service of the Shoe Industry." Such measures rapidly improved the quality of Wenzhoumade shoes and gave new life to the industry.41 This was perhaps the first example of how industry associations could bridge the concerns of business and government, enforce standards within the industry, and promote local economic growth. From such modest beginnings, chambers of commerce and trade associations grew quickly. By August 2002, there were 104 such non-governmental business associations at the city level. In addition, there were another 321 associations at the county, county-level municipality, and district levels with some 42,624 members covering most of Wenzhou's industrial enterprises.42 Not only has the number of associations grown quickly, the number of enterprises participating in a given association has also gown quickly. For instance, the Apparel Industry Chamber of Commerce, founded in 1994, originally had only ten members. By 1998, it had 156 members, in 2000 it had 287 members, and at the beginning of 2003 it had 423 members. In the first half of 2003, its membership suddenly ibid., p. 38. Ibid, p. 228.

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Joseph Fewsmith

jumped to 1,025 enterprises. This jump was due to efforts to reach out to manufacturers of women's and children's clothing; the chamber had originally been organized around the older, larger, and more established makers of men's clothing. As membership expanded, the number of leaders grew. In 1994, when the group was established, there was one chairman, two vice chairmen, and seven board members; by 2003, there was one chairman, 22 vice chairmen, 45 members of the board of directors' standing committee, and 121 board members. Obviously, as the group expanded there was an effort to include more voices in the chamber's leadership.43 Over time, relations between trade associations and government have become more (but not completely) institutionalized. Personal relations between association leaders and government leaders remain close, but there has been a tendency for government officials to be less involved in the internal affairs of trade associations. Although the government still appoints a few trade association heads, 77% report that they freely elect their chairmen in accordance with their own rules of operation. 44 Moreover, the internal organization of trade associations — how many directors to have, how many committees to set up, and whether to organize training and consulting activities to raise funds for the association — seems to be free of government interference. Indeed, the fact that Wenzhou's trade associations receive no government funding makes them quite entrepreneurial. In addition to membership dues, trade associations organize training classes to impart technical expertise and provide consulting services to raise funds. They also organize trade groups to go abroad to understand industry trends and promote the latest information and technical standards to their membership. Symbolic of the changing relationship between industry associations and the government, the Apparel Industry Chamber of Commerce amended its charter in 2003 to specify that government officials should not be named as advisors. The re-organized Advisory Commission was composed of five prestigious entrepreneurs who 43 44

Ibid., p. 286. Yu Jianxing et al, Zai zhengfuyu

qiye zhijian,

p. 286.

Hu Jintao's Approach to Governance 113

had previously served as vice chairmen of the chamber. 45 This change was not an assertion of chamber independence from government supervision so much as a reflection of the growing trust government had in this NGO to run its own affairs — without running afoul of government concerns. Elections for leadership roles in chambers are becoming more competitive. The Apparel Industry Chamber of Commerce was the first to introduce cha 'e elections (in which the number of candidates exceed the number of positions), and others have emulated the practice. Some have borrowed the practice of "sea elections" {hat xuari) from village elections, allowing nominations for association head to be nominated freely by the membership. In 2000, Liu Songfu, the leader in setting up the Apparel Industry Chamber of Commerce, was defeated by Chen Min, the leader of a new generation of entrepreneurs who have expanded the scope of chamber activities as well as its membership. It is apparent that Wenzhou's chambers of commerce have a degree of influence over government policy. For instance, the regulations governing the shoe industry, mentioned above, were a collaborative effort between the government and industry representatives. Similarly, the "Tenth Five-Year Development Plan of the Wenzhou Apparel Industry" was worked out with the Wenzhou Apparel Chamber of Commerce in coordination with the city's Economic Commission. During the sessions of the local people's congress and Chinese People's Political Consultative Conference, Wenzhou's chambers of commerce recommended 141 entrepreneurs to join those two bodies and raised 54 proposals. The general Chamber of Commerce (Association of Industry and Commerce) also organized members of the CPPCC to draft a proposal on creating an industrial park.46 It is apparent that the organization of trade associations has given Wenzhou entrepreneurs a voice that they would not have had individually. Nevertheless, studies indicate that the influence of trade associations remains limited.47 Chen Shenggyong etal., Zuzhihua, zizhuzhiliyu minzhu, p. 294. Yu Jianxing et al., Zai zbengfu yu qiye zhijian, p. 80. Chen Shenggyong etal., Zuzhihua, zizhuzhiliyu minzhu, p. 263.

11A Joseph Fewsmith

Although government officials have withdrawn, at least to some extent, from participation in trade associations, entrepreneurs are increasingly participating in politics, particularly in the people's congresses and Chinese People's Political Consultative Congresses (CPPCCs) at various levels. By 2003, a total of 421 members of 64 chambers of commerce participated in People's Congresses or CPPCCs, including three in the National People's Congress and 13 in the provincial people's congress. 48 Does the growth of local business associations suggest the rise of civil society in China? And does the increasing participation of business leaders in political institutions suggest the possibility of society leading the state? While it is tempting to jump to such conclusions, it is quite premature to make such judgments, even with regard to Wenzhou, much less the rest of China. It is not surprising in a system that understands that "development is the last word" that local (and national) business leaders are gaining recognition and participating more in the political process. This was the import of Jiang's "Three Represents" and the decision to admit private entrepreneurs into the Party (even though many "red capitalists" had already joined the Party before the ban on their participation was formally lifted, reversing the ban imposed in 1989 was symbolically important). Quite a few private entrepreneurs attended the l6th Party Congress in 2002 as delegates, and one, Zhang Ruimin, head of Haier Corporation, -was named an alternate member of the Central Committee. The increasing participation of business leaders in politics, however, suggests an alliance of interests more than it does board based political participation. The "quasi-institutionalized" relationship between trade associations and local government that Chinese researchers speak of suggests the dubious legitimacy trade associations still possess in China's political system. On the one hand, although there are local regulations, there is still no national law; a "chamber of commerce law" has been under discussion for some years, but none has been promulgated. Thus, policy influence is still 48

Ibid, pp. 229-230.

Hu Jintao's Approach to Governance 115

dependent on personal relations rather than a legally based lobbying system or legislative hearing system. On the other hand, the political legitimacy chambers of commerce have attained is based on their taking over certain government functions, such as supervising trades with regard to quality control and "excessive" competition. But defining the role of chambers of commerce administratively raises a lot of difficult questions, not only because they are now subordinate to many administrative organs but also because administrative regulations could easily define chambers of commerce as a "second government" — ending questions of political legitimacy but undermining the vitality that has made them important — or define them as outside the government, enhancing their independence but eroding their political legitimacy.49 China is likely, sooner or later, to generate appropriate legislation, but when it does, such legislation is likely to follow corporatist models for organizing intermediary groups. As mentioned above, Wenzhou's practice deviates from corporatist notions in several regards, including participation being voluntary. But it is difficult to imagine different trade associations competing to represent the same constituency, as in pluralism. It is also difficult to imagine legal institutions growing so rapidly that they could any time soon provide a reliable framework governing state-NGO relations. In the absence of such an institutional framework, personal relations and convergence of interest are likely to govern state-NGO relations for some time. This seems to have several consequences. First, the convergence between government and large business interests is likely to grow. Up to now, Wenzhou's chambers of commerce have fostered a democratic atmosphere, and smaller enterprises are said to participate actively in their affairs. Whether that will remain so in the future remains to be seen. Certainly it is the heads of larger businesses that are able to cultivate relations with the political leadership. Second, it is clear that the interests of business are much better represented through associations than labor. It is possible that Zhejiang will develop better protection for workers Yu Jianxing et al., zai zhengfu yu qiye zhijian,

p. 48.

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in the future; indeed, there are reports that some unions are being allowed to form. But workers associations will be on much shakier grounds than business associations, and leverage will consequently be less. So the bias toward business will remain strong. Third, business interests are likely to continue to prevail over other interests, such as environmental concerns. This is particularly interesting given the emphasis the Hu Jintao-Wen Jiabao government is placing on "sustainable development" and other issues that are encompassed by their notion of a "scientific development concept." Local interests are where grand policy schemes meet reality. CONCLUSION This chapter is a preliminary effort to explain some of the contradictions in contemporary Chinese political life. On the one hand, we see continuing repression, on the other, we see hopeful signs of reform, such as the democratic consultation system in Wenling and the development of chambers of commerce in Wenzhou. Are such different aspects of Chinese political reality as contradictory as they seem or can they be seen as parts of a broader, more coherent strategy? I have tried to lay out a rough scheme for trying to view these and other aspects as part of general strategy to maintain CCP rule, reform the Party, improve its relations with the Chinese people, enhance its political legitimacy — and yet not move the Party in a "liberal" direction, something that Western political scientists have difficulty conceptualizing. The key to this is to understand what the Chinese leadership in general and Hu Jintao in particular have been trying to do to maintain the rule of the CCP. There is no question but that the political leadership in China has looked closely at the demise of the CPSU in the Soviet Union and have tried to draw lessons from it. Lessons have included the need to update ideology (hence, the Three Represents), to adopt more of a populist stance (hence, "establishing the Party for the public, and governing for the people" [lidang weigong, zhizheng weiminj), to address real concerns in the society, and to address party issues, including both matters of internal party

Hu Jintao's Approach to Governance 117

organization (such as the cadre promotion system) and of relations between the Party and the people (such as democratic consultations and chambers of commerce). If there is some consistency to the three "prongs" I laid out above, there is also tension. Clearly in implementing such reforms as the democratic consultation system of Wenling, the Party does not intend to lose control or pave the way for multi-party democracy. But it is quite imaginable that this system (and others similar to it) will increasingly affect the selection and promotion of cadres (the Party has already adopted the "public notification" [gongshi] system), which will increasingly give voice to non-Party people in the selection of Party cadres. Demands for some form of democracy will increase, even as the Chinese government is trying to explain why the "Washington Consensus" and other "neoliberal" ideas are bad, or at least not suitable for China. But there is a tension between efforts to ward off liberal trends of thought and the need to implement some liberalizing measures in grass-roots governance. This area of tension appears to be worth watching in the years ahead as China, however gingerly, explores political reform.

Chapter

Re-making the Party's Image: Challenges for the Propaganda Department Iheng Yongnian and Lye Liang Fook

INTRODUCTION In an audacious move in April 2004, Jiao Guobiao, then Associate Professor at the School of Journalism and Communication at Beijing University, posted a lengthy article of 14,000 words on the Internet attacking the excesses of the Department of Propaganda (DOP). In the article, entitled " Taofa Zhongxuanbu" (literally, Denouncing the Department of Propaganda), Jiao listed 14 major pitfalls which he claims have made the DOP one of the most hated Party organizations in China.1 In Jiao's view, the DOP has abused its power, is 1

Jiao Guobiao, "Taofa zhongxuanbu," Yazhou Zhoukan, 18 April 2004, pp. 32-35. See also Jiao Guobiao, '"Taofa zhongxuanbu' de qianqian houhou [Denouncing the Department of Propaganda, the origin and aftermath]," Kaifang, No. 216, December 2004, pp. 24-28; and, "Professor attacks party PR machine," South China Morning Post, 10 April 2004. 119

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insensitive towards the socially disadvantaged and is corrupt to the core. He even suggested that the DOP be scrapped. The DOP is one of the four key institutions under the Chinese Communist Party (CCP) along with other three, namely, the Central Organization Department, International Liaison Department and United Front Work Department. The four departments are usually headed by high-ranking Party leaders. The DOP reports directly to the Politburo and is presently headed by Liu Yunshan, a Politburo member. More importantly, Li Changchun, a member of the Standing Committee of the Politburo, oversees the entire propaganda machinery including the DOP. In the CCP's illustrious history, the DOP has played a crucial role in mobilizing the support of the population during the anti-Japanese war effort and subsequently against the Kuomintang before the establishment of the People's Republic of China (PRC). After 1949, the DOP was tasked with the even more important task of building socialism in China, enabling it to extend its influence to virtually every aspect of society. Today, the DOP retains a tight lid on information flow and dissemination. Given the standing that the DOP enjoys, it is politically risky for anyone such as Jiao to level any criticism against the organization, even more so if such criticism is made public. Although popular grievances against the DOP, especially among Chinese intellectuals, have existed for years, no one has dared to speak out and openly challenge its way of doing things. Jiao's article broke the convention and generated enormous discussion on the Internet. For a while, it did seem that Jiao might just get away with his criticism as there was no immediate reaction from the DOP. But this was not to be. Almost a year later, in March 2005, Jiao was pressured to resign from his department and was transferred to another department irrelevant to his research interest at Beijing University.2 Although 2

"China fires media professor who called for press freedom," Radio Free Asia, 29 March 2005 (http://www.rfa.org/english/news/politics/2005/03/29/ China_Media/). See also "Professor sacked for taking US post," South China Morning Post, 30 March 2005.

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some time had passed between Jiao's resignation and his blistering attack on the DOP, the connection between the two events was unmistakable. Jiao's case reflects the modus operandi of the DOP, bidding its time and taking action long after a direct challenge to its authority had emerged. Most significantly, Jiao's case has thrown the spotlight on the DOP and raised expectations on the need for concrete reforms in an organization that has so far eluded public scrutiny. To be sure, the DOP, including its sister organizations at the lower levels, has undergone very little changes since it was first formed in the 1920s. It is still an organization with great influence, backed by an elaborate machinery extending from the central down to the local levels. In contrast, society has become much more diversified and complicated, where a newer generation is more aware of their rightful place in society. The question is whether the DOP is able to manage the raised expectations of individuals or even critics of the regime who have become more vocal and sophisticated in using a variety of media channels to air their views or grievances. In other words, can the DOP stay in tune with the times? The DOP has been responsible for projecting the best image of the CCP through either restricting information flow or disseminating specific information aimed at influencing public opinion. In this sense, the DOP is constantly re-making the image of the Party in order to enhance the Party's legitimacy. Given the important role that the DOP plays, it is highly unlikely that it will be abolished anytime soon as suggested by Jiao. More realistically, the DOP can be expected to make adjustments in its orientation and strategy as required by the Party so as to stay relevant. But attempting to predict the timing of such adjustments would be difficult and probably a futile exercise. It would instead be more productive to understand the role of the DOP in Chinese politics and the challenges that the DOP faces so that any adjustments that are subsequently made can be better appreciated. The thrust of this chapter is to examine the role of the DOP in Chinese propaganda politics and to highlight some of the key challenges confronting the DOP into re-making the Party's image. The

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chapter is divided into four sections. Section one that follows will examine the structure of the propaganda machinery. Section two will highlight the key roles played by the DOP since the formation of the PRC. Section three will look at the image building of the Party under the present leadership led by Hu Jintao. Section four will highlight the key challenges that the DOP faces which will explain some of the current and future changes that could take place in the orientation and strategy of the DOP.

PROPAGANDA MACHINERY The institutional system of the DOP that governs China's mass media as a whole can be essentially divided into two broad categories, namely, the Party or government institutions. Figure 4.1 highlights such a system at the national level. At the governmental level, the key organizations under the State Council, China's de facto Party Structure

Government Structure

Politburo State Council (SC) Department of Propaganda (DOP)

Weak chain of command

Strong chain of command Mass Media Players E.g. People's Daily Guangming Daily

-•I

Ministries Ministry of Culture Organizations under SC (a) General Administration of Press and Publication (a) State Administration for Radio, Film and Television Working Organs under SC State Council Information Office Institutions under SC Xinhua News Agency

Figure 4.1 Party and State Organizations Responsible for the Media (National Level). Source: Authors' own compilation.

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cabinet, that are involved in overseeing information flow and control include the Ministry of Culture, State Administration of Radio, Film and Television (SARFT), General Administration of Press and Publication (GAPP), State Council Information Office (SCIO) and Xinhua News Agency. The two most important government institutions that have a direct impact on the role of the print media is the GAPP and, to a lesser extent, the SARFT. The predecessor of GAPP, known as the General Administration of Publication, was formed as early as November 1949 and was primarily responsible for overseeing the nationwide publication industry with emphasis on state-owned publications. 3 After some reorganization, the GAPP was reorganized in 2000 as a ministerial level organization, indicating the high level of importance attached to this body. 4 Today, the GAPP is responsible for, inter alia, overseeing a total of 39 newspaper media groups, 14 publication groups and eight distribution groups. As all publishers including newspapers, books and journals in China are required to be licensed by the GAPP, this agency therefore has the power to deny publishers the right to publish, and completely shut down any publisher who fails to follow its directives.5 The predecessor of SARFT, known as China Broadcasting Affairs Management Division (zhongguo guangbo shiye guanlichu), was formed in June 1949 and was responsible for all matters related to radio, film and television. It became an organization under the State Council in March 1998.6 It was widely known that while all technical and administrative matters related to radio, film, television, satellite 3

The General Administration of Publication was disbanded in November 1954 and its functions taken over by the Ministry of Culture. In July 1973, the National Publication Affairs Management Bureau was formed and was renamed the Press and Publication Administration in January 1987. In 2000, it was again renamed the General Administration for Press and Publication. 4 A write-up of the GAPP can be found at http://www.gapp.gov.cn. 5 "Xinwen chuban zongshu quanguo 'saohuang' ban gongbu 60 zhong feifa baokan mingdan [The National Office responsible for pornography under the General Administration of Press and Publication announces list of 60 illegal newspapers and journals]," People's Daily, 19 November 2004, p. 8. 6 A write-up of SARFT can be found at http://www.chinasarft.gov.cn.

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and Internet broadcast fall under the responsibility of the government, matters that have a propaganda slant would come under the purview of the DOR Also worth elaborating here is the Xinhua News Agency, the state news agency and an authoritative source of information on various issues. Very often, Xinhua is the channel through which the government accords priority in announcing important policies and decisions. Other media channels usually are required to reproduce in full what is already carried by Xinhua. The Ministry of Culture is not directly responsible for print media matters. At times, however, the Ministry of Culture would require the print media to play a role in disseminating information that promotes cultural understanding and national integration among the various ethnic groups in China or cultural exchanges between China and foreign countries. As for the State Council Information Office (SCIO), its primary role is to publicize China to the world through timely and skilful presentation of China's policies, positions on issues, economic development, history and culture.7 To achieve this objective, it taps the resources which the various media channels in China can offer. On occasions, these state organizations may collaborate or work with other government departments to launch cross-ministerial initiatives. For example, in the run-up to the l6th Party Congress in April 2002, eight government bodies, namely, the Ministry of State Security, Ministry of Information Industry, State Administration for Industry and Commerce, and State Bureau of Secrecy came together to mount a nationwide campaign to curb the spread of undesirable information on the domestic Internet network which could affect national security and social stability.8 7

At times, the Chinese Prime Minister chairs conferences organized by the SCIO of which one of the most important occurs immediately after the conclusion of the annual National People's Congress in March of every year. See "Zongli 'da jizhe wen' xinwen fabuhui yeshi yi zhong 'man liliang'" [Prime Minister replies to reporters' queries: press conferences are a form of 'soft power']," Renminwang, 15 March 2005 (http://media.people.com.cn/GB/40606/3243886.html). 8 "Shiliuda qian yue shuaixian qingwang [Prior to the 16th Party Congress, Guangdong took the lead in sanitizing the Web]," Ming Bao, 3 May 2002.

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Although all of the institutions described above are national level organizations, each of them has provincial or lower-level bodies (Figure 4.2). For instance, the GAPP has a bureau in each of the 31 provinces, autonomous regions and municipalities in China. Each of these bureau is in turn responsible for lower-level branches below the provincial level. Also, under the SARFT are the provincial equivalents which themselves have lower-level organizations below them. In theory, all mass media players, whether they belong to the Party or not, come under the purview of the respective local branches of the GAPP or SARFT. They have to follow the regulations, guidelines or directions set by the GAPP or SARFT; otherwise their business licenses could be revoked. Party Structure

Government Structure

Department of Propaganda

Provincial, Autonomous Region & Municipal Governments

Local Propaganda Bureaus

Weak chain of command

^W

Strong chain of command

Organizations Responsible for Mass Media Local Party Newspaper Groups and Other Mass Media Players

(a) Bureau for Press and Publication (b) Bureau for Radio, Film and Television

E.g. Liberation Daily Newspaper Group Southern Daily Newspaper Group

Other Non-party Mass Media Players

Figure 4.2 Party and State Organizations Responsible for the Media (Below Beijing Level). Source: Authors' o w n compilation.

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Running parallel to the government media institutions, the foremost organization for media control under the Party is the DOP of the Central Committee, formed as early as the Second Party Congress in 1922. The DOP reports directly to the Politburo on matters related to information dissemination and control. Table 4.1 shows the present and past leaders of the DOP. The head of the DOP usually holds a concurrent appointment in other Party institutions such as Secretary of the Secretariat of the Party Central Committee or more importantly, the Politburo. Since 1992, in particular, the head of DOP is concurrently a Politburo member, indicating the level of importance the Party attaches to the role played by this organization. While the GAPP and SARFT essentially exercise their censorship powers through their authority to license (and rescind the licenses of) publishers, the DOP is primarily responsible for monitoring content to ensure that China's publishers, in particular its news publishers, do not print anything inconsistent with the CCP's political dogma. It achieves this objectives through three main avenues: (a) screening all books and articles dealing with the Party's or the Table 4.1 Heads of the Central Propaganda Department since 1978 Name

Date of appointment

Zhang Pinghua (iftc^rHt) Hu Yaobang ( M U D Wang Renchong ( E E f i S )

October 1977 December 1978 February 1980

Deng Liqun (XP;b#)

April 1982

Zhu Houze ( T W ^ ) Wang Renzhi ( I S i ) Ding Guangen ( T ^ f i l ) Liu Yunshan ( ^tij 5 ill)

July 1985 January 1987 November 1992 Since November 2002 to date

Concurrent appointment Central Committee Member Politburo Member Secretary, Secretariat of the Central Committee Secretary, Secretariat of the Central Committee Central Committee Member Central Committee Member Politburo Member Politburo Member; Secretary, Secretariat of the Central Committee

Source: Zhongguo gongchandang Zuzhishi ziliao [Organization History of the Chinese Communist Party], issue No. 5, pp. 68-70.

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nation's leaders, significant political issues, and policies relating to foreign diplomacy, nationalities, religion or other issues that may be regarded as sensitive; (b) issuing notices informing publishers and editors what stories can and cannot be covered, and telling them what ideological standpoint should be used when discussing certain issues; and (c) requiring publishers and editors to attend indoctrination sessions where they are instructed on the proper ideological approach to use when reporting on politically sensitive topics.9 Although both the Party and state institutions appear to have clearly defined job scopes and separate responsibilities, it is the DOP that wields real control over the media under the rule known as the "Party principle," by which the media must adhere ideologically to the Party line, propagate the Party message and obey its policies and directives. In reality, the DOP guides and supervises the work of several state bodies within the central government including the SARFT, GAPP and SCIO. In Chinese administrative parlance, these government bodies lie within the network or xitong of the propaganda machinery of the Party and therefore fall under the oversight of the DOP. For instance, in March 2005, the DOP together with the Ministry of Culture, GAPP, SARFT and SCIO announced that the number of national awards granted for programs in publications, journalism and entertainment will be cut significantly in order to uphold the uniqueness and prestige of such awards. 10 Any directive or decision made by the DOP is expected to be adhered to. For instance, just before the l6th Party Congress in June 2002, the DOP instructed its lower propaganda branches to ensure that the various mass media channels under their jurisdiction either exercise caution or refrain entirely from reporting on issues in at 9 2002-2004 Congressional-Executive Commission on China at (http:// www.cecc.gov/). 10 The number of national awards for publications will be slashed from 31 to three, those for journalism will drop from 14 to two and those for entertainment will be reduced from 44 to 18. See "Zhongxuanbu youguan tongzhi jieda 'quanguoxing wenyi xinwen chuban pingjiang guanli banfa' [Department of Propaganda response to queries on the Law on National Awards related to entertainment, journalism and publications]," People's Daily, 7 March 2005, p. 9.

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least 32 areas such as the admission of private capitalists into the CCP, tax reform in rural areas and the adverse impact on certain professions arising from China's WTO membership. 11 The DOP has an extensive network of departments at the lower administrative levels which exercise overall responsibility for the various newspapers and other media channels under them. As indicated in Figure 4.2, the local propaganda bureaus, like the DOP in Beijing, have the final say over how matters deemed sensitive by the Party can be publicized. The local propaganda bureaus report directly to the DOP at the center and are not accountable to the local governments. For instance, the local Party newspaper media groups like the Liberation Daily Newspaper Group in Shanghai and Southern Daily Newspaper Group in Guangzhou, while abiding by the regulations set by the GAPP or to some extent the SARFT, are ultimately accountable to their local propaganda bureaus. The local propaganda bureaus have the authority to take punitive actions against the newspaper groups either directly or by working through the GAPP. More of such punitive actions will be elaborated later. THE DOP UNDER DIFFERENT HISTORICAL PERIODS The DOP is viewed as an organization that exerts extensive influence on all facets of society, and, in particular, on China's mass media.12 Much debate, however, pertains to the degree of control which the DOP has exerted under different historical periods. For purposes of discussion, this section will examine the influence exerted by the DOP under three main historical periods, namely,

11

"Chuanmei biancai jinqu neirong [Media selection and handling of taboo subjects]," Ming Bao, 21 June 2002. See also a list of 35 out of bound areas for reporting and manipulation reportedly issued by the DOP on 5 June 2002 at http://www.asiademo.org/gb/2002/06/20020628c.htm. 12 In the past, China's media essentially refers to the four traditional media channels, i.e. newspapers and journals, radio broadcasting, TV stations and books. Today, it would include other media channels such as the Internet, short messaging service and other electronic means of conveying information.

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under Mao Zedong, Deng Xiaoping and the post-Deng period. Such a division is intended to highlight any adjustments in the orientation of the DOP under each period. The pervasive influence of the DOP can be examined from its control of China's media since the formation of the PRC. During the Mao Zedong era, the dominant theoretical framework for analyzing the Party's control of the media was the mass propaganda and persuasion model. Under this framework, the Chinese media were viewed as tightly-controlled instruments of political indoctrination and mass mobilization.13 Then, the type of control exerted by the Party has been described as pervasive, totalistic and repressive. During the Cultural Revolution, this control reached an absurd level as anyone who dared to express ideas even minimally different from Mao was condemned as a "class enemy."14 The ultimate purpose of the Party and particularly the DOP during the Mao era was on building up a socialist state following the CCP's victory over the Kuomintang. Immediately after seizing power on mainland China, the CCP placed rigid control over all propaganda media and set up a vast propaganda network directly operated by the Party and government. Through this propaganda network, the CCP launched waves of mass campaigns for political indoctrination and thought control as well as for mobilizing people to support the regime's particular economic or foreign policies.15 To a large extent, the mass media was used as a tool by the CCP for the purpose of national integration. 16 Not surprising then that the

13

Yuezhi Zhao, Media, Market and Democracy in China: Between the Party Line and the Bottom Line(Urbana and Chicago: University of Illinois Press, 1998), p. 4. 14 Shaozhi Su, "Chinese Communist Ideology and Media Control," in China's Media, Media's China, edited by Chin-Chuan Lee (Boulder, Colorado: Westview Press, Inc., 1994), pp. 75-88. 15 Vincent V. S. King, Propaganda Campaigns in Communist China (Cambridge, Massachusetts: Center for International Studies, Massachusetts Institute of Technology, January 1966), p. 2. 16 Alan P. L. Liu, Communications and National Integration in Communist China (Berkeley and Los Angeles, California: University of California Press, 1971).

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Chinese media came to be described as the "throat and tongue" of the CCP17 or as operating under a "commandist system."18 The onset of the reform and Open Policy in the late 1970s ushered in the second historical period. During this period, the control exerted by the Party over the media was gradually relaxed although it remained strong. Deng Xiaoping's campaign to "emancipate the mind" and "seek truth from facts" provided political leeway for the Party's control over the media to become somewhat looser. It has been observed that the Chinese media underwent a process of increasing secularization, which included the systematic demolition of the cult of Mao and his "two whatevers."19 An interesting development was that China's top leaders resorted to the mass media to stake their respective ideological positions. At one end of the political spectrum was the conservative faction led by Hua Guofeng who championed the cult of Mao with his "two whatevers" (i.e. whatever policy Chairman Mao decided, we shall resolutely defend; whatever instructions he issued, we shall steadfastly obey). On the other end of the political spectrum was Deng's reformist faction led by Hu Yaobang who used the media to propound the campaigns of "emancipating the mind" and "seeking truth from facts." While reformist leaders like Hu Yaobang employed journals and newspapers such as Lilun Dongxiang (belonging to the Central Party School), People's Daily, Guangtning Daily and Liberation Daily to spread reform ideas and criticize the dogmatic pursuit of ideology and the practice of personality cult, conservatives used their own forums such as Red Flag (the Party's ideological journal) 17

Marlowe Hood, "The Use and Abuse of Mass Media by Chinese Leaders During the 1980s," in China's Media, Media's China, edited by Chin-Chuan Lee (Boulder, Colorado: Westview Press, Inc., 1994), p. 38. 18 Zhongdang Pan, "Improvising Reform Activities: The Changing Reality of Journalistic Practice in China," in Power, Money and Media: Communication Patterns and Bureaucratic Control in Cultural China, edited by Chin-Chuan Lee (Evanston, Illinois: Northwestern University Press, 2000), p. 69. 19 Lowell Dittmer, "The Politics of Publicity in Reform China," in China's Media, Media's China, edited by Chin-Chuan Lee (Boulder, Colorado: Westview Press, Inc., 1994), pp. 100-101.

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to defend their political ideologies. With Deng's support, Red Flag was closed down by Zhao Ziyang in July 1988 and replaced by Qiushi. This journal then became the mouthpiece of the elders and their younger associates.20 Although the Tiananmen Incident of 1989 temporarily broke the momentum of the reform and Open Policy, there was no turning back to the Mao days of central planning and control. Deng's Southern Tour of 1992 put China firmly back on the track of market reforms. This period witnessed the weakening of the near complete monopoly of media control that existed under the Mao era although the Party through the DOP was still able to exercise tight control. In particular, market forces and commercialization threw into sharper focus whether the media should adhere either to the contradictory force of "Party logic" or "market logic." This tension has been described as a "tug-of-war," where the forces of politics are pitted against those of a market economy. 21 In the post-Deng era, the emphasis of the Party turned to ideological reconstruction which had been somewhat neglected by Deng's "getting rich is glorious" emphasis. In 1995, Jiang Zemin called on cadres at the provincial and higher levels to "talk about politics" (Jiang zhengzhi) and live a moral life. In 1996, he launched a "three talks" (san jiang) campaign, urging cadres to talk about politics, virtue and political studies. Although the DOP and state media accorded extensive coverage and support to the activities surrounding the two political campaigns, they received a cool reception among Party cadres. Much better received at the national level was Jiang's "three represents" (sange daibiad) first enunciated in February 2000 where he proposed that the CCP should represent the most advanced mode of production, the most advanced culture and the interests of the 20

Merle Goldman, "The Role of the Press in Post-Mao Political Struggles," in China's Media, Media's China, edited by Chin-Chuan Lee (Boulder, Colorado: Westview Press, Inc., 1994), p. 23. 21 Zhou He, "Chinese Communist Party Press in a Tug-of-War: A Political-Economy Analysis of the Shenzhen Zone Daily," in Power, Money and Media, edited by ChinChuan Lee (Evanston, Illinois: Northwestern University Press, 2000), p. 112.

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majority of the people. The "three represents" paved the way for Jiang's call at the 80th anniversary of the founding of the CCP in July 2001 to admit capitalists into the Party. Despite some disquiet within and outside the Party that such a move could affect the nature of the Party as the vanguard of the peasant and working class, Jiang managed to convince skeptics that this was a move necessary for the Party's survival. The entire Party machinery including the DOP was mobilized to extol the virtues of admitting capitalists into the Party. Ding Guangen, then head of the DOP, emphasized in 2001 that the top priority of the news media was to study Jiang's speech delivered on July 1 as well as the "three represents" put forward by Jiang.22 China's private sector also lent its support to the "three represents."23 Numerous discussion classes were launched at various levels of the Party and government to promote the "three represents." The Central Literature Publishing House even published a book entitled "On the Three Represents."24 Jiang's "three represents" is considered a theoretical breakthrough and has been written into the Party's constitution.25 From the above brief discussion, it can be concluded that despite the lack of any structural change, the DOP has made much effort in remaking the Party image under the three different historical periods. Usually, the type of image portrayed by the DOP depends a great deal on the political orientation set by China's top leaders. Under Mao, the image was of a Party capable of mobilizing the people and available resources to build a socialist state. Under Deng, the Party was lauded for taking the country to the next stage of economic development with the reform and Open Policy. Hence, the term "socialist market economy" came into practice, although in Western parlance a "socialist" system and a "market economy" are strange bed-fellows. Under Jiang, the Party was portrayed as making 22

"Party publicity chief on media's work," Xinhua News Agency, 26 October 2001. "Entrepreneurs from non-public sector hail Jiang's speech," Beijing Review, 9 August 2001. 24 "On the Three Represents," Xinhua News Agency, 8 August 2001. 25 Chen Boxian, "Lilun tupo, dangzhi tuibian [Theoretical breakthrough, Party quality undergoes transformation]," Zhonggong Yanjiu, 35:7, July 2001. 23

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a theoretical breakthrough that would expand the social base of the Party and ensure its relevance in the 21st century. PARTY IMAGE-BUILDING UNDER HU JINTAO When Hu Jintao took over the Party's helm in 2002, the Party made an effort to fine-tune its elitist image as a result of stressing too much on bringing capitalists into the Party. In line with Hu's new three people's principles (xin sanmin zhuyi), i.e. power to be used by the people, concern to be showered on the people and benefits to be enjoyed by the people {quan weimin suoyong, qing weimin suoxi, li weimin suomou), the Party and government took concrete steps to cater to the needs and concerns of the ordinary people. 26 Hu proposed at a Politburo Meeting in March 2003 that the national media carry more articles that reflect the daily lives of the people so that the media can be "closer to reality, closer to the masses and closer to life" {tiejin shiji, tiejin qunzong, tiejin shenghuo). Li Changchun, member of the Standing Committee and the Politburo in-charge-of ideology and propaganda, had on a number of occasions called on Party organs and officials working in the media industry to stay in close touch with the people and pay more attention to issues that affect their lives.27 Apart from high sounding words, Hu decided that the Party and government should lead by example. In 2003, Hu reduced the size of receiving and sending-off delegations at the airport for key Chinese leaders. In the same year, Hu also called off the annual Beidaihe summer retreat in 2003 where key leaders from all over China would gather for meetings. These moves were intended to portray the leadership as less concerned with formalities and less extravagant. Adding a more personal touch, Hu braved sub-zero 26

The new three people's principles were enunciated by Hu Jintao in February 2003 when he addressed participants at the Central Party School. 27 "CPC leader calls on publicity officials to improve work," Xinhua News Agency, 15 April 2003. See also "Senior CPC leader calls for studies of 16th CPC National Congress guidelines," Xinhua News Agency, 12 February 2003.

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temperatures to visit herdsmen in Inner Mongolia in January 2003 while Wen spent the eve of Lunar New Year in February 2003 underground with miners. 28 The concern of the top leadership for the ordinary people has continued unabated. In November 2004, Hu shook hands with AIDS patients in a Beijing hospital in a show of the leadership's concern with the epidemic and determination to curb its spread. 29 For the whole of 2004, there were numerous articles on Xiong Deming, an ordinary female farmer who made headlines after she approached Wen, during his inspection trip to Sichuan, for help to recover money owed to her husband by a construction company. Due to the publicity generated, Xiong was besieged "with countless requests by others to help with similar claims.30 Through Xiong Deming's example, the top leadership tried to send the message that the livelihood of the ordinary people remains a primary concern for those in power. The most recent campaign to remake the Party's image is directed at preserving the advanced nature of the Party (baochi dangde xianjinxing). Every week, Party cadres are required to attend educational and discussion sessions within their work units to discuss ways of improving the practices of the Party and the behavior of its cadres in their daily work. The purpose is to explore how the 28 " p r o f i i e — Hu Jintao, President of People's Republic of China," Xinhua Agency, 15 March 2003. See also "New Premier c o m e s from grassroots," Daily, 17 March 2003. 29

News China

"Hu Jintao kaocha Youan yiyuan, qiangdiao guanai bangzhu aizi huanzhe [Hu Jintao tours Youan hospital, stresses care and love for AIDS victims]," Renminwang, 30 November 2004, http://www.people.com.cn/GB/shizheng/1024/3023665.html. Almost a year earlier, in December 2003, Wen shook hands with AIDS patients, marking the first time a Chinese Premier has ever met with AIDS patients. See "Chinese premier shakes hands with AIDS patients," Reuters, 1 December 2003. 30 "Xiong Deming 'zhide jingpei' de liangge liyou [Two reasons why Xiong Deming deserves respect]," Xinhuanet, 16 November 2004, http://news.xinhuanet.com/ comments/2004-1 l/l6/content_2224620.htm; and, "Shuilaibang Xiong Deming 'zouxia shengtan"? [Who will help Xiong Deming step down from the God's pedestal], CCTV, 6 December 2004, http://www.cctv.com/news/society/2004l206/ 100715.shtml.

Re-making the Party's Image: Challenges for the Propaganda Department 135

Party and its cadres can be more effective in serving the people and be more responsive to their needs. This educational campaign, broken up into three phases of six months duration each, is directed at Party cadres at various institutions across the country. The campaign began in January 2005 and is expected to end in June 2006. The first phase, focusing on cadres within Party and governmental institutions at county level and above, was declared a resounding success.31 As part of the campaign to preserve the advanced nature of the Party, the DOP and Central Organization Department singled out individuals as role models for the public to emulate. State media gave extensive coverage to their achievements. They included Niu Yuru, former Mayor of Hohhot (now deceased) who dedicated his life to improving the lives of citizens in Inner Mongolia; Song Yushui, a top Beijing judge known for her impartiality and fairness in court; Zhang Yunquan, a local official who is ever patient and warm in handling people's petitions in Jiangsu Province; and, Wang Shunyou, a mailman from the Miao ethnic group who braves harsh terrain and often inclement weather to deliver letters to far-flung villages in Sichuan.32 These individuals were carefully selected from different walks of life and various parts of the country. The Party's intention is to highlight the dedication of these individuals to serving the people. Being Party members themselves, these individuals provide further testimony that the Party is alive and well. Central to the people-centered approach espoused by the Party is the "scientific concept of development" (kexue fazhan guan), where the focus is on sustainable growth and more balanced development that requires progress not only on the economic front, but at the social and individual levels as well. This development concept places a premium on improving the overall quality of life, instead

31

"Li Jintian zai guowuyuan xinwenban xinwen fabu huishang de jianghua [Li Jintian's speech at the State Council Information Office press conference]," Xinbuanet, 7 July 2005 (http://news.xinhuanet.com/video/2005-07/07/content_ 3186l91.htm). 32 For details of other individuals singled out by the Party, please see http:// www.xinhuanet.com/newscenter/dyxjx/.

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Zheng Yongnian and Lye Liang Fook

of merely increasing per capita GDP.33 A comprehensive level of development ties in with the call by the top leadership to build a harmonious society (hexie shehui) through balancing economic growth and social development. Wen Jiabao first outlined the building of a harmonious society in his government work report to the National People's Congress in March 2005 and other leaders followed suit. Li Changchun even stated that developing an advanced socialist culture is of much importance in building a harmonious society, indicating that the Party needs to constantly improve its ideology and practices to stay in tune with the times.34 It would appear from the above that the Party under Hu Jintao has gone to great lengths to portray a pro-people image and of championing the interest of the common people. This shift in orientation is intended to bring the leadership closer to the people and to enhance the legitimacy of the Party and its leaders. In remaking this image, the DOP has played a central role since it is responsible for carrying out the political orientation set by the top leaders. It helps to ensure that the state media and relevant Party and government institutions adhere to the tone and substance of the pro-people image set by the Party.

CHALLENGES OF THE PROPAGANDA DEPARTMENT The political challenges that confront the DOP are many, but not all will be elaborated here. This section will highlight some of the more pertinent political challenges as an indication of the uneasy road ahead for the DOP. The DOP will need to be innovative in terms of its thinking and strategy so as to better position itself to address the 33

"Wen Jiabao: laogu shuli he renzhen luoshi kexue fazhanguan [Wen Jiabao: firmly establish and seriously cany out the scientific concept of development]," Xinhuanet, 29 February 2004, http://www.sina.com.en/c/2004-02-29/11221926301s.shtml; "Sizzling economic growth to be controlled in 2004," China Daily, 8 March 2004; and, "New concept focuses on balanced progress," China Daily, 4 March 2004. 34 "Senior Party official highlights role of culture in 'harmonious society'", Xinhua News Agency, 6 March 2005.

Re-making the Party's Image: Challenges for the Propaganda Department 137

challenges ahead. If the DOP is unable to do so, it would be in danger of becoming obsolete. Conversely, if the DOP is able to successfully tackle the challenges, it would help the Party maintain its dominant political position. The challenges facing the DOP can be divided into macro and micro aspects. The macro aspect refers to challenges posed by the broader political environment that the DOP and the Party as a whole operates in, while the micro aspect refers to the challenges that come under the immediate purview of the DOP. Macro Challenges At the macro level, one of the key challenges facing the DOP and the Party is to manage the expectation of the people that have been raised in the wake of the Party's orientation towards the common masses. To a large extent, most ordinary Chinese welcome the timely shift in focus away from the privileged class to the masses. By encouraging the people to speak up, the top leadership is tacitly creating an avenue for the people to air their concerns which was previously unavailable. What is less certain, however, is to what extent this pro-people orientation is translated into concrete or tangible outcomes for the people. Often, the policies set by the Party are announced with a lot of hype, but the outcomes hardly cause a ripple. The analogy to describe this state of affairs is "the thunder is loud but the rain drops are small" (leishengda, yudianxiad). From the positive perspective, if the people's grievances or aspirations are answered, the legitimacy of the Party and its leaders would be enhanced. The case involving Xiong Deming offers an example of how top-level intervention can help resolve a local grievance concerning overdue pay. But the downside is that if every aggrieved individual were to approach Wen Jiabao for help each time they ran into difficulties, the Prime Minister would be overwhelmed and 'will have little time for State matters. Therefore, to a large extent, Xiong Deming's case suggests that existing Party and government institutions are not effective in handling the grievances and concerns of the people.

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Zheng Yongnian and Lye Liang Fook

Since the DOP has been at the forefront in portraying the Party as fighting for the interests of the ordinary people, there is a danger that playing up such an image could eventually backfire if the outcomes of the pro-people orientation are not commensurate with what is being promised or expected. In other words, the gap between what is touted and what is eventually delivered could become a source of instability. When this happens, the DOP in particular and the Party in general will lose much credibility and even much legitimacy. As the propaganda arm, the DOP not only has the responsibility to carry out policies or decisions made by the Party, but more importantly, it has the duty to feedback to the Party the concerns and aspirations of the masses and how best to manage their expectations. Already, the Party has its plate full in meeting existing socioeconomic challenges. In a survey of prominent academics in China in 2004, more than 66% of the 98 scholars polled predicted that from 2004 to 2010, there would be plenty of potential for outbreaks of social unrest. The scholars singled out corruption as the most likely cause of social upheaval. 35 In a separate survey of senior officials at the Central Party School, 59% of them consider maintaining "social stability" as the most decisive factor to the smooth development of China's reform. This percentage represents a steady rise from previous years. From 1999 to 2002, senior cadres who chose maintaining social stability as the most decisive factor to the smooth development of China's reform were 46.7, 50.8, 54.9 and 57.9% respectively.36 Hence, it is important for the Party, including the DOP, not to unnecessarily raise the hopes of the people lest it becomes a factor of instability should such hopes go unanswered.

35

The survey was conducted by the Institute of Political Development and Governance at Beijing University. See "Academics warn that social unrest could pose threat to economy; corruption singled out as a 'highly possible' trigger," South China Morning Post, 9 September 2004. 36 "Gaoceng ganbu zui guanzhu renshi gaige [Senior level cadres most concerned about personnel reform]," MingBao, 1 December 2004.

Re-making the Party's Image: Challenges for the Propaganda Department 139

The second macro challenge which the DOP has to contend with is that the onset of a more liberal society is leading to demands for a more open and transparent political system. 37 The current Hu-Wen leadership faces ever increasing pressure to speed up the pace of democratization in the country, a process that appears unavoidable. Unlike their predecessors Mao Zedong and Deng Xiaoping, who could rely on their revolutionary credentials as a major source of legitimacy, the Hu-Wen leadership is increasingly basing their legitimacy on their ability to not only deliver the economic goods, but also to meet the aspirations of the common people. This is aptly demonstrated by their enunciation of the new three people's principles, with a particular focus on serving the people. The shift in the sources of legitimacy for the Hu-Wen leadership has implications for the DOP. At the very least, it would imply that the DOP would have to be more transparent, if not more accountable, to the public in going about its daily tasks. It would become increasingly difficult, and even politically costly, if it were to continue with its erstwhile manner of withholding information from the public that concerns their well-being. At the height of the Severe Acute Respiratory Syndrome (SARS) in 2003, the DOP tightly controlled information over the number of infected people and the severity of the disease so as to prevent mass panic. 38 It gave the impression that the disease was under control when it was not. Despite the effort to keep a tight lid on information, the public was able to keep abreast of the severity of the SARS outbreak through the Internet and short messaging service (SMS) over the hand phone. The credibility of the Party and DOP took a severe beating when Jiang Yanyong, a retired military

37

"Kaifang zhengti yu Zhongguo de zhengzhi zhuanxing [Liberalization of the political system and China's political transformation]," Xin Bao, 26 July 2005. 38 For a description of the political rationale for the CCP to initially downplay the severity of the disease, please see Zheng Yongnian and Lye Liang Fook, "SARS and China's Political System," in The SARS Epidemic: Challenges to China's Crisis Management, edited by John Wong and Zheng Yongnian (Singapore: World Scientific Publishing, 2004), pp. 45-75.

140 Zheng Yongnian and Lye Liang Fook

doctor, went public with the real extent of the outbreak in his interview with Time magazine in April 2003-39 It was only after Jiang's revelations, and the resultant political backlash from the international community that the Party galvanized the whole nation to deal with the disease. In the past, when a disaster or mishap occurred in any part of the country, the usual manner for the Party in general and the DOP in particular was to isolate the affected area and control the dissemination of information about the event to other parts of the country. The purpose was to keep any negative news from as many people as possible so as to maintain stability and minimize any potential political fall-out to the regime.40 Such an approach was made all the more possible previously when travels by its citizens within and outside the country were restricted and less frequent. In this manner, a serious matter can be reduced in scale whereas a small matter reduced to nothing (dasbi huaxiao, xiaoshi huawu). However, this approach has become less applicable. In an age of globalization and rapid advances in technology, people travel more often and have access to alternative sources of information. Hence, in certain instances, opening up the channels of information may enhance the legitimacy of the Party and the DOP. On hindsight, it is easy to conclude that the Party and especially the DOP should have been more forthcoming with information about the extent of the outbreak of SARS. But this is easier said after an event has occurred than when the event is unfolding. Perhaps, the crux of the matter is whether the DOP can handle future crises in a manner that, on the one hand, would serve the best interest of the public and, on the other, cast the Party in the best possible light. This would not be an easy balance to strike, given the well-informed public and a Party that looks set to want

39

Before being interviewed by Time magazine, Jiang had written to the China Central Television (CCTV) and Phoenix TV to inform them of the real extent of the disease, but he received no response. 40 "China's response to illness illustrates tradition of keeping disaster hidden," Associated Press, 28 March 2003. See also "Dictatorships and disease," International Herald Tribune, 18 April 2003-

Re-making the Party's Image: Challenges for the Propaganda Department 141

to retain a dominant voice in China's politics. There may come a time when the Party and the DOP would have to accept a less dominant position vis-a-vis the public interest on certain, if not all, issues. Micro Challenges The micro challenges refer to those challenges that come under the immediate purview of the DOP. One of the key challenges is to ensure that the Party retains an effective channel through the state media to convey its policies and positions on issues to the public with the increase in variety and growth of various media channels. Since the reform and Open Policy, China's media industry has undergone dramatic changes. Among the most important changes are the trends towards decentralization and commercialization. These trends have made it more difficult for the DOP to have a dominant role over information management and control. Due to decentralization, China has experienced an unprecedented media boom over the past two decades. More newspapers, periodicals, television and broadcasting stations, and books were established and published at the municipal/prefecture and county levels in addition to those existing at the national and provincial levels. The decentralization of the media system also took place horizontally. Many newspapers and periodicals catering to specific readers and/or specializing in particular subject areas have been published by government department, enterprises and other political and social organizations. Table 4.2 shows the rapid growth of newspapers and periodicals. The number of newspapers rose from a mere 186 in 1978 to 2119 in 2003, growing at a rate of 10.2% annually. Likewise, the growth of periodicals has generally been on an upward trend with the most significant period of growth occurring after 1978. In particular, from 1978 to 1986, the number of periodicals experienced double digit growth rates. Table 4.3 shows the growth rate of television and radio stations, and books over a 13-year period from 1990 to 2002. The average annual growth rates of TV stations, radio stations and books during this period are 2.2%, 2.1% and 6.5% respectively.

142

Zheng Yongnian and Lye Liang Fook Table 4.2 Growth Trend of Newspapers and Periodicals (1950s-2003) INewspapers

Year 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 I960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

Total (% change)

Total (% change)

Published volume (billion)

382 390

—

—

— 1.61

— 354

—

296 265 253 285 347 364

1.67 1.71

295 304 370 484 634 822

0.17 0.21

491 463 396 260 273 289 329 343 49 43 42 42 42 195 185 192

1975 1976

189 180 182

1977 1978

180 186

1979 1980

69 188

1981 1982

485 (158.0)

1983 1984

Published volume (billion)

Periodicals

606 (24.9) 773 (27.6) 1014 (31.2)

1.95 2.61 2.44 3.91 4.9 5.1 3.08 2.58 3.3 4.1 4.74 3.67 3.49 3.58 4.11 4.56 8.4

851 442 410 483 861 856 790 191 27 22 20 21 72

9.76

194 (169.0)

10.05 10.14

320 (64.9) 382 (19.4) 476 (24.6)

10.97 12.43 12.37 12.78 13.08 14.04 15.93 16.64 18.7 22.0

0.2

0.29 0.55 0.32 0.53 0.53 0.47 0.23 0.2 0.23 0.35 0.44 0.23 0.09 0.03 0.05 0.07 0.16

542 (13.9)

0.23 0.32 0.4 0.44 0.56

628 (15.9) 930 (48.1) 1,470 (58.1)

0.56 0.76 1.18

2,191 (49.0) 2,801 (27.8)

1.13 1.46

3,100 (10.7) 3,415 (10.2) 3,907 (14.4)

1.51 1.77 2.18

Re-waking the Party's Image: Challenges for the Propaganda Department Table 4.2

(Continued)

Newspapers

Year

Total (% change)

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1445 1574 1611 1537 1576 1444 1524 1657 1788 1953 2089 2163 2149 2053 2038 2007 2111 2137 2119

(42.5) (8.9) (2.4) (-4.6) (2.5) (-8.4) (5.5) (8.7) (7.9) (9.2) (7.0) (3.5) (-0.7) (-4.5) (0.7) (-1.5) (5.2) (1.2) (-0.8)

Published volume (billion) 24.7 24.3 26.5 26.8 20.7 21.1 23.7 25.79 26.38 25.32 26.33 27.43 28.76 30.03 31.84 32.9 35.1 36.78 38.3

143

Periodicals Total (% change) 4,705 5,248 5,687 5,865 6,078 5,751 6,056 6,486 7,011 7,325 7,583 7,916 7,918 7,999 8,187 8,725 8,889 9,029 9,074

(20.4) (11.5) (8.4) (3.1) (3.6) (-5.4) (5.3) (7.1) (8.1) (4.5) (3.5) (4.4) (0.02) (1.0) (2.4) (6.6) (1.9) (1.6) (0.5)

Published volume (billion) 2.56 2.4 2.59 2.55 1.84 1.79 2.06 2.36 2.35 2.21 2.34 2.31 2.44 2.54 2.85 2.94 2.89 2.95 2.95

Note: Numbers in parentheses stand for growth rate in percentage. Source: Zhongguo Xinwen Nianjian (China Journalism Yearbook), various issues.

The second significant trend affecting the media is commercialization. From the mid-1980s onward, the central government has slashed subsidies to the mass media. The first step in the direction of the mass media's self-financing was the issue of a policy document in December 1984, under which, except for a few cases, most magazines lost government financial support. 41 Similar budget cuts resulted in the financial independence of one-third of China's 41

See "The State Council's Announcement on Full Financial Self-Responsibility for the Publication of Periodicals," 29 December 1984, Zhongguo Chuban Nianjian 1985 (Beijing: Shangwu Yinshuguan, 1985), p. 370.

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Zheng Yongnian and Lye Liang Fook

Table 4.3 Growth of Traditional Media, 1990-2002 TV Year

stations

1990

282 298 308 324 324 336 344 347 347 357 354 357 368

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Radio stations 239 .

246 261 282 296 312 315 318 298 296 304 301 306

Books published

Newspapers

Periodicals

80,224

1,444

89,615 92,148 96,761 103,836 101,381

1,524

5751 6056 6486 7011

112,813 120,106 130,613 141,831 143,376 154,526 170,962

1,657 1,788 .

7325

1,953 2,089 2,163 2,149

7583 7916 7918

2,053 2,038

7999 8187

2,007 2,111

8725

2,137

8889 9029

Sources: Zhongguo xinwen nianjian {China Journalism Yearbook, various issues) and Zhongguo nianjian {China Statistical Yearbook, various issues).

newspapers by 1992.42 The policy to commercialize publication was formalized in 1992, which recognized the "commercial nature" of the press and produced a schedule for its transformation.43 An important outcome of media commercialization is the growth of the advertising industry. With the media no longer able to rely on the government for financial support, it had to look for alternative sources of funding. Table 4.4 provides an overview of the rate of expansion of the advertising industry in the four main media channels, namely the newspapers, television, broadcasting and

42

Minxin Pei, From Reform to Revolution: The Demise of Communism in China and the Soviet Union (Cambridge, MA: Harvard University Press, 1994), p. 155. 43 Joseph Man Chan, "Commercialization without Independence: Trends and Tensions of Media Development in China," in China Review 1993, edited by Joseph Y. Cheng and Maurice Brosseau (Hong Kong: The Chinese University Press, 1993), p. 25.

Re-making the Party's Image: Challenges for the Propaganda Department 145 Table 4.4 Share of Total Advertising Revenue of Four Main Media Channels, 1994-2003 (Figures in Parentheses Indicate Percentage of Total Advertising Revenue)

Year

Newspaper

Television

Broadcasting

Periodicals

Total advertising adverstising revenue in revenue in billion billion yuan yuan (% of total)

advertising

advertising revenue in billion yuan (% of total)

advertising revenue in billion yuan

1994

20.03

1995 1996

27.33 36.66 46.2

1997 1998 1999 2000 2001 2002 2003

53.78 62.21 71.27 79.49 90.32 107.87

5.05 (25.2) 6.47 (23.7) 7.77 (21.2)

revenue in billion yuan (% of total) 4.48 (22.4)

6.5 (23.8) 9.08 (24.8) 9.68 (21.0) 11.44 (24.8) 10.44 (19.4) 13.56 (25.2) 11.23 (18.1) 15.62 (25.1) 14.65 (20.6) 16.89 (23.7) 15.77 (19.8) 17.94 (22.6) 18.85 (20.9) 23.1 (25.6) 24.3 (22.5) 25.5 (23.6)

(% of total)

Others in billion yuan (% of total)

0.5 (2.5) 0.74 (2.7) 0.87 (2.4)

0.4 (2.0) 0.38 (1.4)

9.61 (47.9) 13.24 (48.4)

0.56 (1.5)

1.06 (2.3)

0.53(1.1) 0.71 (1.3) 0.89 (1.4) 1.13 (1.6)

18.38 (50.6) 23.49 (50.8) 27.74(51.6) 33.21 (53.4) 37.08 (52) 42.76 (53.8) 44.66 (49.4) 53.07 (49.2)

1.33 (2.5) 1.25 (2.0) 1.52 (2.1) 1.83 (2.3) 2.19 (2.4) 2.56 (2.4)

1.19(1.5) 1.52 (1.7) 2.44 (2.3)

Sources: Wu Guoguang, "One Head, Many Mouths: Diversifying Press Structures in Reform China," in Power, Money and Media: Communication Patterns and Bureaucratic Control in Cultural China, edited by Chin-Chuan Lee (Evanston, Illinois: Northwestern University Press, 2000), p. 58; and Zbongguo Xinwen Nianjian {China Journalism Yearbook, various issues).

periodicals. In 1994, total advertising revenue reached slightly over 20 billion yuan. By 2003, the figure for the first time exceeded the 100 billion yuan mark, representing a five fold increase within a decade. In 2003, the advertising revenue of newspaper, television, radio and periodicals amounted to 23%, 24%, 2.4% and 2.3% respectively. It is worth noting that the advertising revenue of newspapers has fallen behind the advertising revenue of television for the first time since 1995. The share of advertising revenue of newspapers declined from 23.7% in 1995 to 20.9% in 2002 while that of television rose from 23.8% to 25.6% over the same period. This indicates

146 Zheng Yongnian and Lye Liang Fook

that television has overtaken newspapers as the preferred media channel for advertisers.44 Apart from traditional media channels, a more significant, but recent phenomenon has been the growth of non-traditional media channels such as satellite televisions, SMS messages and the Internet. Based on a survey conducted by China Internet Network Information Center (CNNIC), the number of netizens in China reached 103 million by the end of June 2005, representing a yearon-year growth of 18.4%. In particular, the number of people connected to the Internet through broadband connection rose by 23.8% over the same period last year to reach 53 million, exceeding half the number of netizens in China. This marks the first time the number of broadband users exceeding the number of telephone users in China.45 China's Internet population, already the world's second largest, is only 7.9% of the country's 1.3 billion. The room for growth remains tremendous. The proliferation of traditional and non-traditional media channels and their reliance on advertising as an important source of income would mean that these media players are increasingly torn between the need to appeal to an increasing pool of sophisticated readers that demand both timely and innovative way of reporting on news on the one hand and the Party that demands the fulfillment of certain ideological and political tasks on the other hand. The tussle between "market logic" and "Party logic" has intensified. For the state media organizations, it is important to find a balance between these two poles. This tussle can be illustrated by the development of newspaper media groups. Newspaper media groups first appeared on the media scene in the mid-1990s. One of the key characteristics of a 44

Zhongguo Xinwen Nianjian 1999 (China Journalism Yearbook), pp. 106-107. See also "Zhongguo Baoye Guanggao Jingying Jinru Xinde Panzhengqi (China's Newspaper Advertising Management Enters New Period of Rise and Consolidation)," Renminwang, 21 February 2005 (http://media.people.com.cn/GB/ 40754/3190522.html). 45 The 16th Statistical Survey Report on the Internet Development in China (July 2005) at http://www.cnnic.net.cn/html/Dir/2005/07/20/3046.htm.

Re-making the Party's Image: Challenges for the Propaganda Department 147

newspaper media group is that it has several sister publications catering to different market segments. Besides an anchor publication, which usually carries more Party and government-related content, the other publications carry more consumer-oriented news ranging from employment, property, fashion, entertainment to tourism. While the anchor publication helps to fulfill the requirements of the Party to inform and educate the public, the other publications strive to appeal to readers' desire for more choice and variety. Thus a newspaper group, like any state media organization, has to strike a balance between appealing to the Party and masses. By controlling the anchor publication of the newspaper media group, the DOP is able to ensure that the Party's views and perspective are reflected. As for the other publications under the same newspaper group, the DOP affords them room to appeal to the readers. More often than not, the anchor publication is there to perform a service to the Party and is not a lucrative arm of the newspaper media group since it does not enjoy wide readership and does not attract much advertisement revenue. The other publications are instead more profitable and can help sustain the business operation of the newspaper media group. Another major challenge faced by the DOP is to ensure that the various media players are aware of and adhere to the reporting parameters set by the Party. This task has become more complicated given the proliferation of media players and rapid advances in technology. The DOP has had to adjust its strategy from one of near monopolistic control to one of selective control. In other words, it has concentrated its efforts on imposing punitive measures against the major and influential media players or infamous individuals deemed by the DOP to have infringed reporting parameters set by the Party. The punitive measures imposed by the DOP could vary from a simple recall of the published material or temporary closure of the publication to a more serious instance of dismissal, arrest or even imprisonment of individuals who flout reporting parameters. The selective action against the high profile cases serves to forewarn other media players of the consequences should they decide to follow suit.

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In May 2003, Huang Qi, a cyber dissident who posted articles criticizing the Party, and four intellectuals who started the New Youth Study Group to hold online discussions about political reform, received long prison terms. 46 In the same month, under pressure from the DOP, two editors and one journalist were dismissed from the influential China Youth Daily and its subsidiary, Youth Reference. Youth Reference had published an article claiming that around 8%-10% of female university students in Hubei had worked as prostitutes.47 Yet a more well-known case involves the imprisonment terms meted out to former leaders in the outspoken Southern Metropolitan Daily for being critical of the authorities handling of SARS and Sun Zhigang, the migrant worker who was beaten to death while in a detention center for migrants.48 In January 2004, Cheng Yizhong, the then Chief Editor, and six other executives of the newspaper were detained for questioning on suspicion of financial crimes. Two months later, in March 2004, Yu Huafeng and Li Minying, former general manager and editor-in-chief respectively of the daily, were sentenced to jail terms of 12 and 11 years respectively on embezzlement and corruption

46

"A grim reminder for the central government's opponents," South China Morning Post, 13 June 2003- Huang Qi was sentenced to five years in prison on charges of subversion. See also "Webmaster given five years for publishing essays," South China Morning Post, 19 May 2003 and "Ambushes on the information highway," South China Morning Post, 21 May 200347 "Journalists fired in China for prostitution story," Financial Times, 29 May 2003. The China Youth Daily is run by the Communist Youth League. 48 At the height of SARS in the first half of 2003, the Southern Metropolitan Daily carried articles critical of the government handling of SARS. In December 2003, the Southern Metropolitan Daily again irked local censors when it became the first news organization to disclose that a TV producer was being treated as a suspected SARS case at a Guangzhou hospital. This was later confirmed by the authorities. As for Sun Zhigang's death in March 2003, it was the Southern Metropolitan Daily that first reported the case that eventually led to the repeal of the "Measures for the Custody and Repatriation of Urban Vagrants and Beggars" by Prime Minister Wen Jiabao.

Re-making the Party's Image: Challenges for the Propaganda Department 149

charges. 49 Cheng, similarly charged, was subsequently fired and stripped of his membership of the CCP.50 Invariably, the punitive actions taken by the DOP have been perceived by certain sectors within China as well as by the foreign media as negative examples of the Party limiting media freedom and worse still, as a setback for political democratization in China. In certain instances, the punitive actions taken by the DOP does not bring the matter to a close, but instead leads to further complications. In particular, while Yu Huafeng and Li Minying were specifically charged for embezzlement and corruption related to the finances of the Southern Metropolitan Daily, it was widely regarded that both were paying the price for the newspaper's vocal stand on SARS and the Sun Zhigang's case. The public outrage led 2,356 Chinese journalists to sign a petition in June 2005 urging the Guangdong Higher People's Court to release Yu and Li whom they believed are innocent and have been unjustly sentenced. 51 A month later, in July 2005, the Guangdong Higher People's Court rejected an appeal from Yu on the grounds that he failed to submit any "new legal and substantive evidence" for a retrial.52 Li had earlier also submitted an appeal although the court had yet to return a verdict. In August 2005, more than 250 people signed an open letter urging the United Nations Commissioner for Human Rights to look into cases of human rights abuses including those involving Yu and Li.53 The

49

In June 2004, the intermediate court in Guangzhou reviewed their case and cut the jail terms of Yu Huafeng from 12 to eight years and that of Li Minying from 11 to six years. 50 "Guangzhou Southern Metropolis News Editor Sacked," Radio Free Asia, 29 October 2004 (http://www.rfa.org/english/news/politics/2004/10/29/china_ press_freedom/). 51 "Letter to the Guangdong People's High Court," China Digital Times, June 2005 (http ://chinadigital times. net/2005/06/j ournalists_pro_ 1. php). 52 "Journalist jailed for eight years loses appeal," South China Morning Post, 30 July 2005. 53 The signatories including individuals such as Liu Xiaobo, Yu Jie, AIDS activist Wan Yanhai and several family members of the political detainees. See "Campaign urges rights action," South China Morning Post, 14 August 2005.

150 Zheng Yongnian and Lye Liang Fook

case is likely to drag on and may further tarnish the image of the DOP and Party if not properly handled. The purpose in highlighting the case involving Yu and Li is not to prove who is right or wrong, but to show the changed environment that the DOP will have to take into account if it is to effectively carry out its duty of overseeing the various media players. The DOP will increasingly have to justify its actions to the public including punitive actions taken ostensibly to punish those who flout reporting parameters. In the past, once the course of action was taken by the DOP with respect to a case, the case was considered closed. No one would or should dare to challenge the DOP. But times have changed. The following that has been generated over the Yu and Li case demonstrates that China's progress towards a more liberal society would demand more transparency and accountability on the part of the DOP as well as other Party and government organizations. The DOP has to be sensitive to this aspect if it is to stay relevant. CONCLUDING REMARKS The DOP as an organization has remained relatively unchanged while the socio-economic environment that it operates in has been transformed. More than two decades of reform and open policy has brought about a more vocal and mature Chinese society that the DOP in particular and the Party in general has to grapple with if they want to stay relevant. The people's expectations of what the Party and government ought to do for them have risen. They also demand timely and accurate information especially on issues that directly affect their livelihood. The DOP has to contend with the emergence and growth of various media players that offer alternative views that are at odds with the views put forth by the DOP. The DOP will increasingly have to justify its actions to the public that demands greater transparency and accountability. The DOP is not necessarily at a losing end in the midst of the socio-economic transformation that has taken and that continues to take place. It remains an influential and pervasive organization, and

Re-making the Party's Image: Challenges for the Propaganda Department 151

can tap these advantages to transform itself. The predominant view of the DOP is that it is a tool of the Party to achieve certain ends. The ultimate challenge for the DOP is to transform itself so that it is seen in the eyes of the public as an organization that serves not only the Party, but also the people.

Chapter

Reforming the Party and the State under Hu Jintao Hsu Szu-chien

INTRODUCTION At the Fourth Plenary Session of the Sixteenth Party Congress held in September 2004, the Chinese Communist Party (CCP) regime vowed to strengthen its ruling capability. This move revealed the fact that the CCP regime had already been alarmed by the governance and legitimacy crises it was facing. These crises were reflected by the increasing number of cases and expanding scale of corruption among officials and cadres, especially among the leading cadres at various local levels. In the report of the Central Commission for Disciplinary Inspection presented to the Central Party Committee at the Fifteenth Party Congress in 1997, a total of 669,300 Party members were subjected to some form of penalty. This number, however, increased to 846,150 in the same report made at the Sixteenth Party Congress held in 2002. The number of members to be expelled from the Party increased from 121,500 to 137,711 from the Fifteenth to the Sixteenth Party Congress. Cadres at the county-level who received a penalty increased from 20,295 to 153

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Hsu Szu-chien

28,996 from the Fifteenth to the Sixteenth Party Congress, reflecting an increase of 42.9%. The number of cadres at the sub-provincial or bureau level who received a penalty increased from 1,673 to 2,422 from the Fifteenth to the Sixteenth Party Congress, or an increase of 44.8%. Cadres at the provincial and ministry level who accepted a penalty increased from 78 to 98, or an increase of 25.6%.1 (Table 5.1 shows the comparison.) All these numbers reveal the seriousness of the situation. If we look at the increasing rate in Table 5.1, it is easy to find out that it is the local level cadres that are more corrupt than average. Therefore, curbing the corruption of local cadres, especially the leading cadres, has become the most important task for China's political reform. Against this background of eroded legitimacy, since the time that they took over the leadership following the Sixteenth Party Congress, Hu and Wen have adopted a pro-active approach in pushing ahead political reforms. This has become one of the most conspicuous differences between the Hu and Jiang administrations. This chapter intends to provide an overall summary of Hu's political Table 5.1 Corruption of CCP cadres from 1997 to 2002 Corruption cases

1997

2002

Increasing rate

Party members subjected to penalty Party members expelled Provincial or ministry level subjected to penalty Sub-provincial or bureau level subjected to penalty County-level Party cadres subjected to penalty

669,300 121,500 78

846,150 137,711 98

26.4% 13.3% 25.6%

1,673

2,422

44.8%

20,295

28,996

42.9%

Source: "Backgrounds about to the Promulgation of the Intra-Party Supervision Regulation" ( E f t ^ « f ^ ! l t B n W t i f * f i f i l t ) , Outlook Weekly {MMMffff), 5 January 2004, No. 1, pp. 16-18.

1

"Backgrounds to the Promulgation of the Intra-party Supervision Regulation" (Mfa%kWfcM&aKjffMW&X Outlook Weekly (MM.WAX 5 January 2004, No. 1, pp. 16-18.

Reforming the Party and the State under Hu Jintao 155

reform of the Party and the state and an analysis of the momentum generated by political reform, as well as its limitations. This chapter separates Hu's political reforms into three major categories: first, the cadre recruitment reforms; second, the reforms to constrain the decision-making power of the local Party and government leaders; and third, the supervision and responsibility reforms. This chapter is structured into five sections. Following the introduction, the second section analyzes the "cadre recruitment reforms," with its sole focus being on the institutional reforms raised by the "Regulation on the Appointment of Party and Government Leading Cadres." In the third section, three reforms to constrain the decision-making power of the local Party and government leaders are examined. They include "the reforms to regularize the Party representatives' congress," "the administrative legalization reforms," and the "transparency reforms." In the fourth section, the analysis of the supervision and responsibility reforms focuses on four reform measures, i.e., "the CCP Supervision Regulation," "the heavy emphasis on auditing reforms," "media and public opinion supervision," and "responsibility reforms." The discussion in this chapter introduces the major content of these reforms and also points out the related limitations of or problems associated with these reforms. After discussing these reforms, this chapter concludes that these three categories of political reforms are limited in various degrees when measured against four sets of values, namely, "rule by law," "horizontal versus vertical accountability," "participation," and "competition." This chapter argues that Hu's reforms of the Party and the state do to some extent move in a progressive direction, especially in terms of moving toward more institutionalization and making officials more accountable. However, Hu's reforms face limitations set by the nature of the regime, namely, the monopoly of political power. As long as the CCP is not ready to subject itself to any checks from outside, it will be hard for Hu's political reforms to be characterized by separation of power and horizontal accountability, or to encourage really open participation and competition that accommodate social forces. This could limit the effectiveness of Hu's reforms in curbing corruption and the abuse of power among cadres.

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CADRE RECRUITMENT REFORM The first category of political reforms under Hu is concerned with the cadre recruitment reform. This reform actually has its roots back in Jiang's regime. While the cadre recruitment reform has been realized through many Party regulations and provisions, it has mainly taken place through the promulgation of the "Regulations on the Recruitment and Appointment of Party and Government Leading Cadres" in July 2002. It constitutes the CCP's first attempt at establishing rules to govern the open selection and appointment of ruling cadres and officials.2 This chapter will concentrate on this regulation for the purpose of analysis since many other provisions and measures were devised to strengthen its implementation. 3 In the "Regulation on the Recruitment and Appointment of Party and Government Leading Cadres," there are three major mechanisms for appointing leading Party and government cadres. The first mechanism is the "Regular Appointment," applicable to the appointment of all leading Party cadres, and also to the preparation for the nomination of all government officials. The second mechanism is the "Nomination/Recommendation according to the Law" (Sl^/fSScJrtJll)- This mechanism is applicable to the appointment of all leading government officials, who are elected by the people's

2

"CCP Promulgated the 'Regulation on the Appointment of Party and Government Leading Cadres'," China News Net (tffflffBf^), 23 July 2002. 3 Other provisions and measures include: the "Measures to Supervise and Examine the Recruitment and Appointment of Party and Government Leading Cadres," the "Provisional Regulations on the Work of Openly Selecting Party and Government Leading Cadres," the "Provisional Regulations on the Work of Competitive Recruitment of Party and Government Officials," and the "Voting Measure for Deciding Planned or Recommended Candidates for Leading Cadres of the Next Lower Level at the Plenary Meeting of the Local Party Committee." The first measure was promulgated in July 2003, and the other three provisions and the measure were promulgated in April 2004. See Cui Shixin, "A general description of the six new reform measures to further realize the cadre personnel reform"

(Wtt&ttftSBA^fmW^f^tmmU^m,

People's Daily News Net ( A S N ) ,

8 January 2005, .

Reforming the Party and the State under Hu Jintao 157

congress. The third mechanism is the "Open Selection/Competitive Appointment" (^pflMSt, St^llfftD- This mechanism is applicable to the appointment of "local Party secretaries, leading cadres of the working bureaus in the government, and leading cadres for the internal institutions of Party and government bureaus." This chapter will focus on the first mechanism, since it is the mechanism that is designed to constrain the power of all the local Party and leading cadres within the government. The first mechanism is applicable to the recruitment and appointment of the following cadres: the leading members of the Party committee, the Standing Committee of the People's Congress, the government, the People's Political Consultative Conference, the Commission for Disciplinary Inspection, the People's Court, the People's Procuratorate, and the working units under them, or their internal institutions. The recruitment of these local leading Party and government officials involves seven steps: (1) democratic nomination; (2) discussion at the Party secretary's working meeting; (3) deciding and publicizing for public scrutiny; (4) Party inspection (kaocha #§lf); (5) negotiation (yunniang, ISM); (6) Party committee collective discussion and decision; and (7) publicizing before appointment. In short, this reform is an effort to dilute the local leading cadres' monopoly power with regard to the appointment of personnel by introducing a mechanism for limited participation and competition. It allows the public to participate in the process of openly nominating candidates, in public scrutiny, and in the last step of publicizing to the public before appointment. It also adopts a collective decision instead of an individual decision approach at the Party committee level. However, it is worth noting that it still ensures control by a higher-level organization department during the Party inspection. The reform of the Party and government leading cadre recruitment is meant to check the monopoly of personnel power by the "Number One" of all the Party leading cadres, especially the local Party secretaries. The Party assumes that if this monopoly is contained, it will be more difficult for a unified faction to be formed within the local government, and it will be easier to curb rent-seeking

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and corruption.4 For example, according to the "Regulation on the Recruitment and Appointment of Party and Government Leading Cadres," the final decision on the recruitment of the leading cadre shall be made by the higher-level Party committee. A valid decision requires the presence of two thirds of the committee members and a majority vote through secret ballot of the members present. However, this recruitment reform is limited to the following aspects. First, it is open only to the participation of cadres and not citizens. Second, the competition is not open-ended, but closedended. There are many ways in which the Party can screen the candidates it dislikes. It is a competition in which unwanted consequences can be excluded in advance. For example, the "democratic nomination" of the formal preliminary candidates is decided "either by voting in the meeting or by individual interviews."5 The so-called "democratic nomination by interview" in this article can be conducted in a non-competitive manner. In practice in many localities, even though there is a first round of voting to decide the preliminary candidates, the decision as to who will become the formal candidates is decided "basically according to," and not "strictly according to," the results of the first round of voting, which means that the Party still keeps room to maneuver. Again, the final result is not decided as a result of a second round voting but as the result of secret voting within the Provincial Party Standing Committee.6

4

"Press Conference of the Central Organization Department on questions related to the 'Regulation on the Recruitment and Appointment of Party and Government Leading Cadres'" ( ^ f i ^ S t i & i l ^ g l S a t J f i f i J f JLfffiffigmmW, China News Net ( ^ H S f H r a ) , 24 July 2002, . 5 Article 10 of the "Regulation on the Appointment of Party and Government Leading Cadres." 6 For example, in the "two nominations and one campaign speech" case of Sichuan, the party committee of the next higher-level will decide the formal candidates "basically" according to the result of the vote in the "democratic nomination meeting." See Zhang Jingyuan and Tian Gang, "Sichuan's exploration on recruitment of leading cadres," (W\\M&T&%fi$rRPlJ%MM'), China Communist Party News Net, People's Daily News Net ( A K P ^ ) , 27 May 2005, .

Reforming the Party and the State under Hu Jintao 159

Third, and most importantly, the reform has not really excluded the possibility of influence from higher levels within the Party. The recruitment process itself is implemented by a committee composed of the leading members of the Party committee and subordinate departments, but which is chaired by the Organization Department from a higher level.7 According to Article 16, the final result of the "democratic recommendation" is up to the Organization Department of the next higher-level Party committee to decide. In short, all the arrangements preserve the power of final decision of the Organization Department at the higher level as well as the spirit that the "Party commands the cadres" stipulated in Article 2. Fourth, there are many loopholes in the regulation for the leaders of the same unit to exert influence. Article 16 stipulates that "under normal conditions" the number of candidate(s) for the post of the major leading cadre (lEIUHjfi^l) proposed by the Party standing committee for higher-level Party scrutiny should be more than the number of posts. Then, there is a possibility that Party leaders may define the conditions as "special" so as to nominate only one candidate, as long as the higher-level Party organization does not disagree. This would actually make the whole process a non-competitive one. The second loophole lies in the procedures for "negotiation" (B&U). According to Articles 29 and 30 of the regulation, before the formal nomination of the candidate for the Party or government leading cadre, the procedure should go through negotiations among leading members of the Party committee, the government, the People's Congress, and the People's Political Consultative Conference. In other words, the formal candidate who is eventually nominated is a result of the consensus or compromise reached among the existing power holders at the same administrative level. It would be difficult to imagine that such a new leader would initiate a reform that may hurt the vested interests of the 7

Article 13: "The procedure of the 'democratic nomination of the candidates' for the power succession of the leadership at each level is implemented by the Organization Department of the next higher-level Party committee." Article 15: "The democratic nomination working committee is composed of the leading members of this unit, the leading members of the subordinate institutions, leading members of the direct-subordinate units, and other necessary members."

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Hsu Szu-chien

incumbent power holders. These loopholes in the regulation actually allow for the possibility of evading the intended mechanism to break the Party secretary's monopoly of personnel power. A professor at the Central Party School Liang Yanhui has written an article in the famous Party journal Half-monthly Talks ("Ban Yue Tan", ^rRifc) by pointing out that in practice the appointment of the major leading cadre "was usually made on a non-competitive basis, which goes against the regulation. In facing such a problem of evasive implementation, it is reported that the central Party leadership decided to carry forward in a comprehensive manner the voting system on the plenary session of the Party committee at the next higher level in order to decide the posts of the major leading cadres. 8 Judging from these loopholes, we would not be surprised when the examination groups of the Central Organization Department also admitted at the end of 2003 that the implementation of the regulation was not satisfactory when they found that there were still many local cadres who did not fully carry out the regulation.9 Fifth, even though we admit that this reform is in general helpful in curbing the arbitrary power of the local officials and cadres, this reform has not been universally applied in all provinces throughout all levels. There are more advanced local experiments in Sichuan, Hubei, Jiangsu, and Henan. For example, the practices in Sichuan and Jiangsu Province have actually gone further than was required by the regulation itself. According to the regulation, the standing Party committee of the next higher level should nominate the candidates for the leading cadre positions at the prefectural and county 8

See "The Party Central has decided to comprehensively carry forward the system of voting at the plenary session of the party committee for cadre appointment"

(^^mmm$ffimmim&i±m^myimx

Xinhua News Net mmm, 1 June

2004, . 9 "The report of the examination by the Central Organization Department on the 'Regulation' still found an unhealthy tendency in personnel recruitment" m f i a ^ P l f ( « W J & M A ^ E a a W S i F ) , * « * « « News Net (Sff^W), 10 November 2003, .

Reforming the Party and the State under Hu Jintao 161

level. In Sichuan, however, the nomination has been opened to cadre colleagues at the same level. In Jiangsu, the rule of open nomination has been applied to the officials at the sub-provincial level.10 Sichuan Province has promulgated a local regulation with a recruitment process composed of three steps referred to as "two nominations and one campaign speech" (Mffi—"2ft)-11 The first step is "public nomination" in which the selected "public" can freely recommend preliminary candidates. The so-called "public" here does not refer to the masses, but to selected cadres at the level at which the leading cadre is to be elected. For example, with regard to the recruitment of prefectural-level leading cadres, the "public" who is entitled to recommend candidates includes the major leading members from the following prefectural institutions, namely, the Party committee, the People's Congress, the People's Government, the People's Political Consultative Conference, the Party Disciplinary Commission, the People's Court, the People's Procuratorate, the departments of the Party committee, the departments of the People's Government, and people's organizations. The Party committee or the Party small group from a higher level (the provincial level in this case) will decide the "formal preliminary candidates" basically according to the result of the vote. The second step concerns the "campaign speech" given by each of the formal preliminary candidates. They will deliver campaign addresses lasting 15 minutes each. The third step is the process used to confirm the final candidates by a second round of voting. The "cadre public" mentioned above will 10

Another similar case of local reform that exceeds the required standard is Zhengzhou's "Three-round Voting System" in Henan Province. See the "Provisional Regulations on the Recruitment and Appointment of Leading Cadres within the Process of a Three-Round Voting System"

amMmE.mmwmimMi&mmmm?7Mm\

people's Dany News Net

(AKI»3), 27 May 2005, . 11 Zhang Jingyuan and Tian Gang, "Sichuan's exploration on the recruitment of leading cadres," WIWMiivWW^ffiMJS.WMX China Communist Party News Net, People's Daily News Net ( A K R ) , 27 May 2005, .

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cast a second vote after hearing the campaign speeches in order to select two formal candidates so that the higher-level Party committee can make the final decision. This system has been applied to the recruitment of major leading cadres at two levels: the county level (I&&5) and the provincial-departmental/bureau level (JStJljiK.)/ prefectural level (ffjjtf^). 12 Similar to Sichuan Province, Jiangsu Province is also known for its similar reform of "Public Nomination and Public Voting" (^Affi^S)- Jiangsu started to implement the reform in 2003 when four mayoral candidates for county-level cities were selected through this new system. In 2004, when four deputy-bureau (ting)-level cadres, 49 department (chu)-\eve\ cadres, and 242 section (&e)-level cadres were selected through this new system, the system was even applied to 22 provincial-level department leading cadres, including 14 deputy heads of provincial departments, five deputy-principals of provincial-level universities, and three county magistrates.13 However, the results of these experiments may not necessarily be applied to other localities before the Party center really orders such changes. Whether these more advanced experiments imply the direction of future institutional evolution has still yet to be observed. According to some of the local experiences, the percentage of proposed candidates rejected by the higher-level Party committee is rather low. According to a report, of the 4222 cadres that were nominated for voting through the Party committee in Zhejiang Province in 2002, only five were rejected, and the decisions on 88 candidates were

12

"The results of and reflection upon the practice of 'Two Nominations and One Campaign Speech' in Sichuan in the past year" (EBin^MJfi—2ft—^3fcWltiS^Sd©S=tj), Chinese Government Innovation Net (^HRJftfiUffW), 10 January 2005, . 13 Mou Weixu and Guo Bensheng, "Jiangsu Province will have 22 provinciallyappointed leading cadres selected through the 'public nomination and public voting' system" ( f f i p e & J t ^ ^ ^ t ^ l ^ g R ) , Xinhua News Net ( § f W ) , 1 September 2004, .

Reforming the Party and the State under Hu Jintao 163

"postponed."14 In short, unless the already-tested measures to improve the vagueness in the regulation can be incorporated into the revision of the national regulation, there are still apparent limitations in constraining the power of personnel on the part of the local leaders. REFORMS TO CONSTRAIN THE DECISION-MAKING POWER OF THE LOCAL PARTY AND GOVERNMENT LEADERS The second category of reforms consists of the reforms in relation to the local Party and government leaders, and is composed of three parts, namely, the reform of the Party decision mechanism, the administrative legalization reform, and the transparency reform. As for the first part, the most important reform of the Party decision-making mechanism is the normalization of meetings of the Party representatives' congress. Regarding the second part, the most important reform of the administrative legalization reform is the promulgation and implementation of the "Administrative License Law." As to the third part, the reform of transparency, the most important reform is the reform of "open information on governmental affairs," with the "Opinions Concerning Further Promoting Open Information on Governmental Affairs by the Central Office of the CCP and the General Office of the State Council" as its formal policy document.

Normalization of the Party Representatives' Congress The first part of the reform involves the "normalization of the Party representatives' congress" at various levels. This reform is based on the experiences resulting in experiments in various localities over the years, and is concerned with regularizing the convening of the Party representatives' congress and thus transferring the congress 14

"When Shandong Province is carrying out the voting system to appoint leading cadres" ( S ^ — M ^ \ M M M f f $ f ) , China Elections and Governance Net C t l S i S ^ - ^ J o S P ^ ) , 9 January 2003, .

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into an institution that holds real power over important Party and governmental affairs. The experiments started in 12 counties (or county-level cities) in five provinces (Zhejiang, Heilongjiang, Shanxi, Hebei and Hunan) in 1988.15 For example, in Jiaojiang City of Zhejiang Province, the standing Party committee at the county level was abolished and replaced by various committees established by and responsible to the Party representatives' congress. However, due to the fact that it was merely a local and partial reform instead of a comprehensive one, the reform came to stagnation in many counties. Professor Li Yongzhong, a scholar noted for his studies on anti-corruption at the Central Party School, observed that the stagnation of the reform occurred when there were no follow-ups to the reform. He suggested that unless such breakthroughs can take place, the reform could not be fully carried out and thus would lose steam and eventually stagnate. These follow-up measures included "dividing the power of the Party standing committee, breaking the integration of administration and representation, and changing the existing mechanism of power functioning in the Party."16 It was not until the Sixteenth Party Congress that the reform was revived. However, the system of normalization of the Party representatives' congress has not been universally implemented. It has been reported in July 2005 that the Organization Department of the Central Committee was studying how to further enlarge the scope of the implementation of this reform. 17 As Professor Li Yongzhong 15

"Four Progresses in the construction of democratic institutions since the Sixteenth Party Congress" ( 4 3 * + A y t W 5 | 5 « l ? 3 S ± f l J ® ^ s S ^ i E 3 S l a i i S ) , China News Net C + H S f S P ^ ) , 1 July 2004, . 16 "Scholar Li Yongzhong argued that the normalization of the plenary session of the Party representatives' congress is a new breakthrough in the intra-Party democracy reform," Half-monthly Talks (^J=lij£), 30 October 2003, . 17 "The relevant department of CCP's Central Committee is looking at ways of enlarging the scope of the experiments with the normalization of the plenary session of the Party representatives' congress" ( ^ ^ ^ ^ W S I ^ H l H r S r ^ ^ ^ E f t # ^ f £ § 0 1 $ ! r j ) , China News Net (^Hffffli*?), 7 July 2005, .

Reforming the Party and the State under Hu Jintao 165

argued, in order to constrain the power of the local Party committee, the regularized Party representatives' congress (with a plenary session held once a year) should not be treated merely as a symbolic institution. It should be treated as an institution with power to which both the Party standing committee and the Commission for Disciplinary Inspection should be held accountable. 18 Whether the enlargement of the experiments relating to this reform moves in this direction will be a good indicator in the future as to whether the reform is moving in a progressive direction. Administrative Legalization R e f o r m The second part of the reforms for constraining the power of local officials is the administrative legalization. The most important binding document is the "Administrative License Law," which was passed in August 2003- The "administrative approval" refers to the government administration's approval after legal examination of the applications by citizens or legal persons to engage in specific activities. The law regulates the entity, procedure, application and reception, scrutiny and permission, time limit, public hearing, altering and prolonging, special conditions, fees, supervision and examination, and legal responsibility concerning the process of administrative approval. Its goal is to reduce the gray area regarding the implementation of the administrative approval process and constrain the government's behavior in terms of administrative approval. 19 The real tasks of the administrative approval reform are to thoroughly implement the law at various administrative levels and in various administrative systems. According to Professor Yuan Shuhong, the Deputy Principal of the State Administration School, there are four problems that need to be attended to in the process 18

"Scholar Li Yongzhong argued that the normalization of the plenary session of the Party representatives' congress is a new breakthrough in the intra-Party democracy reform," Half-monthly Talks (^^ffij^), 30 October 2003, . 19 "The Administrative License Law of the People's Republic of China," Xinhua News Net (§f<£pw|), 28 August 2003, .

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of implementing the law. First, it is necessary for the law enforcement personnel to receive good training and for the masses to receive education in legal matters. Second, it is important to thoroughly clean up inappropriate regulations at various levels, and to clarify the administrative entity responsible for the various categories of administrative approval. Third, it is important to prevent the administrative agencies from becoming administratively inactive so as to cause administrative disorder and give rise to a power vacuum. Fourth, it is necessary to create relevant supporting regulations or institutions to facilitate thorough implementation of the law.20 These warnings are not without merit. According to the review conducted by the Legal Office of the State Council in July 2005, the task of cleaning-up inappropriate regulations has basically been achieved but not yet been comprehensively finished one year after the law had been put into practice. More precisely, the clean-up of administrative approval at the central and provincial levels has been completed, but the tasks at the prefectural and county levels have not been finished.21 There are also the phenomena of "administrative inaction" in the implementation of this law. In many localities, new regulations need to be created as inappropriate old ones are abolished. However, the creation of many of these new regulations has been delayed. For example, in Guangzhou, the old regulation for automobile gas emissions was abolished while the new regulation, the "Regulation on Atmospheric Pollution Prevention in Guangzhou City," was not formulated until 1 July 2004. Similar phenomena regarding the vacuum in law enforcement have indeed occurred in many localities.22 20

Yuan, Shuhong, "The profound impact of and major issues deserving attention in the implementation of the 'Administrative Law'" ( r fjSd^FRFS; j ^ J i W ^ M ^ S f D f i S v i S & i J i S r a S ) , Forum for China's Party and Government Cadres (tpmMW&^MW, Beijing, 2004, No. 4, pp. 11-15. 21 "A review of the Administrative Law after its implementation for one year"

c
xmhua News Net cm^mx 1 juiy

2005, . 22 "The special signal of the intra-Party public announcement system" ( H ^ a i i f l J S W ^ ^ f a M ) , Outlook Weekly (Beijing), 5 July 2004, No. 27, pp. 11-12.

Reforming the Party and the State under Hu Jintao 167

Beyond the difficulties associated with implementation, there have also been critiques of the loopholes existing in the details in the articles, especially on protecting the rights of the citizens. For example, Article 8 mentioned that "compensation" could be awarded for damage to the interests of citizens caused by abolishing inappropriate old regulations. However, there is not any concrete article regarding "compensation" in the law. Second, Article 30 stipulates that the administrative agencies should publicize "correct and reliable" information concerning administrative approval, but it has not stipulated the time frame for publicizing the relevant information, especially regarding the rights of the applicants. Third, Article 36 stipulates that when his or her "major interest" is involved, the opinions of the third party should be consulted. However, there is no clear definition of what constitutes the "major interest." Fourth, Article 58 stipulates that no fee should be charged to applicants for administrative approval. However, this article also sets out an exception when there exist stipulations in other laws or administrative regulations. Fifth, Section 2 of this article also stipulates that no fee should be charged for an application form. Then, the question of whether a fee can be charged for items other than the application form arises. Sixth, Article 65 stipulates that an obligation should apply to administrative agencies that violate the law. However, no concrete regulation is devised to determine what responsibility these administrative agencies should actually bear. 23 These loopholes have not really given rise to high costs for officials when they fail to do what they are supposed to do, and thus prevent the reform from having the effect that it is supposed to have.

Transparency R e f o r m The third part in the reform to constrain the local leaders' power is transparency. The first important mechanism for the transparency reform was implemented in the form of an "intra-Party information 23

Yang, Jiejun, "Originalities and Limitations of the 'Administrative License Law'" ( l T l R l ^ f f i W f y # f l * ( J I I S ) , FaXueiMm, 2003, No. 10, pp. 93-99.

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disclosure system" within the Party. According to the "CCP Supervision Regulation," the "intra-Party information disclosure system" should be implemented to disclose important information within the Party. This includes three types of information disclosure. First, the decisions of the Party Central Committee should be disclosed through appropriate channels within a certain scope of the Party when necessary. Decisions by the plenary sessions of the Party committee at various levels under ordinary conditions should also be disclosed to lower-level Party organizations and Party members, and when there are practical needs these decisions should also be open to the society. Important decisions by the Party standing committee at various levels and information concerning important matters should be disclosed to lower-level Party organizations and Party members through appropriate channels according to needs. Second, during the recess of the representatives' meeting, the Party committee and Commission for Disciplinary Inspection at various levels should inform the Party representatives of the important decisions and important matters according to needs. Third, important local conditions and issues should be reported to higher-level Party organizations and requests for instruction should be made to higher-level Party organizations according to stipulated times and procedures?^ This important intra-Party transparency reform is again watered down in the process of implementation. As Professor Ye Duchu from the Central Party School pointed out, according to the spirit of the CCP Supervision Regulation, the localities should have more transparency than the central level, since it is stipulated that "under ordinary conditions," decisions made by the plenary sessions of the Party committee at various levels should also be disclosed to lowerlevel Party organizations and Party members, while at the central level the decisions of the Party Central Committee should be disclosed "when necessary."25 However, many local officials have been 24

According to the "CCP Supervision Regulation," Articles 15, 16, and 17. Xinhua News Net ( H f ^ W ) , . The italics are added by the author. 25 See Article 15 of the "CCP Supervision Regulation."

Reforming the Party and the State under Hu Jintao 169

very conservative in the reform of intra-Party transparency by only doing what they have been told to do by the central government. 26 Another problem has arisen regarding the stipulations of Article 16. It is stipulated that during the recess of the representatives' meeting, the Party committee and the Commission for Disciplinary Inspection at various levels should inform the Party representatives of the important decisions and important matters according to needs. However, many localities did not carry this out as they thought it was only up to the localities conducting experiments with the "normalization of the Party representatives' congress" to carry out the reforms. This was also interpreted by Professor Ye as an unwillingness or lack of a pro-active spirit in carrying out the intra-Party transparency reform.27 Following the promulgation of the "CCP Supervision Regulation," the "Opinions Concerning Further Promoting Open Information on Governmental Affairs by the Central Office of the CCP and the General Office of the State Council"

(*&*&m&mmmim&mim^Mftffi&&M#}MM.)

was

also promulgated on 24 March 2005 as the guideline for the government with regard to the transparency reform. According to the "Opinion," there are at least six ways of opening the government information: first, the government press conference; second, the government public bulletin or government working procedure guidelines; third, spreading government information through newspapers, broadcasts, television, or the Internet; fourth, soliciting public opinion through the publicizing of policy, public hearings, specialist consulting, public debate, or inviting citizens to participate in the government's decision-making process; fifth, publicizing information on administrative approvals or public services through the administrative service center; and, sixth, enlarging the scope of Internet services in relation to issuing permits, public inquiry,

26

"The special signal of the intra-Party public announcement system" ( E f t a f g $ ! l S W # ^ f B 5 S ) , Outlook Weekly (Beijing), 5 July 2004, No. 27, pp. 11-12. 27 Ibid.

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public fee payment, certificate application, complaint registration, or assistance request. 28

SUPERVISION AND RESPONSIBILITY REFORM The reform of supervision and discipline comprises at least four reform measures. The first is the promulgation of the CCP Supervision Regulation on 17 February 2004. The second is the "auditing reform" engendered by the promulgation of the "National Audit Report" in 2004. The third is the reform of "media and public opinion supervision reform" embodied in the promulgation and practice of many relevant regulations and policies. The fourth is the "responsibility reform" engendered by the promulgation of the "Provisional Regulations on the Resignation of Party Leading Cadres" in September 2004.

The CCP Supervision Regulation The CCP Supervision Regulation was promulgated on 17 February 2004. The major objective of this regulation is to supervise the leading Party organs and leading cadres at all levels, especially the "first hand," that is, the first Party secretary.29 This regulation has given rise to many mechanisms to supervise the leading cadres' exercise of power. In addition to the disclosure of information mentioned above, these mechanisms include a review session of the work and incorruption, a democratic group review session, the management of citizens' pleadings or petitions, an inspection tour, interviews and admonitions, public opinion supervision, and recall/replacement. 28

"Opinions Concerning Further Promoting Open Information on Governmental Affairs by the Central Office of the CCP and the General Office of the State Council"

(^^M/£mmmm)A/£mmnm~#mim®£;mMmR,x

peoples Dauy

News Net (Af£l»l), 26 April 2005, . 29 "The CCP Supervision Regulation" aims at the "First Hands" ( E ^ ^ # l f t ^ l l B S ¥ — f f l ^ X Outlook Weekly mW.MW, 1 March 2004, pp. 14-15. In addition, see Article 3 of the Regulation.

Reforming the Party and the State under Hu Jintao 171

This section will concentrate on the organizational dimension that this regulation has both changed and has not changed concerning the institutional arrangements on supervision. The following two sections will analyze the "public opinion supervision reform" and the "pleading and petition reform" mentioned in this regulation. According to this regulation, the "Commission for Disciplinary Inspection" ($531) a t each level is responsible for carrying out the task of supervision. However, the commission is not only not independent from the Party committee, but under the leadership of it, while also responsible for supervising it. The relationship between the Commission for Disciplinary Inspection, the Party standing committee, and the Party committee is relatively complicated. According to the Constitution of the CCP, "the Party's local Commissions for Disciplinary Inspection at all levels and the primary Commissions for Disciplinary Inspection function under the dual leadership of the Party committees at the corresponding levels and the next higher Commissions for Disciplinary Inspection." 30 In Article 6, Section 3 of the regulation, it is stipulated that the Party committee at each level is responsible for supervising the standing committee, Party committee members, the Commission for Disciplinary Inspection, working departments under the Party committee, directly-subordinated organizations, delegated organs, and leading cadres of same-level Party small groups. 31 In Article 9 of the regulation, it is stipulated that the Commission for Disciplinary Inspection is responsible for inspecting the standing committee, Party committee members, and leading cadres of the delegated organs and dispatched inspection organs. In other words, the Commission for Disciplinary Inspection supervises the standing committee, and both of them are under the supervision of the Party

30

The "Constitution of the Chinese Communist Party," Chapter 8, Article 43, . The italics are added by the author. 31 "The CCP Supervision Regulation," Xinhua News Net (§fi£p«D, 16 January 2005, .

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committee. However, when the Party committee is in recess, the Party standing committee is usually the most powerful power organ, to which the secretary of the commission is also subject.32 How, then, can we expect the Commission for Disciplinary Inspection to supervise the standing committee during normal conditions? Although the regulation also stipulates that when the Commission for Disciplinary Inspection finds a problem with the members of the standing committee or members of the Party committee it can refer that problem to the next higher-level Party committee or Commission for Disciplinary Inspection, it would still be difficult to do so unless the lower-level commission is certain about receiving support from the next higher-level commission in advance. Professor Li Yongzhong from the Central Party School pointed out that, in many localities, the Commission for Disciplinary Inspection either does not dare to, or is not willing to, or is not able to seriously exercise strict supervision over or to inspect the Party committee members at the same level.33 In short, the real solution to this institutional confusion, according to Professor Li, should lie in disintegrating the "fusion of representation and executive power" of the Party committee's leading system. In other words, by separating the Party committee into three sub-committees, i.e. the Party committee as the representative body, the executive committee as the executive body, and the Commission for Disciplinary Inspection as the supervisory body, with their members not overlapping with each other and with their power originating independently from each other. For the Commission for Disciplinary Inspection to have independent power from the daily leadership of the standing committee, Professor Li argues that it would eventually be necessary for the commission to become a completely vertical system in terms of its 32

Usually, the secretary of the Commission for Disciplinary Inspection is the number two secretary of the standing committee. 33 Li, Yongzhong, "Strengthening the two 'most important issues' in the intra-Party supervision" (MSllll^SmliWMfll r f t I I j ) ) Forum for China's Party and Government Cadres {^WX&Mx&W^D, Beijing, August 2004, pp. 12-14.

Reforming the Party and the State under Hu Jintao 173

political and administrative leadership. 34 Currently, there have been some reforms to improve the independence of the disciplinary inspection system. In 2004, the Central Commission for Disciplinary Inspection centralized the management and directional power of the Commissions for Disciplinary Inspection in all the centrally delegated organs. The Commissions for Disciplinary Inspection will no longer be under "dual leadership" as stipulated in the Party constitution. As for those Commissions for Disciplinary Inspection in the provinces and the lower-level governments, the dual leadership approach has not yet been changed. However, the central government has dispatched touring-inspection groups from the central level to the provinces and from the provincial level to the lower levels.35 If the comprehensive independence of the disciplinary inspection system, as argued by Professor Li, is to one day be realized as the goal of the reform,36 then the Chinese Communist Party will have achieved the "separation of power" proposed by Montesquieu that has long been rejected by the CCP as an idea belonging to the decadent bourgeoisie.

The "Auditing Storm" a n d its Reform The power of centralized supervisory institutions was also moderately expanded in the reform of auditing, which has been referred to as the "auditing storm." This reform started with the publication of the 2003 annual audit report by the State Administration of Audit presented at the Tenth Meeting of the Tenth National People's Congress Standing Committee on 23 June 2004.37 The national audit 34

Li, Yongzhong, "Some thoughts concerning reforming the 'fusion of representative and executive powers' of the Party committee" (Mt^^&M-M^ '"sSfXa"—j fSWStri'JlKjS^lf), Forum for China's Party and Government Cadres (^MMBC&^MiW, Beijing, January 2002, pp. 22-24. 35 Li, Yongzhong, "Strengthening the two 'most important issues' in the intra-Party r supervision" (t\\'BMfa!%ifffi}Mffl S I I j ) , Forum for China's Party and Government Cadres (tpMM$&$n$Bfc$B.^, Beijing, August 2004, pp. 12-14. 36 Ibid. 37 "The Director of the State Administration of Audit Lijinhua Presents the 2003 Annual National Report of Auditing Work" ( $ ^ ¥ S I f S f ' F 2 0 0 3 ^ J l # I f X f F f g ' g ) ,

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report never caught much attention before the year 2003. However, the 2003 annual audit report was said to have caused an "auditing storm" in Chinese politics because it publicized cases of waste or misuse of public funds by many ministries, national level and provincial organs, and national financial institutions. The storm caused the media to argue whether the leading officials of these national organs should be held responsible. 38 Although the storm has been welcomed as a sign of the progress in political reform in terms of checking the arbitrary power of officials, there are again institutional limitations regarding the power of audits as a means of checking government officials. There are three types of proposals for institutional reform that address these limitations. First, the intention and effort to vertically centralize the power or to raise the administrative level of the auditing power have been stalled. It is reported that the Director of the State Administration of Audit, Li Jinhua, has stated that the auditing offices at various administrative levels will not be vertically centralized in China. He pointed out two reasons for this. The first reason is that the creation of the auditing system is rooted in its legalization by the constitution, and if the system is to be reorganized, relevant articles in the constitution need to be amended. The second reason, according to Director Li, is that the local administrative leaders have all placed much emphasis on the work of auditing as an important means of supervising the local public organs. To allow the local government leaders to lead the local auditing offices will benefit the promotion of the work of auditing in the nation.39 These two reasons do not Xinhua News Net (ff^l*§), 24 June 2004, . 38 "The storm of auditing reform has led to the storm of holding officials responsible" ( f f i t & S W t c U P W J I J I ) , People's Daily News Net ( A R P « | ), 4 July 2005, . 39 "The Director of the State Administration of Audit said that the auditing system will not be vertically centralized for now" ( Hflcfipltilf ilrltJB: : W>\^WB^^1tMWMMW), Chinese News Net, reprinted from China News Net ( ^ H S f f i f ^ ) , 5 May 2005, .

Reforming the Party and the State under Hu Jintao 175

seem to really answer the question, which is similar to the case of the Commission for Disciplinary Inspection of the Party, as to whether an auditing office under the leadership of the local government is really able to have the independent power to audit the local government and public organs. In addition to the idea of centralizing the auditing system, there are two other ideas for strengthening the independent power of the auditing system to address the problem of the institutional limitation of auditing power. The second idea is to transfer the auditing power to the People's Congress.40 The third idea, as proposed by the Deputy Director of the State Administration of Auditing Xiang Junbo, is to establish another organ independent of the administrative power and parallel to the People's Court and People's Procuratorate.41 Neither of these two ideas has given rise to any response from the CCP regime. For either of these reforms to take place, the amendment of constitutional reform would be required and would thus be difficult to foresee in the near future. Again, the proposals for institutional reform reflect the institutional constraints of the current reform agenda, and whether there will be such institutional adjustment will become the indicator for future observation.

Media a n d Public O p i n i o n S u p e r v i s i o n In the "CCP Supervision Regulation," supervision by public opinion was listed as one of the measures for intra-Party supervision. In April 2005, the Office of the CCP Central Committee promulgated a document entitled "Opinions concerning Further Strengthening and Improving the Work of Supervision by Public Opinion"

,

40

Yang, Suchang, "On deepening the development of the relationship between the People's Congress and the state audit" ( g ^ A ; ^ S ^ # f f B S ^ f t & l l U M f c ; ) , Studies of People's Congress ( A A f f l ^ ), 2003, No. 10, General No. 142, pp. 4-8. 41 "No official resigns after the storm of auditing reform, and the media called upon four focuses for further reform" ( miMM&^M'g ^ffifflMMPfMVB^WlM ), China Elections and Governance Net (4 , l5i&^^V'nSI*!l), reprinted from the Xuexi Shibao (Beijing), 27 July 2004, .

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mnm-#mmUZmnm%5.>BJLimM&X

The local govern-

ments were asked not to blockade the information, or hide the facts, and not to interfere with supervision by public opinion through bribery or illegal lobbying. At the same time, the CCP Propaganda Department and the State Administration of Radio, Film, and Television also together promulgated the "Regulations on Managing the Conduct of the News Reporting Personnel" ( | f l ^ f f M « ^ A * ^ * W S ^ l ^ M f T )-42 These documents seem to have expressed the Party's intention to utilize public opinion as a means for supervising Party and government cadres at various levels. For example, the "Regulations for Preventing Crimes Perpetrated through Official Functions of Shenzhen City" ( ^ i K r f J S K ^ M B f l f i M ) promulgated on 1 April 2005 have explicitly stipulated that the media is entitled to exercise supervision through influencing public opinion regarding the implementation of official functions by the state's working personnel according to law, and should be responsible for its reports. 43 However, the CCP regime's intention to include public opinion should not be taken as yielding of the CCP's monopolistic political position to society. The regime has also issued several documents for disciplining the media workers, telling them when they are allowed to criticize the government or Party leading cadres. For example, the Central Propaganda Department, the State Administration for Radio, Film, and Television, and the General Administration of Press and Publication together issued the "Regulations concerning the Management of the Conduct of the News Reporting Personnel" ( M^ffffl&mAMti&gg&ffiffife ) in

42

"The Party Central Committee issues document to strengthen supervision by public opinion and demand local governments not to blockade information" ( t p * a j * H i f e i £ # } f t J i * J I : F # § f t f t r a & ) , People's Daily News Net ( A S ^ ) , reprinted from Chongqing Daily News ( U K B $ D , 20 April 2005, . 43 Nan, Zhenzhong, "Supervision by public opinion is the important method to preserve the basic interests of people" mm^MM:BM\RM^M^W^3tM^W, People's Daily News Net ( A R P 9 ) , 20 June 2005, .

Reforming the Party and the State under Hu Jintao 177

March 2005.44 It is reported that in this document the Party limited the media to criticizing the leading cadres in other localities. If the media at the central level wish to criticize the work of local governments or Party committees, such reports have to be submitted to and to be discussed with the Party committee at the next higher level in relation to the criticized locality. If such reports involve criticism of the local leading cadres, they have to be submitted to the next higher-level Party committee in advance. 45 Based on this document, the State Administration of Radio Film and Television has issued more documents making even clearer stipulations on this point. According to "The Implementation Measure Concerning the Management of the Conduct of News Reports through Radio and Television" promulgated in April 2005, in reporting cases in which Party cadres break the law or violate the Party discipline, the news reporting personnel should make sure the effect of the report is positive and should overcome the negative impact. They should also exercise self-awareness in observing relevant reporting discipline, and pay attention to the political and social effects of such reports. In reporting such cases, it is important to pay attention to the appropriate quantity and quality of such reports. In order not to create a bad social impact, they should not report too many of those cases, should not report the cases in an inappropriate style, should not choose inappropriate content for reporting, and should not overdo the reporting.46 According to another document promulgated in May 2005, "A Circular Regarding the Work of Supervising Public Opinion 44

"Central Propaganda Department and other bureaus issue together the 'Regulations concerning the management of the conduct of the news reporting per-

sonnel'" (^S.^mW^^liiM^BmX^.^m^mmM),

People's Daily News Net

( AKf*§), 22 March 2005, . 45 "CCP forbids the mass media from supervising governments in different localities" C^^mUMM^i^WM^M), Chinese News Net (#ftffPiflffi), reprinted from the Central News Agency (Taipei), 6 June 2005, . 46 "The implementation measure concerning the management of the conduct of the news report through radio, and television" {MMW-WMWi^MKm.vtW^M^f. SSl^sSiifcfT), The State Administration for Radio, Film, and Television Homepage, .

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through Radio and Television," criticizing a leading cadre by name should be strictly controlled. In cases where there is real need to criticize the leading cadre by name, the program should be sent to the next higher-level Party committee for examination, and should be approved by the leading cadre in the radio or television institution before it is played publicly.47 In short, the reform of public opinion supervision shows that the CCP regime intends to use the media, which is still under the tight control of the Party, to help supervise the government and Party cadres. At the same time, cadres are asked not to resist the supervision from public opinion, which is mainly represented by the media. However, such supervision should not violate or trespass on the hierarchical Party discipline, especially the authority of the higher Party committee of the criticized cadre. Given the fact that the encouraging and constraining measures are issued at the same time, it is doubtful whether the regime has any intention of loosening its tight control over the media or of allowing the media to have much independent space in checking the power of the government or Party. Responsibility Reform In September 2004, the CCP Central Committee promulgated "The Provisional Regulation on the Resignation of Party Leading Cadres" (WfcWf&ffi&WBfffflfeX The promulgation of this regulation has started what is called "the system to hold officials responsible" (fqj JfflHl)- According to this regulation, there are four types of resignation: "resignation due to official reassignment" ( H ^ A S ? ^ ) , "voluntary resignation" (S=}jPii?lK), "self-censured resignation due to administrative mistake" (^IfrifliD, and "Party-commanded resignation" (Jt4HlSl|t)- The last two types of resignation are resignation mechanisms for the leading cadres to take responsibility for what they have done. "Self-censured resignation due to administrative 47

"A Circular on the Work of Public Opinion Supervision through Radio and Television" ( M f f m i S f l l t ^ S l f l ^ S S W i l f t ] ) , Xinhua News Net ifgj^mX 13 May 2005, .

Reforming the Party and the State under Hu Jintao 179

mistake" is a kind of resignation initiated by the leading cadres themselves as an action to take responsibility for administrative mistakes they have committed. "Party-commanded resignation" is a kind of resignation that is commanded by the relevant Party organization to those leading cadres whose continuing to assume the current leading administrative post is considered to be inappropriate. According to the document, those cadres who are elected or whose posts are assigned by the People's Congress or People's Political Consultative Conference should resign according to the procedures stipulated by the law or relevant legal regulations. For those leading cadres who resign according to the last two mechanisms, if they have violated laws, then they shall also be held legally responsible according to law.48 This reform, again, appears to be a positive reform in terms of increasing the degree of accountability of the whole political system. However, like other reforms, there are limitations to such a reform. First, critics argue that the regulation on resignation is vague in terms of when or under what conditions the leading cadres should resign out of self-censure to be responsible for their mistakes. In cases that are well reported or publicized, it is usually more likely that the leading cadres will tend to resign out of self-censure than in those less-publicized cases. Thus the criterion is not objective or predictable. It is also not clear to whom the mechanism of selfcensured resignation should or can be applied to. Should the government leading cadre or the Party leading cadre resign first?49 In response to this, there are actually many local experiments 48

"Regulations on the recruitment and resignation of Party and government leading cadres are promulgated" ( J t 3 & f l t » # g ^ l i f l 3 t f f i , i » « i ^ e # £ # S I f t f 5 ) , China News Net ( ^ H S f S f ^ ) , 8 September 2004, . 49 Liu, Wenren, "Three problems should be solved in institutionalizing the self-censured resignation in the storm of holding officials responsible"

(®MmM$mf&m\&Mmmmm$EMm),

China

Elections

and

Governance Net ( ^ H i S ^ - ^ J o S R ) , reprinted from China Youth Daily, 30 August 2004, .

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conducted to probe various approaches to clarify the vagueness. For example, Shaanxi issued an "Opinions on Deepening Cadre Personnel Reform" in August 2004, which has stipulated ten conditions under which the leading cadres should resign. 50 Similarly, Hainan Province has set four conditions, and Hebei Province has set eleven. Shenzhen City not only issues a Party document to set the policy, but has even gone so far as to legalize the conditions for self-censured resignation as well as for dismissal from office.51 The second criticism is that there is no rule to regulate when the cadres who have resigned are entitled to another post after their resignation.52 The most conspicuous case happened in Chongqing when it was reported that the previous General Manager of the Chinese National Petroleum Corporation, Ma Fucai, who resigned due to the oil field accident in Chongqing, could be reappointed as the Deputy General Director of the still-forming state organ, the State Administration of Energy. 53 If the officials who have resigned can be reassigned to another post, which may be even higher than the previous one, then the previous resignation would have become meaningless. 50

Chen, Youmou, "Shaanxi Province document of personnel reform to set ten conditions under which cadres should resign out of self-censure"

<.m§&&A3(^MMr\mmim&fe1l\&mm,

China

Elections

and

Governance Net ( ^ H i S ^ - f e j i ' q S R ) , reprinted from China News Net (^fflffffiN), 23 August 2004, . 51 "The self-censured resignation has for the first time been written into China's

local laws" (^\^WW$\&^&%\^MW5$M),

Yahoo News Net Taiwan,

4 January 2005, reprinted from Central News Agency (Taipei), . 52 Guo, Zhengang, "The follow-up management measures for the system of holding officials responsible should not be lacking" ( W M ^ X f ^ M S f c ^ f t l i ^ f f i i S f S ) , China Elections and Governance Net ( ^ Hiift^-% ?n M 1*3), 29 June 2005, reprinted from Workers' Daily, . 53 "China's new agency for managing energy has been ratified: Ma Fucai is expected to take important post" ( 4 « £ l > f f © H $ | # f f i f f i E S : ^ W § l t B f i E g i i ) , 29 April 2005, Xinhau News Net, .

Reforming the Party and the State under Hu Jintao 181

The third kind of criticism argues that the way to hold the cadres responsible through the "self-censured resignation" or "Partycommanded resignation" is either unconstitutional or that it weakens the constitutional authority.54 According to the current PRC constitution, the elected officials should present their resignations to the people's congress that elected them. Constitutionally speaking, whether they can really resign should be up to the People's Congress, and not to the officials' self-censure, nor to the Party committee at the next higher level. It is the People's Congress, as argued by the critics, that has the final constitutional power to propose and decide whether any official should resign or should be stripped of his or her administrative post.55 Nevertheless, the recently passed "Civil Service Law of the PRC" has also included the "self-censured resignation" and "commanded resignation" into the law. According to Article 82 of the law, the leading member of the government should resign when he or she causes a serious loss or a bad social impact due to serious mistakes or the neglect of his or her duty, or because they should be responsible for a grave public accident. If those leading members of the government who should resign out of self-censure or due to other reasons that disqualify them from remaining in the post do not tender their resignation, they should be commanded to resign the leading post. 56 The legalization of these two resignation mechanisms, however, has not really solved the unconstitutional problem. It is still unclear who, the higher-level Party committee or the same level People's Congress, should command the leading officials to resign. Furthermore, it will still be questioned whether, should the 54

"The system of holding officials responsible contradicts with constitutional ideas" (Mf:%iMM&M.ltM^), China Elections and Governance Net ( u t 3 fflii£^ i 3}fjai*3) ) 28 July 2004, reprinted from the Phoenix Weekly (Hong Kong), 2004, No. 15, General No. 151, . 55 Ibid. 56 "The Civil Service Law of the PRC," passed by the Fifteenth Meeting of the Tenth Session of the National People's Congress Standing Committee on 27 April 2005, Ministry of Personnel Website, 29 April 2005, .

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government leading official resign, the Party secretary at the same level, who is actually the real boss, would be held responsible, too. CONCLUSION: THE LIMITED PROGRESSIVENESS OF HU'S POLITICAL REFORMS This chapter has analyzed the political reform under Hu Jintao in two ways: first, by separating Hu's reforms of the state and Party into three general categories and identifying the concrete reform measures in each category (see Tables 5.1, 5.2 and 5.3); and, second, by examining the content of each reform according to state and Party documents, and then probing into the limitations of these reforms.

Table 5-1 Cadre recruitment reforms Reform measures I. Cadre recruitment reforms

Documents 1. Regulations on the Recruitment and Appointment of Party and Government Leading Cadres M I R T W ^ ^r^lfiffilftWU 2. Measures to Supervise and Examine the Recruitment and Appointment of Party and Government Leading Cadres 3. The Provisional Regulations on the Work of Open Selection of Party and Government Leading Cadres 4. The Provisional Regulations on the Work of Competitively Recruiting Party and Government Officials 5. The Voting Measure for Deciding Planned or Recommended Candidates for Leading Cadres of the Next Lower Levels at the Plenary Meeting of the Local Party Committee

mxmmmm

Reforming the Party and the State under Hu Jintao

183

Table 5-2 Constraining the decision-making power of local leaders Reform measures

Documents 1. Regularized Party Representative

Regularized Party representative meeting

Meeting

Administrative legalization reform Transparency reform

Mtf&ft&ffl

A. Decision system by vote jpi^^jlj 1. The Administrative License Law fyjE^f^flSJ^ 1. Opinions concerned with Further Promoting Open Information on Governmental Affairs by the Central Office of the CCP and the General Office of the State Council PMm&M &BB#JKJiL (2005.3.24) 2. The CCP Supervision Regulation

Mftmmkw A. Intra-Party information disclosure system

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Table 5.3 Supervision and accountability Reform measures Supervision and discipline reform

Documents 1. The CCP Supervision Regulation

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Auditing reform Media and public opinion reform

2. The CCP Discipline and Penalty Regulation^a^MmiBlt^^fi^lJ National Audit Report H r l f fiz'a Opinions concerning Further Strengthening and Improving the Work of Public Opinion Supervision

Responsibility and resignation reform

1. The Provisional Regulations on the Resignation of Party Leading Cadres A. Responsibility system fn3J§f0J B. Self-censured resignation due to administrative mistake 5 [ ^ ^ K 2. The Civil Service Law of the PRC

^mx&^mt VM m&

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These reforms mainly aim at reaching four goals, namely, checking the arbitrary power of the local officials, curbing rent-seeking and corruption on the part of the local officials, making the bureaucracy more rational and efficient, and, if possible, accommodating social pressures and economic challenges. According to Table 5.4, which depicts the relationships between the reform measures and these goals, we may find that all of these reform measures have been mainly intended to fulfill the first two goals, that is, to check the arbitrary power of the local officials and to curb rent-seeking and corruption on the part of local leading cadres at various levels. Many reforms have also directly or indirectly aimed at reaching the third goal, that is, to make the bureaucracy more rational and efficient, although it is not as conspicuous a goal as the first two. However, the fourth goal, that is, to accommodate social pressures and economic needs, seems to be the goal that all the reform measures have fulfilled the least. From this perspective, the progressiveness of Hu's political reform is mostly within the parameters of the political system, instead of changing its basic principles. This chapter also analyzes the limitations of each reform, and these are summed up in Table 5-5. In general, these reforms suffer from several common limitations. First, they suffer from the inaction or lack of a pro-active spirit on the part of the local officials and bureaucrats. Second, these reform regulations tend to be vague when it comes to the details, which creates loopholes for local cadres to delay or to adopt ways of evading the implementation of the reforms. Third, in relation to many of the reforms, the backbone of the reform mechanism rests with the Party instead of the governmental institutions. This approach tends to reduce the stability and predictability of the system, since these Party regulations are always subject to the whims and influence of individual leaders and their ad hoc explanations of the rules, which in turns leads to collusive evasion of implementation. Fourth, many of these reforms stress the strengthening of vertical instead of horizontal accountability, even though scholars and even central officials have already sensed the need to make provision for further separation of power if a meaningful check on power is to be really achieved. Sixth, although in

Table 5.4 The goals to be achieved under Hu's political re Reform Categories

Re

To check the arbitrary power of leading cadres Recruitment reform Regulation on the Appointment of Party and Government Leading Cadres Reforms to constrain local leaders' power Regularizing the Party representatives' congress Administrative legalization reform Transparency reform III. Supervision and responsibility reform CCP Supervision Regulation The storm of auditing reform Media and public opinion supervision Responsibility reform

To curb re seeking an corruption leading cad

/

/

/ / /

/ / /

/ / / /

/ / / /

/ The reform on the row was designed mainly to realize the goal on the column. The reform on the row was designed partly to realize the goal on the column. X The reform on the row was not designed to realize the goal on the column.

186

Hsu Szu-chien Table 5.5 Limitations of Hu's reform measures Reform categories

I. Recruitment reforms Regulation on the Appointment of Party and Government Leading Cadres

II. Reforms to constrain local leaders' power Regularizing the Party representatives' congress Administrative legalization reform

Transparency reform III. Supervision and responsibility reform CCP Supervision Regulation

The storm of auditing reform Supervision by media and public opinion Responsibility reform

Limitations

1. 2. 3. 4.

Limited openness for participation; Closed-ended competition; Influence from above not excluded; Influence from same-level leaders not excluded; 5. Local improving experiments may not be applicable nationwide

Needs to be enlarged 1. Administrative inaction of local officials 2. Loopholes in detailed stipulation in implementation Local officials lacking pro-active spirit; administrative inaction

The Commission for disciplinary Inspection cannot be really independent from the Party standing committee, which it is supposed to supervise. The auditing system lacks an independent power base. Media supervision is under the constraint of the vertical Party scrutiny of those supervised cadres. 1. The Regulation is vague on when or under what conditions the leading cadres should resign out of selfcensure; 2. There is no rule to regulate when the resigned cadres are entitled to another post after their resignation; 3. The Regulation goes against the spirit of constitutionalism.

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many reforms more inclusive participation stands out as an indicator of the reform taking place, these more inclusive participation mechanisms are mostly half open. That is, they are open only to the participation of more Party cadres from lower levels instead of citizens or social groups. Based on these limitations, we can also assess Hu's political reforms against the following three sets of democratic values: first, the "rule of law," measured by the extent to which these reforms are institutionalized as state or Party regulations; 57 second, vertical accountability vs. horizontal accountability; and, third, the democratic value of participation and competition. Table 5.6 summarizes the analysis conducted in this regard. In comparison, Hu's reforms focus mainly on strengthening the democratic value of the "vertical accountability" and the "rule of law." The reforms actually do not place so much emphasis on "horizontal accountability" and "participation." There have been signs of some preliminary development of "horizontal accountability" in all three categories of reform, but no real developments with regard to the institutional "separation of power" has yet taken place. There are also developments that involve a broader scope of lower-level cadres participating in the various reforms, but no reform formally institutionalizes the involvement of citizens or social groups. The democratic value of "competition" is the value least realized in the reforms. Only the cadre recruitment reform has some element of competition, but this is only so in a closed-ended manner. Although the democratic values have not been much realized in these reforms, we should not deny the fact that these reforms do move to some extent in a progressive direction. The progressive developments associated with Hu's reforms include the following. First, there is already a preliminary development towards checks and balances both in the intra-Party supervision reform and the 57

The "rule of law" is measured by a three-category indicator, with the reform institutionalized as the "law of the state" at the highest level, as "Party regulation" at the medium level, and as "Party documents" or no concrete document at the lowest level.

Table 5.6 Hu's reforms measured against democrat Demo

Reform Categories and Measures Rule of Law

Recruitment reform Regulation on the Appointment of Party and Government Leading Cadres Reform to constrain local leaders' power Regularizing the Party representatives' congress Administrative legalization reform Transparency reform III. Supervision and responsibility reform CCP Supervision Regulation The storm of auditing reform Media and public opinion supervision Responsibility reform

Vertical accountability

/

/

/ X

/ The reform on the row strongly realizes the value on the column. The reform on the row weakly realizes the value on the column. X The reform on the row cannot realize the value on the column.

/ / / /

H acc

Reforming the Party and the State under Hu Jintao 189

auditing reform. Second, the principle of more inclusive participation and more open competition has been introduced to the reforms. Third, Party cadres and government officials have been asked to be more accountable for the mistakes they have committed. What will be worth following up observation is whether Hu 'will deepen his political reforms along some of the current progressive directions, or whether there will be more developments in certain directions than in others. According to what has been observed in this chapter, it can be hypothesized that the current political reforms place more emphasis on "Party rules" instead of "state rules," and more on "vertical accountability" instead of "horizontal accountability," participation and competition. Nevertheless, such political reforms will inevitably face two challenges: The first is the challenge as to whether the central government or central Party leadership will be able to overcome the problem of asymmetric information in the principal-agent relationship between the CCP central leadership and the local cadres at all levels. If this problem cannot be overcome, these institutional reforms may never be really carried out, and these reforms will have become reforms on paper. The second challenge is a result of the first one. If the central government cannot overcome the problem of asymmetric information in supervising the local governments, officials, and cadres, they will then continue to pursue economic opportunism on the basis of their political power. Under such circumstances, the tension between the state and society will continue to grow. This increasing tension may eventually lead to graver challenges to the legitimacy of the CCP regime as a whole. As Professor Li Yongzhong from the Central Party School has observed, judging from the past experience of the CCP, self-supervision has proved to be ineffective. Whether the CCP regime will be able to keep the Party-state enjoying a monopoly of power non-corrupt is not only critical to its political legitimacy, but also constitute a significant issue in testing the validity of democratic theory.

Chapter

6 Rule of Law and Governance lou Keyuan

INTRODUCTION Rule of Law has become a popular jargon in the Chinese society particularly since the adoption of the Third Amendment to the Chinese Constitution in 1999. This Amendment for the first time in the history of the People's Republic of China (PRC) incorporated the concept of rule of law into the Constitution in which it stipulates that "the People's Republic of China implements law to govern the State and construct the socialist country with the rule of law".1 Since then, the term "rule of law" has been widely used in the context of Chinese politics and governance, despite the fact that the meaning of "rule of law" may not be well understood in China.2 1

Article 5 of the 1999 amended Constitution. The Chinese text can be found in People's Daily (Remin Ribao), 17 March 1999, and an English version is available in Beijing Review, May 3-9, 1999, 14-15. For details, see Zou Keyuan and Zheng Yongnian, "China's Third Constitutional Amendment: A Leap Forward towards Rule of Law in China", Yearbook Law & Legal Practice in East Asia, Vol. 4, 1999, 29-41. 2 Detail discussion of the concept of rule of law is beyond the topic of this paper. For reference, see Jiangyu Wang, "The Rule of Law in China: A Realistic View of the Jurisprudence, the Impact of the WTO, and the Prospects for Future Development", Singapore Journal of Legal Studies, December 2004 Issue, 347-389-

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Just following this new legal development, the State Counc.il issued a Decision on Comprehensively Pushing forward Administration in Accordance with Law in November 1999,3 requesting governments at all levels and subordinated departments of the State Council to strengthen institutional building, tighten administrative law enforcement, strengthen supervision for administrative law enforcement, and heighten the capability of administration in accordance with law. The most significant event took place just after the Fourth Generation of the Chinese leadership came to power: in April 2004, the policy document on "Implementing Program of Comprehensively Pushing forward Administration in Accordance with Law" (henceforth "Implementing the Program" interchangeably) was issued.4 This officially ushered in a new era of administration in accordance with law iyi fa xing zheng) in China. There are several reasons to explain why China has determined to carry out this administrative reform towards rule of law. First, since the economic reform and open-door policy in 1978, the Chinese society has experienced a fundamental change either in economic developments or in the reconstruction of the legal system. In the economic field, economic reform has brought prosperity to the Chinese society and maintained a long-time economic growth. Chinese economy has been changed from the old planned to a new market-oriented economy. The watershed change took place when the National People's Congress (NPC) made a significant amendment to the Constitution by endorsing the term "socialist market economy" to replace the old term "planned economy" in March 1993 5 To back up this constitutional change, the 3rd Plenum of the 14th Congress of the Chinese Communist Party (CCP) adopted the historic Decision on Issues Concerning the Establishment of a

3

Text is available at http://news.xinhuanet.com/lianzheng/2005-08/10/content. 3333987.htm (accessed 17 August 2005). 4 Text is available in People's Daily (in Chinese), 21 April 2004, p. 6. 5 The Amendment is available in People's Daily, 30 March 1993.

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Socialist Market Economic Structure in November 1993.6 Since then, China has been marching towards establishing a market economy. It is commonly said that a market economy is a rule of law economy. For this reason, law is indispensable for the development of the Chinese market-oriented economy and the new type of governance over economic activities. In the legal field there are also many significant changes. The 3rd Plenary Session of the 11th CCP Central Committee, held in December 1978, adopted the communique which set the goals of the legal construction and reestablishment in China.7 A legal system has been gradually built up with the developments of the economic reform. As officially pledged, China will have established a comprehensive legal system by 2010. Second, the requirements from the World Trade Organization (WTO) constitute another main factor for the change of China's legal environment and law enforcement mentality and methods. As a WTO member, China has to bring its relevant laws and regulations in line with those of the WTO. Those administrative rules and regulations which are in conflict with WTO rules have to be revised and/or abolished. The WTO effect is fundamental to the change of Chinese laws at present and in the years to come. Also, WTO requires its member governments to behave in accordance with its requirements including transparency and accountability. Finally, it is to be noted that the Chinese government has leant a lesson from the anti-severe acute respiratory syndrome (SARS) campaign in 2003- The poor administration and management in the early period after the breakout of the SARS at least was a partial cause of thousands of more SARS victims within and outside China.

6

Text is available in China Daily, \1 November 1993. For details on the significance of this Decision, see Yingyi Qian and Jinglian Wu, "China's Transition to a Market Economy: How Far across the River?" in Nicholas C. Hope, Dennis Tao Yang and Mu Yang Li (eds.), How Far Across the River? Chinese Policy Reform at the Millennium (Stanford, California: Stanford University Press, 2003), pp. 35-38. 7 "Quarterly Chronicle and Documentation (October-December 1978)", China Quarterly, No. 77 (March 1979), p. 172.

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For example, the relevant government department tried to conceal critical information from the public. However, the Chinese government finally realized the importance of law and used the 1989 Law on Prevention and Control of Infectious Diseases8 to combat the epidemic. Correspondent measures were accordingly taken to set up quarantine zones in affected areas and to activate the system of reporting and publicizing SARS cases. Information on SARS had been given to the public in time.9 The change of the Chinese leadership may also have some impact on the furtherance of the legal reform and the enhancing of the legal awareness within the Chinese society. Even before he took over all the top posts from Jiang Zemin, Hu Jintao, in commemorating the implementation of the 1982 Constitution for 20 years in December 2002, emphasized the importance of abiding by the Constitution and called for all the cadres to respect its legal authority.10 He has often expressed his belief in governing the country by establishing the Party for the public and using the power for the people (li dang weigong, zhi zheng wei miri). IMPLEMENTING LAW-BASED ADMINISTRATION "Implementing Program of Comprehensively Pushing forward Administration in Accordance with Law" of 2004 is a significant guiding document for the law-based administration. According to this document, China will spend ten years basically realizing the goal of constructing a rule-of-law government by around 2014 or 2015. 8

Text is available in http://www.moh.gov.cn/wsflfg/fl/200205l40007.htm (accessed 30 July 2003). 9 For details, see Zou Keyuan, "SARS and Rule of Law in China", in John Wong & Zheng Yongnian (eds.), The SARS Epidemic: Challenges to China's Crisis Management (Singapore: World Scientific Publishing Co., 2004), 99-122. 10 For details, see Hu Jintao, "Speech at the occasion of commemorating the implementation of the 1982 Constitution for 20 years", 4 December 2002, at http://66.102.7.104/search?q=cache:WXE48_FolPIJ:202.106.184.148/2002-1204/26/250121.html+%E8%83%Al%E9%94%A6%E6%B6%9B%E5%BC%BA%E8%B0% 83%E5%AE%AA%E6%B3%95&hl=en&start=l (accessed 17 August 2005).

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In order to achieve this goal, several objectives have been set forth: (1) to separate government from enterprises and public institutions (shiye danwet) to smooth the relationship between the government and the market and between the government and the society, to divide clearly the functions and responsibilities between the central and local governments and between respective government departments, and to formulate an administrative management system which becomes normative, coordinative, transparent and efficient; (2) to put forward and adopt local and administrative laws and regulations and normative documents in conformity with the competence and procedures prescribed by the Constitution and relevant national laws; (3) to implement laws and regulations in a comprehensive and accurate way so as to effectively maintain economic and social order; (4) to formulate a scientific, democratic and normative decision-making mechanism and to timely reflect the demand and will of the people; (5) to formulate a mechanism to resolve social contradictions; (6) to link administrative power to responsibility and to improve the supervision mechanism; and (7) to heighten the legal awareness of administrative personnel, particularly leading cadres. 11 The document provides six basic requirements for law-based administration, including lawful administration; reasonable administration; rightful procedure; efficiency and provision of convenience for the people; honesty; and combining power with responsibility. It also specifies guidelines for deepening the institutional reform in compliance with relevant laws in other areas of administration. It is understandable that in the post-WTO era, governments at all levels in China have to change their means of administration and governance. Law will become more and more important in government management. This change is designed to limit the government power, to establish adequate administrative procedures and to formulate the conception of responsible governance. There are a number of special laws regarding administration in China and which will be discussed in relevant sections in this paper. The most important 11

"Implementing Program", supra Footnote 4.

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one and also most related to administration in accordance with law is the Law on Administrative Licensing which was passed in August 2003 and came into force from 1 July 2004.12 The Law on Administrative Licensing defines "administrative licensing" as the conduct of an administrative organ to examine and approve a certain specified activity which has applied for.13 In the economic field, public health, macro economic adjustment and control, ecological environmental protection, and development and utilization of limited natural resources require administrative licensing. Any regulation on administrative licensing should be publicized; otherwise they cannot become the basis to grant an administrative license.14 A citizen, legal person or other organization enjoys the right to presentation and explanation on administrative licensing, the right to apply for administrative review or launch an administrative litigation. The new law explicitly forbids government agencies from empowering themselves with the right to grant permits or collecting fees not required by the law. In order to prevent localism, the Law specifically provides that any administrative licensing at certain locality should not prevent individuals and enterprises from other regions from conducting production operations or providing services, nor restrict commodities from other regions into the local market.15 The new law is regarded as an attempt of the Chinese government to facilitate the start-up of more small businesses and small and medium-sized enterprises (SMEs), which have been playing a more important role in job creation.16 Through the implementation of the law, amount of administrative licensing will be greatly reduced and departments under the State Council will no longer 12

Text is available in People's Daily (Renmin Ribao), 28 August 2003, at 13. See Meng Yan, "Law alters national licensing standards", China Daily, 29 June 2004; and "New licensing law streamlines bureaucracy", China Daily, 1 July 2004. 13 Article 2 of the Administrative Licensing Law. 14 Article 5 of the Administrative Licensing Law. 15 See Article 15 of the Administrative Licensing Law. 16 See Chua Chin Hon, "China cuts costly red tape", The Straits Times, 30 August 2003, p. 1.

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have the right to determine whether a certain economic activity needs an administrative permit. In order to reduce the number of items for administrative examination and approval, the State Council established an Office of Leading Group for the Reform of Administrative Examination and Approval System to conduct a comprehensive clean-up of items for administrative examination and approval. Three rounds of cleanup of these items were made, respectively in October 2002, Februrary 2003 and May 2004. As a result, 1,795 items were cancelled or adjusted, accounting for half of the total items. The State Council and its departments still retain 1,799 items which are divided into two categories: administrative licensing items and non-administrative licensing.17 Sixty percent of the total number of the nation's items for administrative examination and approval are prescribed by State Council department regulations and rules. 18 The reduction of the items created by the State Council and its departments can in fact lead to elimination of the same items at the local level. While the Law has been hailed as "a great help in China's efforts to build a market economy and check corruption",19 its implementation will meet a series of challenges. First, the Law only provides general principles which result in ambiguities in theory and would become un-enforceable in practice. Second, the advanced legal spirit embodied in the Law may not be endorsed by governments at all levels and their officials who have such administrative power in hand for long time. As a result, "the implementation of the law will inevitably conflict with vested interests".20 Another important law is the 1996 Law on Administrative Punishment. It governs the administrative activities which impose punishment upon violations. It sets forth several principles: (1) no 17

See "New big progress in the reform of our administrative examination and approval system", People's Daily (Renmin Ribao), 6 February 2005, at 4. 18 See Huang Haixia and Han Bingjie, "Self-revolution of the Government", Liaowang News Weekly (Liaowang Zhoukang), 14 June 2004, No. 24, at http://wwwl.people. com.cn/GB/shehui/1063/2602969.html (accessed 6 July 2004). 19 "New law to help streamline licensing", China Daily, 1 September 2003. 20 "Commentary: Law keeps government in check", China Daily, 6 September 2003.

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punishment shall be ever imposed when there is no express stipulation for such punishment; (2) the power to prescribe in terms of punishment for personal rights or property rights only belongs to law; and (3) the procedure for administrative punishment is for the first time detailed in the law, particularly the hearing system which is quite new in China. As is reported, the Measures on Administrative Punishment adopted by the Banking Supervisory Committee in 2004 provides that the person concerned has the right to apply for a hearing before the punishment is imposed under certain circumstances such as involving a big amount of fines, or receiving an order to stop the business or when his banking license is revoked. 21 For these reasons, it can be said that it is one of the important milestones for the rule of law in China.22 Following this law, other major laws were also enacted, such as the Law on Administrative Review Procedure adopted in April 1999 and the Law on Civil Servants adopted in April 2005. The latest development of administrative law is linked to the WTO requirements. On the one hand, governments at all levels should administer by law and on the other they should follow the transparency principle set forth by the WTO law. The publicizing requirement stipulated in the Administrative Licensing Law is a typical example. In addition, after the WTO entry, China is unable to continue using large amount of normative internal documents to govern the society. Instead, the government documents, when needed and in line with the WTO regulations, should be reflected in the form of laws and regulations. For this reason, during the SARS period, various government departments passed a large number of administrative regulations concerning public health, transportation, protection of wildlife and environment, and prices, etc.

21

See "Banking Supervisory Committee: five big administrative punishments may be subject to hearing", International Financial Daily (in Chinese), 4 January 2005, at 2. 22 See Ying Songnian, "Developments of the Chinese Administrative Law", Zengfa Luntan (Journal of China University of Political Science and Law), 1998, No. 5, 19-20.

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Problems, however, still remain in the law-based administration. First, not all officials and/or government departments are used to this new governance method as required. Some still issued internal documents during the SARS period. That is why there is a complaint in China that too many "red-dotted documents" (hongtou wenjiari) flying over the sky based on the administrative discretion, which would be suspected of abuse of administrative power. For that reason, the role of people's congresses should be strengthened and the government power should be endorsed by people's congresses through legislation.23 In a transitional society like China, such old practices may co-exist for a time with the new practice, but the new one will eventually replace the old one completely. Some deficiencies also remain in the implementation of the Law on Administrative Licensing since it came into force in July 2004. These deficiencies include the following: (1) the mentality of some leading officials has not been changed; they still stick to the old administrative method or do not clearly understand the Law; (2) it is a heavy task to make compatible implementing measures including the publicizing system, hearing system, and responsibility system; (3) ineffective cleanup of unapproved items; (4) lack of unified norms for non-licensed items subject to administrative approval; and (5) unlawful fee charges for administrative licensing.24 In addition to the law-based administration, the "take the blame and resign" system (yinjiu cizhi zhi) has been established. It began during the SARS period when Major of Beijing and Minister of Health resigned due to their poor and ineffective performance in the fight against SARS. In April 2004, the Provisional Regulations on the Resignation of Leading Cadres of the Party and the Government were adopted. The scope of resignation has been expanded to all party and government organs. In the same month, Premier Wen Jiabao 23

See Cheng Jie, "Prevention and treatment of SARS needs the exercise of power by people's congresses", in http://www.iolaw.org.cn/feidian/shownews.asp?id=790 (accessed 26 July 2003). 24 See "Five big problems still remain in the implementation of the Administrative Licensing Law", Legal Daily (Fazhi Ribao), 1 July 2005.

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chaired a State Council standing meeting which dealt with three serious accidents including the Chuandong Blowout Accident; Miyun Hongqiao Trample Accident; and Jilin Zhongbai Shopping Mall Fire Accident. The State Council approved Ma Fucai, General Manager of the Sinopec's resignation for the blowout accident. Some of the responsible persons for the Miyun Accident were even brought to the court for criminal charges including negligence. 25 The Milk Powder Scandal in Anhui Province in April 2004 is a new addition to the previous cases: 97 people in local governments and supervision departments were held responsible for the inferior quality milk products which caused death of at least 12 babies in Fuyang.26 The "take the blame and resign" system is now incorporated into the newly adopted Law on Civil Servants.27 According to Article 82 of that Law, civil servants with leading posts may resign their leading posts due to individual or other reasons; those who have misconduct or caused serious loss or social impact or accidents should take the responsibility and resign the leading posts, otherwise will be ordered to resign.28 This can be seen as a further step of the Chinese Government to institutionalize the WTO requirement of accountability in its legal system and governance. Very recently, the State Council issued the "Certain Opinions on Carrying out the Responsibility System for Administrative Law Enforcement" in July 2005-29 It was based on three considerations: (1) to carry out the decision of "Implementing Program" of 2004; 25

For details, see "Two responsible persons for the Miyun Trample Accident were tried and the court hearing lasted for seven hours", New Beijing Daily (Xin Jingbao), 14 October 2004, at http://www.people.com.cn/GB/shehui/1063/ 2917898.html (accessed 14 October 2004). 26 See "97 face punishment in milk powder deaths", China Daily, 8 November 2004, p. 1. 27 The Law was adopted on 27 April 2005 and will come into force on 1 July 2006. For reference, see "Civil Servants Law coming out with many new meanings", People's Daily (in Chinese), 28 April 2005, p. 10. 28 Text is available at http://www.law-lib.com/law/law_view.asp?id=91802 (accessed 22 July 2005). 29 Text is available in People's Daily (in Chinese), 28 July 2005, p. 2.

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(2) to govern and supervise law enforcement of the government; and (3) to meet the urgent need of carrying out the responsibility system.30 It contains three main requirements: (1) to clarify the basis for law enforcement, i.e., to comb and make clear relevant laws and regulations as well as the "three fixes" (san ding)?'1 regulations which are used for administrative law enforcement; (2) to decompose law enforcement authorities, i.e., to allocate statutory authorities to actual law enforcement institutions and posts; and (3) to determine law enforcement responsibility, i.e., to determine responsibilities of law enforcers at different departments or posts and to determine the categories and contents of responsibilities that law enforcers should take. 32 To enhance the law enforcement responsibility, an assessment mechanism has been established. The Opinion also provides clear details on how to investigate and deal with illegal or improper law enforcement undertakings. ADMINISTRATIVE TRANSPARENCY As mentioned above, transparency becomes a major part in the course of administration in accordance with law; it is not only a requirement from the WTO, but also was called for during the SARS period. As a result, the new Regulations on Public Health Emergencies were enacted in May 2003,33 providing that any individual or organization has the right to report emergencies and enjoys the right to accuse governments of not performing their duties according to law. The Regulations has for the first time established the information publicizing system at the governmental level. "Implementing Program of Comprehensively Pushing forward 30

See "Answers to journalists by an official in charge of the State Council Legal System Office", People's Daily (in Chinese), 28 July 2005, p. 2. 31 The so-called "three fixes" refers to a plan determining a governmental department's responsibility, staff size, and assignment of official positions. 32 See "Certain Opinions of the State Council Office on Carrying out the Responsibility System for Administrative Law Enforcement", People's Daily (Renmin Ribao), 28 July 2005, at 1. 33 Text is available in People's Daily (Renmin Ribao), 13 May 2003, at 8.

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Administration in Accordance with Law" of 2004 requires the openness of government information. According to it, administrative organs should publicize government information except for State secrets and legally protect commercial secrets and matters concerning personal privacy. The public has the right to consult the publicized information with the conditions provided by the government,34 Among the local governments, the Government of Guangzhou is the first to have adopted the information openness regulations in early 2003- The rapid development of government internet websites has enhanced the government information openness. As of July 2005, there were more than 10,000 government websites registered under gov.cn.35 There was a case recently in Shanghai regarding the access to government information: Dong Ming, a 70-year-old woman sued the Housing and Land Administration Bureau of Xuhui District after she was refused access to the archives of the gardened villa she used to live in. The legal basis is the Provisions of the Shanghai Municipality on the Openness of Government Information which took effect from 1 May 2004. According to Dong, her father bought the villa in 1947, but her family was expelled from it in 1968. But the Bureau said based on a 1998 regulation, only the owner of the villa can read the original documents of the property.36 Since it is the first case regarding access to government information, it drew wide attention within China, in particular from the legal circle. The case has been discussed in detail in mass media as well as in law journals.37 34

See "Implementing Program", supra Footnote 4. See "Regulations on Government Information Openness is expected to come out", People's Daily (in Chinese), 28 July 2005, at 10. 36 See Cao Li, "Lawsuit over access to housing archives", China Daily, 5 July 2004. 37 For example, Zou Rong, a professor from East China University of Politics and Law, said that "the bureau should provide the information to Dong. What she requested is actually archives that are more than 30 years old, which should be open to the public according to the law." Ibid. However, another legal scholar does not think that the Court should support Dong since documents concerning housing registry are regarded as personal privacy and believes that the refusal by the Bureau was right. See Liu Feiyu, "Case Study: A Link between Publication of Administrative Information and the Protection of Personal Data", Legal Science Monthly (Fazhi Yuekan), No, 4, 2005, 122-128. 35

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It is suggested that the process of administrative transparency and openness should be added to some major laws concerning vital interests of the society and citizens, such as the Law on Government Procurement, Law of Agriculture and Law on Production Safety. The 1998 revised Law on Land Management does not provide an open and transparent procedure on land appropriation itudi zhengyong) which concerns the vital interest of peasants who are only informed of the government decision after it has been taken.38 Another problem in the administrative transparency is related to the implementation of the Law of Confidentiality.39 According to that law, information which concerns national security and interest is state secrets. The law provides for seven categories of information which are regarded as confidential and should be kept from the public. However, since the relevant provisions in that law are not detailed enough so that a large number of government information which is open to the public in other countries is kept secret from the Chinese public. For example, the Regulations on State Confidentiality and Scope of Confidentiality in the Auditing Work jointly issued by the State Audit Administration and the State Confidentiality Bureau in June 1996 classifies "auditing investigations and results regarding leading cadres at the provincial level" as a confidential item.40 It is also suggested that "administration openness" (zbengwu gongkai) should be incorporated into the Chinese Constitution so that it can bind the ruling party and change the ruling method. 41 On the other hand, since there is no law on administrative transparency at the national level, it is still unclear as to what and to what extent administrative information should be open to the public, who takes the responsibility of hiding the information and who can exercise the power of

38

See Wen Xiaoli, "Legal System of Administrative Openness", Chinese Legal Science (Zhongguo Faxue), No. 2, 2004, 3—4. 39 It is adopted in September 1988 and came into force from 1 May 1989. Text is available at http://www.sdca.gov.cn/anquan/baomifa.htm (accessed 10 August 2005). 40 See Wen, supra Footnote 38, p. 11. 41 See Wen Xiaoli, "Basic Issues in Legalizing Administration Openness", Legal Science (Faxue), No. 6, 2004, 38-40.

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supervision or make corrections.42 It is reported that the Regulations on Government Information Openness will come out in the near future and according to it, information openness will become a compulsory requirement. 43 Although administrative openness is a requirement of governance in accordance with law, it is much to be desired in practice since many government departments and local governments are still not accustomed to this new practice of administration. It is worth mentioning the "Audit Storm" taking place in 2004. On 23 June 2004, Li Jinhua, Chief of the State Audit Administration, reported to the NPC regarding the implementation of the 2003 Central Budget and other financial revenues and expenses. His report revealed in some details illegal activities by some government departments and officials. No matter whether these illegal activities linked to corruption or embezzlement, they are all related to the incompliance of the law in administration. According to the plan of the State Audit Administration, all the auditing results except for State or commercial secrets have to be publicized to the public by 2007.44 Independent auditing in China is not an easy job. The State Audit Administration was only established in September 1983 and being a quasi-ministerial level department under the State Council, it is not regarded highly by other departments. The Audit Report in 2004 brought about resentment from relevant departments on the one hand and met with difficulties in correcting illegal activities in these departments on the other. However, the audit process helps law-based administration as well as administrative transparency. Transparency is also a response to the development of the internet. Formerly, the government was able to monopolize and control the

42

Yue Furong, "Why is the openness of administrative affairs so difficult?" Market Daily (Shichang Bad), 29 October 2004, p. 1. 43 See '"Regulations on Government Information Openness' is expected to come out", People's Daily (Renmin Ribao), 28 July 2005, p. 10. 44 See Shen Jianli, "Audit in 2004: not storm but transparency", New Beijing Paper (Xin Jingbao), 30 June 2004, at http://wwwl.people.com.cn/GB/jingji/1037/ 2607051.html (accessed 6 July 2004).

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information and its flow, but with the development of the internet, the public information platform has become very big and the government is no longer able to do the same as previously, thus making transparency an inevitable choice. As of 2004, the number of internet users in China was 94 million.45 Internet therefore becomes a new challenge to the Chinese governance. ANTI-CORRUPTION CAMPAIGN Corruption can cause social instability. More importantly, it can arouse the people's defiance of the efforts of the CCP to ensure fairness and cast doubts about its legitimacy to rule the country. In order to maintain its rule in China, it is imperative for the CCP to launch campaigns against corruption. It should be noted that before the economic reform, corruption was not a big problem in China. However, the emphasis on economic development in the last two decades has stimulated the spread of corruption in China in various forms, giving rise to what has been called "systemic corruption".46 Facing such a serious problem, China has to use law to crack down on corruption, particularly after it had introduced the rule of law. The other reason to use the law against corruption is that the CCP has realized that the use of ideology to crack down on corruption is ineffective, as revealed in the so-called "three stresses" (sanjiang) campaign.47 Realistically, it is impossible for China to completely eliminate corruption; what it can do is only to curb its increase.48 One reason 45

See Shi Xiangzhou and Wang Suhuai, "Look at the Government at a New Platform", Liaowang News Week (Liaowang Zhoukang), No. 10, 7 March 2005, at 13. 46 For details, see R. Klitgaard, "Subverting Corruption", Finance & Development, June 2000, 2-5. 47 The "three stresses" campaign was initiated in 1999 and continues in 2000. It was an effort to revitalize Party identity, but could not achieve its goal. See Zheng Yongnian, "The Politics of Power Succession in Post-Deng China", Asian Journal of Political Science, Vol. 8(1), 2000, at 27. 48 Klitgaard asserts that it is impossible to eliminate corruption entirely, that the best any government can do is balance various considerations and determine its own "optimal level of corruption". See R. Klitgaard, Controlling Corruption (Berkeley: University of California Press, 1988), at 24.

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lies in the fact that China is a one-party ruled country. As long as the power of the CCP is not effectively checked and supervised, such power can still give rise to corruption. Anti-corruption campaigns have been carried out in China from time to time since the founding of the PRC, particularly after the economic reforms. However, after more than 20 years of reform, the situation of corruption has become even more severe. The reason is simple. Corruption is closely linked to power. When power is unrestricted, corruption breeds quickly.49 It thus seems a sound system of checks and balances needs to be established urgently. As has been rightly pointed out, "the more checks and balances exist within a society, and the more strong institutions are in place to protect such checks and balances, the fewer opportunities there may be for corrupt practices which remain unchecked or unpunished". 50 The following efforts having taken are closely related to administration in accordance with law. Recent Measures w i t h E c o n o m i c Leverage Economic sanctions are necessary for crackdown on corruption since economic benefits provided the original incentives for corruption. The State Audit Administration has prepared a plan to audit all government and Party officials, including those at ministerial level, when they leave their posts. According to the plan, the auditing system focuses on two things: (1) an investigation to determine whether or not the official has ever violated the country's financial regulations and rules; and (2) an attempt to establish whether or not the official has fulfilled his/her duties. One of the aims is to help uncover clues of corruption and to act as a warning to officials who are still in their posts. While the problem of corruption cannot be solved by this post-departure audit, given that there are a number of difficulties in implementation, the audit system can still play an 49

Li Rongxia, "Inflicting Severe Punishment on Corruption", Beijing Review, 22 May 2000, at 13. 50 Ibrahim Shihata, "Corruption — A General Review with an Emphasis on the Role of the World Bank", Dickinson Journal of International Law, Vol. 15, 1997, at 467.

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important part in the anti-corruption campaign. 51 It is reported that three deputy-ministerial level officials were found corrupt through the auditing process for the last two years.52 The other economic measure is the "two separate lines in revenue and expenditure" (shouzhi liangtiao xiari), or separating revenue from expenditure. The main points of this system are as follows: (1) all items and standards for fees must be approved by the State Council or the government above the provincial level; no unauthorized items for fees shall be made, and the scope of feecollecting should not be expanded; (2) when charging fees or fines, the unified receipts printed by the central or provincial financial departments should be used, and certificates of identify should be shown; (3) collecting of fees and fines should be made strictly in accordance with the law, and fine-collecting and fee-collecting should be separate; (4) the opening of bank accounts should be approved by finance departments and people's bank; no bank account should be opened without authorization and no "small treasuries" (xiaojinkii) should be established in private; (5) all administrative fees and revenue based on fines should be handed over to the national treasury; no amount should be taken in secret; (6) when arranging the budgets for the law enforcement departments, the finance departments should separate the handover administrative fees and revenue from fines from their expenditure, and the administrative fees can be used in priority for the necessary expenditure of any relevant work. 53 It is obviously another important measure to prevent and control corruption from the source. 51

See Liu Weiling, "New move to fight graft", China Daily, 21 August 2000. It is reported that since April 2000, the State Audit Administration has audited the leaders of six major financial institutions when they left their posts. See Wang Ying, "Graft war targets the top", China Daily, 27 October 2000. 52 See "Crimes of three deputy-ministerial level officials were uncovered through auditing for last two years", Legal Daily (in Chinese), 11 July 2005. 53 See "Circular of the National Audit Office Concerning Further Implementation of the Regulations" on "Separation Between Revenue and Expenditure", Gazette of the State Council of the People's Republic of China (Zhonghua Renmin Gongheguo Guowuyuan Gongbao), 1999, No. 28, 1999, 1216-1218.

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Administrative Measures Another set of recent measures for combating corruption in China includes the reform of personnel and the introduction of a rotation (lungari) mechanism in the civil service. In 1996 the Ministry of Personnel prepared the "Provisional Measures of Position Change among Civil Servants in accordance with the Regulations of State Civil Servants". Based on these measures, from 1996 to the end of 1998, 400,000 civil servants in 27 provinces were rotated. The mechanism has proved to be effective in reinforcing the supervision of civil servants, raising the vitality and efficiency and enhancing the cleanness of the governmental organs. It is an important measure to prevent the breeding of corruption. For the reform of personnel, the "Reform Program to Deepen the Cadre System of Personnel" in 2000 is an important document. The following measures have been announced in the Program: (1) reinforcing the work of open selection of leading cadres and of allowing official positions to be taken by competition; (2) introducing the open show system of publicizing before appointment igongshi zhi) for leading cadres; (3) taking various measures to resolve the problem of cadre retirement; (4) developing cadre work exchanges; and (5) reinforcing the supervision of the work of selecting and appointing leading cadres and other cadres. 54 The last measure is aimed at reducing corruption in the personnel system. However, it should be pointed out that though the above reform of the personnel system is necessary, other measures should also be supplemented, such as adequate pay for civil servants and improving the civil servant recruitment system. Transparency International's Corruption Perceptions Index and Bribe Payers Index show that bribe taking in many developing countries is extensive, primarily because of low public salaries, and senior public officials' and politicians'

54

See "The Programme on Deepening the Reform of Cadre Personnel System", People's Daily (Remin Ribao), 21 August 2000; and also see "To Provide the Systematic Guarantee for the Building of Cadre Team with High Quality", Legal Daily (Fazhi Ribao), 23 August 2000.

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de facto immunity from prosecution.55 The professionalization of the civil service is thus a key element to curb official corruption. In that case, high-ranking governmental officials should be appointed through the open recruitment system rather than by the CCP Department of Organization whose operation is often shrouded in secrecy. After Hu Jintao became the new Party chief, the CCP has stepped up its anti-corruption campaign. Based on the requirement put forward in the "CCP Decision on Strengthening the Construction of the Governing Capability of the Party", the CCP issued "Implementing Program on the Establishment of the System of Punishment and Prevention of Corruption" in early 2005- It attempts to establish a preventive system to curb rampant corruption in China and to target eight areas to prevent corruption from its origin: (1) to implement the Law on Administrative Licensing and reform the administrative examination and approval system; (2) to deepen the reform of financial management system and to realize the goal of "two separate lines in revenue and expenditure"; (3) to implement the State Council Decision on the Reform of the Investment System and to strengthen the supervision of governmental investment behavior; (4) to enhance the reform of cadre and personnel system and to establish a supervisory mechanism for cadre selection and appointment; (5) to undertake the reform of supervision system in accordance with the "CCP (Trial) Regulations on the Intra-Party Supervision"; (6) to continue the reform of financial enterprises and improve the banking supervision; (7) to enhance the judicial reform and strengthen the judicial supervision; and (8) to manage and supervise various social organizations including professional organizations and intermediary agencies.56

55

Jeremy Pope and Frank Vogl, "Making Anticorruption Agencies More Effective", Finance & Development, Vol. 37(2), June 2000, p. 6. 56 See "Plenary Session of the CCP Disciplinary Committee held to delimit the bottom line for political virtues and to punish disaster-makers", Liaowang News Weekly (Liaowang Zhoukan), January 2005, at http://www.peacehall.com/news/gb/china/ 2005/01/2005011111325.shtml (accessed 11 January 2005).

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Zhang Zhonghai, Member of the CCP Standing Committee, Chongqing Municipality Tang Fujing, Vice-major, Ya'an City, Sichuan Province Yang Sihong, Chief of the Bureau of Public Security, Wuhan City, Hubei Province Hu Faqun, Vice Secretary of the CCP Committee, Shangrao City, Jiangxi Province An Huijun, Chief of the Bureau of Public Security, Luohu, Shenzhen Yu Dalu, Vice-president, China Agricultural Development Bank Yu Xiaotang, General Manager, Wenzhou Construction Group Corporation, Zhejiang Province Yang Zaixi, Vice-major, Lanzhou City, Gansu Province Zheng Weiming, Deputy Director-General, Department of Finance, Gansu Province Xufangming, Director-General, Department of Finance and Banking, Ministry of Finance Li Xing, Vice-Mayor, Jining City, Shandong Province Zhang Xiaochuan, Chief, Bureau of Broadcasting and Television, Chongqing Municipality Yang Duoming, Vice-President, Higher People's Court, Guangxi Zhuang Autonomous Region Source: "No Escape from the Net of Justice: A List of Recent Corrupt Officials Investigated and Punished by the CCP", at http://news.wenxuecity.com/ BBSView.php?SubID=news&MsgID=32032 (accessed 24 July 2005).

Nevertheless, despite various efforts having taken, corruption is still a serious problem in the Chinese society (see Table 6.1). Also the Chinese government faces new problems. For example, many corruptive officials fled overseas before their criminal activities have been unearthed. It is reported that in Fujian Province alone 69 corruptive officials fled abroad during the first half year of 2004.57 JUDICIAL REMEDIES Limit of government power is manifested in the recent developments of administrative law in China. The milestone in the development is the promulgation of the Law on Administrative Litigation in 1989This law, for the first time, set the detailed standards to define which 57

See "69 corruptive officials fled abroad from Fujian during the first half year", Mingpao (in Chinese), 13 September 2004.

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administrative activities are legal or illegal. Chinese courts have the right to repeal illegal administrative activities. It is reported that since the implementation of the Administrative Litigation Law, and as of April 2004, courts throughout the country had accepted and handled more than 910,000 "mingaoguan" (ordinary people suing governmental officials) cases of first instance, covering more than 50 kinds of administrative areas. For closed cases, the rate for plaintiffs to win the case is about 30%.58 It is recalled that 15 years ago when the Law on Administrative Litigation was drafted, some government departments did not agree to use such terms as "defendant" and "plaintiff because in their minds a government should not become a "defendant"; if the government and ordinary people sit before the court on an equal footing, the authority of the government organ would be damaged. 59 However, after the implementation of this Law, the mindset of the government departments as well as governmental officials has been completely changed. In the case of the Inner Mongolia Jinsui Food Company versus the Trademark Bureau of the State Administration for Industry and Commerce in 2004, Fan Hanyun, executive vicedirector of that Bureau, as representative of the defendant, appeared at the court. In the past, relevant departments of the central government only appointed an ordinary staff member and a lawyer to be present at the court hearing.60 This indicates the attitude change of the government departments from passive to proactive regarding administrative litigation and it is linked to the development of the rule of law process in China. In accordance, the previous common three "fears" in administrative cases may eventually disappear: (1) ordinary people are afraid of suing the governmental officials for fear of revenge; (2) administrative organs are reluctant to 58

See "The winning rate for ordinary people to sue the officials in China is about 30% and the revision of the Administrative Litigation Law needs five breakthroughs", 6 April 2004, at http://www.hsm.com.cn/node2/nodell6/node275/ node276/userobject6ail62926.html (accessed 6 April 2004). 59 See Wu Jin, "Towards Rule-of-Law Government" (Part 1), People's Daily (Renmin Ribao), 22 April 2004, at 6. 60 For details, see "Senior government official defends suit in court", China Daily, 2 April 2004.

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respond to the lawsuits for fear of losing face when they lose the cases; and (3) courts are reluctant to hear the administrative cases for fear of offending the administrative organs.61 Yet, some of the provisions in the Law on Administrative Litigation are out of date and need necessary revisions. As suggested, there are at least five areas which need to be revised: expansion of the scope of administrative litigation; expansion of the qualification of plaintiffs; safeguarding the right to lawsuit of the interested parties; establishment of the administrative court; and strengthening of the imposition of legal liability on the administrative chief.62 The revision of this Law has been put in the Five-Year Legislative Plan of the 10th NPC Standing Committee. Second, ordinary citizens would encounter several difficulties in bringing government departments and/or officials to courts in line with the Administrative Litigation Law. A paper published in a recent issue of the China Journal has examined administrative litigation in rural China and found that "[t]o offset the many advantages enjoyed by the government offices that are sued, including the propensity of judges and other officials to protect one another, plaintiffs often need to secure support from advocates from officialdom or in the media. Collective action, or the threat of it, can also increase the likelihood of winning". 63 The 1994 State Compensation Law64 is a big supplement to the Law on Administrative Litigation. It has developed the administrative 61

Wang Binlai, "Enhance the administrative organs to manage administration according to law (social survey)", People's Daily (Renmin Ribao), 7 October 1998. 62 See "The winning rate for ordinary people to sue the officials in China is about 30% and the revision of the Administrative Litigation Law needs five breakthroughs", 6 April 2004, at http://www.hsm.com.cn/node2/nodell6/node275/ node276/userobject6ail62926.html (accessed 6 April 2004). 63 Kevin J. O'Brien and Lianjiang Li, "Suing the Local State: Administrative Litigation in Rural China", China Journal, No. 51, January 2004, at 93. 64 Text is reprinted in Peng Liming (ed.), Compendium of the Existing Laws of the People's Republic of China (Zhonghua Renmin Gongheguo Xianxing Falii Quanji) (Beijing: China Construction Materials Industry Publisher, 1998), Vol. 1, 50-56. It came into force on 1 January 1995.

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litigation system by establishing the compensation system. According to it, victims suffering damages caused by State organs or their personnel have the right to claim compensation from the State. The Law provides two categories of compensation and their scope of application: administrative compensation applicable to illegal activities done by State organs, or their personnel and criminal compensation applicable to illegal activities done by public security departments, judicial organs, or prison management departments. There is a typical case relating to the implementation of the State Compensation Law. On 9 April 2001, 25 repatriated people were burnt to death in a mini-bus with a special design of escape prevention, along the way from Haifen to Guangzhou in Guangdong Province. Families of 11 victims were not satisfied with the postdeath treatment and decided to sue the Shanwei Bureau of Civil Affairs in January 2003- On 18 April 2004, the court of first instance ruled that the Shanwei Bureau had to pay compensation at the amount of 187,000 RMB to each of the victim families. The Intermediate Court of Shanwei upheld the above ruling in the appeal case afterwards.65 As of November 2004 from the effective date of the Law in 1995, procuratorates at all levels throughout the country registered and handled 7,823 compensation cases, made decisions on 3,167 such cases involving compensation amount of more than 58 million RMB.66 In order to improve the State compensation system, "Implementing Program of Comprehensively Pushing forward Administration in Accordance with Law" of 2004 requires the administrative compensation to be undertaken in strict accordance with

65

For details, see "25 people burnt to death in a repatriate bus in Guangdong and victim families got state compensation", 18 November 2004, at http://www.peacehall.com/news/gb/china/2004/ll/2004lll81354.shtml (accessed 18 November 2004). 66 See "Supreme Procuratorate explores the reform on State Compensation Law; compensation has totaled more than 58 million for 10 years of the law implementation", New Beijing Daily (Xin Jingbao), 3 January 2005, at http:// www.people.com.cn/GB/l4576/l4957/3094389.html (accessed 3 January 2005).

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the "Measures on the Management of State Compensation Funds" so as to safeguard rights of citizens, legal persons or other organizations to obtain compensation under the law.67 Finally, it is worth mentioning that the Supreme Court issued the "Decision on Certain Issues of Handling Administrative Cases of International Trade" concerning foreign investors and entrepreneurs in August 2002.68 It is the first such regulation relating to handling trade cases in line with the WTO regulations. According to Article 10 of this regulation, foreigners and foreign entities have the same litigation right as Chinese citizens and entities in administrative cases relating to international trade. However, if a certain foreign country sets limits against Chinese citizens as to the same right, then the reciprocity principle applies. In fact, the regulation embodies the rule of judicial review required by the WTO law. In China's legal framework, judicial review refers to administrative litigation and administrative trial. Under the new regulation, any person, whether legal or natural and foreign or local, has the right to ask for such a review of certain administrative act through litigation. The relevant court will examine the case by looking into seven aspects: whether evidence is genuine and adequate; whether laws and regulations are applied correctly; whether there is a breach of statutory procedure; whether there is ultra vires; whether there is abuse of power; whether administrative punishment is obviously unfair; and whether there is omission and delay of performing statutory duties.69 The regulation assists Chinese courts with supervising the conduct of governmental organs involved in international trade administration.70 While such a judicial review of administrative act is only limited to cases relating to international trade, it reflects the extent to which the Chinese courts function to curb government abuses and illegal behaviors.

67

See "Implementing Program", supra Footnote 4. Text is available in http://www.chinacourt.org/sfjs/detail.php?id=4ll66 (accessed 7 September 2002). 69 Article 6 of the Regulation. Also see "Supreme Court determines the review criteria for administrative cases relating to international trade", in http://www. chinacourt.org/public/detail.php?id=9779 (accessed 7 September 2002). 70 See "New role for legal system in trade", China Daily, 30 August 2002. 68

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CONCLUSION: AN UNFINISHED TASK Law-based administration is the requirement after China's WTO entry and also the prerequisite for developing a market economy. The transformation from a management-type government to a service-type government is also linked to the policy of the new leadership. Hu Jintao and Wen Jiaobao have promised that the government will be more attuned to the people's needs. 71 However, whether "Implementing Program" of 2004 as well as the Administrative Licensing Law can be effectively implemented still remains a question mark. The main problem is related to whether the Communist Party and the governmental officials can be able to fully comply with laws. As pointed out, failure on the part of the government to observe the law undermines the whole concept of rule of law.72 China may have realized that it would take a long time to reach the goals of law-based administration. Clearly, the CCP does wish that "[t]he legal system could be strengthened in a number of ways that do not directly threaten the Party but rather further its self-professed goals to rationalize governance, increase government efficiency, rein in local officials, and root out corruption".73 On the other hand, China is in a transitional period of social order restructuring, in which "rule of man" and "rule of law", "rule by law" and "rule of law" coexist. The current legal reform in China can be characterized as "rule of the Party by law", which is in the middle of the road, departing from "rule of man", but not yet reaching the realm of "rule of law". It is not appropriate to use the standards of a matured legalized society to measure China's legal developments. Although the CCP has imposed some negative constraints over the development of the Chinese legal system, admittedly the achievements in China's legal reform up to today should be attributed to the efforts made by the Party. We can recall that in the earlier times such 71

John Pomfret, "China's Slow Reaction to Fast-Moving Illness: Fearing Loss of Control, Beijing Stonewalled", Washington Post, Thursday, 3 April 2003, p. A18. 72 Jiang Ping, "Chinese Legal Reform: Achievements, Problems and Prospects", Journal of Chinese Law, Vol.9, 1995, p. 74. 73 Randall Peerenboom, China's Long March toward Rule of Law (Cambridge: Cambridge University Press, 2002), p. 226.

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as Mao's era, the CCP rejected outright the concept of rule of law. It is interesting to note that according to some observations, Chinese leaders trained in law have increased in number; and between the last two CCP Central Committees the number of full members with law degrees rose from three (2%) to eight (4%). 74 The course towards rule of law is thus irreversible just as China's economic reform has experienced since 1978.

74

See Cheng Li and Lynn White, "The Sixteenth Central Committee of the Chinese Communist Party: Hu Gets What?" Asian Survey, Vol. XLffl(4), 2003, p. 581. Caution should be taken by counting the number of law degrees since in China graduates trained in political science, public administration, international relations and sociology are all granted law degrees in addition to those trained in law.

Part III Sustaining Economic Growth and Reform

Chapter

New Patterns of Economic Growth Wu Yanrui

Literature on China's economic growth has mushroomed in recent years.1 Yet our knowledge about the Chinese economy is still limited partly because the Chinese economy and society are changing rapidly. Every traveler in China would have observed and be impressed by the dynamics in the economy and society. The objective of this chapter is to present an updated study of the patterns of economic growth in China. The coverage of the chapter is not to be exhaustive but limited to address some key issues in understanding the patterns of economic

1

For reviews of the Chinese economy, Chow, G.C. (1987), The Chinese Economy, Singapore and Teanech, NT: World Scientific; Chow, G.C. (2002), China's Economic Transformation, Maiden, Mass.: Blackwell Publishers, Lin, J. Yifu (1992), "Rural reforms and agricultural growth in China", American Economic Review 82, 34-51. Ash, R.F. and Y.Y. Kueh (eds.) (1996), The Chinese Economy under Deng Xiaoping, Oxford: Clarendon Press, Naughton, Barry (1996), Growing Out of the Plan: Chinese Economic Reform, 1978-1993, Cambridge and New York: Cambridge University Press, Fouquin, M. and F. Lemoine (eds.) (1998), The Chinese Economy, Paris: Economica Ltd, Wong, John and Ding Lu (eds.) (2002), China's Economy Into the New Century: Structural Issues and Problems, Singapore: Singapore University Press and World Scientific Publishing.

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growth in China.2 In particular, this chapter aims to examine the new patterns of China's growth at present and in the near future. It begins with a review of the main features of China's growth in the past 25 years (1979-2004) covering the role of production inputs in growth, openness to trade and investment and uneven development strategy. The chapter then discusses the emerging new patterns of growth. The focus includes the deepening of economic reforms, further structural transformation, technological progress, balanced growth and globalization. Finally, the chapter concludes with some remarks. CHINESE ECONOMY SINCE 1979: A GREAT LEAP FORWARD Since 1979, eversince the economic reform program was initiated, China has enjoyed unprecedented economic growth with an average annual rate of 9-4% during 1979-2004.3 The accuracy of this figure may be questionable but high growth for about a quarter of a century is evident by all means in China. 4 Due to this growth, China's share of the world income has risen gradually to match the country's status in the world more than a century ago — a true recovery of the nation's economy in a short period of time (Figure 7.1). However, China has a long way to go to match its status in the 2

For more comprehensive studies of China's recent growth, Lin, J. Yifu, F. Cai and Z. Li (1996), The China Miracle: Development Strategy and Economic Reform, Hong Kong: The Chinese University Press; Bramall, C. (2000), Sources of Chinese Economic Growth, 1978-1996, Oxford and New York: Oxford University Press, Wang, Xiaolu and Gang Fan (eds.) (2000), The Sustainability of China's Economic Growth, Beijing: Economic Sciences Press, Garnaut, R. and Ligang Song (eds.) (2004), China: Is Rapid Growth Sustainable?, Canberra: Asia Pacific Press. Wu, Yanrui (2004), China's Economic Growth: A Miracle with Chinese Characteristics, London and New York: RoutledgeCurzon Press Limited. 3 Calculated using official statistics from the State Bureau of Statistics (various issues and 2005), State Bureau of Statistics (various issues), China Statistical Yearbook, Beijing: China Statistics Press. 4 Some scholars such as Rawski, T.G. (2001), "What Is Happening to China's GDP Statistics?", China's Economic Review 12(4), 347-354 and Wang, X.L. and L. Meng (2001), "A Reevaluation of China's Economic Growth", China's Economic Review 12(4), 338-346 have questioned whether China's growth rates have been inflated.

New Patterns of Economic Growth 221 35 i 30

25 2015 10

o o

o

m

o

-H

Figure 7.1 China's Shares of GDP over the World Total, 1500-2030. Notes and sources: Data for 1500-2001 are based on Maddison (2003) who derived historical GDP figures in international dollars for the world economies. GDP shares for 2004 and 2030 are author's own estimates using China's real growth rates during 2001-2004 and an assumed annual rate of growth of 5.6% for China and 3% for the world during 2001-2030.

world at the beginning of the 19th century when the Chinese economy was the largest on earth according to the estimates by Maddison.5 For instance, if current growth momentum continues, China would need another 25 years to catch up with the United States and to become the largest economy in the world again according to the forecasts in Figure 7.1. Recent growth in China is characterized with several features which determine the pattern of growth so far. Specifically, China's economic growth since 1979 has been driven by rapid expansion in production inputs, increasing openness to trade and foreign investment, and an unbalanced development strategy. The conventional factors of production include labor and capital. Both labor and capital inputs have experienced considerable growth in the last 25 years. Total employment in China has enjoyed smooth growth with a rate 5

Maddison, A. (1998), Chinese Economic Performance in the Long Run, Paris: OECD Development Centre.

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about 3% in the 1980s and a modest rate of about 1 per cent since the early 1990s (Figure 7.2). Growth in gross investment and hence capital stock has however been very high. For example, China's gross investment over GDP ratio has remained about 40% since 1979-6 As a result, capital stock is estimated to be growing at an average rate of 9.6% during 1979-2004 according to Figure 7.2.7 Associated with the increase in production factors is the rapid improvement in efficiency. This gain in efficiency originated from the agricultural sector due to the implementation of the household responsibility system (HRS) in the late 1970s and early 1980s.8 The introduction of the HRS made the distribution of farming outputs more rational and thus provided incentives for Chinese peasants to organize their farming activities according to the market rather than the state plan. As the result of the efficiency gain in farming, a large pool of surplus labor emerged in the rural sector in the early 1980s.9 In the meantime, rural-urban out-migration was restricted. The consequence was the creation of enormous township and village enterprises (TVEs) in the rural areas, especially the outskirts of Chinese cities. The TVEs partly absorbed the surplus labor in the farming sector and made an important contribution to the rural economy. For example, TVEs employed about 70 million workers in 1985 which were more than a half of China's urban workforce in the 6

State Bureau of Statistics (2005), China Statistical Abstract 2005, Beijing: China Statistics Press. 7 Other estimates of the average rate of growth of capital stock include 9.15% for the period 1979-1990 by Li etal. (1995), 7.70% for the period 1979-1994 by Hu and Khan (1997), 7.90% for the period 1979-1995 by the World Bank (1997) and 8.86% for the period 1979-1995 by Maddison, A. (1998), Chinese Economic Performance in the Long Run, Paris: OECD Development Centre. 8 For more detailed coverage of rural reforms in the late 1970s and early 1980s, refer to McMillan, J., J. Whalley and L. Zhu (1989), "The impact of China's economic reforms on agricultural productivity growth", Journal of Political Economy 97(4), 781-807 and Lin, J. Yifu (1992), "Rural reforms and agricultural growth in China", American Economic Review 82, 34-51. 9 Meng, Xin and Nansheng Bai (1988), Structural Changes: Transfer of Rural Labour in China, Zhejiang: Zhejiang People's Press, derived an estimate of surplus labor of about 107 million in 1984, p. 217.

New Patterns of Economic Growth 223

0

H—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i—i CT\0'-^t-in*ot^ocONO^csc<>'^-inM3r--ooa'\0~-,cNr^^r-00000000000000000000C\0NOO\0N0NC?\C^0>OOOOOO

Figure 7.2 Growth Rates of China's Employment, Capital Stock and GDP, 1979-2004. Notes and sources: Growth rates are author's own estimates. The raw data of GDP and employment are drawn from the State Bureau of Statistics (2005), China Statistical Abstract 2005, Beijing: China Statistics Press. Capital stock estimates are based on Wu, Yanrui (2004), China's Economic Growth: A Miracle with Chinese Characteristics, London and New York: RoutledgeCurzon Press Limited, by assuming a rate of depreciation of 4%. Meng, Xin and Nansheng Bai (1988), Structural Changes: Transfer of Rural Labour in China, Zhejiang: Zhejiang People's Press.

same year.10 By 2002, TVEs accounted for almost one third of China's GDP.11 The development of Chinese TVEs is unique in the sense that Chinese peasants were prohibited from moving to the cities to find jobs and instead they created their own industry in the rural areas.12 10

According to the State Bureau of Statistics (2003, pp. 126 and 448). According to the State Bureau of Statistics (2003, pp. 55 and 449). 12 Findlay, Christopher, Andrew Watson and Harry X. Wu (eds.) (1994), Rural Enterprises in China, Basingstoke, Hampshire: MacMillan and New York: St. Martin's Press for a comprehensive survey of the TVEs. 11

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The relocation of rural surplus labor from the farming sector to the TVEs brought about substantial gain in efficiency.13'14 Maddison (see Footnote 5) estimated that labor relocation during 1978-1995 contributed to 19% or about 1.4 percentage points of China's growth. This finding is supported by the analysis of Woo.15 The gain in efficiency also partly resulted from economic restructuring in the urban areas such as the reforms of the state-owned enterprises (SOEs), the marketing systems, the price-setting mechanisms and the administrative system. There is a huge literature discussing these reform initiatives and their impacts which are not detailed here. 16 Figure 7.3 visualizes the efficiency gain in terms of labor productivity which has been steadily rising with the exception of a temporary interruption in 1990.17 Economic reforms led to not only efficiency improvement in the form of catch-up to China's own best-practice output but also technological progress, i.e., outward shift in the production frontier (hence catch-up to the world best-practice). A measure of these changes is the growth of total factor productivity (TFP). While the 13

Wu, H. and Yanrui Wu (1994), "Rural Enterprise Growth and Efficiency", in Rural Enterprises in China, edited by Christopher Findlay, Andrew Watson and Harry X. Wu, Basingstoke, Hampshire: MacMillan and New York: St. Martin's Press. 14 World Bank (1997), China 2020: Development Challenges in the New Century, the World Bank, Washington, DC. 15 Woo, W.T. (1998), "Chinese Economic Growth: Sources and Prospects", in The Chinese Economy, edited by M. Fouquin and F. Lemoine, Paris: Economica Ltd. 16 For comprehensive discussions, see Wang, George C. (ed.) (1982), Economic Reform in the PRC, Boulder, Colorado: Westview Press, Lardy, N.R. (1983), "Agricultural Prices in China", World Bank Staff Papers N0.6O6, World Bank, Washington, DC, Wu, Jinglian and Renwei Zhao (1987), "The dual pricing system in China's industry", Journal of Comparative Economics 11, 309-318, Reynolds, Bruce L. (ed.) (1987), Reform in China: Challenges and Choices, New York: M.E. Sharpe, Feuchtwang, S., A. Hussain and T. Pairault (eds.) (1988), Transforming China's Economy in the Eighties, volumes 1 and 2, Boulder, Colorado: Westview Press, Perkins, D. (1988), "Reforming China's Economic System", Journal of Economic Literature 26(2), 601-645, and World Bank (1990), China: Plan and Market, a World Bank country study, World Bank, Washington, DC. 17 The 1990 slowdown was the result of student demonstration in 1989 and the austerity economic program implemented afterwards.

New Patterns of Economic Growth 225 600 - •- - • Labour productivity indices

500 --

- • — Trade-GDP ratios

400

200 --

100 I

I I I

[ I I

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I I I

I I I

I I I

I I I

h » O O Q O M O O « J » « « ) a ) 0 \ O l O \ 0 \ 0 0 \ 0 \ 0 \ ^ 0 \ 0 0 0 0 0

Figure 7.3 Labor Productivity Indices and Trade-GDP Ratios, 1979-2004. Notes and sources: Author's own calculations using data from the State Bureau of Statistics (2005). Labor productivity indices are in real terms. The base year (1979) index is set to be 100.

precise estimate of TFP contribution to China's growth is controversial, the consensus view is that the contribution is positive at either the aggregate or industry level.18 18

This is based on a survey of more than 10 major studies including Li, Jingwen, Gong Feihong and Zheng Yisheng (1995), "Productivity and China's economic growth, 1953-1990", in Productivity, Efficiency and Reform in China's Economy edited by K.Y. Tsui, T.T. Hsueh and Thomas G. Rawski, Hong Kong: Chinese University of Hong Kong, Borensztein, Eduardo and Jonathan D. Ostry (1996), "Accounting for China's Growth Performance", American Economic Review (Papers and Proceedings) 86, 225-228, Hu, F. Zuliu and Mohsin S. Khan (1997), "Why Is China Growing So Fast?", IMF Staff Papers 44, 103-31, World Bank (1997), China 2020: Development Challenges in the New Century, the World Bank, Washington, DC, Maddison, A. (1998), Chinese Economic Performance in the Long Run, Paris: OECD Development Centre, Woo, W.T. (1998), "Chinese Economic Growth: Sources and Prospects", in The Chinese Economy, edited by M. Fouquin and F. Lemoine, Paris: Economica Ltd., Wu, Yanrui (2003), "Has productivity contributed to China's growth?", Pacific Economic Review 8(1), 15-30. Zheng, J.H. and A.G. Hu (2004), "An Empirical Analysis of Provincial Productivity in China (1979-2001)", Working Papers in Economics No. 127, Department of Economics, Goteborg University.

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China's growth in the past 25 years has also been accompanied by increasing economic liberalization and openness. In particular, Chinese economic policies have been very pro-trade. The ratio of the total value of trade over GDP has increased from 11% in 1979 to 70% in 2004 (see Figure 7.3). This change is impressive. 19 The Chinese economy is now even more trade-oriented than other large economies such as Japan and US. For the latter, for example, the ratios of the total value of trade over GDP were 21% and 24% in 2002, respectively.20 In the meantime, after the absence of about two decades, foreign direct investment (FDI) went back to China in 1979- By the late 1990s China became the largest recipient country of foreign direct investment among the developing economies. It has eventually overtaken the US to become the largest host of FDI in the world in recent years. The mechanism of the market has also changed from virtually non-existence to become the main force guiding economic activities. Various indicators have been developed to measure the level of marketization. For example, Wang 21 combined a set of economic indicators to construct a marketization index series for China's regions. In general, relatively developed regions have achieved a higher level of marketization than the less developed ones according to Wang (see Footnote 21). One can also look at the shares of the non-state sector over total employment and output. Wu22 showed that the state sector employed less than 10% of China's total work force in 2002. These empirical findings all imply the rising role of the market and the private sector in the Chinese economy. These developments in China have been recognized internationally. For instance, recently, several 19

One can of course argue that China's trade-GDP ratios may be overestimated due to the existence of a large non-tradable sector in the Chinese economy. 20 According to the World Development Indicator 2005 database (World Bank, 2005). 21 Wang, X.L., 2004, "Marketisation in China", in China: Is Rapid Growth Sustainable? Edited by Ross Garnaut and Ligang Song, Canberra: Asia Pacific Press. 22 Wu, Yanrui (2004), China's Economic Growth: A Miracle with Chinese Characteristics, London and New York: RoutledgeCurzon Press Limited.

New Patterns of Economic Growth 227

countries have formally announced their recognition of the Chinese economy as a market economy for the sake of trade negotiations.23 Though very controversial, China has adopted an uneven development strategy in the past decades. This policy is well reflected in the popular political slogans such as "let some get rich first". Following this line of thinking, China first adopted the policy of setting up special economic zones (SEZs) which were offered preferential treatments in terms of taxes, international trade and so on, and has led to the emergence of several new, affluent cities like Shenzhen and economic prosperity in Xiamen and Zhuhai.24 In the late 1980s, the Chinese authority further implemented preferential policies to develop 14 coastal cities including Shanghai, Guangzhou, Tianjin and Dalian. The development of these coastal areas coincided with the relaxation of the control on rural-urban migration. As a result, many young and physically healthy rural workers were attracted to the cities and other relatively more developed areas. In the meantime, a substantial amount of capital has also flowed from the rural areas to the cities and from less developed regions to more developed ones. The consequence of both migration and capital flow is that the gaps between the rural and urban areas and between the coastal and non-coastal regions have been enlarged. Figure 7.4 presents several indicators of unbalanced development. In general, regional disparity has worsened over time though there was an interruption in 1990. The gap between the rural and urban areas also tended to rise over time. Inequality among the households is even worse than that at the regional level and that between the urban and rural areas according to Figure 7.4. These disparities are now of serious concern to Chinese policy makers as they may become the potential sources of social unrest and instability. 23

These countries include Singapore, Malaysia, New Zealand, Thailand and Chile, to cite a few. In addition, Australia is in the process of negotiating a free trade agreement (FTA) with China, and will have to recognize the Chinese economy as a market economy too. 24 These regions host the first four special economic zones, that is, Shenzhen, Shekou, Xiamen and Zhuhai.

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Wu Yanrui

Regional

Urban-rural

Urban rich/poor Rural rich/poor

Figure 7.4 Indicators of Unbalanced Development. Notes and sources: Author's own estimates using data from the State Bureau of Statistics (various issues, 2005). "Regional" represents ratios of population weighted mean GDP per capita of the top five regions (Shanghai, Beijing, Tianjin, Jiangsu and Zhejiang) over that of the bottom five regions (Guizhou, Gansu, Guangxi, Yunnan and Shaanxi). "Urban-rural" reflects ratios of urban consumption over rural consumption. "Urban rich/poor" indicates the ratio of the disposable income per head of the top 20% urban households over that of the bottom 20% for 1991 and 2004 (1979 and 1990 data are not available). "Rural rich/poor" indicates the ratio of net income per head of the top 20% rural households over that of the bottom 20% for 1990 and 2004 (1979 data are not available. 1990 figure is the ratio of net income per capita of the top 17.72% of rural households over that of the bottom 19.89% of rural households and it is estimated using household survey data).

To sum up, encouraged by the idea of "getting rich is glorious", China's economic reform program was initiated in 1979 and has since progressed well by adopting a gradualist approach and following the doctrine of "crossing the river by touching the stones". The success of economic reforms has led to sustained growth for about 25 years. This growth has so far been driven largely by the expansion of production factors such as labor and capital. In particular, China's capital stock has enjoyed continuous growth due to a high rate of domestic savings and the massive inflow of foreign direct investment. Growth has also been boosted due to the efficiency gains associated with the relocation of resources from the low productivity sector (e.g., the farming sector) to the more productive

New Patterns of Economic Growth 229

sectors (i.e., the manufacturing sector). In addition, China's economic policies have been unusually pro-trade and foreign investment. Both international trade and foreign direct investment have made substantial contributions to China's economic growth. Furthermore, it seems that picking areas for priority development has also played a role in stimulating economic growth though problems associated with this unbalanced strategy are emerging now. The Chinese economy has now moved to the second wave of high growth which would be different from growth in the past 25 years and which is the focus of the rest of the chapter. NEW PATTERNS OF GROWTH If the pattern of growth so far is called the old model, what is the new pattern of growth in China? This question is addressed in the following sections. My analysis focuses on several aspects which will shape up the Chinese economy in the future. These include the deepening of economic reforms, structural transformation, technological progress, balanced development strategy and global economic integration.

Deepening Economic Reforms While the Chinese economy has been transformed significantly from a centrally-planned regime to a market-oriented system, the transition is by no means complete. Growth in the near future will be accompanied by further institutional reconstruction and perfection of the market mechanism. One important recent development was the revision of the 1982 Chinese Constitution in March 2004. Protection of private property is for the first time included in the Constitution. The broadly-defined private sector, which is termed the non-state sector in China, has already changed from a trivial player to the dominant force in the Chinese economy. For example, the non-state sector was responsible for 91-1% of total employment and created more than 58% of total industrial value-added in 2004.25 Author's own estimates using data from the State Bureau of Statistics (2005).

230

WuYanrui Budgetary allocation 4% f

..

I )nmestic loans

N;

19%

^ ^ ^ ^ J I 'oreign capital

^^M

4%

Self-raised funds 56% Figure 7.5 Sources of Funding for China's Total Investment in 2004. Notes and sources: State Bureau of Statistics (2005, p. 52).

In 2004, just about 23% of total investment was funded by budgetary allocation and domestic loans (Figure 7.5). Thus, private capital was the main source of funding in 2004. At the regional level, the private sector is more influential in the relatively more developed regions. Figure 7.6 presents two indicators of the development of the private sectors, that is, the share of private sector investment over total investment in fixed assets and that of private sector industrial output over total industrial output. These shares imply that the level of private sector development is positively related the level of regional income with Tibet as an exception which overwhelmingly replies on the state sector for investment and industrial production. Thus, as regional economies develop over time, the private sectors in these regions become more influential. It can be anticipated that there will be substantial growth of the private sector in the coming decade. The private sector, in particular, will play an important role in transforming the loss-making state-owned enterprises.26 26

Garnaut, R., Li. Song, St. Tenev and Y. Yao (2005), China's Ownership Transformation: Process, Outcomes and Prospects, International Finance Corporation, the World Bank.

New Patterns of Econom ic Growth 2 31 100 90 80 70

Investment

60 50 H 40 30 20 Industrial output

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Figure 7.6 Private Sector Development among the Provinces, 2003. Notes and sources: "Investment" ("Industrial output") represents the shares of private sector investment (industrial output) over total investment in fixed assets (total industrial output). The shares are calculated using data from the State Bureau of Statistics (2004, pp. 190 and 514). The regions are ranked in ascending order from left to right according to gross regional product (GRP) per capita. The two lines are trendlines. The private sector includes all but the state sector which is defined as the state-owned or controlled through share-holding.

Other developments in terms of deepening economic reforms include the improvement of the regulatory systems. Both central and local governments have made significant efforts to move away from direct involvement in business activities and to focus on policy-making and regulatory roles. But, there are still links between state enterprises and governments at various levels. For instance, the state is still linked with major enterprises through majority share-holding. This may still bring about moral hazard problems. We can expect that, over time, governments at different levels will further withdraw from business activities by selling state-owned shares of major companies. In addition, through the promulgation of many laws and regulations, China has made substantial progress towards a system based on the rule of law. The enforcement of these laws and regulations,

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Wu Yanrui

however, is far from satisfaction. Over time, this is an important area for further improvement. Both internal and external forces will oversee the development and perfection of an effective legal system in China. Internal forces include the wish of the general masses to have a fair legal system in China and the demand for law and order within an increasingly more market-oriented, affluent society. External factors will include China's international commitments such as the compliance with WTO rules and free trade agreements (FTAs) signed with other countries.27

Structural Transformation and Economic Growth China's growth in the near future will be associated with drastic structural changes in the economy and society. On this matter, significant progress has been made in China. Table 7.1 illustrates that the role of the primary sector in the Chinese economy has declined significantly (its GDP share fell from 31.2% in 1979 and to 15.2% in 2004) but it is still the largest sector in terms of employment. The secondary sector accounted for more than a half of China's GDP in 2004 but only employed 22.5% of the nation's workforce. It is thus clear from Table 7.1 that new jobs in the Chinese economy are mainly created in the tertiary sector rather than the secondary sector as popularly perceived. As the economy develops, further structural changes would take place as the Chinese economy is very much an outlier in comparison with the structure of other economies. Figure 7.7 demonstrates that China is far away from the international norm and that it has great potential for the expansion of the tertiary sector. In terms of structural transformation, urbanization will be another issue which China has to confront in the near future. Due to its stringent internal migration policy (the core is the hukou system 27

China became an WTO member in November 2001 and will have to honor all WTO commitments after 2006. China and ASEAN have agreed to reduce tariff rates from July 2005 onwards and eventually establish a free trade area. People's Daily (2005), "China-ASEAN FTA Tariff Reduction Starts", July 9 (overseas edition).

New Patterns of Economic Growth

233

Table 7.1 China's Economic Structure Employment (%)

GDP (%) Years

Primary

Secondary

Tertiary

Primary

Secondary

Tertiary

1979 1990 2004

31.2 27.0 15.2

47.4 41.6 52.9

21.4 31.3 31.9

69.8 60.1 46.9

17.6 21.4 22.5

12.6 18.5 30.6

Notes and sources: Author's own estimated using data from the State Bureau of Statistics (2005).

0

10000

20000 30000 40000 GDP per capita (ppp$)

50000

60000

Figure 7.7 GDP Shares of the Tertiary Sectors in Selected Economies, 2002. Notes and sources: GDP per capita in purchasing power parity is drawn from the World Economic Outlook database April 2005 (IMF, 2005). GDP shares of the tertiary sectors are extracted from the World Development Indicator 2005 database (World Bank, 2005). Countries with missing data are excluded from both databases.

which divides China into rural and urban areas), China's urbanization is lagging behind economic development according to international standards. Figure 7.8 shows that the share of urban population or degree of urbanization in China is about 10 percentage point lower than the average of the world economies at the similar level of development. This gap implies a potential pool of rural

234

Wu Yanrui

0-1

0

1

1

1

1

1

1

1

1

5000

10000

15000

20000

25000

30000

35000

40000

GDP per capita (ppp$) Figure 7.8 Urbanization and Economic Development, 2003. Notes and sources: GDP per capita in purchasing power parity is drawn from the World Economic Outlook database April 2005 (IMF, 2005). Urbanization indices are extracted from the World Development Indicator 2005 database (World Bank, 2005). Countries with missing data are excluded from both databases.

migrants of more than 120 million.28 The process of urbanization will certainly be accelerated due to the impact of economic growth and structural adjustment in the coming decades.

Growing through Innovation Growth in China in the past 25 years has been characterized by massive injection of factor inputs. Over time, as the Chinese society becomes more affluent, both labor and capital inputs are expected to grow slowly. Growth in employment has already been declining (see Figure 7.2). Due to the one-child family planning policy, China has leapfrogged to the stage of slow growth in workforce (around 1% annually) which is very common in the developed economies. 28

The number is based on the assumption that China's population in 2003 was over 1.2 billion.

New Patterns of Economic Growth 235

The current situation of slow growth will continue for a long time. Since 1979 China has spent about 40% of its GDP in investment, one of the highest rates in the world. This rate is definitely to fall over time. Many East Asian economies have gone through this process. For example, gross investment as a share of GDP in Japan was much higher in the 1960s and early 1970s (peaked around 39% in 1970 according to Figure 7.9). As a result, gross fixed capital formation in Japan achieved an average rate of growth of 15-96% during 1955-1960 and 13.92% during 1971-80, respectively.29 During the same periods, the Japanese economy enjoyed its best growth performance with average rates of 8.35% and 9-83% (see Footnote 29). However, since the mid 1970s, the growth of gross capital formation in Japan has slowed down substantially. This slow-down coincided with the fall in the ratio of gross investment over GDP to about 30% in most years of the 1980s and 1990s and around 24%-26% in recent years.30 Apart from the slowdown in growth in employment and investment, population ageing will also have an impact on the Chinese economy. Population at the age of 65 and above amounted to 4.9% of China's total population in 1982. This share jumped to 7.6% in 2004, and is expected to reach 11.4% in 2020.31 Due to the implementation of the one-child policy for two decades, China's population is ageing faster than many other countries at a similar stage of development. Population ageing will lead to a slow growth in China's workforce, lower domestic savings and hence less capital for investment. The fall in growth in labor and capital implies that technological progress will be the main driving force of economic growth in the future. Growing through technological progress is also reflected in the shift in the composition of industrial products. Figure 7.10 illustrates that output shares of products under the categories of "medium and high technology" have increased over time. In particular, the share of 29

Minami, Ryoshin (1994), The Economic Development of Japan: A Quantitative Study, second edition, London: MacMillan, p. 120. 30 According to the World Economic Outlook database April 2005 (IMF, 2005). 31 Wang, Mengkuai (ed.) (2005), Key Issues in China's Development 2006-2020, Beijing: China Development Press.

236 Wu Yanrui 40 -i 38 36 34 A j

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O CN Tt^O 0 0 0 0 0 0 0 0 0 0 O N O \ O \ O \ C ^ N O S ^ ^ O N ^ O N O N O V C T N ^

Figure 7.9 Gross Investment over GDP in Japan, 1960-2003. Notes and sources: Data of the period 1960-1998 are drawn from Easterly, W. and H. Yu (2000), "Global Development Network Growth Database", unpublished, the World Bank, Washington DC, and the rest from the World Economic Outlook database April 2005 (IMF, 2005). Data for the overlapping year (1980-1998) are used to check the consistency of the two databases. The straight line is the trend line. 100% Hi-tech

60% 40%

Medium-tech Low-tech

20%

Primary products

1993

1995

1998

2000

2002

Figure 7.10 Composition of Products by Level of Technology, 1993-2002. Notes and sources: The classification of industrial products follows UNIDO (2002), Industrial Development Report 2002/2003: Competing through Innovation and Learning, United Nations Industrial Development Organization Vienna as cited by Wang, Mengkuai (ed.) (2005), Key Issues in China's Development 2006-2020, Beijing: China Development Press, p. 53-

New Patterns of Economic Growth 237

hi-tech products grew from 8.3% in 1993 to 21.6% in 2002. In addition, the share of hi-tech products among Chinese exports has also increased from 7.8% in 2000 to 14.3% in 2004 according to Wang.30 Innovation will also appear in the form of improved energy efficiency. China's energy efficiency has improved substantially. However, it is still well behind the international standard. Figure 7.11 shows the declining trend in terms of energy consumption per US dollar of GDP during the period of 1979-2004. It also demonstrates that China's energy efficiency is well behind that in the more developed economies such as the United States, Japan and Mexico though China has done better than India in recent years. Further improvement in energy efficiency is possible due to several factors. Technological progress will lead to the invention and adoption of energy-saving technologies. Over time, the less energy-intensive service sector will also expand at the expense of the more energyintensive manufacturing industry. Thus, energy efficiency improvement will also result from the structural transformation of the economy. Finally, the rising cost of energy (due to the surge in oil prices, for instance) and increasing competition will also force consumers and producers to optimize the use of energy.

Balanced G r o w t h China's economic growth in the coming decades will result in more balanced development of the country. This will be driven by economic policies which will correct the biased development strategy in the past decades and target at an even development model. The current political slogans such as "affluence for all" and "harmonious society" reflect the wishes of policy-makers and the general masses in the country. A balanced development approach requires more equity between the rural and urban areas and between the coastal and non-coastal regions. To reach this goal, Chinese authority has undertaken some major policy initiatives.32 The development of

32

Lai, Hongyi (2005), "Growth with Rising Income Inequality: China's Response to The Problem", EAI Background Brief No. 227, East Asian Institute, Singapore.

00

— • — - China — • — - India £ • X -

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Figure 7.11 China's Energy Efficiency in International Perspective. Notes and sources: Data are author's own estimates using statistics from the State Bureau of Statistics (2005), World Economic Outlook database 2005 (IFM, 2005) and World Development Indicator 2005 database (World Bank, 2005).

western China was announced in 1999.33 Since then, led by the central government, substantial resources have been directed to China's western regions. 34 Table 7.2 shows that growth in total capital investment in the western regions has outpaced the rest of China since 1998. This growth has largely supported by the central government which has increased its budgetary allocation in favor of the western regions during 1998-2003. More recently, the development of the northeast regions has become one of the priorities among the economic agenda of the current government. 35 As for the rural 33

More detailed studies of the "go-west" program are presented in Lu, Ding and William A.W. Neilson (eds.) (2004), China's West Region Development: Domestic Strategies and Global Implications, Singapore: World Scientific Publishing. 34 Officially, the "go-west" program covers five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjian), six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan and Yunnan) and one autonomous municipality (Chongqing). 35 Dong, Lisheng (2005), "China's Drive to Revitalize the Industrial Rustbelt in the Northeast Region: Seeking a New Pillar of Growth", Working Paper No. 116, East Asian Institute, Singapore.

New Patterns of Economic Growth 239 Table 7.2 Capital Investment in China's Regions

Regional Groups Inner Mongolia Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Sub-total Sub-mean Rest of China

Total Capital Investment 2003/1998

State Budgetary Allocation 2003/1998

4.34 1.92 3.05 1.79 3.02 1.66 3.35 2.50 1.96 2.26 2.79 1.87

6.40 3.14 9.27 1.70 2.61 2.56 4.63 2.06 2.42 8.24 5.42 3.97

2.54 1.95

4.37 2.27

State Budgetary Allocation shares 1998 2003 1.88 2.54 1.29 3.81 1.46 2.35 2.09 4.80 3.05 0.54 0.58 4.04 28.45

5.21 3.45 5.18 2.80 1.65 2.59 4.19 4.28 3.20 1.93 1.36 6.93 42.78

71.55

57.22

Notes and sources: Author's own estimates using data from the State Bureau of Statistics (various issues).

sector, "San Nong Wen Ti" (literally, agriculture, countryside and peasants) has attracted many news headlines in recent years. The main policy response so far is the reduction or abolition of taxes in the farming sector in some regions. 36 The target is to abolish all taxes in the farming sector nation-wide within a few years, and even to subsidize farming in some regions.37 Health care and education in the rural areas have also been strengthened. 38 It is suggested that rural schools should be fully 36

Xiao, Junyan (2005), "The rural economic situation and prospect", China Development Review 7(2), 25-33. 37 Lu, Mai and Calla Wiemer (2005), "Putting Farmers First: An End to China's Agriculture Tax", EAI Background Brief No. 231, East Asian Institute, Singapore. 38 Li, Changping (2005), "On three problems in rural China", Southern Daily, July 23 (electronic edition).

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funded by central government budget and that the barriers to ruralurban migration be removed. 39 To ensure more balanced distribution of the benefits of growth to all members of the society, equal opportunity is even more important. Thus, it is important to provide equal access to education, healthcare and employment. Education and healthcare are foundations for the accumulation of human capital in the future. The inadequacy of rural education has already resulted in the shortage of skilled workers which co-exists with a large army of rural surplus labor in China.40 Globalization a n d E c o n o m i c Integration In the 21st century, the world has moved to the era of globalization. China cannot afford to be left out. In fact, China has scored very well so far in terms of international integration. China's integration with the world has been strengthened by some major developments in recent years. China applied to be a WTO member in 1986 and, after a lengthy process of negotiations, China's WTO membership was finally granted in November 2001. China has definitely embraced foreign investment, and since 1996 has been the largest recipient of foreign direct investment among the developing economies. Instead of crying for "the wolves are coming", Chinese companies have been very happy to "dance with the wolves" and compete against foreign companies. The process of China's market liberalization has been faster than expected. As a result, the Chinese economy has been more open than other large economies at the similar stage of global integration.41 China has reached an agreement with ASEAN to expand bilateral trade and eventually establish a free trade area. China is also in the process of negotiating a free 39

Han, Jun, Y. Xie, X. Xu, C. Cui, Y. Pan. B. Yu and D. Luo (2005), "Coordinating Urban-rural Development and Striving for All-Round Prosperity of the Rural Economy", China Development Review 7(2), 34-46. 40 It is estimated that there are still about 120-150 million surplus labor in rural China Wang, Mengkuai (ed.) (2005), Key Issues in China's Development 2006-2020, Beijing: China Development Press, p. 187. 41 Economist (2005), "How China Runs the World Economy", July 30, p. 13.

New Patterns of Economic Growth 241

trade agreement with Australia. On the non-economic front, China has settled border issues with Russia and is working with Vietnam and India towards peaceful agreements on disputed territories. China has shown that its global responsibility increases as its economic power rises. For example, China ceased to receive interestfree loans from the World Bank and will not receive financial aid from Japan soon. China made substantial contributions to the Indian Ocean Tsunami rescue effort and took part in UN peace keeping forces in Africa and Asia. CONCLUDING REMARKS In summary, after continued growth of 25 years, China is heading towards the second wave of high growth. This new wave of growth has some distinct characteristics. Similar to the growth in the past 25 years, China's new growth is based on further economic reforms which will lead to the expansion of the role of the private sector and the mechanism of the market, and the development and perfection of the regulatory and legal systems. The new growth will also be accompanied by dramatic structural changes in the economy. These include further expansion of the tertiary sector to absorb the large pool of surplus labor in the farming sector and acceleration of urbanization. With reference to these two issues, China lags behind international norms. In the past 25 years, China has followed an "extensive model" of growth which relies on growth in factor inputs. This pattern would be changed to an "intensive model" which mainly depends on high efficiency and technological progress. Other economies such as Japan have gone through the similar process of growth and development. In addition to technological advancement, an intensive growth model also includes improved energy efficiency and production and exportation of more hi-tech products. In the coming decades, China would adopt a more balanced growth strategy to correct the past practice of uneven development. A balanced growth strategy implies more equal development of the rural and urban areas and the coastal and non-coastal regions, and less disparity in the distribution of growth benefits, access to education and

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other opportunities. China's new growth will also be characterized by increasing internationalization or globalization. There will be more outflow and inflow of capital and goods between China and the rest of the world. Globalization also implies China's commitments to international rules and responsibilities. Thus China's global responsibility will grow as the country's economic power increases.

Chapter

8 Change and Reform in Financial Markets Howard Davies*

The future of the Chinese financial system is one of the most important issues in the world today. That may seem something of an exaggeration, but I think it is a contention one can easily support. It is as true in London, as it is in South East Asia. The future of the Renminbi has been at the centre of a rather dangerous war of words between China and the United States, with members of the United States Congress threatening the Chinese with protectionist tariffs if they did not implement a revaluation. Following the announcement at the end of July that the RMB was to be devalued by an initial 2% and in future will be pegged against a basket of currencies, and allowed to fluctuate within a daily band, we may hope that this tension has been defused, at least for the time being, though the extent of change has been very modest so far. However, rather than entering that highly charged political debate — I would prefer to step back a little and look at the evolution of the Chinese financial system over the last few years, to offer a diagnosis of some of the problems which have emerged, and to speculate * This chapter is based on a lecture at the Lee Kuan Yew School of Public Policy, National University of Singapore in September 2005.

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a little on changes that might be needed in the future. In doing so, I am bound to be influenced both by my past experience at the FSA, and my current experience on the International Advisory Councils of the China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC). But I must quickly emphasize that I speak in a personal capacity only, and in no way reflect the views of the Chinese regulators themselves, or indeed the Financial Services Authority (FSA). I also draw on work done by others at the London School of Economics (LSE), to whom I am grateful.

STATE OF CHINA'S FINANCIAL SYSTEM The first important point to make, which is not as well understood outside China as it might be, is that in many respects the Chinese financial system is already very well developed, even by the standards of Europe or the United States. Earlier this year the McKinsey Global Institute published an intriguing report on the world's capital markets. For those who like large numbers, they point out that at the end of 2003 the global financial stock had reached $118 trillion, an almost ten-fold increase on the $12 trillion it amounted to in 1980. And the growth of the global financial stock has been much more rapid than that of GDP. In 1980, it was roughly equal in size to world GDP — by 2003, it had grown to more than three times GDP (Figure 8.1).

• Global GDP

• Global Financial Stock

Figure 8.1 Global GDP and Global Financial Stock, 1980-2003 (US$ trillion). Source: McKinsey Global Institute, 2005.

Change and Reform in Financial Markets 245

These are, if you like, Trivial Pursuit numbers. Amaze your friends at dinner parties with your knowledge of the size of the global financial stock! It is more interesting to ask what we can learn from a regional breakdown and, particularly, from an analysis of the position of China within the totals. You will not be astonished to learn that the United States market dominates the global financial system. Thirty-seven percent of the total financial stock is in the United States. Add the Eurozone, the United Kingdom and Japan, and you get to 80%. Latin America accounts for only 2%. The whole of Asia, including Japan and the Tiger economies, accounts for 23% — with the Chinese share at around 4% of the global total. China's global population share is around 20%, to give a point of reference (Figure 8.2). That share of the world's financial assets has been growing, and is likely to grow further in the future. Over the last ten years Chinese financial assets have been growing at 14.5% a year, almost twice as fast as the world average, which is close to 8%. Furthermore, there is no sign whatsoever that the Chinese financial growth rate is slowing down — indeed rather the opposite (Figure 8.3). So the Chinese financial system is maturing rapidly. In fact, if we look at financial depth, we find a rather striking comparison. One

• Europe D Asia • China • Rest of World Figure 8.2 Global Financial Stock, 2003 (%). Source: McKinsey Global Institute, 2005.

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useful indicative measure of financial depth is financial stock as a percentage of GDP. The United States, Japan and the United Kingdom are all somewhere around 400% of GDP. Remarkably, China has already developed a relatively deep financial system and its depth, on this measure, at 323% of GDP, is slightly higher than that of the Eurozone at 314%. That is in contrast to some other rapidly developing economies. Indeed China's financial stock is six times the size of India's, where the financial depth index is only 137%. All these figures are, as I explained, taken at the end of 2003 (Figure 8.4).

Change and Reform in Financial Markets 247 10 8 C

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Figure 8.6 Bank Deposits as % of Financial Stock. Source: McKinsey Global Institute, 2005.

It is particularly useful also to look at the composition of these financial assets, country by country. If we do so, we find that China has been developing in an atypical manner. For convenience, we can divide the financial stock into equities, private debt securities, government debt securities and bank deposits. We can see that China accounts for 4% of the global equity stock, 1% of private debt, 2% of government debt, yet 9% of global bank deposits (Figure 8.5). Put another way, 62% of China's financial stock takes the form of bank deposits, compared with only 20% in the United States, 30% in the Eurozone, and even in India, which we often think of as also driven by bank finance, the figure is only 45% (Figure 8.6).

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The Chinese financial system remains very heavily dominated by the banks and, indeed, bank deposits have been growing more rapidly than equities in China in recent years, so the reliance on bank financing has become even stronger, which is uncharacteristic for a country at China's state of development. We typically find that countries with GDP per head at around the Chinese level are beginning to develop their securities markets to allow them to take a larger share of the burden of financing a rapidly growing economy. This heavy weight of bank finance in the system as a whole has meant that the problems of the banking system are of more than usual significance in economic terms. A country so heavily reliant on bank finance cannot afford a banking system which is weakly capitalized and poorly managed. So let us look a little more closely at the banking system itself and its problems. Four aspects of the Chinese system are particularly striking. First, the number of banks is relatively small. There are only around 125 banks in China compared to 5000 in Europe and over 7000 in the United States (Figure 8.7). (This excludes the huge number of rural credit cooperatives, however.) The major banks are large by international standards — ICBC is now in the top 20 in the world — but the concentration ratio, if one looks at the proportion of assets held by the top three banks, is not especially high at 47%. True, it is only 20% in the United States, though rising quite rapidly with the 8000

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growth of Citigroup and Bank of America, but it is 65% already in the United Kingdom and 80% in the Netherlands (Figure 8.8). The Singapore figure must be comparable. Second, the Chinese system is remarkable for the dominance of corporate lending in the total. Somewhere around 80% of the revenues and profits of Chinese banks are currently generated from commercial business. Third, on the reverse side of that coin, most of the deposit base comes from retail customers. But those retail customers take advantage of few banking products. Deposit accounts are fairly well spread, but only 5% of customers even in the major cities own mutual funds. On average, there is one credit card in China per 1000 people, compared to over three per person in the United States. (There may be a happy medium to be found between these two extremes.) Fourthly, taking all this together, one of the consequences is that Chinese banks have been significantly less profitable than those in other countries. That is driven by the fact that they have relatively low fee income and high loan losses and write-offs in their corporate business, which have not been offset by rising profits on the retail side of the business. In most countries, retail banking is more profitable than corporate banking. The customer base is less powerful, and the default losses are lower. The non-performing loan problem is the one which has attracted the greatest attention overseas. Estimates of its scale have Percent of deposits held by top three banks (2002) 100^

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varied hugely. Some external commentators have put the figures as high as 50% of the total size of the Chinese banks' balance sheets. Official figures put the percentage at around 15% at the end of 2003, down about 5 percentage points over that year. It is probably fruitless to attempt to reconcile these different estimates. There are many uncertainties which are extremely difficult to resolve. There are problems, for example, in the quality of accounting and auditing in Chinese banks and indeed in the enterprises to which they have lent money. There are different judgments about when a loan should be regarded as non-performing. Underlying these issues is concern about the "whole property rights infrastructure in China. If property rights are unclear, particularly related to land, where changes in local laws can result in sharp changes in value, the valuation of the loan book will be subject to considerable uncertainty at the best of times. But whatever the precise NPL number it is important to ask why the position deteriorated so far, even if one accepts — as I certainly do — that considerable efforts are now being made to grapple with the issue, efforts which are being met with some success. Essentially, we should see the NPL problem as one arising from a long period of very rapid growth, combined with political influence over lending decisions at local level. We all marvel at the way in which the Chinese economy has expanded, apparently in a straight line, at around 9% a year for a quarter of a century. This is indeed a stunning performance unparalleled in recent times, or perhaps ever. But of course while at the aggregate level growth has been high every year, in individual regions and individual industries the picture has been much more varied. For every ten remarkable successes, with the creation of new and dynamic export businesses, there have been perhaps two or three corresponding failures. And the after-effects of those failures have reverberated through the financial system. Loans provided to the failed enterprises have remained on the balance sheets. Industrial waste, as it were, has silted up the banking system. Many of these loans were not subject to independent credit appraisal, and were in effect directed lending, so it is hard to blame the banks themselves for all the problems they face. That is why it is necessary and justified for the Government to

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step in to help the banks restore themselves to financial health. Significant capital injections have already been forthcoming, involving tens of billions of dollars. But before considering what more needs to be done to bring this still difficult problem under control, it is worth reflecting for a moment on the capital market dimension. What has been happening in Chinese capital markets? Why have they not developed more rapidly and made a greater contribution to financing growth? A more flourishing capital market would take some pressure off the banking system and add another element of credit appraisal to corporate lending, which would improve the capital allocation process. Chinese equity markets have behaved very disappointingly in recent years (Figure 8.9). Both the Shanghai and the Shenzhen markets have been in decline and have repeatedly hit record lows. Why is this, at a time 'when the economy has clearly been doing well? One answer comes from the Economist, which, in an article last year on China's markets, concluded "Much of the decline can be attributed to a massive share overhang: the government still owns twothirds of the equity in the country's 1,287 listed firms, and its periodic attempts to sell, or rumors that it may do so, depress prices. On top of that, the market is rigged by the securities industry, made up of 130 largely corrupt brokers, most of which are trying to stave off bankruptcy, having promised investors guaranteed returns they

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Figure 8.9 Shanghai Equity Market.

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now cannot honor. But the biggest problem is the poor quality of the listed companies". Apart from that, as they say, the situation is fine. The Economist, using its trademark blunt language, may be exaggerating somewhat to make the point. But there is no doubt that measures need to be taken to restore confidence in Chinese equity markets. I will say more about them in a moment. Looking briefly at the bond market, a superficial view might suggest that the prospects are brighter. Over the last few years, far more bond finance has been raised than new equity investment. According to the China Development Bank, bond transactions in 2002 were over 450 times as large as they were in 1997. That is impressive growth in any language. However, most of this new issuance and secondary market turnover have been in public sector bonds of various kinds. The corporate bond market is still very small by comparison with the total outstandings in government and public sector agency debt. Private bonds apparently make up 5% of the financial stock, but most of the supposed corporate bonds in issue are effectively guaranteed by one state agency or another. There is relatively little secondary market trading in corporate bonds. Most investors buy and hold. Indeed most of the bonds in issue are held by the banks and liquidity is very low. As a result, the bond market, as well as the equity market, is not playing its full potential role in Chinese economic development. AN AGENDA FOR FINANCIAL REFORMS Against that background, what needs to be done? What are the components of a potentially successful reform program? The answer is not, I think, conceptually difficult. We know a lot about how financial systems need to evolve to respond to the needs of developing economies. There is considerable experience in developed countries on how to handle banking crises and problems of undercapitalization. There is a lot that can be said about the technical characteristics needed to promote successful bond markets. There is

Change and Reform in Financial Markets 253

much international good practice in corporate governance which can be invoked. International accounting standards are available for use. The Chinese authorities, who are particularly open in these matters, and who are evidently excellent learners, are well aware of these points. But execution is the problem. There is not time today to offer a detailed catalogue of all the measures that need to be taken. So I will just briefly describe the three main headings of a reform agenda, and offer a few pointers to the future in each case.

Strengthening the Banking System The Chinese authorities recognize that restructuring the banking system is of the highest priority. Unless the banking system is reformed and strengthened, it will act as a brake on economic growth. The highest profile problem relates, as I have said, to the non-performing loans. That, in turn, divides into two: dealing with the stock of NPLs and stemming the flow of new NPLs in the future. Dealing with the stock has already involved significant capital injections, and the establishment of asset management companies: "bad banks" which take the worst loans off bank balance sheets and try to work them out. Progress in the realization of NPL collateral through the asset management companies has been slow. The realization rate is roughly 20%-30% of the book value of the bad loans taken over, a lower figure than initially hoped. But a secondary market is now emerging and foreign institutions have been prepared to put capital into China to acquire portfolios of bad debts. Within the banks themselves a new and more commercial approach is developing as younger managers have been put in place and been given targets to reduce NPLs. The announcement of moves towards flotation and the introduction of foreign minority shareholders has added additional impetus to this effort. There remains a good way to go. Even if the actual proportion of NPLs is close to the government's estimate, in the low teens, that is still around ten times the experience in well-managed British banks. But I would say nonetheless that the authorities have made good progress, and indeed have grappled with the problems with

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greater speed and determination than did the Japanese during the 1990s. There are certainly considerable challenges ahead. Preparing all the major Chinese banks for flotation will be neither easy nor cheap. It will require significant changes in the management and culture of the banks, and in their reporting practices. One positive step is that overseas independent directors are being introduced, including Peter Cooke, the former head of supervision at the Bank of England, who has joined the Board of the Bank of China. We are also seeing significant overseas investors taking large stakes. Only last week ICBC sold a 10% stake to Goldman Sachs, Allianz and American Express. The introduction of greater foreign competition into the domestic banking market, another important element in the equation, will also be difficult. The WTO commitments require it, however. The CBRC will need to show great determination in pushing this strategy forward. Capital Markets R e f o r m The reforms needed in the capital markets may be even more difficult. On the equities side, the government will certainly need to reduce the share overhang represented by its own holdings. Plans have been announced to begin this process through a pilot scheme in which tranches of government shareholdings are offered to the market with, in effect, compensation payments made to those who have held tradable shares in the past. Interestingly, some companies have introduced employee share option plans as part of their share redesignation schemes. It is too early to say how successful this exercise will be in removing the dampening effect on markets which the share overhang has created hitherto. But an important start has been made, and recent announcements by the government suggest they plan to press ahead. The CSRC have set up an embryonic investor compensation scheme for those investors who have lost money through fraudulent activities by securities firms. Again, this could be a very helpful move, though it is too early to assess its impact. The CSRC has

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stepped up its enforcement activity against securities firms who have misused client funds. And there has been one case of a significant capital injection by a foreign firm. So far, and not surprisingly, it is not easy to see any positive impact in terms of market confidence. In the short term, one perhaps should not expect a significant rise in prices. The Shanghai market in fact continues to trade on a higher price/earnings multiple than Hong Kong, which suggests that current equity prices may not be artificially low. And the short-term effect of government share sales is likely to be depressing. It may be some little time before confidence returns sufficiently for new IPOs to emerge, which would be the best sign of a revival in the markets fortunes. On the bond side a different agenda of change is needed. A number of reforms are necessary. Some of them are quite detailed. There is a need, for example, for efficient and transparent pricing benchmarks. The arrival in the Chinese market of independent rating agencies, operating to international standards and independent of issuers, investors and the government, would also be helpful. With some kind of ratings structure, it would be possible to envisage listing non-guaranteed bonds, to encourage the development of credit discipline in the market. Bond markets elsewhere also benefit significantly from liquid secondary markets and repo markets which allow short selling. There are also typically a range of derivative products which add liquidity and there are instruments, notably interest rate swaps, which facilitate hedging strategies. Some of these features of the debt markets in New York and London will not be easy to replicate in China in the short term. But it is important to develop a strategy to introduce reforms and liberalization over a period. The British government has financed the study of how derivative markets might best be introduced, which may help. But I suspect the Economist article is right in arguing that, in the long run, what is needed above all is stronger corporate governance in Chinese companies. It has long been understood that there is a powerful relationship between corporate governance standards, investor protection and the vitality of capital markets. The CSRC has issued a rather good corporate governance code for application by

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Chinese companies. In fact, in my previous job, I participated in its launch in Beijing. But we know in the United Kingdom that there can be a considerable distance between the issuance of a good practice code and its full implementation in the corporate sector. There is certainly still a long way to go to China and full implementation may not occur until there is greater pressure from rating agencies and indeed from investors. The problem of introducing stronger corporate governance practices in an environment in which the majority of the shares of most significant companies remains in state hands are considerable. Who appoints independent directors? How can their independence be buttressed? To whom are independent directors in practice responsible, to the majority shareholder in government, or to minority shareholders in the market? Will the appointment of independent directors by the government really strengthen the protection of the rights of minority shareholders? There are no easy answers to these questions. Obviously they become more tractable as state shareholdings are reduced. But, realistically, it will be some time before the dominant ownership model is one of distributed shareholdings. After all, there are a number of continental European countries in which that is still not the case. Regulatory R e f o r m The third area in which continued progress is needed relates to the regulatory environment in China. Here the authorities have made very significant strides in recent years. The establishment of three separate regulatory commissions for banking, securities and insurance, namely, CBRC, CSRC, and China Insurance Regulatory Commission (CIRC), was a positive step forward. The banking and securities regulators, where the need for overseas advice is probably greatest, have been remarkably open in appointing international advisory councils and consulting them extensively. They have begun large scale training programs for their staff. In the case of the CSRC they have imported top experts from Hong Kong, like Tony Neoh and Laura Cha, to strengthen the upper ranks. All of this is

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very creditable and demonstrates a degree of openness to external influences which has not often been replicated in other countries. But in international regulation the goal posts keep moving. The technical requirements on banking supervisors associated with Basel II and its implementation are considerably more onerous than those associated with Basel I. Validating banks own internal credit models will be testing. The CBRC faces a considerable challenge in upgrading the skills of its existing staff and recruiting more. The same is undoubtedly true in the other commissions as the markets become more open and more competitive. The focus of regulation is shifting towards the enforcement of transparency and disclosure and away from a "command and control" structure. The skills and mindset needed to operate in this new market orientated world are very different. Regulators must also create a climate in which it is expected that their staff will challenge the institutions in their charge. Creative tension is the key to well-functioning system elsewhere in the world. It is also now very clear that there is a need for stronger collaboration between the three Commissions. Just as has happened in other countries, interactions between banking, securities and insurance markets are growing and it is no longer possible effectively to regulate one sector without understanding something of the others. In China, we are already seeing the arrival of multi-functional financial groups. A recent World Bank paper argued that there are inconsistencies in the regulatory environment in China which need to be addressed. For example, while the CSRC is attempting to encourage greater investment in equity markets, there are severe restrictions on the degree to which insurance funds may hold equities in their portfolio. The same is true in relation to municipal pension funds. So as the reform process continues there is a clear requirement for some kind of overarching body to ensure consistency of the regulatory approach taken in the different sectors. That is a challenge which the state council fully recognizes, I believe. It is one which is faced by many other countries. Indeed, in the United Kingdom precisely the same point could have been made in 1997, before the creation of the FSA. It may be too early for China to consider the' establishment of a single regulator, but more co-ordination is needed.

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CONCLUDING REMARKS This may seem a formidable agenda, as indeed it is. But we ought not to be pessimistic about the chances of success. The Chinese financial system has already changed dramatically, and is unrecognizable from the monolithic structure dominated by the People's Bank which we saw just a few years ago. It will be a bumpy ride, certainly, and the reverberations may be felt in South East Asia, but I am generally optimistic about the chances of success.

Chapter

9 Strengthening Corporate Governance: Completing the Unfinished Business of SOE Reform Sarah Y. Tong*

ECONOMIC REFORMS AND CHINA'S SOES Reforming China's state-owned enterprises (SOEs) has been one of the most important objectives for the Chinese authority, and probably the most challenging one. The reforms have gone through roughly two phases with different goals and measures. In evaluating China's SOE reforms, one needs to keep in mind that the government has been extremely reluctant to privatize SOEs on a mass scale, especially those considered as of strategic importance to the economy. During the first phase, between early 1980s and mid-1990s, the main objective is to introduce and to strengthen profit-related * The author thanks Liang Ruobing for his contribution to an earlier draft and John Wong for his useful comments and suggestions. The chapter also draws some reference from a seminar given by Dr. He Jiacheng at East Asian Institute of National University of Singapore in May 2004. Remaining errors are those of the author.

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incentives for managers. A system of manager-responsibility was introduced in the early 1980s where a manager of an SOE signed a contract with its supervising government agency with negotiated terms.1 The types of contracts have evolved over time from a "profit retention scheme" (lirun liucheng MM HJfiBi) to a "contract profit-loss responsibility system" (zifu yingkui g j % M if); and subsequently to the introduction of "tax for profit system" (li-gai-sbui ^Iji&^fc). The process of "incentivizing" SOEs was accompanied by the introduction of the so-called "dual track pricing system" (jiage shuanggui tf^tfcxWMlM)? Price reform was enacted along with measures taken to decentralize government fiscal responsibilities and to reduce the scope of government planning. As a result, there is more and more reliance on the market in the allocation of consumer goods and factors of production, in investment financing, in foreign trade, and in foreign exchange management. Less price distortion leads to a more conducive business environment for SOEs to operate and to compete in the market place. The approach was considered quite successful in redirecting firms to be more responsive to market competition and maximize profit. A new emphasis in SOE started in early 1990s beginning with a small-scale experiment of "covert privatization" in the form of "shareholding companies", mainly at the local levels. In the mid1990s, the contractual arrangement designed to tackle the incentive problem was gradually abandoned and SOE reforms entered the second phase, to transform SOEs into a "modern enterprise system". Following Deng Xiaoping's tour to South China in 1992, China unleashed a new reform momentum to build the so-called "socialist market economy", under which the term "state-run enterprise" 1

Under the central-planning system, each state-owned enterprise (SOE) is categorized into the government's management system at various levels. For example, some SOEs are centrally managed and are subject to supervision of different ministries. Provincial SOEs on the other hand are managed and supervised by provincial branches of the government ministries. 2 Under the dual track pricing system, SOEs purchase within-quota input under "planned price" to fulfill output quota for the government. Above-quota input may be acquired at "market price" and above-quota output sold at market price.

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(guoying qiye HUf jfeik) was replaced with "state-owned enterprise" iguoyou qiye HI W4^U0- The simple change in terminology was sufficiently significant as it makes a distinction between ownership and management. Between 1993 and 1997, much effort was directed towards the establishment of such "modern enterprise system". On one hand, the government promotes further improvement in enterprise governance; at the same time, great emphasis was placed on enterprise groups (qiye jituan 4kik.M I D through mergers and acquisitions or other forms of integration among SOEs. After the Company Law was enacted in July 1994, the experimentation of the shareholding system was further accelerated. In early 1995, China's SOE reform efforts crystallized further into a more explicit strategy of "nurturing the big into giant conglomerates, while letting go the small SOEs to the forces of market mechanism (zhuada fangxiao M^Sfc'lO"- The government has decided that while they could "let go" around 240,000 small, mainly local-level SOEs, they will retain the 1000 large SOEs belonging to the central government for economic and social reasons. These large SOEs are considered of strategic importance as they constitute the backbone of China's industry in terms of total capitalization and employment. For the small SOEs, various forms of restructuring have been used including reorganizations, mergers and takeovers, leasing and management contracts, conversion to shareholding companies, or outright closures. This second wave of SOE reform has resulted in the mass number of lay-off workers in urban areas and has caused the share of SOEs in China's industrial sector to shrink gradually and consistently. In 1990, SOEs accounted for 78% of total industrial output. The figure dropped sharply to 28% in 1996. Since 1996, a new statistical system has been implemented in which SOEs and corporations controlled by the state are grouped under one category, called state-owned and state-holding enterprises. Under the new reporting system, their shares in number of firms, total output, total value-added, and total assets in above-scale industry have continued the earlier decline.3 3

Above-scale industry includes large and medium size enterprises as well as small enterprises with an annual sale above RMB 5 million (about US$600,000).

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In 1998, state-owned and state-holding enterprises accounted for 39% of total number of firms, 50% of gross output value, 57% of total industrial value-added, and 69% of total assets of the above-scale industry. In 2004, the figures are down to 14%, 35%, 42%, and 52%, respectively (Figure 9-1). In 2005, the state sector continued to grow slower than the rest of the industrial sector. In the first eight months of 2005, valueadded of state-owned and state-holding companies increased by 11% over the same period in 2004. On the other hand, valueadded of private industrial firms, stock-holding companies and firms with foreign investment (including those with investment from Hong Kong, Macao and Taiwan) increased by 25%, 18%, and 16%, respectively. On the whole, the decades-long government efforts of grappling with the SOE reform have produced many encouraging results though many problems remain unresolved. For example, there has been repeated official acknowledgment of mounting SOE losses and continuing indebtedness of SOEs. In 2004, there were about 40,000 loss-making firms, accounting for 18% of all above-scale industrial

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Figure 9-1 Share of State-owned & State-holding Enterprises in Industry Total. Source: Statistical Yearbook, various years. China Statistical Abstract 2005.

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firms. Among state-owned and state-holding firms, however, more than one third (35%) firms have negative profit. The total amount of loss is RMB 67 billion which accounts for more than half (54%) of the total of all above-scale loss-making firms. Reforming and restructuring China's SOEs is far from complete. OWNERSHIP DIVERSIFICATION AND THE ROLE OF THE STATE In late 1990s, the call for enterprise reform has accelerated again. An important goal is to clarify ownership structure of SOEs. There were also efforts to diversify ownership of former SOEs. In practice, there has been a wide range of ways in which SOEs are "restructured". In many cases, the restructuring implies a mild change of the so-called "corporatization," converting a previously bureaucratically-run SOE into a company with defined ownership shares and a board of directors to exercise control. In other cases, restructuring can include overt privatization, with a new set of private owners and institutions replacing the vaguely defined public interest. The result is that the number of SOEs has dropped significantly and the government now maintains state ownership and state control of the most important enterprises. As shown in Figure 9-2, the share of state-owned and statingholding firms remain very high in most of the upstream industries which are often highly capital-intensive, and resource related. They include extraction of petroleum and nature gas, production and distribution of electric power and heat power, mining of other ores, processing of petroleum, coking, and processing of nuclear fuel, mining and washing of coal, production and distribution of gas, and smelting and pressing of ferrous metals. The share of state-owned and stateholding firms in total sectoral value-added ranges from 66 to 94%.4 The state's shares in value-added are also high in tobacco industry (99%), production and distribution of tap water (86%), and transport equipment manufacturing (64%). The ten industries are indeed very 4

Total industry hereafter refers to above-scale industry unless stated otherwise.

264

Sarah Y. Tong • # of firms

• Value-added

• Total assets

Q Employment

Figure 9-2 % of State-owned and State Holding Enterprises 2003, the Highest ten Industries by % in Value-added. Source: China Statistical Yearbook, 2004.

important for the economy. These industries jointly made up 30% of total industrial output, 38% of total industrial value-added, 41% of total assets, and 24% of total industrial employment in 2003. Figure 9-3 lists the industries where the shares of state-owned and stating-holding enterprises are the lowest among 39 industries. They include a number of labor-intensive consumer goods manufacturing such as leather, fur, feather and related products; furniture; apparel, footwear, and caps; cultural, education and sport goods; and artwork and other manufacturing. State-owned and state-holding enterprises account for less than 5% of total value-added in these industries. Other industries where state-owned and state-holding enterprises have lower representation include recycling, plastics manufacturing, metal products manufacturing, electrical machinery and equipment, and measuring instruments and office machinery. In these industries, the share of the state sector in total value-added ranges between 2% and 13%. The ten industries together account for 18%o of total industrial output, 15% of industrial value-added, 12% of total assets, and 23% of industrial employment in 2003.

Strengthening Corporate Governance

Q# of firms

D Value-added

D Total assets

D Employment

265

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Figure 9-3 % of State-owned and State Holding Enterprises 2003, the Lowest ten Industries by % in Value-added. Source: China Statistical Yearbook, 2004.

While maintaining tight grips of the most important industries, the Chinese government has also attempted to diversify the stateownership. This becomes quite clear when we examine the changes in ownership within China's large- and medium-size industrial enterprises (LMEs). While accounting for only around 10% of all abovescale enterprises, China's LMEs collectively make up two-third of gross industrial output, industrial value-added, and total assets of all enterprises. Since the mid-1990s, there have been dramatic changes in the ownership composition among China's LMEs while the total number has main relatively stable. Between the 1994 and 1990s to 2004, the number of LMEs ranges from 21,000 to 24,000. The number of state-owned LMEs, however, has decreased sharply, from more than 15,000 (68% of all LMEs) in 1994 to around 11,000 (51% of total) in 1999 (Table 9.1). The share of state-owned assets in the state-owned enterprises has also dropped from 69% to 51%. It is noted that the ownership restructuring is not a simple retreat from SOEs by the state but is

266

Sarah Y. Jong Table 9-1 Share of State-owned Assets in Total Assets of LMEs Number Ownership

rtal State-owned Collective-owned HMT Foreign Shareholding Private Other domestic

State(%)

1994

1999

1994

1999

22,331 15,267 4,006 919 919 946 4 270

21,573 10,750 3,375 1,552 1,957 3,441 312 186

69.0% 94.3% 11.2% 0.0% 0.0% 48.0% 0.0% 38.6%

51.1% 85.0% 3.4% 17.0% 12.7% 34.7% 3.0% 29.3%

Source: Jefferson et al. (2003).

accompanied by a process of state-ownership diversification. First, the number of shareholding LMEs increased from 946 to 3,441 between 1994 and 1999.5 Among the shareholding companies, on average, the state holds more than one third of the assets in 1999Second, the state ownership has become more pervasive and diversified across different ownership forms. In 1999, on average, the state holds 17% assets of LMEs with funds from Hong Kong, Macao and Taiwan, 13% assets of foreign invested LMEs, and 29% assets of other domestic firms. 5

Industrial firms in China are categorized into seven groups. State-owned include state-owned enterprises, state-owned jointly operated enterprises, and wholly stateowned companies. Collective-owned include collective-owned enterprises, shareholding cooperatives, and collective jointly operated enterprises. Firms with funds from Hong Kong, Macao, and Taiwan (.HMT) include overseas joint ventures, overseas cooperatives, overseas wholly owned enterprises, and overseas shareholding limited companies. Foreign firms include foreign joint ventures, foreign cooperatives, foreign wholly owned enterprises, and foreign shareholding limited companies. Shareholding companies include shareholding limited companies, and other limited liability companies. Private firms include private wholly owned enterprises, private-cooperative enterprises, private limited liability companies, and private shareholding companies. Other domestic firms include state-collective jointly operated enterprises other jointly operated enterprises, and other enterprises. Jefferson, G. et al, "Ownership, performance, and innovation in China's large- and medium-size industrial enterprise sector", China Economic Review 14, 2003, 89-113-

Strengthening Corporate Governance 267

China's SOEs have indeed undertaken dramatic ownership restructuring since mid-1990s. Overall, the fraction of the industry owned and controlled by the government has reduced significantly. At the same, the state maintains tight control of industries with strategic importance and extends its influence to firms of other ownership structures as well. Ownership clarification, restructuring, and diversification of enterprises are important steps in the efforts to build world class enterprises. However, change in ownership alone will not automatically lead to effective and efficient management of state firms. The restructuring process itself as well as the governing mechanism will both have important implication for the effectiveness of the firms' governance. STATE-OWNED ASSETS SUPERVISION AND ADMINISTRATION COMMISSION By 2004, there are still more than 30,000 state-owned and state-holding industrial enterprises. They fall under the supervision of either the central or various local authorities. In April 2003, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) was established, as both a regulatory body as well as the supervisory body representing government investment. As the investor, the SASAC has the responsibility to guide and to advance the reform and restructuring of SOEs, to ensure the preservation and increment of the value of state-owned assets of enterprises under its supervision, to enhance the management of state-owned assets, to facilitate the establishment of modern enterprises system in SOEs, to strengthen corporate governance, and to propel the strategic adjustment of the structure and layout of the state economy. 6 More specifically, the SASAC is in charge to dispatch supervisory panels to some large enterprises on behalf of the state and to take charge of daily management of the supervisory panels. It also

6

SASAC website: http://www.sasac.gov.cn/eng/eng_index.htm.

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appoints and removes top executives of enterprises, and evaluates their performances through legal procedures, either grants rewards or imposes punishments based on their performances; establishes corporate executives selection system, and improves the incentives and restraints system for corporate management. As a regulatory body, the SASAC is also responsible for drafting laws and administrative regulations of the management of the state-owned assets and drawing up related rules; directing and supervising the management of local state-owned assets according to law. Since its establishment in 2003, the SASAC has pushed for a number of agendas to further China's SOE reform. One such agenda is to formulate rules to facilitate SOE restructuring and while preventing asset stripping in the process of restructuring. Two documents, "Views on Standardizing SOE Ownership Restructuring" and "Temporary Methods for Managing the Transfer of Enterprise State Assets",7 were released in late 2003- One problem that has emerged is the potential asset-stripping through "insider-privatization" of management buyout. On 14 April 2005, the SASAC issued a comprehensive regulation8 on management buyouts of state assets. Using the new regulation, SASAC strives to gradually formulate a consistent policy in SOE restructuring, instead of banning all management buyouts. For example, according to the new rule, management buyout of state-owned companies, state-holding companied, and their listed companies of large three types are not permitted anymore. As 7

^ ^ I ^ H W ^ h l k B S C i t i J l f E i i J O ("Guanyu Guifan Guoyou Qiye Gaizhi Gongzuo Yijian") ("Views on Standardizing SOE Ownership Restructuring"), l±$.S^]ii:U$$ik/§MWlffr'&} ("Qiye Guoyou Chanquan Zhuanrang Guanli Zanqing Banfa,") ("Temporary Methods for Managing the Transfer of Enterprise State Assets"), ^ ^ H W i ^ & f r f SMSfitWfrMjg)) ("Qiye Guoyou Chanquan Xiang Guanliceng Zhuanrang Zanxing Guiding") ("Tentative Method of Transfer of Enterprise State Assets to Management"), SASAC website, www.sasac.gov.cn/gzjg/ zcfg/zcfg.htm. 8 (&±m:£?:$(.fa'gmm$t?itWftM&) ("Qiye Guoyou Chanquan Xiang Guanliceng Zhuanrang Zanxing Guiding") ("Tentative Method of Transfer of Enterprise State Assets to Management"), SASAC website, www.sasac.gov.cn/gzjg/ zcfg/zcfg.htm.

Strengthening Corporate Governance 269

a result, there is only less than 100 listed companies qualified for management buy-out.9 The new rule also specifies that the management should not be in favored compared to other potential buyers in the bidding exercise. Another important agenda for the SASAC is to be involved in the selling-out of the non-circulating state shares. In late 2001, efforts to sell off state shares had triggered a massive market decline and the program had to be suspended. On 30 April 2005, the China Securities Regulatory Commission (CSRC) announced that some companies were being given permission to begin selling their state-owned, noncirculating shares, and thereby to begin converting to a system in which all their shares could circulate legally. The SASAC plays an important role in this new endeavor. As the representative for the government as owners of state-owned assets, the SASAC in fact represent the interests of the non-tradable state shares. Much consultation is required to strike a balance between the SASAC and the CSRC, which, as regulator, representing the interests of the minority shareholders. On 27 June 2005, the SASAC issued a Guideline on the Reform of Stocking Structure of State-holding Listed Companies.10 In addition, the SASAC is also proposing to enhance its function as a representative of enterprises' owners. As a regulatory body, it is also planning to further streamline non-core SOEs while restructuring the large firms under its control. It seems that the SASAC has emerged to become an important organization in China's economic arena. There are, however, uncertainties in the future due to the SASAC's ambiguous mandate. In short, the SASAC combines both 9

" < & 3 l k B W j t e & l R l £ S M * H h ! g f i s « £ } mm"", ("'Qiye Guoyou Chanquan Xiang Guanliceng Zhuanrang Zanxing Guiding' Jiedu") ("Interpreting 'Tentative Method of Transfer of Enterprise State Assets to Management'"), 19 April 2005, SASAC website, http://www.sasac.gov.cn/gzyj2/200504l90006.htm. 10 fH«-KHKS^^S*fiJS±T&^^HSR^Sa¥W»#a:Jlll) ("Guowuyuan Guoziwei Guanyu Guoyou Konggu Shangshi Gongsi Guquan Fenzhi Gaige de Zhidao Yijian") ("Guideline of the State-owned Asset Supervision and Administration Commission of the State Council on Reforming Stock Holding of Publically Listed Companies under State Control"), 27 June 2005, SASAC website, http://www.sasac.gov.cn/gzjg/cqgl/200506200072.htm.

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ownership and regulatory functions. The key problem is there is no law governing the control of state assets and therefore the legal obligations and rights for SASAC are unclear. CORPORATE GOVERNANCE OF CHINA'S SOES AND CAES Of all China's industrial SOEs, close to 200 industrial firms fall under the direct supervision of the central SASAC and they were called Centrally Administrated Enterprises (CAEs). Their number of dropped from 196 by the end of 2002 to 169 currently as the SASAC pushes to further reduce the number of CAEs. Those that remain are the most important part of China's SOEs and the corner-stones of the economy. In 2002, CAEs had total assets of RMB 7.13 trillion in book value, and increased to RMB 9-19 trillion in 2004. Total assets in net value also went up form RMB 3-20 trillion in 2002 to RMB 3.95 trillion in 2004, in which more than 80% is owned by the state. While the number of CAEs is small, there exist large variations. A small number of CAEs make up the majority of the total assets, profit, and revenue. In 2001, while assets of individual CAEs ranges from RMB 1.2 trillion to only RMB 20 million, the top 10 CAEs accounted for two third of all CAEs' assets. In 2003, the profit of the top 10 profit-makers accounted for more than half of the overall profits of all CAEs. The most profitable industries are oil and petrochemicals, telecommunications, steel, and automobile. To push CAEs to become modern corporations and to encourage external investment, a significant portion of high quality assets has entered the capital markets both at home and abroad. In 2003, nine of the top ten and 26 of the top 100 listed companies in domestic stock exchange are subsidiaries of CAEs. Externally, 12 of the 15 Chinese companies listed on New York Stock Market and 19 of the 36 Chinese companies listed on Hong Kong market are subsidiaries of CAEs. Currently, the SASAC controls 168 companies listed on the Chinese exchanges in Shanghai and Shenzhen. These companies account for 34% of domestic stock market value and 18% of the value of the Hong Kong stock market.11 Barry Naughton, "SASAC Rising", China Leadership Monitor, No. 14, 2005.

Strengthening Corporate Governance 271

Even with the recent push for SOE restructuring and stock exchange listing, many issues remain as how to ensure efficient and effective management of SOEs and state-assets. As Premier Wen pointed out that, in the official documents for the 3rd Plenary Session of the l6th CPC National Congress, the core of building modern enterprise systems is to improve corporate governance. There are a number of issues concerning corporate governance of SOEs, including insider-control, absentee ownership, and " Yi Gu Du Da" (—JM&^l), where the single share owned by the state accounts for a large majority of total capitalized shares. One approach to resolve such problems is the separation between ownership and control. Depending on the specific arrangement, the separation may sometime lead to the problem of "strong management, weak ownership", where the managers behave against the interests of the shareholders. More specifically, for companies with diversified equity, it may be difficult to prevent managers from harming shareholders' interests. For companies with highly concentrated equity, on the other hand, the concern is how to prevent the controlling shareholders from harming minority shareholders' interests. For companies where the state holds the controlling equity, like the case of China's SOEs, an additional issue is that the representative agency for the controlling shareholders may ignore even the controlling shareholder's interests. The problems discussed above exist to various degrees in China's SOEs. For CAEs, the process of corporatization has been slow and the ownership is highly concentrated in the state. In contrast, SOEs at the local levels are much more active in the corporatization drive. In the cases where non-governmental parties became the controlling share-holder of listed companies, the interest of controlling shareholders is now better serviced by their representatives. The task of protecting minority shareholders and monitoring management remains a challenge. The system of board of directors was put in place by law. Aside from the rather universal problem of specifying the board's function, there are additional issues concerning board of directions in Chinese corporations. For example, all board members are currently from within the company; many are in fact in the management team.

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Such boards are unable to perform their dual role. A related question is how to ensure that the board performs its duty effectively. One remedy to this problem is the inclusion of independent directors and there are efforts in the direction. It has become standard for listed companies to include independent directors and to increase their representation. An immediate question is what qualification the independent directors should have. The CSRC requires professional certification from independent directors for listed companies. Currently, most independent directors in the listed companies have working experience in accounting, law, scientific research, and economics. The benefit of such practice is that firms are able to assemble a team of independent directors quickly. However, many independent directors lack the experience in business operation, management and supervision and fail to comprehend the complexity of business operations and performing their supervisory duty effectively. It is perhaps necessary to include people with diverse specialties, such as management experiences in large companies or finically institutions. In addition to selecting the right independent directors, it is also crucial to ensure their independence and to enhance their supervisory power, if the system were to work. According to China's Company Law, the board's chairman is also the legal person for the company. This does not seem to be a good arrangement as in Chinese enterprises the responsibility of business operation is often with the legal person who is likely to be the CEO. As such, there is no separation between the board director and the management team. A number of steps should be taken to resolve the problem. For example, there should be more communication and consultation between CEOs and independent directors when deciding board meeting agenda. Moreover, the companies could establish position of chief independent director who is empowered to monitor the CEO. Finally, there could be a Chairman-CEO separation. In 1999, a step was taken to establish the "dispatched board of supervisors", including investors and their representatives. The key is to engage personnel independent of the company. According to

Strengthening Corporate Governance 273

regulation, the members should "consist of officials" who are "not receiving salary from the enterprise", and "not participating and not interfering" in company affairs. For CAEs, after they are transformed into shareholding companies, either a dispatched board of supervisors or an internal board of supervisors will be established depending on the form of restructuring.12 A number of financial scandals in recent years suggested that the board of supervisors could not function effectively either due to incompetence or lack of supervisory authority. Currently, the system is not effective in verifying business performance. It is obvious that supervision would not be effective when some board members are also members of the management team. For China's CAEs, for example, the financial reports should be audited by an independent accountancy firm, not by accountancy firms chosen by the companies. According to reports, in 2002, China's State Auditing Office conducted liability auditing for 12 leading CAEs and found that the financial reports, especially profit figures, were often not authentic. One practice China could use is to require that the financial report be verified by the auditing committee, a subcommittee of the board, which is authorized to select an independent auditor. There is also room for change on how to decide management compensation. In general, the overall compensation for manager of China's CAEs is low, which makes it difficult to attract and to retain highly qualified managers. In addition, there is only a small gap between the president and the deputy president. Moreover, the relative amount between fixed salary, bonus, and long-term benefit is not conducive for long-term incentive. Finally, fringe benefits are not monetized and thus not transparent. Currently, "the management team determines their own compensation" and they are not effectively linked to real business performance, since no effective mechanism in place to verify the performance. Measures should be taken to require information discloser for management compensation. 12

The joint-stock companies will establish a DBS and the stock companies will set up an Internal Board of Supervisors in accordance with the Company Law of China.

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Promoting institutional investors is an important component to improve corporate governance of the CAEs. The SASAC was established to represent and to supervise state-owned assets at various administrative levels. The key goal is to resolve the problem of absentee ownership. For China's SOEs, the owner can hardly exercise its ownership right, including verifying the business performance, examining the compensation of management team, and deciding the use of profits and the decisions are made by the management team. And there is no effective incentive and supervision. Since its establishment, the SASAC has made arduous efforts to resolve the "absentee ownership" problem. But there is also an issue of incentive and supervision for the supervisory body. For example, different departments of the State Council may have subsidiaries of their own, in which case, the government institution is both the owner and the supervisory body without proper incentive and supervisory mechanism. To improve state assets management, some issues related to the SASAC needed to be addressed. First of all, the exact nature of the SASAC should be identified. If it is positioned as an institutional investor, the goal will be to facilitate asset building. Second, the scope of supervisory power for the SASAC should be defined. If it is given the full authority as the owner of the state assets, the SASAC should accelerate corporatization of SOEs and, afterward, exercise its right as the shareholder but not the board of directors or management. Third, a mechanism to monitor, to supervise, and to provide incentives to SASAC should be established. MORE CHALLENGES AHEAD LN SOES REFORMS So far, China's economic reform has been remarkably successful. However, reforming China's SOEs has proved to be difficult. Much effort has been labored in recent years to restructure the sector and reformulate institutional environment to build a strong and competitive modern corporations. This is especially important as China is obligated, under its WTO accession, to open its domestic markets to competition from western multinational corporations.

Strengthening Corporate Governance 275

Most of China's SOEs, even the largest CAEs, are yet to climb to the top of world's large corporations. Not only that the ownership restructuring is far from complete, institutional arrangement governing state assets is still in the making. At the same time, there is a new wave of reorganization of big businesses in advanced industrial countries, precisely in the industries where China's CAEs focus. There is a large and growing disparity in the size, research capability, financial resources and business skills between the leading firms in the advanced economies and those in China. There is urgency in developing China's large companies, mostly of which are SOEs. For China's SOEs to grow bigger and stronger, the related issues of ownership and corporate governance need to be addressed. For the state ownership, the question is how is could be effectively represented and protected. The related question is how to establish a mechanism to ensure selection of capable managers and to exercise effective supervision of managers. The establishment of the SASAC is a significant step forward. Much more challenges lie ahead.

Chapter

10 The Effects and Implications of Foreign Direct Investment in China for Other Developing Economies: Hollowing Out or Filling in?* Busakorn Chantasasawat, K.C. Fung, Hitomilizaka and Alan Siu

INTRODUCTION In recent years, there has been a tidal wave of foreign direct investment (FDI) pouring into China. In 2003, China overtook the United States and became the largest recipient of FDI in the world, receiving US$54 billion worth of FDI (UNCTAD 2004).1 The success of China in attracting foreign direct investment is not by chance. One of China's earliest strategic policy reforms was to open up the Southern part of the country to attract foreign * We benefited from very insightful comments from Professor John Wong and Professor Wang Gungwu. June Sieh provided us with very capable research assistance. 1 We exclude Luxembourg from the overall ranking since Luxembourg traditionally has a lot of re-export of capital, making it difficult to measure how much FDI it actually receives.

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investors. China's attempt to introduce markets into its economy goes hand-in-hand with the liberalization of its FDI regime. In some ways, foreign direct investment reforms can be seen as a vanguard of domestic market reforms. While increases in FDI from the outside world are complementary to China's efforts to modernize its economy, many developing countries are worried about the prospects of a rising China that absorbs an increasing amount of investment from the world's major multinationals. Several governments in Asia and Latin America have publicly noted that the emergence of China has diverted direct investment away from their economies. Policymakers and analysts in the developing world are convinced that the rise of China has contributed to the "hollowing out" phenomenon, a situation where investors choose China over other countries as a destination for their investment. This in turn has ostensibly led to a loss of manufacturing industries and jobs, further weakening the vitality of these economies.2 In this chapter, we examine critically the question of whether the successful FDI policy of China has diverted foreign direct investment away from a group of Asian and Latin American economies. Two concepts of diversion need to be clarified. One is absolute diversion, which occurs when an increase of China's FDI is associated with an absolute decline of FDI into other economies. The second concept is relative diversion, which refers to the case where a rise in China's FDI share in FDI going to developing countries is associated with a decline in other developing economies' FDI shares. The first question undertaken in this chapter is whether China contributes to an absolute FDI diversion. Fundamentally, this is an empirical question; thus we survey the most recent and most relevant empirical economic literature, including some of our own work in this area and highlight their results. We look at developing and newly industrialized economies in Asia as well as in Latin America. In Asia, 2

Popular press reported that in 2002, Mexico lost more than 200,000 jobs in the maquiladora assembly industry along the U.S.-Mexico border, as more than 300 companies have moved to China; Miami Hearld, "Fear of 'Made in China' speeds up deal," 21 November 2003.

Effects and Implications ofFDI in China to Developing Economies 279

the economies in focus include Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Indonesia, Philippines and Thailand. The Latin American economies in our study are Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. The second question we ask is whether China has contributed to a relative FDI diversion. Again to provide an answer, we draw on empirical work done by ourselves as well as other empirical economic researchers. Relative diversion is often considered to be a less meaningful indicator of well-being to economists; however, to some policymakers relative diversion seems to constitute a cause for alarm. Lastly, we turn our attention to what these Asian and Latin American economies can do if indeed some form of diversion did take place. Here, we argue that whether one is concerned about absolute or relative diversion, policymakers in Asia and Latin America should focus on improving various domestic elements that are ultimately both under their control and are more important determinants of how much FDI they will obtain. These factors include policies that promote openness and lower corporate tax rates. The organization of this chapter is as follows. In the following section, we provide general background discussions related to FDI in China. Section 3 then surveys relevant policy issues. Section 4 examines current economic literature on determination of FDI. In Section 5, we discuss results from several relevant existing literatures on China's possible absolute diversion of FDI. Section 6 focuses on a discussion of China's possible relative diversion. In Section 7, we discuss some policy instruments that are useful in attracting FDI. Section 8 concludes. SOME GENERAL CHARACTERISTICS OF FOREIGN DIRECT INVESTMENT IN CHINA One of the most important elements of China's economic reform has been the promotion of foreign direct investment inflow. FDI in China has grown dramatically over the past two decades, since China initiated its "open-door" policy in 1978 (Table 10.1). When

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Busakorn Chantasasawat et al. Table 10.1 Contracted and Realized FDI, 1979-2003 (US$ million/%) Contracted

Year

Amount

1979-1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1979-2003

6,010 1,732 2,651 5,932 2,834 3,709 5,297 5,600 6,596 11,977 58,124 111,436 82,680 91,282 73,277 51,004 52,102 41,223 62,380 69,195 82,768 115,070 942,879

Growth Rate

53.1% 123.8% -52.2% 30.9% 42.8% 5.7% 17.8% 81.6% 385.3% 91.7% -25.8% 10.4% -19.7% -30.4% 2.2% -20.9% 51.3% 10.9% 19.6% 39.0%

Realized Amount 1,166 636 1,258 1,661 1,874 2,314 3,194 3,392 3,487 4,366 11,007 27,515 33,767 37,521 41,725 45,257 45,463 40,319 40,715 46,878 52,743 53,505 499,763

Growth Ri

97.8% 32.0% 12.8% 23.5% 38.0% 6.2% 2.8% 25.2% 152.1% 150.0% 22.7% 11.1% 11.2% 8.5% 0.5% -11.3% 1.0% 15.1% 12.5% 1.4%

Source: China Statistical Yearbook

China initiated the "open-door" policy, its FDI inflow was quite limited. It was not until the mid-1980s when FDI in China surged, marking the beginning of China's ride on the wave of globalization. In the early 1990s, China's FDI once again gained momentum as it achieved an unprecedented growth between 1991 and 1993However, both the number of projects and the contracted value began to drop in 1994. This downturn continued until the next big wave of FDI inflow hit China in 2000. In 2002, despite the global decline in FDI in the world, China experienced an increase in FDI

Effects and Implications of FDI in China to Developing Economies 281

inflow and overtook the United States to become the world's largest FDI recipient in 2003. Tables 10.2a and 10.2b present contracted and realized values of FDI, respectively, from 15 leading investing countries.3 An important characteristic of the FDI to China is its large contribution of investment from Hong Kong, Taiwan and Macao, especially during the late 1980s and early 1990s. One of China's reform strategies is to first open up Special Economic Zones (SEZs) in the southeast part of China in order to attract foreign capital from its neighbors. Four SEZs were established in two southeast coastal provinces, Guangdong and Fujian. In Guangdong province, there are three SEZs: in Shenzhen, Zhuhai, and Shantou. Shenzhen was a small town sharing a border with the then British colony, Hong Kong. Zhuhai is located next to Macao. Shantou is another coastal town that lies near the border between Guangdong and Fujian. The fourth SEZ, Xiamen in Fujian province was a relatively industrialized city, located near Taiwan. Hong Kong has by far been the biggest investor in China throughout the years. Investment from Hong Kong to China has increased rapidly since the early 1980s. Between 1983 and 2002, contracted and realized amounts of FDI from Hong Kong account to more than US$375 billion and US$204 billion, respectively. These figures account for 45.4% and 45.8% of the total respective contracted and realized amounts of FDI from the world. However, it has been frequently estimated that a significant portion of investment from Hong Kong to China originates from China itself or from countries outside Hong Kong.4 A large sum of China's capital outflow is channeled to Chinese firms located in Hong Kong and finds its way back to China as FDI. This type of "round tripping" of funds is mostly used 3

Contracted investment refers to investment that is promised. Realized investment refers to investment that is actually used. For details, see Fung, K.C. (1997). Trade and Investment Flows: Mainland China, Hong Kong and Taiwan, Hong Kong, City University of Hong Kong Press and Fung, K.C, Lawrence J. Lau and Joseph Lee, (2004). United States Direct Investment in China, American Enterprise Institute (AEI) Press, Washington, D.C., with Foreword by George P. Shultze, former U.S. Secretary of State. 4 Fung, K.C. (1997). Trade and Investment Flows: Mainland China, Hong Kong and Taiwan, Hong Kong, City University of Hong Kong Press.

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Share in total

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1992

1995

1998

2000

2001

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Total Hong Kong, China United States Taiwan Japan Singapore Virgin Islands Korea United Kingdom Germany France Macau, China Netherland Canada Malaysia Australia Above 15

100.0 66.8 7.1 5.1 5.4 1.8 0.0 0.4 1.0 1.2

100.0

100.0 44.9 8.2 6.4

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100.0 27.2 12.8

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0.5 0.4 0.5 95.2

8.3 9.5 1.4 3.3 3.9 1.8 0.7 1.2 0.7 1.1 1.2 1.4 94.0

31 3.2 4.6 0.9 0.6 1.1 1.8 0.6 1.3 92.1

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Source: China Statistical Yearbook, China Foreign Economic Statistical Yearbook, Alma Trade, various issues. Note: Data for 1983-1992 include data of Foreign Direct Investment and other Foreign

284

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Share in total

1983-1992

1992

1995

1998

2000

2001

20

Total Hong Kong, China United States Taiwan Japan Singapore Virgin Islands Korea United Kingdom Germany France Macau, China Netherland Canada Malaysia Australia Above 15

100.0 61.8 9.0

100.0 68.2 4.6 9.5 6.4 1.1 0.0 1.1

100.0 53.5 8.2 8.4

100.0 40.7 8.6

100.0 35.7 9.5 6.4

100

8.3 4.9 0.8 2.8 2.4 1.0 0.8 1.2

7.5 7.5 8.9 4.0 2.6 1.6 1.6

100.0 38.1 10.8 5.6 7.2

3.1 11.2 1.1 0.0 0.3 1.1 1.4 0.7 0.6 0.3 0.4 0.1 0.7 91.7

0.3 0.8 0.4 1.8 0.3 0.5 0.2 0.3 95.8

0.3 0.7 0.7 0.6 94.6

6.4

0.9 1.6 0.7 0.7 0.6 93.8

5.3 9.4 3.7 2.9 2.6 2.1 0.9 1.9 0.7 0.5 0.8 92.3

9.3 4.6 10.8 4.6 2.2 2.6 1.1 0.7 1.7 0.9 0.6 0.7 91.2

33 10 7 7 4 11 5 1 1 1 0 1 1 0 0 89

Source: China Statistical Yearbook, China Foreign Economic Statistical Yearbook, Alma Trade, various issues. Note: Data for 1983-1986 include data of Foreign Direct Investment and other Foreign

286

Busakorn Chantasasawat et al.

to bypass regulations such as barriers to trade or to gain eligibility to incentives available to only foreign investors (e.g. tax concessions). According to the World Bank,5 round tripping accounts for 20%-30% of FDI in China. Between 1983 and 2002, Singapore and Macao ranked 6th and 12th in total contracted FDI in China, and they ranked 6th and 11th respectively in total realized FDI. The presence of both economies appears to have been stronger in the beginning of the 1990s. While several East and Southeast Asian economies are among the top investors in China, none of the Latin American economies is among the top 15 foreign investors in China. In the last few years, prices of commodities and raw materials such as copper, aluminum, cement, steel, petroleum and soybeans have soared partly due to the breakneck pace of China's industrialization. This seems to have benefited countries such as Brazil, Argentina and Venezuela as China became one of their largest export markets. But overall, the economic relationship between China and Latin America, in contrast to that between China and East and Southeast Asian, is still at an initial stage. Another difference between the Asian and Latin American economies is that there is increasing evidence that a vertical production and business network is thriving among the Asian economies, including China, but not among the Latin American economies. 6 ' 7 ' 8 RECENT POLICY CONCERNS IN ASIA AND LATIN AMERICA Various analysts, commentators and policymakers in Asia and in Latin America have voiced concerns about the economic rise of 5

World Bank. (2002). "Global development finance 2002," p. 41, Washington, D.C. Ando, Mitsuyo and Fukunari Kimura (2003). "The formation of international production and distribution networks in East Asia," mimeo, Keio University, Tokyo, Japan. 7 Fukao K. and Toshihiro Okubo (2003). "Why has the border effect in the Japanese market declined? The role of business networks in East Asia," mimeo, Hitotsubashi University, Tokyo, Japan. 8 There is of course a production network between Mexico and the United States. But in this respect, Mexico is quite different from the rest of Latin America. 6

Effects and Implications ofFDI in China to Developing Economies 287

China and its adverse effect on FDI flows in their economies. In November 2002, Singaporean Deputy Prime Minister Lee Hsien Loong (who has since become the Prime Minister of Singapore) commented that "Southeast Asian countries are under intense competitive pressure, as their former activities, especially labor-intensive manufacturing, migrate to China. One indicator of this massive shift is the fact that Southeast Asia used to attract twice as much FDI as Northeast Asia, but the ratio is reversed."9 According to KOTRA, the state-run trade and investment promotion agency of the Republic of Korea, the rate of FDI in most Asian countries is falling as global investors are being drawn to invest in China.10 World Economic Forum director for Asia, Frank J. Richter, said if the Asian countries do not take prudent and pragmatic steps to be as competitive as China, the FDI flows into these economies would be adversely affected.11 Furthermore, Taiwan's Vice Premier Lin Hsin-I said that facing the rapid rise of the Mainland Chinese economy, Taiwan would have to take effective measures to increase its competitiveness. Taiwan has to implement the "go south" policy to encourage Taiwan to switch their investments from the Mainland to Southeast Asian countries.12 In Latin America, Cesar Gavina, head of the 34-country Organization of American States, was quoted to have said, "The fear of China is floating in the atmosphere here. It has become a challenge to the Americas not only because of cheap labor, but also on the skilled labor, technological and foreign investment front." Panama's Vice Minister of Foreign Affairs, Nivia Rossana Casrellen, said, "The FTAA is moving ahead because of a collective will to speed up development and a collective fear of China".13 According

9

"China's Rise Is the Most Dramatic Change in Asia," ChinaOnline, 14 November 2002. Sung-jin Kim, "Foreign Investment Likely to Fall," The Korea Times, 26 August 2002. 11 "Future Flows of FDI into Asian Economies to Depend on China," New Straits Times-Management Times, 9 March 2002. 12 "Taiwan to Improve Competitiveness," Taiwanese Central News Agency, 21 November 2002. 13 Miami Hearld, "Fear of 'Made in China' speeds up deal," 21 November 2003. 10

288

Busakorn Chantasasawat et al.

to Businessweek's Mexico City Bureau Chief, Geri Smith, "China has siphoned precious investment and jobs from Mexico...".14 RECENT ECONOMIC LITERATURE ON THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT Is China's FDI policy a friend or an enemy to other developing economies in Asia and in Latin America? What determines foreign direct investment flows into the Asian, Latin American and other economies? To gain some insights to these questions, we now look at selectively some recent relevant economics literature.15 Brainard16 empirically examines the determinants of the ratio of U.S. export sales to total foreign sales (the sum of export sales by sales by foreign affiliates) by industry. She uses a framework to focus on factors that favor concentration of production (i.e. favoring exports) vs. proximity to overseas customers (i.e. factors that favor sales by foreign affiliates). The explanatory variables include freight costs to the export market, tariffs of the host country, per capita gross domestic product, corporate tax rates, measures of trade and FDI openness, measures of plant scale economies and corporate scale economies. She also adds a dummy representing whether a country has a political coup in the last decade. In her random effects estimation, almost all the variables have the right signs and are significant. The major exception is the corporate tax rates, which has the opposite sign as predicted. Gastanaga, Nugent and Pashamova17 focus on policy reforms in developing countries as determinants of FDI inflows. They employ both ordinary least squares as well as panel estimations. Expected rates of growth, corporate tax rates, degree of corruption and degree of openness to FDI are all important determinants of FDI 14

Businessweek, "How China opened my eyes," 8 November 2004, p. 66. This review is not meant to be exhaustive. 16 Brainard, Lael S. (1997). "An empirical assessment of the proximity-concentration trade-off between multinational sales and trade." The American Economic Review, 87, 4, pp. 520-544. 17 Gastanaga, V. M., J. B. Nugent and B. Pashamova (1998). "Host country reforms and FDI inflows: How much difference do they make?" World Development, 26, 7, pp. 1299-1314. 15

Effects and Implications of FDI in China to Developing Economies 289

flows into these economies. Hines 18 and Wei19 both examine impact of institutional factors on FDI. By employing a corruption index, Hines shows that after 1977, United States FDI grew faster in less corrupted countries. Wei (see Footnote 19) uses OECD FDI data and shows that both corruption and tax rates have negative effects on FDI flows. Wei's estimations are cross-sectional.20 Fung, Iizaka and Parker,21 Fung Iizaka and Siu22 Fung, Garcia-Herrero, Iizaka and Siu23 show with panel regressions that market sizes, labor costs, tax rates and institutional reforms are important for determining various sources of FDI into different provinces of China. Weiss24 provides an up-to-date review of the literature related to the investment and trade opportunities and threats of a rising China. However, for our purpose, the most useful set of papers include the following: Chantasasawat, Fung, Iizaka and Siu,25,26,27 Zhou and Lall (2005) and Eichengreen and Tong (2005). All of these papers 18

Hines, James R. Jr. (1995). "Forbidden payment: Foreign bribery and American business after 1977." NBER Working Paper, No. 5266. 19 Wei, Shang-Jin. (1997). "Why is corruption so much more taxing than tax? Arbitrariness kills," NBER Working Paper, No. 6255. 20 Other related literature includes Bao, Shuming, Gene Hsing Chang, Jeffrey D. Sachs and Wing Thye Woo (2002). "Geographic factors and China's regional development under market reforms, 1978-1998," China Economic Review, 13, 1, pp. 89-111, Fung, K.C., H. Iizaka and A. Siu (2003). "Japanese direct investment in China," China Economic Review, 14, 304-315, Zhang, Kevin Ffonglin and Shunfeng Song (2001), "Promoting exports: The role of inward FDI in China," China Economic Review, 12, 1, pp. 385-396., etc. 21

Fung, K.C., H. Iizaka and S. Parker (2002). "Determinants of U.S. and Japanese direct investment in China," Journal of Comparative Economics, 30, pp. 567-578. 22 Fung, K.C., H. Iizaka and A. Siu (2003). "Japanese direct investment in China," China Economic Review, 14, 304—315. 23 Fung, K.C., A. Garcia-Herrero, H. Iizaka and A. Siu (2005). "Hard or soft? Institutional reforms and infrastructure spending as determinants of foreign direct investment in China," Japanese Economic Review, forthcoming. 24 Weiss, John (2004), "People's Republic of China and its neighbors: Partners or competitors for trade and investment?" ADB Institute Discussion Paper, No. 13, Tokyo: Japan. 25 Chantasasawat, B., K.C. Fung, Hitomi Iizaka and Alan Siu (2003a). "The giant sucking sound: Is China diverting foreign direct investment from other Asian economies?" Asian Economic Papers, forthcoming.

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focus directly on the empirical issue of whether China did divert FDI away from other countries. We will turn to the results of these papers in the next section. FDI IN CHINA: IS THERE AN ABSOLUTE DIVERSION? Does the rise of China lead inevitably to an absolute FDI diversion? There are two sets of arguments that we should consider here. First, in examining which low-cost export platform to locate, multinationals may choose between investing in China versus another country, say Thailand or Mexico. In this case, the multinationals consider a set of factors, including wage rates, political risks, infrastructure, etc., that make a country desirable as a production site. Such decision then diverts FDI from an Asian or a Latin American economy to China. We call this the "investment-diversion effect". The second argument is the production and resource linkages among the rising China, the rest of Asia, and parts of Latin America. In manufacturing, this takes the form of further specialization and growing fragmentation of the production processes, i.e., a firm setting up factories in China, Thailand and Mexico to take advantage of their respective competitiveness in distinct stages of productions. Components and parts are then traded among China and other economies. An increase in China's FDI is then positively related to an increase in Thailand's or Mexican FDI. Lall and Weiss28 document some early signs of an electronics production network between China and Mexico. 26

Chantasasawat, B., K.C. Fung, Hitomi Iizaka and Alan Siu (2003b). "International competition for foreign direct investment: The case of China," paper presented at the ADB institute, May 2004, mimeo, university of California, Santa Cruz and COE-RES Discussion Paper No. 22, Center for Excellence Project, Hitotsubashi University, Tokyo: Japan. 27 Chantasasawat, Busakorn, K.C. Fung, Hitomi Iizaka and Alan Siu (2004). "Foreign direct investment in East Asia and Latin America: Is there a PRC effect?' Asian Development Bank Institute Discussion Paper #17, Tokyo: Japan, November. 28 Lall, Sanjaya and John Weiss, (2004). "People's Republic of China's competitive threat to Latin America: An analysis for 1990-2002," ADB Institute Discussion Paper No. 14.

Effects and Implications of FDI in China to Developing Economies 291

A different but complementary argument is that as China grows, its market size increases and its appetite for minerals and resources also rises. This, subsequently, bring market-seeking foreign investors, who are eager to capture market, into the country. Meanwhile, other multinationals also invest in other parts of Asia and Latin America to extract minerals and resources to supply the fast-growing China in need of a whole spectrum of raw materials. Some of these commodities are copper, steel, aluminum, petroleum, coal and soybeans. We call this effect the "investment-creation effect". Theoretically we cannot determine a prior the net effect of investment-creation and investment-diversion for China. It is thus important to examine empirical studies that can provide us with some answers. Empirically, Chantasasawat, Fung, Iizaka and Siu, (see Footnotes 25-27) Eichengreen and Tong (2005) as well as Zhou and Lall (2005) provided answers to the question of whether China contributed an absolute FDI diversion from the East and Southeast Asian economies. In addition, Chantasasawat, Fung, Iizaka and Siu (see Footnote 27) and Eichengreen and Tong (2005) also examined the issue of absolute diversion for Latin American economies. In this section, we highlight their results in Table 10.3As demonstrated by these previous independent studies, there is now a growing consensus that the emergence of China hitherto has not led to an absolute FDI diversion from other Asian economies in the region. In fact, just the opposite is taking place; an increase in FDI in China is associated with increases of FDI in its neighbors. This is still true after controlling for total global outflows of FDI. In other words, the positive association of FDI to China and FDI to other Asian economies is not simply because of a larger supply of FDI in the world. What can explain this positive association? The empirical results found by various independent studies may, to some extent, be due to production-networking activities among Asian economies as well as increasing resource demand. The evidence of production network among China and other Asian economies can be seen in the substantial two-way trade of intermediate and final goods in the same industries among those countries (Tables 10.4a and 10.4b).

Table 10.3 Empirical Results on China's FDI: Absolute Div

Study Chantasasawat, Fung, Iizaka and Siu (see Footnote 25)

Time Period 1985-2001

Asian Economies

Singapore, Taiwan, Korea, Hong Kong,* Thailand, Philippines, Malaysia and Indonesia Chantasasawat, Fung, Iizaka 1985-2001 Singapore, Taiwan, Republic and Siu (see Footnote 26) of Korea, Hong Kong, Thailand, Philippines, Malaysia and Indonesia Chantasasawat, Fung, Iizaka 1985-2002 Singapore, Taiwan, Korea, and Siu (see Footnote 27) Hong Kong, Thailand, Philippines, Malaysia and Indonesia Eichengreen and Tong (2005) 1988-2002 Japan, Bangladesh, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Thailand and Vietnam Zhou and Lall (2005) 1992-2001* Indonesia, Malaysia, Philippines, Korea, Singapore, Taiwan and Thailand

An increas China is an incre Asian ec An increas China is an incre Asian ec An increas China is an incre Asian ec An increas China is an incre Asian ec An increas is associ of FDI t

*The results remain the same even when Hong Kong is excluded. **The authors also examine the periods 1986-2001 and 1986-1991. For these periods,

Effects and Implications ofFDI in China to Developing Economies 293 Table 10.4a China's Two-Way Trade of Electric Equipment with its Neighbors, 2003

Taiwan Republic of Korea Singapore Thailand Malaysia Philippines Indonesia

Exports of Electrical Equipment to China (US$1000) 17,075,435 13,224,831 3,432,677 1,984,551 7,179,539 4,251,766 346,577

Rank in Exports to China

Imports of Electrical Equipment from China (US$1000)

Rank in Imports from China

1 1 1 2 1 1 7

2,470,679 4,122,382 2,869,225 888,914 1,587,136 890,895 632,660

1 1 1 2 2 1 3

Source: Fung, K.C. (2004), "Trade and investment: China, the United States, and the Asia-Pacific economies." In: China As An Emerging Regional and Technology Power- Implications for U.S. Economic and Security Interests, Hearing before the U.S.-China Economic and Security Review Commission, U.S. Government Printing Office: Washington, D.C., China's Custom Statistics Monthly, December 2003.

Table 10.4b China's Two-Way Trade of Electric Equipment with its Neighbors, 2004

Taiwan Republic of Korea Singapore Thailand Malaysia Philippines Indonesia

Exports of Electrical Equipment to China (US$1000) 23,851,636 18,571,820 4,992,460 2,917,693 9,987,515 6,314,601 602,847

Rank in Exports to China

Imports of Electrical Equipment from China (US$1000)

Rank in Imports from China

1 1 1 1 1 1 5

3,513,061 6,638,518 5,275,117 1,258,441 2,175,148 1,479,093 948,541

1 1 1 2 2 1 1

Source: China's Custom Statistics Monthly, December 2004.

294

Busakorn Chantasasawat et al.

Next, we would like to ask the same question with respect to China's other potential competitors, viz., developing economies in Latin America. Does the emergence of China lead to an absolute decline of FDI going to the Latin American economies? There have been many press reports of such occurrences, particularly in Mexico. However, one also hears how a mixture of countries, such as Venezuela, Chile and Brazil profit from an expansion in their resource and mineral extracting industries, which supply commodities and fuels that feed into China's rapid industrialization. Empirically, which vision is the real one? We turn next to Table 10.5. There are various arguments that may lead one to believe that FDI going to China is associated with an absolute decline of FDI going to developing countries in East and Southeast Asia and in Latin America. However, there is a growing consensus among independently conducted research that led to the following: thus far, there is no absolute diversion of FDI by China in East and Southeast Asia as well Table 10.5 Empirical Results on China's Absolute FDI Diversion in Latin America

Studies

Time Period

Latin American Economies

Empirical Results

Chantasasawat, Fung, Iizaka and Siu (see Footnote 27)

1985-2002

Argentina, Bolivia, An increase in FDI Brazil, Chile, to China is not significantly Columbia, Costa Rica, Ecuador, El Salvador, associated with an Guatemala, Mexico, increase or Nicaragua, Panama, decrease in FDI Paraguay, Peru, to the Latin Uruguay and American Venezuela. economies

Eichengreen and Tong (2005)

1988-2002

N/A

An Increase in FDI to China is not significantly associated with an increase or decrease in FDI to the Latin American economies

Any Absolute FDI Diversion by China? No

No

Effects and Implications of FDI in China to Developing Economies 295

as in Latin America. For the case of East and Southeast Asia, FDI in China is in fact complementary to FDI going to China's neighbors. FDI IN CHINA: IS THERE A RELATIVE DIVERSION? In this section, we examine the issue of whether FDI in China has led to a reduction in shares of FDI in other East and Southeast Asian economies as well as in Latin American economies. Successful economic reforms have propelled China into 25 years of high growth. With such success, many analysts are beginning to predict that China may one day return to its historical position as a dominant economic power. According to Angus Maddison,29 China's share of the world's income was 32.4% in 1820, a share that is even larger than that of the United States in 1995 (see Table 10.6). To some policymakers in Asia and Latin America, the higher growth rates of China relative to other countries can mean eventually a return to China's historical role as a dominant power in the region and even in the world. Dominance, to some, is not simply measured in absolute terms, but also in relative terms. This can be disturbing since the emergence — or re-emergence of a major power can bring substantial strains to global relationships. Because of this and other reasons, some may be concerned that even if China is not Table 10.6 Distribution of World Income over the Long Run

China India Europe United States

Japan Russia

1700

1820

1890

1952

1978

1995

23.1 22.6 23.3 N/A 4.5 3.2

32.4 15.7 26.6 1.8 3.0 4.8

13.2 11.0 40.3 13.8 2.5 6.3

5.2 3.8 29.7 21.8 3.4 9.3

5.0 3.4 27.9 21.8 7.7 9.2

10.9 4.6 23.8 20.9 8.4 2.2

Source: Angus Maddison (1998), "Chinese Economic Performance in the Long Run" OECD, Paris. Note: The above are shares of world income based on purchasing power parity. Maddison, A. (1998). "Chinese economic performance in the long run," OECD, Paris.

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associated with any absolute FDI diversion, it may still have diverted FDI relatively. By gaining more FDI relative to other economies, China's growth will continue to surpass its neighbors, bringing China ever closer to its past dominant role. Economists in general, however, are not as interested in relative positions. As long as a nation can gain from trade, the size of gain relative to its trade partner is irrelevant. While this economists' viewpoint is sensible, some policymakers may still want to know if there has been a relative diversion. To investigate this issue, we turn to existing studies. There has only been one set of research that highlights this problem. Chantasasawat, Fung, Iizaka and Siu (see Footnotes 25,27) studied the issue of relative diversions for both East and Southeast Asian economies as well as for Latin American countries. Their results are summarized in Table 10.7a and Table 10.7b. Existing work indicates that, indeed, there is a relative FDI diversion as a result of the emergence of China for both Asian and Latin American economies. These results along with those from the earlier sections give us a picture that for the Asian region, FDI has been going to China as well as to the other East and Southeast Asian economies. Nonetheless, China receives a larger proportion of the total FDI that goes to the developing countries, and the other Asian economies receive less. Consequently, the Asian economies' shares decline.

Table 1 0 . 7 a Empirical Result o n China's FDI Relative Diversion in Asia

Study Chantasasawat, Fung, Iizaka and Siu (see Footnote 25)

Time Period 1985-2001

Asian Economies Singapore, Taiwan, Korea, Hong Kong, Thailand, Philippines, Malaysia and Indonesia

Empirical Result An increase in China's FDI is associated with a smaller Asian economy' share of total FDI going to all developing countries

Any Relative FDI Diversion by China? Yes

Effects and Implications of FDI in China to Developing Economies

297

Table 10.7b Empirical Result on China's FDI Relative Diversion in Latin America

Study Chantasasawat, Fung, Iizaka and Siu (see Footnote 27)

Time Period 1985-2002

Asian Economies

Empirical Result

Any Relative FDI Diversion by China?

An increase in Argentina, Bolivia, Brazil, Chile, Columbia, China's FDI is associated with Costa Rica, Ecuador, a smaller Latin El Salvador, Guatemala, American Mexico, Nicaragua, economy' share Panama, Paraguay, of total FDI going Peru, Uruguay and to all developing Venezuela countries

Yes

Furthermore, this may explain why while many nations are aware that they are gaining with the emergence of China, there is also an underlying sense of anxiety among many in the region. This ambivalence may stem partly from the results of various studies— complementarity among the levels of FDI, but diversion among the shares of FDI. USEFUL MEASURES THAT OTHER ASIAN AND LATIN AMERICAN ECONOMIES CAN IMPLEMENT The rise of China can have an uneven impact on different economies. Regardless of whether one is concerned about absolute or relative FDI diversions, our studies (see Footnotes 25-27) show that typically the effect of a rising China is dwarfed by other more traditional and more mundane factors. These factors which have larger impact on attracting FDI than the emergence of China are precisely the type of measures that economies in Asia and Latin America should pursue in the first place. What are some of these measures? First, FDI responds to lower corporate tax rates. Low and stable tax rates have been an instrument used effectively by some European economies such as Ireland to attract multinationals. Our studies confirm the potency of lower corporate tax rates in attracting more FDI.

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Openness to trade is also a winning strategy in attracting foreign firms. East and Southeast Asian economies have a long tradition of embracing open trade and this is good news because it is a more important determinant of FDI than the rise of China. In some sense, embracing globalization, rather than retreating from globalization is still a good economic strategy. Some Latin American economies that seem to be retreating from globalization will likely face more disappointment, as less FDI will follow. Improving the quality of institutions, such as combating corruption and having a sound legal system are also good measures to pursue. Lastly, having a thriving domestic market is often useful in attracting FDI. All these measures follow from standard economic reasoning and our studies confirm empirically that they are more important determinants of FDI inflows than the emergence of China. Thus the same old set of sound economic measures is also applicable in dealing with new challenges such as FDI diversion by a re-emerging China. CONCLUSION China's development strategy to attract foreign firms has been a huge success. Its external "open-door" reforms are complementary to its internal policies to privatize its economy. Nevertheless, is China's FDI policy detrimental or complementary to attempts by other economies in Asia and Latin America to attract more FDI? In other words, is China diverting FDI away from other Asian and Latin American economies? This is the paramount question on the minds of many academic researchers as well as policymakers in Asia and Latin America. In this chapter, we further differentiate between diversion based on an absolute sense and diversion based on a relative sense. Theoretically, the emergence of China can have both investment-creating effects as well as investment-diverting effects. In this chapter, we examine this issue critically, drawing from recent empirical work done on these questions.

Effects and Implications of FDI in China to Developing Economies 299

Several insights and conclusions can be drawn. There is a growing consensus among independently conducted research which shows the following: thus far, there is no absolute diversion of FDI by China in East and Southeast Asia well as in Latin America. For the case of East and Southeast Asia, FDI in China is in fact complementary to FDI going to China's neighbors. In other words, in terms of FDI inflows, the emergence of China has been a win-win situation for China and for other Asian economies. These conclusions are consistent with the view that there is a thick and growing production network within these Asian economies and China, but except for Mexico, there is relatively little vertical production-sharing among the Latin American countries. Thus multinationals may want to set up factories and distribution network in both China and other parts of Asia to accommodate their increasingly sophisticated global supply chains, but they do not seem to view China and Latin America systematically as rival, alternative sites of business networks. There have, however, been relative FDI diversions, with the shares of FDI going to Asian and Latin American economies declining as more FDI flows to China. In other words, an increase in China's investment is associated with a decline in the Asian and Latin American shares of foreign direct investment going to all the developing economies. This in general should not be a cause for alarm, but in some quarters it somehow is. This may actually help explain why there is an underlying anxiety about the rise of China even when its neighbors are reaping benefits from its emergence. Some government officials, rightly or wrongly, are concerned about the pecking order among different nations in the region. Lastly, the emergence of China is in general not the most important factor determining the inflows of foreign direct investments into these economies. In fact, some of the old standard economic prescriptions such as low corporate tax rates, a high degree of openness, measures to combat corruption and policies that create a larger domestic market are generally more important factors. Thus, in counteracting whatever FDI diversion that may occur, these

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standard economic measures, while mundane, will still be valuable in the new world order, with China growing at a breakneck pace and absorbing an increasingly large share of foreign capital. ACKNOWLEDGMENT This research project is supported by a grant from the University Grants Committee of the Hong Kong Special Administrative Region, China (Project No. AoE/H-05/99).

Chapter

11 Changing Land Policies: Ideology and Realities John Wong and Liang Ruobing

THE "LAND PROBLEM" In recent years, when the Chinese economy is experiencing overheating, land use and land acquisition policies are very much in the public limelight. To begin with, the lack of clear-cut property rights provisions and effective land use regulations and controls together with ineffectual policy implementation, particularly at local levels, have contributed to a lot of "mis-use of land", which in turn led to the over-development of some infrastructure and capital construction projects as well as the over-heating of the real estate sector in many urban centers. This has been one of the root causes of China's recent economic over-heating. Suddenly, the authorities were faced with a "land problem" or tudi wenti, and a number of new regulations and directives were issued to cope with the "land problem". The government recognized that far too many large capital projects and new housing estates had been put up "illegally" without due regard to proper procedures or proper land-use regulations, and those "illegal constructions" had 301

302 John Wong and Liang Ruobing

much contributed to over-investment and over-production in certain economic sectors, and hence the overall economic over-heating. The government therefore took measures to tackle such widespread "land mis-use" and in so doing the land policy was practically employed as an instrument of macroeconomic control and as a means of putting on halt or cutting back the so-called unauthorized investment projects. This was the case of the much-publicized billion dollar "Tieben Steel" in Jiangsu in the spring of 2004. Since the Chinese economy is still under reform, and the government still relies heavily on direct administrative means to cool down the economy, the selective use of land policy has proved to be quite effective in scaling back certain large investment projects. The land problem has also created serious social impact. Housing development and infrastructure projects often involve the eviction of existing land users or occupiers. This often results in the forced resettlement or the eviction without adequate compensation of the original land users, giving rise to many cases of disputes. The recent years have witnessed an increasing number of social protests and local riots connected with land eviction and resettlement, mainly in the urban areas. Chinese commentators refer to this kind of cases as "land abuses". It is well known that China's economic development over the past two decades has been blatantly urban-biased, with economic growth being accompanied by widening rural-urban income disparity. In the rural areas, the land question is very much part of the rural poverty problem as well as its potential solution. On the one hand, the existing land-use rights in the rural areas still do not provide sufficient land tenure security to the cultivators. On the other hand, peasants also fall victim to eviction without adequate compensation as more and more agricultural land in the coastal region has been converted to non-farm uses. Over the longer run, the Chinese government needs to reconsider its land-use rights in the rural areas by privatizing the land or transferring the ownership rights to the peasants. This will enable a large number of low-income and poverty-stricken peasants to have a stake in China's growing economy.

Changing Land Policies: Ideology and Realities 303

The "land problem" in China is, in a sense, a manifestation of the government's failure to effectively address the needed institutional precondition of China's economic growth. China's economy has experienced spectacular growth under the impact of market reform. But China's drive to build a functioning institutional base for the market system has not been accomplished. Specifically for the effective functioning of the land market, China has yet to introduce a transparent and clear-cut property rights system along with the necessary supporting legal and administrative framework. Furthermore, the land issue in China is also complicated by the changing ideological stand of the Chinese Communist Party (CCP) towards its land policy over the decades. China's changing land policies are, in a nutshell, a mirror image of the changing ideological orientation of the CCP itself. CHANGING IDEOLOGICAL FOUNDATION OF THE LAND POLICY Before the Industrial Revolution, "land" was a key factor of production, and the Physiocrats of the 18th century even asserted that all wealth comes from the land, with agriculture being the only productive economic sector capable of contributing a "produit net". With the beginning of the Classical economics from Adam Smith to Ricardo and Marx, land, labor and capital and technological progress constitutes the main components of the Classical production function: O = f(L, K, D, T~) — or output is a function of labor (Z), capital (iO, land (£>), and technological progress (70. According to Adam Smith, the father of modern economics, all four factors contribute to economic growth. Ricardo, however, stressed more on labor and land as crucial factors of production. Land — not just agricultural land but also a proxy for the supply of natural resources — in the Ricardian system is a scarce commodity with limited supply. Rents are the prices paid for the use of land, which has no alternative use — not much opportunity in those days for land to be used by industry. Ricardo went on to develop the Classical theory of rents (e.g. the concept of differential rents),

304 John Wong and Liang Ruobing

which, together with his "labor theory of value", formed the central part of Ricardo's analytical framework and had greatly influenced Marx.1 The cornerstone of the Marxian economic theory is the labor theory of value, and he had gone much further than Ricardo in defining value. In modern terms, Marx's GDP will be the total of "c + v + s", where c is "constant capital" or charges on fixed capital, v is "variable capital" or total wages paid to workers, and 5 is "surplus value" or contributions of workers for which they are not paid and hence denotes the portion of "exploitation". Accordingly, the Marxist production system has no place for interest as return on capital and rent as return on land. Capital and land do not create value, only labor does. Land is therefore not regarded as a productive asset.2 It is not known how far early Chinese Communist leaders like Mao Zedong had actually grasped the basic theoretical essentials of Marxism. What is certain is that Mao as a revolutionary leader did make his contribution on the tactical aspects of the Communist revolution. After the failure of the Hunan uprising, Mao soon came to realize that China as a pre-industrial society simply did not have a large industrial proletariat class to serve as the back-bone of the communist revolution, which had to depend critically on the support of the peasant masses for success. To the extent that China's traditional agrarian system in the first part of the 20th century was fast breaking down, Mao and most of the Communist leaders (who were of peasant stock) could not fail to see mounting rural unrest as the potential vehicle for the Communist revolution. Hence Mao promised land to the poor peasants. Wherever the Red Army went, land reform was carried out. It is therefore quite true to say that the CCP had come to power on the back of peasant discontent.

1

See J.A. Schumpeter, A History of Economic Analysis New York, Oxford University Press, 1954; and Robert B. Elelund, Jr and Robert F. Hebert, A History of Economic Theory and Method, New York, McGraw-Hill Publishing, 1990. 2 See Earnest Mandel, An Introduction to Marxist Economic Theory, New York, Pathfinder Press, 1970.

Changing Land Policies: Ideology and Realities 305

In 1949, the CCP came to power and inherited a depressed and underdeveloped agrarian-based economy. In a broader sense, agricultural backwardness in China was mainly a consequence of technological stagnation aggravated by the worsening man-land ratio. To the CCP, however, Chinese agriculture was underdeveloped primarily because its institutional framework was highly "feudalistic", whereby, in Marxian terms, the "production relations" had impeded the development of the "production forces". Such a contradiction would have to be resolved before agricultural development could take place, and this would entail the substitution of new production relations based on socialistic organization, for the old production relations were embedded in the feudal or semi-feudal agrarian framework. Hence the ideological basis for the institutional reorganization (or socialization) of the Chinese agriculture was set up under Mao. The first step in the institutional reorganization was land reform, which was completed by 1952. In terms of economic revolution, the Chinese land reform was actually quite moderate. It only sought to expropriate the landlords as a class; but less than 50% of the land had actually been redistributed. In any case, the land reform offered limited economic leeway for the many newly-created small owners. 3 The CCP had to encourage peasants to organize themselves into many mutual aid teams (MATs) by pooling their labor and other productive resources. Soon the CCP was making separate efforts to encourage the peasants to form the agricultural producers' co-operatives (APCs) by merging a few MATs. Bigger and more elaborately organized, the APCs, based on the keynote of "central management but private ownership" were regarded as semi-socialist in nature. The APCs, in alleviating the structural shortcomings of small scale peasant farming but still retaining certain peasant incentives connected with private ownership of resources, could well be an optimal organization structure for efficient farming. However, Mao wanted a complete 3

See John Wong, Land Reform in the People's Republic of China: Transformation in Agriculture, New York, Preager Publishers, 1973.

Institutional

306 John Wong and Liang Ruobing

socialization of agriculture and strongly advocated for the conversion of lower APCs into the much larger collectives called "advanced APCs". In 1957, 120 million peasant households were organized into collectives under Mao's campaign of "rural upsurge". 4 Two years thereafter, China witnessed the Great Leap Forward movement (1959-1962) in which the 750,000 collectives were merged or reorganized into 26,000 people's communes, a still higher form of socialistic organization. The original model of the commune was a huge organization which took over functions of the local government and claimed to have achieved elements of communism. Under the communes, land and other productive assets were collectivized, and there was only return on labor in terms of work points. But as the Great Leap Forward collapsed and the agricultural sector plunged into a three-year crisis, the communes were decentralized and streamlined, resulting in a three-level organization: the commune, the production brigades and the production teams. The post1962 commune structure continued to exist until the commune system was scrapped by Deng Xiaoping in the early 1980s. With the formation of the communes, the momentum of institutional transformation sparked off by the land reform had spent itself. Except for Mao, some top CCP leaders like Liu Shaoqi and Peng Dehuai had started to realize the futility of relying on mere institutional changes as a source of agricultural growth, i.e. mere changes in "production relations" would not further develop the "production forces". To boost agricultural production, attention must be paid to technological transformation in terms of supplying more modern inputs like chemical fertilizers.5 Furthermore, the more liberal Communist leaders had increasingly become aware that excessive institutional changes like the formation of the communes were achieved at the cost of hurting peasant incentives and lowering individual initiative in production. 4

Tong Dalin, Socialist Upsurge in Chinese Countryside, Beijing, Foreign Languages Press, 1958. 5 For a further discussion of this subject, see John Wong, "Agricultural Production and Socialist Transformation in China: Two Decades After", The Malayan Economic Review Vol. XVIII, No. 2, October 1973-

Changing Land Policies: Ideology and Realities 307

In the aftermath of the Great Leap Forward, Liu Shaoqi, therefore, put forward a kind of "household responsibility system" called the san-zi yi-bao as a means of addressing the peasant incentive problem to speed up agricultural recovery. This was done by decentralizing production decision making down to the production team level and relaxing government measures towards private plots and rural free markets. However, Mao, un-moved and un-repented, continued to put his faith on the socialization of agriculture as the main source of increasing agricultural productivity. In 1966, Mao launched another upheaval called the Cultural Revolution, which attacked all forms of material incentives as unwarranted revisionist "economism". And Liu Shaoqi was toppled in the process. LAND POLICIES IN THE ERA OF REFORM The Cultural Revolution left behind at least one positive legacy. Many old guards like Deng Xiaoping emerged from the Cultural Revolution nightmare to finally realize that the obsession with ideological purity and political mass movements was not conducive to economic development, and that the socialization of the means of production would not lead to increases in productivity. Many things had seriously gone wrong in Mao's approach to economic development. When Deng finally regained power in the late 1970s, he was determined to open a new chapter in China's modern economic history by launching economic reform and the Open Policy. It is not often realized that land had actually constituted a critical link in Deng's economic reform process, which started with agriculture. As discussed earlier, the commune system still existed in 1979 when Deng started economic reform. Under the communes, production was organized at the team level but the decision of what to produce came directly from the production brigade above. All the productive assets in the communes were collectively owned. Peasants were also organized to build roads and irrigation works, not just agricultural production. They were paid work points but their final income did not reflect their personal initiative or productivity.

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Thus the first shot of Deng's rural reform was the revival of the "household responsibility system" called baochan daohu. Under the system, land, draught animals and farm implements in the production teams were divided up and contracted to individual peasant households in return for a fixed share of the output. This gave individual cultivators not just autonomy in the production decision-making but also incentives to increase productivity. Essentially, land regained its economic role as a key factor of production in agriculture. With the peasants given the land-use right for long-term uses (initially for 15 years, but subsequently extended to a longer period), the peasants had the security of tenure so that they could improve on the land under their cultivation. By 1982, Deng took measures to scrap the commune system altogether. In short, while Mao abolished peasant farming, Deng restored it. The impact of the various rural reform measures on agricultural production was almost immediate: a rapid growth in agricultural production and a sharp rise in rural income for peasants. The general rise in rural income was caused partly by increases in agricultural productivity and partly by greater diversification of agricultural activities, which were stimulated by the re-opening of the rural markets for non-grain cash crops. As agricultural productivity increased, more surplus labor was released for non-farm activities. This in turn led to the mushrooming of the township and village enterprises (TVEs). It has now been widely acknowledged that China's economic reform has been eminently successful in comparison with similar efforts in the former Soviet Union and Eastern Europe mainly because it started with a successful rural reform. Less well known is the role that was played by land in China's Open Policy, Deng's second pillar in his overall economic reform. Essentially, the idea of the Open Policy was to provide China with the opportunity to capture the mechanism of international capitalism for its economic growth by utilizing foreign trade and foreign investment. Initially, the Open Policy was associated with the establishment of four Special Economic Zones (SEZs) such as Shenzhen, Zhuhai, Shantou and Xiamen. Foreign investors (mainly Hong Kong industrialists) were

Changing Land Policies: Ideology and Realities 309

invited to set up factories in the SEZs under different arrangements such as completely foreign owned or joint ventures. The influx of foreign enterprises to China's urban centers in the coastal region presented a new challenge to the government's land policy. Since all land was state-owned or collectively-owned, it had no commercial value without a secondary land market. Many local governments had been very innovative in "turning land into capital" by going into joint ventures with foreigner partners, with the Chinese side providing land (at only small cost, i.e. only the cost of developing the site or resettling its original occupiers) and the foreigner providing machine and equipment. That was a very clever way of capitalizing on land when China was short of financial capital. Subsequently, as China's market system developed further, the government had to open up the urban land market, treating land as a commodity. The commercialization of land had proceeded very rapidly in recent years, leading to the overheating of the property market in many urban centers as well mounting incidents of "land mis-use" or "land abuse". LAND MARKET IMPERFECTION, PROFITEERING AND ABUSES In recent years, China's economy after several years of high growth was at risk of over-heating. Over-investment particularly in the real estate sector of coastal cities and over-expansion of capital projects in development zones and industrial parks were singled out as one of the major contributing factors to economic over-heating. At the same time, the "rural problem" (san-nong wenti) has also become serious as more and more cultivated lands were converted to non-farm uses (Figure 11.1) without due regard to the land law and without adequate compensation for the original cultivators. From late 2003, a series of new land-use regulations were issued. The main measures include streamlining and merging the development zones and cutting back the power of local governments for approving land appropriation. On 30 December 2003, illegal development zones were either redrawn or merged after a regulation was

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|

y-

•

87 £

EE3 Cultivable land - * - Farmland as % of cultivable land

87.6 129^2\ 4

L~~l •

•

1\

127.6

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1

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"

125.9

.

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1214

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— i — 1999

— i — 2000

2001

2002

1 2003

Figure 11.1 Decline of China's Cultivable Land and Farmland, 1998-2003. Source: China Land and Resources Almanac, various issues, Ministry of Land and Resources.

passed by the National Development and Reform Commission (NDRC), Ministry of Land and Resources (MLR) and Ministry of Commerce (MOC). On 29 April 2004, the State Council suspended farmland appropriation for non-agricultural uses for at least half a year. The power to requisite land by local governments was also withdrawn. The central government also acted to reduce real estate projects and construction of industrial parks. On 21 October 2004, the State Council publicized a document on strict management of land, which recapitulated the forenamed two documents. In 1986, for the first time, land in China was allowed to be transferred on the market. Since then, it has become an important source of revenue for many local governments. Land developers stood to profit even more. As local governments hold the monopoly in both the buyer's and seller's markets, it is pretty easy for them to reap supernormal profits from land transactions — a clear case of rent seeking. Local governments are able to acquire farmlands from peasants at low prices and then sell them at high prices by manipulating land supply. The buying and selling of land has thus become a viable source of revenue for many local governments, which have to promote local economic development and to provide employment. Since the central government or even the provincial government has

Changing Land Policies: Ideology and Realities 311

rarely provided financial assistance to local governments for economic development, local governments have used such land appropriation as a means of "turning land into capital", a highly innovative way of meeting capital shortages. At the same time, the process has also enriched many corrupt local officials. As a buyer in the land market, a real estate developer or an investor (both domestic and foreign) can also benefit from the wide profit margin between the price of acquiring the land from the local government and its selling price in the secondary market. This has been the main source of land speculation in many cities. For a real estate developer, land price is often determined by location rather than by use. In developed countries, compensation of land appropriation is usually based on the market rate, which includes the potential price of the land for alternative uses. In China, the 1986 Land Management Law stipulates that total compensation of land appropriation, including resettlement allowances and compensation for existing building and structure, and crops, should be determined by the local government on the basis of existing costs of current land uses. Most land appropriations involve the acquisition of farm land for conversion into non-farm uses, i.e. industrial land or building houses, which command a higher price premium for the land. Since peasants or the original cultivators are paid basically only the price of their original use (i.e. agricultural land use), 6 they 6

In principle, land compensation is between six- and ten-fold of average output of previous three years; settlement allowance is based on population and per capita allowance is between four- and six-fold of average output of previous three years; other compensation is fixed by the provincial government. At the same time, maximum compensation is based on per hectare settlement compensation and not more than 15-fold of average output of previous three years as well as total sum of land compensation; settlement allowance should also be less than 30-fold of average output of previous three years. Underpayment of land appropriation is always an issue with land policy. It is possible that even with such low level compensation, farmers were still not paid. Many cases involving embezzlement of land compensation were reported recently. For instance, on 23 June 2004, the director of State Auditing Administration reported several cases of misappropriating land compensation to the 10th Congress of NPC. See Shen Lutao, Zou Shengwen and Zhang Xudong, "An Astounding Auditing List", Xinhua News, http://news.xinhuanet.com/ house/2004-06/24/content_1543721.htm, 24 June 2004.

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are therefore denied the opportunity of reaping the "surplus" from the alternative use, which generally goes to the local government, some corrupt officials, developers or land speculators. It goes without saying that in a poor or economically backward region, agricultural land generally has very limited alternative uses as there are very few opportunities for industrial expansion or real estate development there. Not surprisingly, most profitable land transactions in recent years have taken place in coastal cities or the more developed coastal provinces with rapid economic development. In these areas, the land market has also been booming because of rising prosperity, and hence land has been appropriated generally with a "wider margin between sellers and buyers. According to the Ministry of Land and Resources, 89% of 245 billion yuan derived from the sale of land-use rights (99% of which is from land assignment) in 2002 came from the more developed eastern seaboard of China (Figure 11.2). In many districts, counties and cities of China's eastern region, land revenue generally accounts for more than half of local fiscal revenue. Accordingly, an active and controlled land market is highly important for the local economy. Local governments and local officials have all the incentives and benefits (public and private) to promote the land market and keep it booming. As land transactions are

Figure 11.2 Local Revenue from Sales of Land Use Rights, 1999-2002. Sources: China Land and Resources Almanac, various issues, Ministry of Land and Resources.

Changing Land Policies: Ideology and Realities 313

brisk and the property market becomes very hot, there will inevitably be many irregularities or illegal activities involved in land appropriation and trading. According to the Land Management Law, in urban areas, property rights of the land belong to the state, and central and local governments are authorized to allot or assign land-use rights directly for public or private uses. In the rural areas, all farm land is supposed to be collectively-owned. For land allotment, it has to be first taken over by the local government before it can be transferred for other uses. However, the process of land appropriation has not always followed this procedure strictly. In other countries, when land is acquired by the government for public use (e.g. to build roads), the original owner or user is usually compensated at a fair price, if not at the market rate. But this is not always the case in China. In China, a person who needs land has to apply for land-use right from the local land administration office.7 After the local authority has examined and approved the application, land is technically or legally converted from agricultural to non-agricultural use. A farmer whose land has been appropriated is compensated in accordance with his regular incomes derived from the land as a farmer, i.e. the opportunity cost of the land for agricultural use. The Land Management Law thus regulates the amount of compensation a farmer would get. (See Figure 11.3 for procedural details of China's land appropriation). In the process of appropriation, there are 'ways for local officials to engage in irregularities such as deliberately 7

Generally, land appropriation needs to be approved by the land administration office above county level unless land is basic farmland or farmland larger than 35 ha or other land larger than 70 ha, under which appropriation has to be approved by the State Council. According to land management law, examination and approval of farmland appropriation focuses on two aspects: land-use changes, and feasibility of construction project. The former is regulated by the National Overall Plan for Land Use which assigns the quota for transformation of cultivated land to non-agricultural use. The latter is controlled by the Annual Plan for Land Use, which directs urban and rural construction plan. See Land Management Law of People's Republic of China, 1998; Operational Ordinance of Land Management Law, 1998.

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1. Application for land use: Applicant submits land use proposal, annual project of infrastructure construction as well as related materials, documents and maps* to land administration office above county level. The Application form of land use for construction is filled in.

4. Land appropriation: Application is approved. Land is appropriated by local government (county or city level). Procedure is as follows: declaration, requisition compensation, rural population settlement, taxation on applicant and consolidation of dispute.

5. Signing documents for land use: Land use contract need to be signed for land assigned and certificated documents need to be signed for land allocated. Applicant will register land use with those documents.

2. Accepts application and examines documents: Land administration office above county level accepts and examines the application. Within 30 days, project on transformation of farmland, supplementation of farmland, land appropriation and land supply need to be studied before submitting to the superior section.

3. Examination and approval of land use: Documents are received and examined by authorized section within land administration system (neibu huishen).

6. Administration after land appropriation: After land appropriation, land administration office insures that involved residents are well settled, land is transferred, disputes are consolidated, and end case reports are made.

7. Issuing land use certificate: Applicant registers land use at local land administration office. Land map is made, land area is ratified, and land use right is determined and registered at local cadastral office. As legal warrant, land use certificate is issued by local government.

Figure 1 1 . 3 C u m b e r s o m e Procedure of Land Appropriation. Notes: 'Materials include: certificate of applicant, feasibility report o n project, preexamination of land administration office, report o n preliminary project, m a p of construction project, supplementation of farmland (if farmland is involved), evaluation report o n geological fatality (if necessary), and evaluation report o n land-value.

Sources: Operational Ordinance of Land Management Examination and Approval of Land Use for Construction.

Law; Resolution

on

categorizing the piece of appropriated land under a lower grade, 8 and hence down grading the value of the land for the purpose of compensation. For the land to be used for public interest such as 8

According to the Land Management Law of 1998, for example, the appropriation of land above 35 hectares should be examined and approved by the State Council; some local governments then divided a big plot larger than 35 ha into several small ones for approval by local authorities.

Changing Land Policies: Ideology and Realities 315

building a road, compensation is deliberately reduced. Furthermore, there is ambiguity in the definition of projects of public interest. Often, many commercial construction projects were passed off by corrupt local officials as projects of public interest. The fundamental causes for these phenomena are the lack of clear property right on land, poor land policy implementation and un-checked power of local officials. As the existing rural land tenure system does not provide clear rights to farmers who have little bargaining power vis-a-vis local governments when the appropriation happens, it leads to unfair appropriation and inadequate compensation for farmers.9 This in turn encourages widespread land appropriation by local governments even ahead of real market demand. Often local governments appropriate the land first and sell it to developers, who would leave the land standing idle to await appreciation in value (Figure 11.4). The lack of proper institutional arrangements for the check and balance of local power therefore constitutes the key reason for "land abuse". Besides assigning land on the market, local governments can negotiate with applicants directly in an agreed assignment Qxieyi churang). When an agreed assignment is exercised, the price of the land is obviously artificially fixed by bargaining, not in accordance with the supply and demand of the land market. The market mechanism seldom comes into play. Figure 11.5 shows that "agreed assignments" account for over 80% of total land transfer cases. Much like an underthe-table deal, an agreed assignment makes it quite easy for corrupt 9

This is also the main difference between the land appropriation system in China and those of industrialized countries, say the US and Japan, under the full-market economy system. In industrialized countries, farmers have full property right to land and the price of land is market-driven. To Chinese local governments, they have the right to actualize land appropriation but not to determine how much the compensation should be, see K. Kristajanson, RJ. Perm, "Public Interest in Private Land: Private and Public Conflicts", in Land Use Policy and Problems in the United States, edited by Howard W. Ottoson, Lincoln: University of Nebraska Press, 1964; Y. Nishida, "Reflections on Land Reform in Japan", in Land Policy Problems in East Asia — Toward New Choices-. A Comparative Study of Japan, Korea and Taiwan, edited by B. Koppel and D.Y. Kim, East West Center and Korea Research Institute for Human Settlements, 1994.

316 John Wong and Liang Ruobing Property right Farmland

Collectives

Use right

Appropriation

Property & use rights Farmers ^Compensation determined by governments

Local/Central governments Auction

Assignment of use right (churang) Developers

Non-farm Uses

Bidding

Primary Land Market

List for sale _

, Agreed assignment

Transfer of use right (zhuanrang)

Secondary Land Market - Vacant for better price

Use of land

Developers

Price determined i i by governments J

Examination and approval of construction projects

Figure 11.4 Converting Farmland to Non-farm Use. Note: —• denotes the direction of land transfer; —> denotes the direction of capital flow; --- denotes possible courses w h e r e lawbreaking or corruptions usually h a p p e n .

officials to engage in rent seeking and for unscrupulous developers to profiteer, all at the expense of the state and the farmers. As local governments have the power to decide on land development (i.e. how local land is to be used) and also the power to alter or interpret the administrative rules governing land-use, residents are often at risk of falling victim to such irregularities and manipulation. The case in point is the new ruling by the Shenzhen municipal government on 29 June 2004, which designates all previous farmers under the Shenzhen administration as urban citizens by the end of October 2004. As the 270,000 or so Shenzhen farmers celebrate their new urban identity, their farmlands are also now more vulnerable to acquisition under the urban land-use law. Since rural land has now become urban land, the procedure for land appropriation in this case is much easier. CHALLENGES OF LAND POLICY REFORM After two decades of economic reform China's policies governing land use and ownership are no longer ideologically driven. The land

Changing Land Policies: Ideology and Realities 317

eza Agreed assignment - » - A s % of total:

200-

203.9

and

117.3

-

99.6 3

10US

-

145.2

3 150n u

83.7 83.S

84.0

50•

0'

1

1

1

Figure 11.5 Land Assignment by Agreement and Market Transaction, 1998-2003. Sources: China Land and Resources Almanac, various issues, Ministry of Land and Resources; http://www.mlr.gov.cn, Ministry of Land and Resources of China.

market is emerging in both rural and urban areas. However, China's land market is still full of imperfections and it suffers from too much government intervention especially at the local levels, as discussed earlier. Like all natural resources, land embodies the Ricardian concept of scarcity. Only an effective and a well-functioning market can lead to an efficient allocation of scarce resources. No amount of administrative guidance and government intervention from the government, however well intentioned, can result in the allotment of land to the most efficient user and at a price that can best reflect the true economic cost of scarcity as well as the opportunity cost of its potential alternative uses. The ideal land market of course represents only a theoretical extreme. Land market everywhere is in fact subject to a lot of regulations and planning controls as well direct government intervention. The problem with the Chinese land market is not because of over-regulation or over-stringent measures of planning controls, but actually their exact opposites; Chinese land market is actually lacking in effective administrative rules and regulations and is further aggravated by ineffective implementation. On top of all these,

318

John Wong and Liang Ruobing

long-term land-use plans are also lacking. Not just for the smaller regional cities, even big metropolis like Beijing, Shanghai and Guangzhou have yet to promulgate their detailed land-use master plans. The direction of reforms and changes for China's land policies should be sufficiently clear. Efforts must be made to strengthen the institutional foundation of the land market. This includes not just more effective rules and regulations on land use, but also an effective legal framework to support the operation of the land market. Government intervention can not only impede the operation of the market, it can also render the market function better. The challenge for the Chinese government is obviously to aim at the latter. Thus far, the land policy reform initiatives mainly came from the central government which, alarmed at the widespread "land abuse" at local levels, was determined to curb such irregularities for the sake of social stability. Worried over economic overheating caused by excessive fixed investment and property speculation, Beijing had also used land policy as an instrument of macroeconomic control, because in both cases "illegal use of land" was involved. Clearly, in both cases, the motivation for Beijing's intervention was driven by short-term objectives and expediency. For an effective land policy reform, the central government must go for more coherent and long-term policy options. Since most cases of land abuse or land-misuse occur at local government levels and since most local governments have abused existing land policies in order to boost local revenue, proper reform measures should therefore be aimed at addressing the key issue, which is to make local governments less dependent on land sales as a source of local revenue. At the heart of strengthening the overall institutional base of the land market lies the critical issue of property rights, which remain a "black hole" in China's overall economic reform efforts. China today is still institutionally incapable of introducing clear-cut, transparent and enforceable property rights in various fields of economic activities. But China must make a start. Given the political will, land ownership rights should be the relatively easier area for the government

Changing Land Policies: Ideology and Realities 319

to implement the property rights system, particularly in the rural area. A great deal of the tudi wenti or land problem stems from chanquan wenti (property rights problem). The Hu-Wen leadership has recently been pushing for more "people-oriented" development policies. One of the major government concerns today is how to alleviate rural poverty or how to deal with the san-nong problem. There are intellectuals in China who argue that China is in need of another land reform in order to restore land rights to the cultivators. And this would be the fundamental solution to not just the land problem but also the rural problem.

Part IV Coping with Social Issues and Tensions

Chapter

Income Inequalities, Limited Social Mobility and Remedial Policies Lai Hongyi

Two of the most daunting social and economic challenges for Hu Jintao and Wen Jiabao are rising income inequalities and limited social mobility. They perceive increasing economic and social inequalities as a genuine threat for China's political stability and legitimacy for the Communist regime. Upon assuming his premiership in March 2003 Wen said that he was worried about the slow increase in farmers' income, rising unemployment, lingering poverty and the east-west regional disparity.1 This chapter examines the trend of income distribution and social stratification in the recent decades and related policies under Hu and Wen in China. It argues that in the reform era China has witnessed a steady rise in income inequality and in social mobility. However, upward social mobility is hampered by significant influence 1

"Wen Preoccupied with Rural Areas, Unemployment, Poverty," posted on http://www.xinhua.org on 18 March 2003; "Wen Jiabao on Major Problems Facing New Government," post at http://english.peopledaily.com.cn on 18 March 2003, accessed on 27 August 2004.

323

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Lai Hongyi

of one's residency and parents' background. Increasing income inequality and restricted social mobility combine to produce social polarities and induce social conflict. Hu and Wen have adopted measures to address rising income inequality, have tried to help out peasants and rural migrants, and have emphasized open procedures and merits in official promotion. However, they are yet to reverse severe income inequality and restraining factors in social mobility. The remainder of the chapter will first analyze the trend of income distribution in the reform era. It then analyzes China's social strata, stratum identification, and social mobility. It discusses political challenges of income inequality and social mobility, examines and assesses measures that Hu and Wen have introduced to tackle these problems. It ends with a discussion of remaining challenges for Hu and Wen. RAPID GROWTH WITH RISING INEQUALITIES China under Mao Zedong was quite egalitarian due to a number of peculiar factors. The country was so poor that only a few people could amass wealth. Under the command economy, personal assets were very limited. Mao's egalitarian policies of regional development and his control of wage differentials led to an even distribution of income. Equality was achieved at the expense of efficiency and prosperity. In the reform era, the state adopted a pro-growth policy, dramatically raising China's level of development and living standard. Between 1978 and 2002, China's per capita GDP grew by 5.4 times, per capita rural income grew by 4.3 times, and per capita urban income by 3 7 times. By 2002, China's per capita GDP reached US$940, higher than that of India (US$480), Sri Lanka (US$840), and Indonesia (US$710).2 The living standard in China has also improved. During 1978-2002, the Engel coefficient of rural households (or the share of food expenses in these households' expenditure) declined 2

China Statistical Yearbook 2003, p- 72; China's Government Report at the 10th NPC; World Bank, World Development Report 2004 (New York: Oxford University Press, 2004), pp. 252-263.

Income Inequalities, Limited Social Mobility and Remedial Policies

325

Table 12.1 Per Capita Annual Income of Urban and Rural Households in China, 1978-2002

Per• Capita Rural Income

Engel Coefficient of Rural Households

Engel Coefficient of Urban Households % of food in total consumption 58 57 53 54 50 45 39 38 38

yuan

Index (1978=100)

yuan

Index (;i978=100)

% of food in total consumption

134 191 398 686 1,578 2,162 2,253 2,366 2,476

100 139 269 311 384 456 484 504 528

343 478 739 1,510 4,283 5,425 6,280 6,860 7,703

100 127 160 198 290 330 384 416 472

68 62 58 59 59 53 49 48 46

Year 1978 1980 1985 1990 1995 1998 2000 2001 2002

Per Capita Urban Income

Sources: China Statistical Yearbook 2003, p. 244.

from 68% of total consumption to 46%; the Engel coefficient of urban households declined from 58% to 38% (Table 12.1). The Chinese have moved beyond a state of living merely on or below subsistence. With rapid economic growth, China has made mighty progress in reducing absolute poverty. In the countryside alone, the share of the population below the official poverty line decreased from 40% in 1980 to about 14% by the mid 1990s.3 The vice-president of the World Bank for the Asia-Pacific Region commented in 2004: "Since 1980, China has achieved poverty reduction on a scale that has no 3

Information on the official line of rural poverty comes from the following sources: Li Qiang, Zhongguo Fupin zhi Lu (China's Road toward Aiding the Poor) (Yunnan: Yunnan remin chubanshe, 1997), pp. 120-121; Anti-poverty Project Group of China Reform and Development Research Institute in Hainan, Zhongguo fanpinkun zhili jiegou (The Structure in China's Anti-Poverty Governance) (Beijing: Zhongguo jingji chubanshe, 1998), pp. 39; Liu Chunbin, "Install Aid-the-Poor Tax on Upscale Entertainment Places to Solve the Problem of Too-low Poverty Standard," Xiang Gang Chuanzhen (.Hong Kong Fax), No. 2004-21 (2004).

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Lai Hongyi

parallel in human history". 4 The above rosy picture, however, reflects the national aggregate. The absolute number of people in poverty in China was large, partly due to its large population. The World Bank estimated in 2004 that 200 million (or 15% of the) Chinese lived below the international poverty line.5 "Relative poverty", however, emerges as a new problem. Rising income is distributed rather unevenly, especially since the late 1990s. According to a survey in 2002, 3-5% of the Chinese (or 45 million) had annual per capita disposable income of 20,000 yuan (US$2416) and lived a luxurious life. Some 450 million, or 35% of the population, came under the middle-income group, garnering annual per capita disposable income of 6,000-7,000 yuan (around US$785), and living a relatively well-off life. About 620 million, or 48% of the population, earned no more than 2000 yuan (US$242) of disposable income a year. They lived above subsistence, yet are not well-off. Some 80 million rural residents, or 6.2% of the population, earned less than 700 yuan (US$85) a year and lived in destitution (Figure 12.1).6 These four income groups are labeled as luxurious, well-off, above subsistence, and destitute, respectively. The aforesaid income distribution in China resembles roughly a rhombus, small at both ends and large in the middle. The Gini coefficient is the most commonly-used measurement of income disparities, a value of 0.40 and higher denotes serious income inequality. According to the World Bank, the Gini coefficient of per capita resident's income in China started at a very low 0.288 in 1981, 4

"Wiping Out Poverty Galvanizes China," China Daily, 18 October 2004. "China Reports First Rise in Poverty since Start of Reforms," Straits Times, 19 July 2004. The World Bank devises two lines of international poverty, i.e. US$1 a day and US$2 a day. While the World Bank might use US$1 a day as the criterion here, it would take into account the low consumer prices in China. For discussion of the gap in international and Chinese data on poverty in China, refer to Shujie Yao, "Economic Development and Poverty Reduction in China over 20 Years of Reforms," Economic Development and Cultural Change, Vol. 48, No. 3 (April 2000), pp. 447-474. 6 "Who Belongs to the High-income Group in China? A Large Nationwide Survey of Wages and Remuneration in 2002," posted at http://www.manager.cn, accessed on 21 August 2004. 5

Income Inequalities, Limited Social Mobility and Remedial Policies Destitute (Annual per capita disposable income = US$85), 8 0 ~ \ million \

327

Luxurious (Annual per capita disposable /"income = US$2416), 45 / million

^ ^ ^ ^ ^ ^ ^ ^ ^ ^

Well-off (Annual per capita disposable Income = US$785), 450 million

Above Subsistence (Annual per capita disposable income = US$242), 620 million

Figure 12.1 Size of Four Income Groups According to an Income Survey in China in 2002 (Millions). Source: Footnote 6.

rose to 0.388 in 1995 and reached a high of 0.403 in 1998. The Gini coefficient registered 0.459 in 2001 and 0.454 in 2002, on par with that in the U.S. (0.466) (Figure 12.2).7 Estimates of income distribution 7

World Bank data from 1981 to 1995 come from World Bank, 1997, Sharing Rising Incomes. Washington, D.C.: World Bank, pp. 2, 10. The data were based on a survey on labor income done by the State Statistical Bureau Survey Team. The data included estimated in-kind income such as housing, education, and health care benefits. Data for 1998 come from World Bank, 2001, World Development Report: Attacking Poverty. New York: Oxford University Press, p. 282. Data for 2001 and 2002 were extracted from Yang Yiyong and Huang Yanfen, 2003. "New Situation in Income Distribution of China's Residents," in Ru Xin, Lu Xueyi, and Shan Tianlun, eds. 2003 Nian: Zhongguo Shehui Xingshi Fenxi yu Yuce {2003: Analyses and Predictions of China's Social Situation). Beijing: Shehui Kexue Wenxian Chubanshe: 226-234. No details about the research method are disclosed. For studies on income inequality in China, refer to Keith Griffin and Zhao Renwei, eds. 1993. The Distribution of Income in China. New York: St. Martin's Press; Zhao Renwei, Li Shi and Carl Riskin, eds., 1999. Zhongguo Jumin Shouru Fenpei Zaiyanjiu {Income Distribution of China's Residents Revisited). Beijing: Zhongguo Caizheng Jingji Chubanshe; Yang Yiyong et al., Shouru Fenpei Tizhi Gaige Gongjian {Tough Battles in Reforming the Income Distribution System), Beijing: Zhongguo Shuili Shuidian Chubanshe, 2005, p. 23.

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Lai Hongyi

0.5 -CXXCuL-

0.45 0.4c 0.35 at

0.3 £ o 0.25 o "E 0.2 5 0.15

o

0.1 0.05 1980

1985

1990

1995

2000

2005

Year, 1978-2005 # National Estimates by Zhao Renwei and Li Shi

O National Estimates by Ministry of Finance

• National Estimates by World Bank

• Estimates by Yang Yiyong and Others

Figure 12.2 Gini Coefficient of Income Distribution in China, 1978-2005. Data Sources: See Footnote 7.

thus suggest that income inequality in China has risen sharply since the late 1980s.8 China is a geographically large country; moreover, by the Chinese categorization of countryside 60% of the population is rural 8

Caveats apply to estimates on income inequality in China. First, one or two Gini coefficients may not be an adequate measure of income distribution of so vast a country as China. Second, the content of income has thus changed drastically over the years. It included mainly wages in the early years of reform, but has encompassed income from property as well as in-kind income such as housing and medical subsidies income since the 1990s. Measures of income varied among scholars. Some measures include only wages, bonus, and in the case of farmers, income from sales of products; more prudent measures also include in-kind income as well as income from property. However, illegal or hidden income such as bribery and unreported earnings continues to be an issue for any data on income. The abovementioned estimates by the World Bank and by Zhao Renwei and Li Shi are more comprehensive.

Income Inequalities, Limited Social Mobility and Remedial Policies 329

residents.9 Regional and urban-rural developmental gaps contribute a great deal to income disparities. Finally, inter-strata income gaps are also increasing. The regional, urban-rural, and inter-strata gaps accentuate rising disparities in the reform era. First, the urban-rural gap of development has increased. While rural income in developed areas is much higher than that in underdeveloped regions and even urban income in some developed regions, average rural income is much lower than average urban income. In 1978, an average rural resident's consumption was equivalent to 34.1% that of an average urban resident. It improved to 43-3% in 1985. Moreover, this ratio decreased drastically to 33-9% in 1990 and to an alarming 27.8% in 2001 (Figure 12.3). In contrast, in many other countries the rural income level is equivalent to twothirds of the urban level; few countries witness a ratio below 50%. In addition, college students from the countryside including those from developed regions do not enjoy easy access to urban jobs as do urban students. Moreover, regions have developed at highly different paces. Per capita resident income in the interior region in 1985 was 67% that of the coastal region. This ratio declined to 55.8% in 1995 and reached a much lower 46.5% in 2001 (Figure 12.3).10 Finally, the income gap of different strata has enlarged, as levels of skills of labor vary and wage differentials widen. Disparities within the cities and in the countryside have thus grown. The urban Gini coefficient rose from 0.16 in 1978, to 0.27 in 1993 and to 0.33 in 2001; the Gini coefficient in the countryside grew from 0.21 in 1978, to 0.32 in 1993 and to 0.42 in 2000. n A study attributed urban poverty to change in components of 9

Unlike the functional categorization used widely in the West, the Chinese urban-rural categorization is administrative in nature. 10 Data come from China Statistical Yearbook (CSY) 1987, p. 672; CSY1992, p. 278; CSY1996, p. 280; CSY 1999, p. 72; CSY2001, p. 68; CSY2003, p. 72. 11 Data come from the following sources: Zhao Renwei, Li Shi and Carl Riskin, eds., Zhongguo Jumin Shouru Fenpei Zaiyanjiu (Income Distribution of China's Residents Revisited). Beijing: Zhongguo Caizheng Jingji Chubanshe, 1999; Zhao Manhua, Wang Shangyi, Hao Yunhong, and Wang Minghua, Shouru Chajuyu Liangji Fenhua Wenti Yanjiu (A Study of Income Gaps and Polarization). Beijing: Zhongguo Jihua

330

Lai Hongyi

•£ a a E 5

0.7

i&

0.6

35 *o

0.5

o ffi

** c ^* n

- Interior Household Consumption Relative to the Coastal Level

o cc — i .2

o 2 Z. E 0.4 o^ oo c c 0.3 = 3 0.2 52

Rur elati

*l

0.1

or

0

1980

1985 1990 1995 Year, 1978-2004

2000

2005

Figure 12.3 Urban-Rural and Regional Income Gaps in China: 1978-2004 Data Sources: China Statistical Yearbook 1987, 1992, 1996, 1999, 2001, 2003.

income, slow income growth, rise in inequalities, governmental welfare policies, and "employment hostility" of industrial growth. As far as rural inequality is concerned, some scholars blamed it on poorlydeveloped economic factor markets and a diminishing role of households in redistribution, whereas some attributed it to unfavorable terrain, location and climate and associated it mostly with agricultural China.12 Worldwide, however, China appears to be an intermediate case of poverty and inequality when compared to other developing countries. The share of the population in China living below US$1 a

Chubanshe, 2002, pp. 38, 59, 152; Yang Yiyong and Huang Yanfen, "New Situation in Income Distribution of China's Residents". The income in the measure appears to reflect mainly monetary income (wages and income from property and assets) and exclude in-kind income. 12 These studies are respectively Azizur Rahman Kahn, Keith Griffin, and Carl Riskin, "Income Distribution in China during the Period of Economic Reform and Globalization"; Dwayne Benjamin and Loren Brandt, "Income Distribution in China: Markets and Inequality in Rural China: Parallels with the Past"; Carl Riskin, "Chinese Rural Poverty: Marginalized or Dispersed?", The American Economic Review (AER), Vol. 89, No. 2 (May 1999), pp. 296-300, 292-295, 281-284.

Income Inequalities, Limited Social Mobility and Remedial Policies 331

day is smaller than that of India, the Philippines, and Nigeria; the share of the Chinese earning less than US$2 a day is below that of India, Indonesia, the Philippines, and Nigeria. China's income inequality in the late 1990s, measured by the Gini coefficient, was worse than that of India, Sri Lanka, Indonesia, and Poland, but was better than that of Thailand, the Philippines, Malaysia, Russia, and much better than that of Nigeria and Brazil.13 Nevertheless, inequality breeds instability in China. Unemployment, corruption, income disparities, and poverty were top concerns for 15,000 urban residents in 31 provinces at a national survey in late 2002. All these concerns except corruption relate directly to rising inequality. Laid-off workers and displaced peasants frequently protest or petition to the local government. Some even travel to Beijing to protest and appeal to the central government in various forms, including threatening to jump off buildings. Rural migrants commit many violent crimes in the cities, including burglary, robbery, ransom, and murder. SOCIAL STRATIFICATION AND MOBILITY The other major social challenge for the Hu-Wen leadership is limited social mobility. China has undergone considerable social change in the reform era and has witnessed a new structure of social strata. On the basis of a nationwide survey in late 2001 sociologists at the Chinese Academy of Social Sciences (CASS) identified ten major classes in the reform era. In the order of hierarchy, these ten strata are as follows (Table 12.2 and Figure 12.4). 1) State and social administers. This stratum included leading officials of national and local Party, government, public institutions (including universities, research institutes, public media, 13

World Bank, World Development Report 1997, 1999/2000; 2003; 2004. New York: Oxford University Press. "Wiping Out Poverty Galvanizes China," China Daily, 18 October 2004. For a detailed analysis on income inequality in China under reform, refer to Lai Hongyi, "Growth with Rising Income Inequality: China's Response to the Problem," EAIBackground Brief No. 227, Singapore: EAI, NUS, February 2005.

332

Lai Hongyi Table 12.2 Social Strata in China Ten social strata (according to CASS)

%of population, 2001

State and social administers Managers Private entrepreneurs Professionals Clerks Industrial and commercial households (self-employed individuals) Employees in the services and commerce sectors Manufacturing workers Agricultural workers The unemployed (urban and rural)

Five conventional social strata

2.1 1.6 1.0 4.6 7.2 7.1

%of population, 2001

Upper stratum

3.7

Upper middle stratum

5.6

Middle stratum

14.3

11.2

Lower middle stratum

28.7

17.5 42.9 4.8

Low stratum

47.7

Sources: Lu Xueyi, ed. Dangdai Zhongguo Shehui Jieceng Yanjiu Baogao {A Research Report on Social Strata in Contemporary China). Beijing: Shehui Kexue Wenxian Chubanshe, 2002, pp. 10-23; the percentage comes from Lu Xueyi, ed. Dangdai Zhongguo Shehui Liudong {Social Mobility of Contemporary China). Beijing: Shehui Kexue Chubanshe, 2004, p. 13.

State and social administers Managers

E 3

Private entrepreneurs

I I

Professionals

+•<

s
Clerks Self-employed Employees in the services and commerce sectors

tt*i*ttSt 1

Manufacturing workers l'-V"'/ii Agricultural workers

-

E3SE!

'mammm!*5*i»i*SIS»iMli85 WWKWi •H

The unemployed (urban and rural) 323

10

20

30

40

% of Population, 2001 Figure 12.4 Size of China's Social Strata. Source: Table 12.2.

50

Income Inequalities, Limited Social Mobility and Remedial Policies 333

2)

3)

4)

5)

6)

7)

8)

and hospitals), and social groups. Possessing organizational resources, they made up 2.1% of the population. Managerial personnel. This stratum included managers of state, collective, private, stock-holding, foreign, and joint-venture enterprises. It controlled a vast amount of economic resources and accounted for 1.6% of the population. Private entrepreneurs. This stratum included investors and owners of private enterprises that employed over eight workers, not including managers who are hired by owners to operate these enterprises. These managers were included in the second stratum. They constituted merely 1% of the population. Professionals. This stratum included professionals, scientists, and engineers at various governmental agencies and public institutions, as well as enterprises. It possessed special knowledge and know-how for modern production. It was also referred to as intellectuals in China. It accounted for 4.6% of the population. Clerks, namely, low-rank clerks and non-professional employees handling daily administrative affairs at Party and governmental offices, public institutions, and enterprises. They accounted for 7.2% of the population. Individual industrial and commercial households (or the self-employed). This stratum referred to individuals with a certain amount of capital who invested it in production, circulation of goods, labor services and financial activities. It also included small shop owners, self-employed individuals, small stock holders or traders, and lessors of small apartments or houses. It constituted 7.1% of the population. Employees in the services and commerce sectors, including non-professionalized employees in services sectors who might be either manual or non-manual laborers. They accounted for 11.2% of the population. Manufacturing workers. They included manual and semi-manual laborers and employees in manufacturing and construction. Peasant workers also belonged to this stratum, yet they were relatively distinct from the rest due to their lower status, salary

334

Lai Hongyi

and compensation. This stratum made up about 17.5% of the population. 9) Agricultural workers, including individuals whose main profession was agriculture, and whose income primarily came from agriculture. Agriculture included cultivation agriculture, forestry, husbandry, and fishery. Agricultural workers made up about 43% of the population. 10) Jobless, unemployed, and semi-employed people. The stratum included laid-off workers, able-bodied people looking for jobs, and peasants who had lost their land for cultivation. It accounted for about 4.8% of the population. 14 The CASS research team categorized the first two strata (state and social administers and managers) as the upper stratum, private entrepreneurs and professionals the upper middle stratum, clerks and individual industrial and commercial households the middle stratum, employees in the services and commerce sectors and manufacturing workers the lower middle stratum, and agricultural workers and unemployed the low stratum (Table 12.2).15 According to this definition, China's social structure looks like a pyramid, with very large low strata at the bottom, moderately large middle strata in the middle and small upper strata of the top (Figure 12.4). A survey in 2002 asked urban residents in China to identify themselves among one of the five strata. It found that nearly half (46.9%) of the respondents identified themselves as the middle stratum. Some 1.6% said they belong to the upper stratum, 10.4% the uppermiddle stratum, 26.5% lower-middle stratum, and 14.6% the low stratum. The positive side is that a plurality of urban residents claimed to be the middle stratum and might desire social stability and expect steady materialistic improvement. They could become a stabilizer of 14

Lu Xueyi, ed. Dangdai Zhongguo Shehui Jieceng Yanjiu Baogao 04 Research Report on Social Strata in Contemporary China). Beijing: Shehui Kexue Wenxian Chubanshe, 2002, pp. 10-23. The percentage comes from Lu Xueyi, ed. Dangdai Zhongguo Shehui Liudong {Social Mobility of Contemporary China). Beijing: Shehui Kexue Chubanshe, 2004, p. 13. 15 Lu Xueyi, ed. Dangdai Zhongguo Shehui Jieceng Yanjiu Baogao, p. 11.

Income Inequalities, Limited Social Mobility and Remedial Policies 335

the society mediating between upper and lower strata. Along with those who viewed themselves as in the upper strata, they made up 58.9% of urban residents, an absolute majority in the cities.16 The downside is that rural residents, which constituted about 60% of the population, is not included in the survey and that the rural residents were likely to view themselves as lower-middle and low strata. The lower strata, rather than the middle strata, remain large in China, boding ill for China's stability (Figure 12.4). The shape of China's distribution of social strata looks like a pyramid with large lower strata, rather than a socially-stable rhombus with a large middle class. In addition, studies have suggested that peasants who seek jobs in the cities fall within the lowest strata and could hardly move up. For example, peasants who engage in trade in the cities were ranked 96th in among 100 professions in a 1996 survey on professional prestige in China.17 As a whole, the middle stratum may well make up only a minority of the population. In addition, compared with surveys on population in developed societies and surveys on urban residents on industrializing countries even back in 1979, the size of the middle stratum in China in 2002 appeared small. For example, among developed societies 74% of Singaporeans, 73% of the Australians, 61% of Americans, 58% of the French, 56% of the Japanese, and 51% of the urban South Koreans regarded themselves as the middle stratum. Among urban residents in the developing countries, 67% of the Filipinos and over 57% of Brazilians and Indians classified themselves as the middle stratum. Therefore, compared with major developed and developing countries China's middle class is noticeably smaller. Moreover, a much higher percentage (41.1%) of the urban Chinese view themselves as the lower strata (i.e. the lower-middle 16

Li Peilin, Zhang Yi, Zhao Yandong and Liang Dong, Shehui Chongtuyujieji Yishi {Social Conflicts and Class Consciousness in China Today), Beijing: Shehui Kexue Wenxian Chubanshe, 2005, pp. 55-72. 17 Li Qiang, Nongmingong yu Zbongguo Shehui Fenceng (Urban Migrant Workers and Social Stratification in China), Beijing: Shehui Kexue Wenxian Chubanshe, 2004, pp. 7-9, 20-26.

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and low strata). In contrast, only 19-2% of Singaporeans, 13-1% of the Australians, 21% of Americans, 30.5% of the French, 29-4% of the Japanese, 32.7% of the urban South Koreans, as well as 24.4% of the urban Filipinos, 29-4% of urban Brazilians, and 29.2% of urban Indians classified themselves as the lower strata. Therefore, compared with major developed and developing countries China's lower-middle and low strata are much larger even in the cities.18 This may have negative effects on China's social stability, as lower strata tend to be more dissatisfied with the status quo than the middle and upper strata and are more ready to challenge the status quo, the elites, and the state. While the majority of the top seven out of the afore-mentioned ten strata view the current social and economic conditions favorably, the lowest three strata may have a more negative view of the current situation. Only 18.9% of the top-level elite, 14.4% of the middle-level elite, and 13% of the low-level elite saw the current social situation unfavorably. As much as 25.4% of manual laborers (or blue-collar workers) and 24% of the laid-off and unemployed workers held this view.19 More alarmingly, a strong plurality of urban residents viewed sympathetically collective petitions and demonstrations. The largest portion (one-third) of the people surveyed indicated that they would participate in these acts, while over one-fifth said they would show sympathy but abstained from action, and an equal portion of people chose an ambiguous stance of "Don't know". Though 15% of urban residents said they would act as bystanders in group petitions and demonstrations, only 9-3% suggested they would dissuade people from petitioning and demonstrating. Clearly, the people who joined peaceful protests outnumbered those who would try to prevent them. It was found that the propensity of individuals to take part in protests correlated with their view of the seriousness of conflict between social strata.20 18

Data come from Li Peilin et al., Shehui Chongtu yu Jieji Yishi, pp. 56-57. Data come from Li Peilin et al., Shehui Chongtu yu Jieji Yishi, p. 106. 20 Data come from Li Peilin etal, Shehui Chongtu yu Jieji Yishi, pp. 94-99; 107-108. 19

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Among a variety of social conflicts, urban residents viewed the conflict between the rich and the poor as the most serious, followed by employer-employee conflict in private enterprises, foreign enterprises and state enterprises as well as official-populace conflicts. Conflict between peasants and urban dwellers was ranked last.21 This suggests that the afore-discussed rising income gaps seem to produce negative social ramifications and undermine social stability. The bright side is that social mobility in China appears to have increased during the reform era compared to the pre-reform era. This is true across the board, including inter- and intra-generational mobility. For example, the inter-generational mobility (from father to children) increased from 41.4% in the pre-1980 era to 54% in the post-1980 era, and the intra-generation (during different years of an individual) from 35.3% to 38.2%. Overall, the upward mobility far exceeded the downward one. In addition, post-secondary education and age apparently have gained significance, whereas state employers have lost its significance in social mobility after 1992.22 Surveys and analyses found that in the reform era (1978-1991 and 1992-2001) social mobility was positively influenced by the profession and status of one's father, household residency (city versus rural household registration), education (especially at post-secondary schooling), Party membership, state employers (positively during 1978-1991 but negatively afterwards), and after 1991, age. 23 Finally, as various studies suggest, social mobility continues to be influenced strongly by one's given social attributes, especially the father's status and place of original residency as well as official positions. This may well aggravate social tension and instability. Lu Xueyi (2004), for example, found in an extensive nationwide survey that individuals with a highly educated father tended to receive higher education and that individuals whose parents were cadres were more likely to be promoted as administrators.24 Walder Data come from Li Peilin et al., Shehui Chongtu yu Lu Xueyi, Dangdai Zhongguo Shehui Liudong, pp. Lu Xueyi, Dangdai Zhongguo Shehui Liudong, pp. Lu Xueyi, Dangdai Zhongguo Shehui Liudong, pp.

Jieji Yishi, pp. 136-162. 176-177; 190-201. 190-201. 195-206.

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found that cadres tended to earn higher income due their official positions. 25 Li Peilin, Zhang Yi, Zhao Yandong, and Liang Dong concluded from their own surveys that individuals' self-identification of social stratum coincided with that of their father. Zhou concluded on the basis of a study on promotion of officials in China that officials' social capital, a critical element in their promotion, depended on their age, parental administrative rank, and their own rank. 26 These findings echo those by overseas Western scholars. 27 This trend is alarming, suggesting that the communist ideal of free mobility for commoners is being undermined and that the traditional pattern of upward mobility on the basis of parental status is making a comeback. In addition, among various social strata, peasants, who are predetermined by their residence registration at birth, appear to suffer the most from limited social mobility. It is true that peasants, having gained the freedom of mobility in the reform era, are able to work and live in the cities. However, their social mobility continues to be severely restricted. A survey in Beijing in 1997 indicated that among 100 professions, peasants who worked in the cities were ranked the 94th in terms of social status, followed by six professions that tended to be taken up by migrant workers, i.e. movers, maids, contractors, garbage recyclers, rickshaw drivers, as well as guards and receptionists for factories and organizations. Other professions

25

Andrew Walder, "Markets and Income Inequality in Rural China: Political Advantage in an Expanding Economy," American Sociological Review, Vol. 67, No. 2 (Apr 2002), pp. 231-253. 26 Zhou Yu, Ganbu Zhiye Diwei Huode de Shehui Ziben Fenxi (An Analysis of the Social Capital for Attainment of Professional Status of Cadres). Beijing: Shehui Kexue Wenxian Chubanshe, 2005, pp. 56-57. 27 See, for example, Xueguang Zhou, "Economic transformation and income inequality in urban China: Evidence from Panel Data," The American Journal of Sociology, Vol. 105, No. 4 0anuary 2000), pp. 1135-1174. In another study, Dennis Tao Yang found the urban-biased policies contributed to urban-rural disparities and their increase in recent years. See Yang, "Urban-based policies and rising income inequality in China," The American Economic Review, Vol. 89, No. 2 (May 1999), pp. 306-309.

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taken up by migrant peasants were ranked higher, but still toward the bottom of the social pyramid. Construction workers were ranked the 86th, peasant businessmen in the cities the 92nd, saleswomen the 90th, and security guards the 93rd.28 As the majority of migrant workers have a very difficult time obtaining permanent urban residency, they are deprived of good chances for upward social mobility. They may be confined to the afore-mentioned professions with low social prestige and stay at the bottom of the social pyramid.

POLICIES REGARDING INCOME REDISTRIBUTION AND SOCIAL MOBILITY In response to growing disparities, China has started to adjust its patterns of growth. On the one hand, the state continues to emphasize economic development. It believes that only through development could people's living standard be improved, peasants employed in the cities, poverty reduced, and wealth generated for redistribution. On the other hand, the state has paid greater attention to equity. Simply put, the state gradually reduces existing policy bias, urban bias and inequalities in the following ways. Top leaders project an image of caring for the common and low-income people. The state facilitates urbanization and rural development and has increased financial inputs into the countryside. It has expanded welfare programs to aid the very poor in the countryside and the cities; it has also launched programs to help underdeveloped regions and create more space for upward mobility of the low strata. Governmental agencies have been established to address disparities. The following segments discuss these measures one by one. 1) Building a Caring and Populist Image. New leaders Hu Jintao and Wen Jiabao carefully projected an image of caring for the common people and helping out low-income Li Qiang, Nongmingong yu Zhongguo Shehui Fenceng, pp. 7-9, 20-26.

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groups. At the 82nd anniversary of the founding of the Party in 2003, Party Secretary Hu called on cadres to use power for the people, show concern for the people and seek benefit for the people (fe^JK#fJE^ ^%B$\%, M% &#fl£ ) He reminded officials that the country was governed and the Party set up for the people {^KWL% K> tL'5t%//Z~). Hu asked cadres to mitigate difficulties of the common people and urged cadres to sincerely implement the state's measures for reducing poverty and economic hardship. 29 Hu and Wen spent their Chinese New Year with commoners (miners and peasants, etc.), checking out their material conditions and assuring them a better future. Their populist approach earns them respect from the common people and some legitimacy for the central government. Many Chinese view Hu and Wen as dedicated and compassionate leaders. Hu and Wen's populist approach defuses discontentment from low-income earners for the time being. 2) Aiding the Very Poor. The state has stepped up its support for those who fail to catch up with the increasingly competitive rural and urban economy. Starting from 1986, the State Council has made aiding the poor in the countryside a routine task. In that year, it established an Aiding-the-Poor and Development Leading Small Group (APDLSG) ( H ^ - ^ c ^ J f ^ I ^ M ^ I ) and an office. Now some 30 million (or 3%) of rural residents qualify for aid. The state implements a vigorous developmental program to lift the rural poor from poverty. It builds infrastructure, develops human capital, extracts local resources, protects local ecology and environment, employs peasants in developmental projects, enforces family planning, and forges cooperation with international organizations. The state also expands its welfare program for the very poor in the cities. Prior to the mid-1980s, the state's social relief covered

29

"Hu Jintao Gives an Important Speech at a Seminar on Studying and Implementing the Important Thought of the 'Three Represents'," posted at http://news.xinhuanet.com on 1 July 2003, accessed on the same day.

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"three-nos" ( H ^ c ) rural and urban individuals (those who had no working abilities, no financial and no family support). In 1998, unemployment increased with the reform of state-owned enterprises (SOEs). In response, the center has asked local governments to provide assistance to laid-off workers from SOEs through a program called basic subsistence guarantee (BSG, or IM^^fefi^HSPlOIn the second half of 2001, the state replaced the BSG with a program called the minimum subsistence guarantee (MSG, or J H g ^ S - S ^ i ) managed by the Ministry of Civil Affairs ( K ^ S P ) and local branches for all qualified urban residents. A special budgetary account was created. In October 2002, the coverage of the program was extended, covering those who have not received full wages, subsistence fee for laid off workers, unemployment pension, or retirement pension for several consecutive months. Upon coming to power, Hu and Wen have significantly stepped up fiscal support for social programs that help out the poor, the sick, and the senile. Recipients of the MSG aid increased from 4.6 million in the first half of 2001 to 22.35 million in 2004. As of October 2002, 13% of 19-6 million MSG recipients were laid-off workers, 15% registered unemployed, 10% current employees, 5% retirees, 29% dependants of these poor individuals, and 5% "three-nos" individuals. In 2004, the recipients of the MSG program on average each received 62 yuan a month, a 12.7% increase from the 55 yuan from the previous year. The center's expenses on the program have dramatically increased. In 1992, the state spent only 120 million yuan on urban social relief, a predecessor of the MSG. The spending increased to 1.2 billion yuan in 1998 and 4.6 billion yuan in 2002. Under the leadership of Hu and Wen, it soared to 9.2 billion yuan in 2003 and 10.2 billion (plus 8.9 billion yuan from local governmental revenue) in 2004. Its share of the state's budgetary expenditure increased from 0.032% in 1992, 0.11% in 1998, 0.21% in 2002, 0.40% in 2003, and 0.35% in 2004. In 2003, the center spent a total of 70 billion yuan on social relief and welfare, a 20% jump from 2002. In 2004, this budgetary item increased to 146.5 billion yuan, an 18.1% gain from 2003. In this year, the emphasis was on easing the negative

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effect of inflation on low-income families and assisting those families with serious illness, severe handicap, and no income. 30 3) Launching Regional Developmental Programs. Regional gap described previously can only be reduced through proper macroeconomic policies and long-term plans. In light of this, China has shifted its regional developmental focus from the coast to the western region and the northeast rust-belt since the late 1990s. The state implemented western development in 2000. A huge sum of state funds of 850 billion yuan have been invested in 80 mega infrastructure, energy, environmental, and resources extraction projects in 12 western provinces. From 2000-2004, the state injected 460 billion yuan in construction funds and another 500 billion yuan in fiscal transfers and special-item subsidies in the west.31 Since late 2002, the center has embarked on a program to revive the economy of the northeast (Liaoning, Jilin, and Heilongjiang 30

Tang Jun, "Leap-like Development in the Institution of Minimum Subsistence Guarantee for Urban Residents in China;" Yang Yiyong and Huang Yanfen, "New Situation in Income Distribution of China's Residents;" and Mo Yong, "Employment: Heed the Groups in Difficulties amidst Challenges," in Ru Xin, Lu Xueyi, and Shan Tianlun, eds. 2003 Man: Zhongguo Shehui Xingshi Fenxi yu Yuce, 243-46; 231; 40-41. Wen Jiabao, "Governmental Work Report, 2004"; "Governmental Work Report, 2005"; "White Paper on China's Social Security Conditions and Policies," Renmin Ribao {People's Daily), September 8, 2004; "An Analysis on the Situation of Fiscal Operation and Prospects for Fiscal Policies in 2005," posted at www.neri.org.cn/h_fenxi_ji/2004/20040409.pdf. 31 For analyses and evaluations of China's western development, refer to Hongyi Harry Lai, "China's Western Development Program: Its Rationale, Implementation, and Prospects," Modern China 28: 4 (October 2002): 432^66; "China's Western Development (I): Progress in the First Two Years"; "China's Western Development (II): Problems Ahead," EAI Background Briefs Nos. 156-157(Singapore: EAI, NUS, 26 May 2003); Hongyi Lai, "National Security and Unity, and China's Western Development Program," Provincial China 8: 2 (October 2003), pp. 118-143. For a concise and updated discussion, refer to LAI Hongyi, Hu Wen quan toushi: Hu Wen shizheng neimu quan jiedu ji Zhongguo weilai zhanwang {Hu and Wen under Full Scrutiny: A Comprehensive Inside Story of Governance under Hu and Wen and Prospects for Future China). Hong Kong: Wenhua Yishu Chubanshe, 2005, pp. 280-288.

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Provinces) (M^s'fcik'). In November 2003, the central government approved 100 large projects totaling 6l billion yuan, most of which were in equipment manufacturing as 'well as in processing raw materials and agricultural commodities.32 This move aims at rejuvenating the rust-belt that started to fall behind in terms of development in the 1970s. 4) Facilitating Rural Development and Reforming the Residency System. Based on the Chinese government's categorization of countryside, as much as 59-5% of the Chinese resided in the countryside in 2003, making up for the majority of the above-subsistence and destitute income groups in Figure 12.1. In order to raise the income of rural residents, the state encourages rural development and their employment in the cities to address the urban bias. In the early 1980s, the state introduced household farming that generated a surge in productivity. In 1998, the Party eased peasants' worries about their land use rights and promoted productivity in farming by promising a 30-year land lease. The state currently attempts to protect peasants' use of land for tillage from encroachment, support rural enterprises and build towns in the countryside. The state has improved management of rural land and has tightened its use since 2003. In 2003, the state increased financial inputs into agriculture in order to improve productivity and facilitate commercialization. In February 2004, the central Party went a step further, issuing "Opinions on Several Policies Accelerating the Growth in Peasants' Income". Dubbed the No. 1 Central Document in 2004, this has been the first Party document on agriculture since 1986. Several policies were pursued in the spirit of the document. First, the state announced in 2004 that it would relieve peasants of long-standing fiscal burdens by lowering agricultural tax by one percentage point a year and by phasing out the tax in five years. This move would 32

"Northeast Revival Enters a Stage of Practical Execution", Beijing Qingnian Bao {Beijing Youth Daily), 27 November 2003.

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save peasants of 7 billion yuan a year. With reduced revenue from agricultural tax, however, the interior provinces were likely to have fiscal shortfalls. The state also undertook reform of rural government in order to reduce the burden of administrative expenses on the peasants. It allocated 39.6 billion yuan in fiscal transfers in 2004 for that purpose. It has also stepped up fiscal support for these provinces, especially in education. Second, the state directly subsidizes grain producers. In 2004, the state's direct subsidies for grainproducing peasants amounted to 10 billion yuan, and its support for peasants in the form of tax cuts, exemptions and subsidies totaled 45.1 billion yuan (or US$5.4 billion). Third, in 2004 the state devoted much of increases in funds in education, culture, and health sectors to the countryside. The projects funded included the renovation of rundown school buildings and provision of free textbooks in the central and western regions. In 2004, the center was expected to have increased its economic support for the countryside by 30 billion yuan, or 20% increase from the previous years. 33 These policies stimulated expansion in agricultural output. While the total sown cultivation area declined by 2.48% during the 2000-2003 period, it grew slightly by 0.7% in 2004, totaling 153-6 million hectares. In 2004, the gross output value of agriculture, forestry, husbandry and fishery grew by 7.5%, the highest annual growth since 1997.34 The state encourages peasants to migrate to and work in the cities so as to raise their income. Now the income of many rural residents depends much on non-farm jobs. In recent years, the state has allowed rural residents to work in the cities with the relaxation of the residential household registration (P P ) system.35 The state is also taking measures to protect peasant workers in the cities. In 2003, the state helped them to retrieve unpaid wages. In October 2003, Premier Wen learned through a peasant woman 33

"This year the center's 'San Nong' inputs will increase by 30 billion yuan," Xinhuawang, posted at http://news.xinhuanet.com/newscenter/2004-01/28/ content_1289337.htm on 28 January 2004. 34 State Statistical Bureau, Zhongguo Tongji Zaiyao (China Statistical Abstract) 2005. Beijing: China Statistical Press, 2005, pp. 116-118. 35 Refer to the chapter by ZHAO Litao for detailed discussion of the Hukou reform.

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about his husband's unpaid wage and the commonality of this issue. He and Hu Jintao ordered a nationwide campaign where national ministries and local government were mobilized to help peasants retrieve unpaid wages from employers. By January 2004, 21.5 billion yuan or 68% of unpaid wages of peasants were paid out.36 In 2003, the central government (the center) reformed shelter and repatriation stations (^^iSi^ftlllSD where station clerks used to physically abuse and financially extort peasant workers. The center also asks localities to make provisions for children's education, health care and work safety, and employment training for peasant workers. The No. 1 Central Document in 2004 also declared that peasant workers were an integral part of the working class, aiming to lift their status to that of urban workers. The measures for rural development and overhauling the residency system play a dual role. They would both address urban-rural income gaps and the rigid divide between peasants and higher strata. 5) Introducing Examination in Recruiting and Promoting Officials. Promoting officials on the basis of their merits, abilities, and qualifications is the best way to promote fair social mobility and reduce the influence of officials' family background. Since the late 1990s, China has been moving toward a fairer system of recruiting and promoting officials. As early as 1996, the Department of Organization (DOO) of the central Party approved the use of "open selection and appointment" consisting of recommendation, exams, and evaluation in promoting officials and cadres. In 1998, the Ministry of Personnel ordered the Party and governmental agencies to promote officials through "competition". The approved appointment procedures consisted of open registration, exams and questions and answers, evaluation by the masses, investigation by the organization in charge, and public notice for comments prior to formal appointment. The DOO called for wider use of "open selection and appointment" in official promotion in 1999.37 Under Hu and Wen, these trends continue and 36

"The New Concept of New Deal"; "The Year of 2004: Eight Issues People Heed," posted http://www.xinhuanet.com on 9 March and 28 January 2004, respectively. 37 Lu Xueyi, Dangdai Zhongguo Shehui Liudong, p. 225.

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thicken. Now it has been common for national and local government (including the government, the People's Congress, and the court) to recruit clerks and officials through exams and interviews. In some localities such as Jiangsu, "open selection and appointment" was also used as experiments in appointing township and county chiefs after Hu and Wen assumed power. 38 ACHIEVEMENTS AND CHALLENGES As discussed, while China's rapidly increasing living standard deserves many credits, income inequalities and limits in social mobility for the low strata are worrying. Hu and Wen pay greater attention to social inequality and mobility than their predecessors. This section assesses the positive and negative aspects of China's income distribution and social mobility and Hu-Wen policies for addressing these issues. Overall, China has achieved several successes in containing inequality. First of all, the average living standard in China continues to grow rapidly. During the 1978-2002 period, China's rural household income grew at an average 7.2% a year and urban household income 6.7% a year. In 2004, both rural and urban household income continued its noticeable growth, at 6.8% and 7.7%, respectively. Rural income growth in 2004 was the highest since 1997 and the second highest since 1986.39 Second, continuous growth has reduced the level of absolute poverty sharply. The World Bank estimated that in 1999, 19% of the Chinese lived below the international poverty line of US$1 a day. In 2004, this share dropped to 15%. More and more Chinese are breaking out of a life of mere subsistence.40 38

For a thorough discussion of social policies and political experiments under Hu and Wen, refer to the chapter by HSU Szu-chien and Hongyi Lai, Hu Wen quan toushi. 39 Zbongguo Tongji Zaiyao {China Statistical Abstract) 2005, p. 102. 40 World Bank, World Development Report 1997, 1999/2000; 2003; 2004. New York: Oxford University Press.

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Third, welfare and regional development programs in the 2000s apparently have restrained the rapidly growing trend of "relative poverty", especially urban-rural and regional income disparities.41 The rural-urban consumption ratio declined from 0.433:1 in 1985 to 0.278:1 in 2001. It improved slightly to 0.283:1 in 2002. With economic support for rural areas under the Hu-Wen administration, this ratio increased to 0.312 in 2004, improving to the level in 1998 (Figure 12.3). As stated, in 2004, the rural income registered the highest annual growth since 1997. The resident's income in the interior was 67% that of the coast in 1985. This ratio fell sharply to 46.5% in 2001. With western development and northeast revival programs, this ratio only dipped slightly to 46.1% in 2002 and 45.2% in the first half of 2004 (Figure 12.3). The underlying reason is faster growth of the interior regions in recent years. The annual GDP growth of the western provinces during the 2000-04 period averaged 10.1%, 1.8% above the national average and 1.6% higher than the region's average from 1997-99- In 2004, three northeastern provinces averaged 12.2%, 2.7% higher than the national one. 42 The Gini coefficient rose very slightly from 0.459 in 2001 to 0.465 in 2004 (Figure 12.2). Fourth, a preliminary social security system has been established and programs for developing the poor area have been instituted. Now the Aid-the-Poor Program covers destitute rural residents; the MSG program and retirement pension/insurance take care of the very poor and old in the cities, respectively. The Western Developmental Program introduced by Jiang Zemin and Zhu Rongji and maintained by Hu and Wen, as well as the Northeast Revival Program introduced by Hu and Wen, assists the growth of the west and the northeast, respectively. Fifth, outstanding barriers discriminating against migrant workers in the cities are being reduced, and peasant workers enjoy better treatment at the workplace. In Shenzhen, for example, peasants can 41

Yang Yiyong and Huang Yanfen, "New Situation in Income Distribution of China's Residents," p. 226. 42 Zhongguo Tongji Zaiyao (China Statistical Abstract) 2005, pp. 26, 21.

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legally live in the city with either proof of employment or a rented room. Foreign-invested firms renovate dormitories and install recreational facilities in order to attract these workers. Sixth, the government realized the importance and urgency of rural development which it either overlooked or conducted experimental reform in selected localities. It has accelerated fiscal and governmental reforms and acted to increase financial support for the countryside. Regarding social mobility, progresses in the following areas are worth noting. First of all, social security and the MSG program offer minimal protection for the urban unemployed. Subsidies and financial inputs into the countryside have eased peasants' burdens and increased their income. These policies help to some extent the low stratum (peasants and urban and rural unemployed) to reduce economic hardship, survive economically and advance socially. They ease somehow potential displeasure with the society and the regime. Furthermore, Hu and Wen pay greater attention to the plight of peasants and peasant workers and have adopted policies to address it. Their policies help to shed the media spotlight on predicament of the countryside and migrant workers and rally social efforts to combat the problems. Wages for migrant workers in Guangdong have increased modestly in recent years, as the monthly wage for a peasant worker in Shenzhen has grown from 400-500 yuan since the 1990s to 600-700 yuan nowadays. 43 In addition, as the state criticizes discrimination and stigma against peasant workers and acts to remove it, greater space has opened up for advancement of peasants. Moreover, the state's recent fiscal support for education in poverty areas in the interior regions is good news for social mobility of children of poor peasants. In addition, the new leadership's call for local provision of public services for migrant workers and their children (such as the former's training and the latter's schooling) may gradually remove the stumbling bloc against peasants' social advancement. 43

Interview with a taxi driver in Shenzhen, 10 July 2005.

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Nevertheless, China continues to face daunting challenges. First of all, China needs to follow through industrialization and move most of its peasants into non-farming jobs. Given that 60% of the population resides in the countryside, China has a long way to go in raising the income and status of its peasants and cutting the rural-urban income gap which stands about 69% (per capita rural resident income was 31% of the urban level in 2004). China needs to significantly forge urbanization and turn peasants into urban dwellers in order to raise their income. In addition, China's current social security is very thin compared with developed countries. In 2002, China spent only 0.47% of its budgetary expenditure and 0.1% of its GDP on the MSG program. In contrast, in the mid 1990s developed countries spent 1% to 2% of their GDP on social relief programs. 44 Furthermore, China has to do more to provide decent basic services for the poor and empowering them, hence creating greater opportunities for their upward mobility. The lack of these public services severely restricts the social mobility of the low strata. According to the World Bank, the government has yet to deliver health, education, utilities, and security services to the poor, improve their human capital, and provide them with equal economic and social opportunities as other residents. The state can also empower the poor through transferring the responsibilities of service provision and regulation to local government, communities, households, private operators, and non-governmental organizations.45 In this regard, China has a long way to go in providing public services for all social groups, especially the low-income group and lower strata, and helping these groups with social advancement. China has yet to undertake the following tasks for underdeveloped rural and urban areas as well as low-income groups: 1) provide affordable 44

Tang Jun, "Leap-like Development;" p. 246. Data for China are computed using statistics provided in Tang and China Statistical Yearbook 2003, p. 338. 45 See World Bank, World Development Report 1990: Poverty; World Development Report 2000/2001: Attacking Poverty; World Development Report 2004: Making Services Work for Poor People. New York: Oxford University Press.

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and decent education, health and utilities, 2) deliver efficient and friendly governmental services, and 3) empower local communities through enhancing the power of elected village committees or urban residential organizations in running communal and economic affairs and in restraining corruption and power abuse by local cadres. China has yet to step up social security reform and provide social welfare for rural residents, including health care and retirement pensions. Now only very rich counties can provide health care and pension for their residents. Financing primary and secondary education for children, especially rural children is a key to increasing their future income and reducing the urban-rural divide. Moreover, China has yet to fully utilize personal tax for redistribution, which developed countries do successfully. China's tax revenue comes mainly from value-added tax. Constituting a miserable 6.9% of China's tax revenue in 2003, personal income tax failed to even up unequal income. The state thus has to fall back on other poverty-fighting measures described. While China needs to reduce tax rates and make them progressive, it should collect legitimate taxes on the rich for income redistribution and helping out the poor. Finally, promotion of officials, especially middle-and high-ranking officials, can be improved through greater use of public participation and transparency. This will reduce the undue influence of officials' family backgrounds, patron-clientelism and bribery and promote meritocracy in official advancement.

Chapter

13 Labor Market Reforms under the Hu-Wen Administration Ihao Litao

Labor market reforms in the past two decades have greatly promoted labor mobility from countryside to cities, from inland provinces to coastal regions. The dominant theme has been reforming the household registration or hukou system, an institution that strictly controls population movement. This involves two types of institutional change. On one hand, hukou reforms have made urban hukou status increasingly accessible to rural residents. Conversion to an urban hukou holder provides a route for rural residents to access urban employment and social welfare. On the other hand, efforts have been made to de-link urban employment from urban hukou status. Many urban jobs no longer require local permanent resident status. These reform measures, coupled with rapid economic growth, have produced unprecedented labor flows in human history. In terms of rural-urban migration, the number of migrants increased from 2 million in the mid-1980s to 70 million in the mid-1990s and

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94 million in 2002.1 In terms of interprovincial migration, the number of migrants increased from 11.83 million in the period of 1985-1990 to 27.53 million in the period of 1995-2000.2 However, there are certain limits to earlier labor market reforms. Hukou reforms proceed too slowly to benefit the majority of rural migrants. So far hukou reforms are largely confined to towns and small cities. Medium-sized and large cities have been very cautious in controlling the size of their populations. Moreover, requirements for hukou conversion are so high that only a small minority of investors and well-educated talents are qualified. Early reforms aiming to de-link urban employment from urban hukou status have been more successful. However, other institutions governing the distribution of social welfare, such as education, social security and labor protection, are still firmly linked to urban hukou. As a result, migration to urban cities does not eliminate rural-urban hierarchy. Instead, it reproduces such a hierarchy within the cities. Bad conditions, excessive overtime, no contract and no social security all illustrate rural migrants' second-class status in the cities. Into the new millennium, there are more than 100 million rural migrant 'workers in the cities, surpassing urban workers as the main Chinese industrial workforce. Politically, rural migrant workers are seen as part of the working class, a category that is politically superior to other social groups. Economically and socially, however, they share much of the features of the urban underclass. This discrepancy has prompted the Hu-Wen administration to pay more attention to migrant workers. In the sections below, I will describe significant policy shifts under the Hu-Wen administration in dealing with migrant 'workers.

1

Huang, P. and F. N. Pieke (2003). "China migration country study." Paper presented at the Conference on Migration, Development and Pro-Poor Policy Choices in Asia, Dhaka, 22-24 June 2003. 2 Lin, J. Y., G. Wang and Y. Zhao (2004). "Regional inequality and labor transfers in China." Economic Development and Cultural Change 52: 587-603.

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MOVING TOWARD AN INTEGRATED LABOR MARKET Rural-urban segregation is one of the many legacies of China's experimentation with socialism. Urbanites enjoy secure employment and privileged access to food, housing, education, healthcare, public transportation, pension, and other forms of welfare benefits. In contrast, peasants are excluded from this welfare system. For about two decades, they have to feed themselves under collective farming, and hand over a significant portion of agricultural products to the state at artificially low prices set by the state. Labor migration from countryside to cities is effectively regulated by the state through a host of institutions, such as the hukou or household registration system, government monopoly of job assignments, the system of food rationing, and the system of welfare provision.3 These institutions have been creating segmented and fragmented labor markets in China eversince the late 1950s. Individuals have been denied freedom of residence and migration. Over time urbanbiased policies create a rural-urban hierarchy, with the vast number of Chinese peasants being left out of the socialist welfare system. As the rural-urban segregation becomes institutionalized, urbanites come to perceive themselves as the privileged class in the society. Later on this becomes the psychological basis for the discrimination against rural migrants. While the institutions of household registration, job assignments and food rationing were still in place in the 1980s, new developments began to erode their effectiveness in controlling labor migration. Rural reforms not only freed up rural labor force from collective farming, but also provided extra grain to the urban market, making it possible to buy food without urban registration status. 4 Meanwhile, the expanding infrastructure investments in the cities and the booming economy in the coastal regions generated a huge demand for lowcost labor. Many of the job vacancies were created outside the state employment system. 3

Cheng, T. and M. Selden (1994). "The origins and social consequences of China's Hukou system." The China Quarterly 160: 818-855. 4 Zhao, Y. (1999). "Labor migration and earnings differences: The case of rural China." Economic Development and Cultural Change 47: 767-782.

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The rapid but uneven economic development is a major driving force of labor migration. The rural-urban income inequality was declining in the early 1980s, but began to increase in the latter half of the 1980s (see Appendix 1). In response to the changing patterns of income differences, rural-urban migration was negligible in the early 1980s, began to emerge on a large scale in the late 1980s, and grew rapidly throughout the 1990s. Into the new millennium, more than 100 million peasants are believed to seek employment opportunities outside of their villages. Seen in this light, the labor market has been expanding to cut across the once rigid rural-urban boundary. Other than the rapid but uneven economic development, institutional changes in the labor market has been an important contributor to the rising number of rural migrants. The most significant change is the introduction of self-supplied food hukou (zili kouliang hukou) in 1984 and the temporary resident permit (zanzhu zheng) in 1985. A temporary hukou and resident permit can be issued to any rural migrant who has a regular job or business in the city. Those with a temporary hukou or resident permit can legally live and work in the receiving cities, but as the prefix "self-supplied" suggests, they are denied access to food rationing and many other benefits available only to those with an urban hukou. Another significant change is the introduction of blue-stamp (lanyiri) hukou. This type of hukou is issued to investors, buyers of property, and professionals. A one-time entry fee is charged for the blue-stamp hukou. Because of this payment, the holders of bluestamp hukou, unlike those of self-supplied hukou, enjoy most of the community-based benefits and rights.5 The introduction of temporary hukou and temporary resident permit proves to be an important institutional innovation. It leaves the prevailing hukou system intact and unchallenged; but in a limited way, it de-links urban employment from urban hukou status. With the introduction of temporary residence, the urban labor market is open to rural migrants. The introduction of blue-stamp hukou 5

Liu, Z. (2005). "Institutions and inequality: The Hukou system in China." Journal of Comparative Economics 33: 133-157.

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adds some flexibility to the rigid hukou system. It allows certain non-urban hukou holders to live and work like urban hukou holders without going through the long and difficult ^M&cw-conversion process governed by a strict quota system. These reform measures undoubtedly facilitate rural-urban migration. They have greatly contributed to economic growth and income transfer.6 However, as a compromise between urban need for low-cost labor on one hand and the need to preserve urban privilege on the other, the early institutional changes in the hukou system are only the first step to an integrated labor market where individual laborers can move freely nationwide. While they open up urban labor markets to rural laborers, they nonetheless recreate a distinct and inferior status category — temporary hukou or temporary resident — for rural migrants. As a result, rural migrants are granted access to urban employment, but are denied access to other forms of urban privilege. Those with a blue-stamp hukou seem to fare better, but because the experimentation with blue-stamp hukou is largely limited to small towns, the overwhelming majority of rural migrants in large cities are at best holders of temporary resident permit. Moreover, few migrants seem to qualify for blue-stamp hukou even in small towns and cities. The Chinese government began a new round of hukou reform in the late 1990s. Its purpose is to promote greater labor mobility by making urban hukou more easily accessible to rural residents. Under the new scheme, family reunion becomes an easy route for conversion to urban hukou status. Converting from a rural to urban hukou is easier for children, elderly parents, husbands and wives whose parents, children, or spouse, respectively, are urban hukou holders. The localized practice of hukou for "talents and investments" further increases the accessibility of urban hukou to selected groups of talents and investors. Other measures conducive to migration include streamlined procedures governing temporary and permanent migration, and the abolition of the rural-urban migration 6

World Bank (1997). Sharing Rising Incomes: Disparities in China. Washington, DC: World Bank.

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quota system in small cities and towns nationwide. 7 Some provinces such as Fujian, Guangdong, Jiangsu and Zhejiang take a bolder step to erase the rural-urban distinction in the houkou system. They abolish the decades old distinction between agricultural and nonagricultural hukou and register people as either local or temporary residents. Holders of blue-stamp hukou and self-supplied hukou are converted to local hukou if they meet locally-set conditions that include a local legal residence and a stable job. HUKOU-BASED

LABOR MARKET SEGMENTATION

The 1997-2002 hukou reform, however, still reflects the long-standing urban bias against rural laborers. The entry barriers to urban hukou are too high for the overwhelming majority of rural migrants. Most of them do not have an immediate family member with an urban hukou in the receiving city. Few of them are qualified for the policy of hukou for talents and investments. The modified policy of granting local hukou to migrants with a permanent residence and a stable job is probably the most accessible route for rural migrants. However, due to job irregularity and lack of permanent residence, very few seem to qualify for local hukou, especially in larger cities where the requirement for income, employment and residence are considerably higher.8 From labor mobility point of view, the 1997-2002 reform is not inclusive enough to eliminate labor market segmentation in urban China. An overwhelming majority of rural migrants are still in a distinct 7

In June 1997, the State Council approved the Ministry of Public Security's "Experimental Plans on Reforming the Hukou System in Small Cities and Towns" and "Suggestions on Improving Rural Hukou Management." This experimental stage was followed by a national implementation starting October 2001. 8 In Ningbo, Zhejiang province, a national model of the hukou reform, less than 2% of the 2 million rural migrants are expected to qualify for local hukou. In Shijiazhuang, the capital city of Hebei province, less than 4% of the 300 thousand migrant workers were qualified for local hukou in 2001 (cited from Wang, F.-L. (2004). "Reformed migration control and new targeted people: China's Hukou system in the 2000s." The China Quarterly 111: 115-132).

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category, separate from urbanites. Institutions developed to protect the interest and rights of urban hukou holders remain unavailable to "outsiders" from the countryside. Of course, labor market segmentation is widely observed in a variety of market economies. In a segmented labor market, some jobs, firms, occupations, and industries cluster into the core sector while the others fall into the marginal one. 9 The level of wage income, the degree of job security, the duration of employment, the opportunity of promotion, and the importance of education for wage determination and promotion all vary with the sectoral location, with the core sector being much more attractive than the marginal one.10 In terms of labor market segmentation, urban China is no different from other market economies. However, there is a crucial difference in the basis for segmentation. While race, ethnicity, gender and/or education are important determinants of labor market outcomes in other market economies, hukou status is uniquely an important basis of segmentation in urban China. Hukou as an institution divides the urban population unambiguously into permanent dwellers and temporary residents. The former are well protected by the government in terms of employment, pay, education, and social security; the latter are exposed to a plethora of adverse market forces due to lack of organization, collective bargaining, and other forms of labor protection and social security. 9

Doeringer, P. B. and M. J. Piore (1971). Internal Labor Markets and Manpower Analysis. Lexington, MA: Heath; Dunlop, J. (1966). "Job Vacancy Measures and Economic Analysis." In The Measurement and Interpretation of Job Vacancies-. A Conference Report, National Bureau of Economic Research. New York: Columbia University Press; Kerr, C. (1954). "The Balkanization of Labor Markets." pp. 92-110 in Labor Mobility and Economic Opportunity, edited by E. Wight Bakke. Cambridge, MA: MIT Press; Thurow, Lester C. (1975). Generating Inequality: Mechanisms of Distribution in the U.S. Economy. New York: Basic Books. 10 Osterman, Paul (1975). "An empirical study of labor market segmentation." Industrial and Labor Relations Review 28: 508-523; Stolzenberg, R. M. (1978). "Bring the boss back in: The employer size, employee schooling, and socioeconomic achievement." American Sociological Review 43: 813-828; Villemez, W. J. and William P. Bridges (1988). "When bigger is better: Differences in the individual-level effect of firm and establishment size." American Sociological Review 53: 237-255.

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The contrast between temporary migrants and permanent residents is striking in almost every aspect of labor market outcomes: -

-

-

Permanent migrants earn higher income than temporary migrants.11 People who obtain urban bukou late in their lives do not fare so well, as compared to other urban residents. They are less likely to enjoy employer-provided healthcare benefits, and are more likely to be self-employed or unemployed (see Footnote 5). Earnings returns to education are higher for urban hukou earners than for rural hukou earners (see Footnote 5). Much higher percentage of rural migrants experience joblessness than urban hukou holders. According to surveys conducted in Beijing in 2000 and 2002, nearly 20% of migrants had been jobless for at least three months during their stay in Beijing (calculated from Huang and Pieke, 2003, p. 5). By comparison, the registered unemployment rate for Beijing was 1.4% at the end of 2002.12 The overwhelming majority of migrant workers suffer from inadequate labor protection. Long working hours — up to 10-12 hours a day — is a norm. Wage default is not uncommon. There is hardly any compensation for sick leave. 13

Of course, urban hukou holders are also increasingly stratified in the course of market transition. But this does not change the fact that the urban labor market is segmented along the line of hukou status. Having a rural hukou means a second-class status and incomplete 11

Fan, Cindy C. (2001). "Migration and labor-market returns in urban China: Results from a recent survey in Guangzhou." Environment and Planning A 33: 479-508. 12 China Statistical Yearbook of Labor (2003). China Statistical Yearbook of Labor 2003- Beijing: Zhongguo laodong chubanshe. 13 According to a year-end inspection done by the Shenzhen government in 2003, 40% of the inspected enterprises had defaulted on wage payments, which amounted to more than 100 million yuan (Ministry of Labor and Social Security, 2004). According to a survey done in Beijing in 2002, 46% of migrant workers had been ill during their stay in Beijing. Of these, 93% received no payment from their employer for their medical expenses (cited from Huang and Pieke, 2003, p. 5).

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membership in the receiving community.14 Low wages, bad conditions, excessive overtime, and lack of contracts and social security typically characterize migrants' work life in urban cities. While economists tend to explain the income difference between migrants and urban hukou holders in terms of human capital, arguing that migrants' income disadvantage is caused by their lower educational levels and the poor quality of rural education, the hukou-based inequality is more than that. Human capital is only partially responsible for income gap between rural migrants and urbanites. The disparity remains, though to a lesser degree, when education is taken into account. Moreover, income is only one of the many differences setting rural migrants apart from urbanites. Other differences, such as poor working conditions, excessive overtime without compensation, and a lack of contracts and social security, are based on hukou status rather than human capital. Hence labor market segmentation in urban China first and foremost stem from institutions such as the hukou system. THE IMPACT OF LABOR MARKET SEGMENTATION ON LABOR MOBILITY Labor market segmentation has a negative impact on labor mobility. It reduces the attractiveness of urban jobs for rural laborers, thus lowering the overall rate of labor mobility, especially the rate of mobility for groups with alternative employment opportunities. From labor mobility point of view, China's labor market features low rates of labor mobility, low rates of labor mobility for the best educated, and high turnover rates for migrant workers. Such patterns are closely related to labor market segmentation and the second-class status of migrant workers in the segmented urban labor markets. Overall low rate of labor mobility. According to the migration literature, at the individual level willingness to migrate is positively 14

Solinger, D. J. (1999). Contesting Citizenship in Urban China-. Peasant Migrants, the State, and the Logic of the Market. Berkeley and Los Angeles, CA: University of California Press.

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correlated with interregional income differentials, and negatively related to financial and psychic costs involved in migration. If financial cost is a function of the distance of migration, and if psychic cost is mainly associated with heterogeneity in language and ethnicity, the rate of interprovincial migration in China should be comparable to that of interstate migration in the United States (see Footnote 2). If interregional income differentials are also considered, China would have a much higher interprovincial migration rate because of its much higher regional income disparity. However, Johnson's (2003)15 research finds that migration is far less common in China than in the United States. During the one-year period of 1996-1997, 2.5% of all employed workers moved between states. This is four times the interprovincial migration rate of the employed in China during 1995-2000 (see Footnote 2). Low rate of labor mobility for the well educated. The migration literature suggests that on average, the better educated are more likely to migrate. However, this is only partially true in rural China. Although migrants are in general more educated than non-migrants, many of the best educated prefer staying as local elites. This explains why local non-farm workers are more educated than outmigrants. A survey conducted in Sichuan province in 1995 and early 1996 finds that while migrants receive more education than nonmigrants (7.56 versus 6.24 years of schooling), they are not as well educated as local non-farm workers (7.56 versus 8.16 years of schooling). This comparison is especially informative because a migrant worker earned about 2,400 yuan more than a local non-farm worker 16 (also see Footnote 4). For the well educated, migration is the second best option next to local non-farm employment. 17

15

Johnson, D. G. (2003). "Provincial migration in China." China Economic Review 14: 22-31. 16 On average the explicit costs of transportation, housing, and certificates amounted to 721.7 yuan for each migrant worker, about 30% of the earnings difference between a migrant worker and a local non-farm worker. 17 Guang, Lei and Lu Zheng (2005). "Migration as the second-best option: Local power and off-farm employment." The China Quarterly 181: 2 2 ^ 5 .

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Consequently, the best educated and the least educated are less likely to migrate for urban employment. 18 High turnover rates for rural migrants. The second-class status of rural migrants on one hand leads to comparatively low rates of migration from countryside to urban areas, on the other hand results in excessive mobility for those who have already migrated to cities. Unattractive jobs reduce migrant workers' commitment and lead to high turnover rates. For instance, in Dongguan, an industrial boomtown in the Pearl River Delta region, nearly 10% of the workers are estimated to leave for other jobs annually, while the proportions are as high as 20% in the textile and toy sectors.19 Some surveys report much higher turnover rates. 20 To prevent workers from quitting, many factories resort to extreme measures such as holding migrant workers' ID cards, and demanding "deposit" of up to two months' wages. Without institutional means to safeguard their interests and rights, individual migrant workers are intrinsically weak in the urban labor market but they are not entirely powerless. Immobility and excessive mobility described above are rural laborers' response to labor market segmentation. When individual actions combine to reach a large scale, rural laborers are able to have repercussions on the labor market in the form of "labor shortage". Shortages of migrant workers seem strange and least likely in a country with massive labor surplus. Nonetheless, Guangdong, Fujian, and Zhejiang provinces began to suffer from a shortage of migrant workers in 2003. The situation worsened in 2004. Guangdong province, for instance, has employed 19 million migrant

18

Li, H. and S. Zahniser (2002). "The determinants of temporary rural-to-urban migration in China." Urban Studies 39: 2219-223519 Ministry of Labor and Social Security (2004). "Guanyu mingong duanque de diaocha baogao [Report on Shortages of Migrant Workers]." 20 The rate of turnover could be much higher for some particular enterprises. One report, for instance, reveals that the turnover rate reached 7% a month in a factory in Dongguan. See "Boot Camp at the Shoe Factory," The Washington Post, 3 November 1996.

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workers, but is still short of 2 million more (see Footnote 19). As part of China's manufacturing powerhouse, Fujian and Zhejiang are plagued by the same problem. Most companies in need of rural laborers are involved in work that is labor-intensive, are small- or medium-sized businesses, and are engaged in toy manufacturing, electronic assembly, attire-making and plastic processing. Companies offering monthly 'wages — including overtime pay — below 700 yuan have serious recruitment problems, especially in recruiting young female workers between the age of 18 and 25, and skilled workers with proper vocational trainings (see Footnote 19). Investigations conducted separately by the Ministry of Labor and Social Security and the People's Bank of China21 suggest that while the growing demand for labor and the rising rural income in 2004 are partially responsible for the problem, other factors such as low wages, poor working conditions, and inadequate protection of migrant workers' rights also play an important role. According to their reports, the average monthly pay for migrant workers is 160 yuan lower in Guangdong than in Jiangsu. Cities in Guangdong province, such as Guangzhou, Shenzhen, and Dongguan have lower minimum wages than inland cities in Shanxi and Jiangxi. Moreover, the average pay for workers in the Pearl River Delta region has increased by only 68 yuan in the past decade. If rising prices of goods and cost of living are factored in, real wages have actually dropped. Interviews with rural laborers suggest that their psychological limit is a maximum of ten hours a day for a monthly pay of 600 yuan. However, many of the jobs available require them to work 12 hours each day for about 500 yuan a month, leading many of these workers to settle for less attractive work in their hometowns or move to factories in the Yangtze River Delta, where the pay and working conditions are better. 21

The Ministry of Labor and Social Security is responsible for employment and labor protection, among other things. Its report was released on 8 September 2004. The People's Bank of China, as China's central bank and monetary authority, is concerned about the impact of labor shortage on labor costs and productivity.

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Enforcement of laws and regulations that aim to protect labor rights is notoriously weak. Very often employers fail to sign labor contracts and pay labor insurance. Frustrated by low wages, wage defaults, bad conditions, excessive overtime, no contracts and no social security, migrant workers vote with their feet and leave South China for more attractive jobs elsewhere. While the problem is believed to be a localized one that is unlikely to spread or change the overall picture of China's massive surplus labor, labor shortage in a labor abundant country is indeed a wake-up call for low-cost, labor-intensive enterprises, and for labor market institutions that have long neglected the interests and rights of migrant workers.

INSTITUTIONAL BARRIERS TO AN INTEGRATED LABOR MARKET The rising number of rural migrants suggests that market reforms in the last two decades have lowered institutional barriers to the urban labor market. In the general process of liberalizing price, trade, and labor mobility, temporary hukou and resident permit was introduced in the mid-1980s. Hukou-based food rationing was abolished in the early 1990s. Jobs are increasingly allocated through market mechanisms. The decade-old rural-to-urban migration quota system was removed in small cities and towns. The distinction between agricultural and non-agricultural hukou was abolished. The policy of hukou for talents and investments further opened large cities to a minority of investors and the highly educated. However, labor market segmentation along the line of hukou status and the problem of labor shortage against the backdrop of massive labor surplus indicate that the focus of policy should shift from controlling and guiding the migration process to improving the employment environment of the migrant workers. As institutions linking urban employment to urban hukou are in the decline, more attention should be given to institutions linking education, housing, and other forms of social services to urban hukou status.

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Institutions that impede the effort to de-link urban employment from urban hukou status are largely laws, which have a broad impact on migration and mobility. Other than the laws, there are institutions with more specific functions, which combine to shape life chances and produce labor market segmentation in the cities. The most significant legal barriers are found in: "The Constitution of the People's Republic of China." China's constitution in the 1950s explicitly guaranteed a plethora of freedom and rights, including freedom of residence and migration.22 However, as China began to tighten its control on population movement in the late 1950s, such freedom "was increasingly restricted. In recognition of the changed situation, the 1975 Constitution finally deleted the article that guaranteed people freedom of residence and migration. Up till today, freedom of residence and migration has no legal foundation in the Constitution. "Regulation on Household Registration in the People's Republic of China." Issued in 1958, this is the first and the only hukou administration law whose establishment followed legal procedures. According to the regulation, "When a person migrates from a rural area to a city, he/she must apply for moving-out at the household registration agency of the place of residency, and present certificate of employment from an urban bureau of labor, admission letter from a school, or certificate of moving-in from an urban household registration agency."23 Although restrictions on rural-to-urban migration were gradually lifted in the course of market transition, this regulation is still in place as of today. "City Planning Law of the People's Republic of China." This law was passed in 1989 and went into effect in 1990. Article 4 stipulated 22

In September 1949, on the eve of the founding of the People's Republic of China, the Chinese People's Political Consultative Conference issued the Common Programme, China's first de facto constitution. Article 5 stipulated that the people shall have a plethora of freedom and rights, including freedom of moving from one place to another. The 1954 Constitution similarly guaranteed people freedom of residence and freedom to change their residence. 23 National People's Congress (1958). "Regulations on Household Registration in the People's Republic of China [Zhonghua renmin gongheguo hukou dengji tiaoli]."

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that "the state shall guide itself by the principle of strictly controlling the size of large cities and developing medium-sized and small cities to an appropriate extent in the interest of a rational distribution of productive forces and of the population." A large city means one which has a non-agricultural population of 500,000 or more in its urban and inner suburban districts. By strictly controlling the size of large cities, this law reinforces restrictions on rural-to-urban migration, especially migration to large cities. Other than legal barriers, there are institutions with more specific functions, which impede labor mobility one way or another: Hukou system. The hukou system, which registers a person at a specific place, was established in the 1950s and was perfected afterwards. It creates separate categories to divide the population into different hukou types such as rural or urban, agricultural or nonagricultural. Conversion from agricultural to non-agricultural hukou, from rural to urban hukou is strictly controlled by the state. Over time, the rural-urban distinction crystallizes into rural-urban hierarchy, with life chances differing sharply between rural and urban hukou holders. Hukou reforms in the past two decades have been largely confined to small cities and towns (defined as county-level cities, county seats and established towns). Because of the state policy to strictly control the size of large cities, many challenges are still ahead to extend hukou reforms to medium-sized and large cities. Employment system. Facing the surmounting pressure to lower the urban unemployment rate or simply to protect urban labor market, city governments often have employment policies that favor urban hukou holders over non-hukou holders. For some jobs, they require local firms and institutions, state-owned or privately-owned, to hire only local residents. For instance, "students with a Beijing hukou only" has become a requirement in recruitment tests for civil servants at some central government agencies and agencies in the Beijing municipality.24 Clearly hukou status, not education, is central to this type of discrimination. Shanghai municipality has similar policies. It

See "Discrimination in Job Market." China Daily, 9 May 2005.

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issued regulations in 1994 that divided jobs into three categories. More than 100 types of employment were reserved exclusively for those with a local hukou status; another 20 to 30 types of employment were available to rural migrants only if no candidates with a local hukou applied; and the third type of employment had no hukou requirement. 25 Education system. Public spending on education in urban cities is related to the size of urban population (with urban hukou status). As a result, local governments have no incentive to provide education to the children of migrant workers. Public schools either do not accept them, or ask for very high extra pay. A small number of highincome migrants are able to send their children to private schools that charge very high tuitions. For the overwhelming majority of rural migrants who bring their children along, the best choice is private schools for migrant children, whose equipment and teaching quality is often lacking. The education system therefore reinforces segregation based on hukou status. Social security system. Varieties of social welfare have long been an urban phenomenon, closely associated with state employment. With the state sector shrinking in the late 1990s, the state began to explore the possibilities for the establishment of a social security system independent of enterprises and public institutions, and has broadened the social security system to cover urban residents, state employees or not. In 1998, the Chinese government established the system of "three guarantees," namely, guarantee of basic subsistence allowance for laid-offs from state-owned enterprises, guarantee of unemployment insurance, and guarantee of minimum subsistence allowance for urban residents. However, the new system has largely excluded rural migrants as beneficiaries. For migrant workers, the road to social security remains long and arduous. 26 25

Huang, P. (1996). "Hukou system and rural-urban migration in China." CERES, Rome: UN Food and Agriculture Organization. 26 According to a news report, as of 2004, only 2.7% of migrant workers are covered by the medical insurance system, and 3.4% by the pension system. See, "Social Security Plan Has Long Way to Go," China Daily, 20 May 2004.

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Housing distribution system. Migrants are largely excluded from the mainstream housing distribution system.27 Homeownership is largely out of their reach. While they are eligible for commodity housing, they are ineligible for bank mortgages. In the secondary housing market, where older housing units change hands, a local hukou is often required. In terms of renting, migrant workers are not qualified for subsidized public housing for low-income families. Given these constraints, the majority tend to live in less-well built dwellings with less kitchen and bathroom facilities. Many of them have to leave their family behind in the countryside (see Footnote 17). Despite the fact that rapid economic growth has generated massive labor flows from countryside to urban cities, from inland provinces to coastal regions, institutional barriers remain to block rural migrants' full access to the urban labor market, as well as various forms of public goods and social services. Further reform of such institutions is therefore needed in order to promote greater labor mobility, and to create a more favorable employment environment for migrant workers. LABOR MARKET REFORMS UNDER THE HU-WEN ADMINISTRATION A number of factors make migrant workers a prominent issue for the Hu-Wen administration. The first factor is the incompleteness of earlier reforms. Labor market reforms in the 1980s and 1990s have de-linked urban employment from urban hukou status, but fail to de-link social welfare from urban hukou status. The ubiquitous phenomenon of hukou-based labor market segmentation and the emerging problem of regional labor shortage suggest that the earlier reform has reached its limit. The second factor is the sheer size of migrant workers. There are more than 100 million migrant workers in the cities, believed to have surpassed urban workers as the main Chinese industrial workforce. 27

Wu, W. (2004). "Sources of migrant housing disadvantage in urban China." Environment and Planning A 36: 1285-1304.

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This demographic change has prompted the government to acknowledge migrant workers as "members of the working class" even prior to Hu-Wen administration, a category that is politically superior to other social groups. 28 The third factor is the growing income disparity between rural and urban areas, between inland and coastal regions, and between rich and poor. The increasingly unequal income distribution is perceived as a threat to social stability. Concern over social unrest, which tops other concerns, prompts the Hu-Wen administration to adopt a "pro-people" approach in dealing with domestic issues, and to emphasize the need to balance growth-centered economic policies with social policies catering to disadvantaged groups, such as peasants, migrant workers, and laid-off workers. The Hu-Wen administration is keenly aware of problems facing rural migrants, such as excessive restrictions on the types of employment they are allowed to have, inadequate protection of the rights and interests of non-local laborers, and frequent wage defaults and illegal collection of fees. However, options available to the Hu-Wen administration are limited in certain ways by the past reforms. First, hukou reforms proceed too slowly to benefit the majority of migrant workers. Medium and large cities still maintain a rural-to-urban migration quota system. Moreover, local governments make their own hukou policies, and the requirement for obtaining an urban hukou is often too high for rural migrants. Given the slow pace of hukou reforms, it is unlikely that hukou reform can be an immediate solution for the Hu-Wen administration. Second, migrant workers' second-class status is the result of a host of institutions instead of a single one. This means that to improve the employment environment of migrant workers, the Hu-Wen administration should have comprehensive, well coordinated programs. This could be a very challenging task because different ministries have different priorities, because local governments

28

The no. 2 document of 2002, issued by the State Council in early 2002, classifies migrant workers as members of the working class instead of peasants.

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have their own interests, and because a large number of laws and regulations are still urban-biased. An overview of the Hu-Wen administration's policy statements suggests several significant policy shifts in dealing with rural migrant workers. First, rural migrants have received unprecedented attention from top policy-makers. Rules and regulation issued specifically for them have increased substantially. These include comprehensive policy statements covering various aspects of the employment environment of rural migrants, as well as more narrowly focused policies that target specific problems facing migrant workers. Second, under the Hu-Wen administration, the policy focus shifts from controlling and guiding the migration process to improving the employment environment of migrant workers. Third, in the 1980s and 1990s labor market reforms focus on de-linking urban employment from urban hukou status. Abolishing the rural-urban migration quota system or substantially increasing the quota is not the dominant approach. In the period of 1997-2002, the hukou reform gained momentum, especially in towns and small cities where the decade-old migration quota system is abolished. Under the Hu-Wen administration, attention has shifted from the hukou reform to de-link social services from hukou status. More specifically, progress has been made in the following areas: Employment. Lifting unreasonable restrictions on rural migrants' employment in cities has been an integral part of labor market reforms under the Hu-Wen administration. Such restrictions are often imposed by local governments for administrative purposes. In the State Council's No. 1 Document of 2003, local governments are asked to abolish the system of administrative approval governing the use of rural laborers by enterprises, lift the restriction on the types of employment that rural migrants are allowed to have, and refrain from interfering with employers' hiring decisions. The same circular requires local governments to straighten out the procedure governing migrants' employment in cities, eliminate the registration items put in place just for peasant workers, and gradually implement the system of one-card management by means of the temporary

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residence card. All industries and professions, especially specialized industries and professions, should treat rural migrants equally as urban residents with respect to technical qualifications, health and other requirements. Overcharging migrants on identification certificate, temporary resident certification, employment certificate and card has been rampant. The central authority reiterates that no extra fees should be charged except the certificates' production cost. Government agencies are forbidden to introduce items of administrative expense and collect fees from peasant workers. 29 Since the early 1990s, the government has adopted the policy of "treating fairly, guiding rationally, and improving administration and service" for rural laborers working in cities. The government has established the labor service cooperation system and the employment service system. On the basis of such administrative service systems, the government has set up a labor recruitment information network, carried out recruitment information surveys and regularly issued analyses and announcement of the recruitment needs of enterprises. Under the Hu-Wen administration, great efforts have been made to perfect such services and make job information accessible to migrant workers. 30 Labor contract and labor protection. Prior to the Hu-Wen administration, efforts have already been made to protect the rights of rural laborers through labor contracts. 31 Due to the widespread problem of wage defaults, the Hu-Wen administration stepped up efforts in this area. Labor contract has been highlighted as an important legal weapon for rural migrants. Employers are required to sign labor contracts with peasant laborers. A labor contract should 29

See, General Office of State Council, "Circular on Properly Handling Management and Service Work Governing Peasants' Employment in Cities", 5 January 2003; General Office of State Council, "Circular on Further Improving the Employment Environment for Migrant Workers", 27 December 2004. 30 Ibid. 31 For instance, the central government emphasized in September 2002 that enterprises should sign labor contracts with rural laborers they employ (New China News Agency, 4 September 2002).

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clearly define the duration of employment, job specifications, labor protection, labor requirements, remuneration, and the liability for contravening the labor contract. The labor contract should also specify the standard used in wage payment, the item of payment, the mode of payment and the time of payment. When the labor contract goes into effect, peasant laborers enjoy all the rights stipulated by the Labor Law. Departments in charge of labor protection are asked to intensify their supervision over the way employers pay wages, and establish a system to supervise and control wage payments to peasant laborers. 32 The Hu-Wen administration has strengthened inspection of wage payments to peasant workers as part of its "pro-people" policy. According to an estimation by the All-China Federation of Trade Unions, defaults on wage payments to peasant workers amounted to 100 billion yuan up to 2003, with the construction industry accounting for 70% of the cases of wage defaults.33 In view of this, the General Office of the State Council issued a circular on 22 November 2003, planning to solve the problem of wage defaults in the construction sector in three years, starting from 2004. The Ministry of Labor and Social Security also issued a circular in 2003 to conduct a special inspection of wage payments to peasant workers, giving particular attention to industries with a high concentration of rural migrant workers, such as construction, services, and manufacturing.34 The newest effort is manifested in "Rules on Labor and Social Security Inspections", issued by the State Council in November 2004. Inspections are institutionalized under the new rules. Nationwide, the Ministry of Labor and Social Security will administer the whole inspection system. At the local level, local departments of labor and social security will undertake labor inspections. 32

General Office of State Council, "Circular on Properly Handling Management and Service Work Governing Peasants' Employment in Cities", issued on 5 January 2003. 33 See, http://wwwl.people.com.cn/GB/shizheng/1026/2207791.html, accessed on 30 June 2005. 34 See, http://www.molss.gov.cn/news/2003/1231a.htm, accessed on 30 June 2005.

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The new rules define a broad range of matters to be inspected, including those related to labor contracts entered between the employer and laborers, compliance of the employer with laws and regulations regarding child labor, women and minor employees, compliance of the employer with laws and regulations regarding work hours, work leave, wages, overtime compensation, and compliance of the employer with laws and regulations regarding participation of various social security programs and payment of premiums for these programs. The new inspection rules have a major breakthrough. A diverse range of administrative fines and penalties are clearly defined in case of violation of labor and social security laws and regulations. For instance, the labor and social security department will order the employer to make amends or to pay an extra penalty equivalent to 50%-100% of the original payment if the employer withholds or owes wages of an employee without valid reason, pays wages below the local minimum wage standard, or terminates a labor contract 'without making compensation to the employee in accordance with laws and regulations. The labor and social security department can also impose a penalty if the employer resist or obstruct inspections, or fail to take corrective measures as ordered by the labor and social security department. With its unprecedented broad scope and clearly-defined enforcement mechanisms, the new regulation represents a major development in the protection of labor rights by means of administrative inspections. Vocational training. Labor market mismatch — oversupply of unskilled laborers and undersupply of skilled workers — has been listed as one of the contributing factors leading to a shortage of migrant workers in Guangdong, Fujian and Zhejiang in recent years 35 (also see Footnote 19). Up to 2003, only 9.1% of the rural labor force received vocational training. To improve the quality of 35

The program was jointly developed by the Ministry of Agriculture, the Ministry of Labor and Social Security, the Ministry of Education, the Ministry of Science and technology, the Ministry of Construction, and the Ministry of Finance.

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rural workforce, and to facilitate labor mobility from agriculture to industry, from countryside to cities, the government has worked out the National Program for Training Rural Workers 2003-2010.36 Its implementation strategy is to strengthen overall planning, to increase government financial input, to consolidate institutions and mechanisms and to develop demand-driven training projects. In the period of 2003-2005, the program aims to provide guidance training for 10 million rural laborers waiting for non-farm employment, and half of them will receive vocational training. On-the-post training will be provided to 50 million rural workers who have already moved into non-agricultural sectors. In the period of 2006-2010, the target for guidance training, vocational training, and on-the-post training is 50 million, 30 million, and 200 million, respectively. Education for migrant children. Urban pubic schools have long been unwilling to admit children of migrant workers because doing so would squeeze their financial and educational resources. They therefore charge much higher tuition fees on migrant children, which effectively keep most migrant children out of urban public schools. As a result, these children end up in under-funded and often unlicensed private schools, on the street or at the workplace of their parents. To de-link education from urban hukou status, the State Council issued a circular on 17 September 2003, asking education authorities to include children of migrant workers in their nineyear compulsory educational program. 37 It also asked public-funded primary and secondary schools in cities to accommodate migrant children as much as possible. According to the circular, the responsibility for providing school education to migrant children lies primarily in 36

People's Bank of China (2005). "Zhongguo huobi zhengce zhixing baogao zengkan: 2004 nian Zhongguo jinrong quyu yunxing baogao [China's Regional Financial Operation in 2004, Supplement to Executive Report on China's Monetary policy]." 37 Earlier policies have suggested ways to provide education to the children of migrant workers, such as the No. 1 Document of 2003 issued by the General Office of State Council. What makes this circular distinct is the details regarding the implementation of the policy, and the clarification of who should be responsible for providing education to migrant children.

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the government of the importing area instead of the government of the sending areas. The main provider of compulsory education is urban public-funded primary and middle schools rather than migrant schools, which are privately and specially run for migrant children with substandard quality but low tuition expenses. To support the implementation of the new policy, the circular asked related government agencies, including pubic security, planning, finance, personnel and social security, to take coordinated measures to increase financial and educational resources to schools with migrant children. Social security and insurance. The issue of extending social security to migrant workers has gained particular attention under the Hu-Wen administration. Among various types of insurance, such as pensions, medical insurance, child birth insurance, and unemployment insurance, priority has been given to work-related injury insurance. The State Council passed "Regulations on Work-related Insurance" in April 2003. Under the new regulations, migrant workers are also entitled to work-related insurance. To implement the regulations and to improve the employment environment for migrant workers, the Ministry of Labor and Social Security issued a circular on 1 June 2004, stating that priority will be given to millions of migrant workers in construction, mining and other sectors where employees are more likely to sustain industrial injuries or vocational damages. Employers in these sectors are required to pay occupational injury insurance fees for their employees. The practice is expected to expand to all sectors in the future. CHALLENGES STILL AHEAD — CONCLUSION Overall, compared to the past administrations, the Hu-Wen administration has paid more attention to the employment environment of migrant workers. Labor market reforms under the Hu-Wen administration are more comprehensive than before. Institutions that used to cover urban permanent residents only and are the very base of urban privileges are expanded to include migrant workers. Various reform measures are expected to grant migrant workers more access to public employment service system, urban education system, rights protected by labor contracts, and social security system. Effort

Labor Market Reforms under the Hu-Wen Administration 375

in this direction suggests that top policy-makers have realized that more balanced development and more equal share of economic growth are vital to China's future economy and society. Many problems, of course, are still ahead. Migrant workers' lower status results from a host of institutions, some of which are not on Hu-Wen's reform agenda. The city planning law, effective in 1990, is in example of such a case. According to this law, the state should strictly control the population size of large cities. Instead of facilitating migration, this law reinforces the restriction on rural-tourban migration, especially migration to large cities. For those institutions on the reform agenda, some are less thoroughly reformed than others. For instance, the social security reform is still at a rudimentary stage. In the years to come, it mainly focuses on the work-related injury insurance and has yet to include other forms of social security. Implementation is another problem. For one thing, formal institutions and rules are often counteracted by informal institutions and rules. "Rule of law" is far from reality in China. For another, implementing the new regulations requires concerted efforts by different ministries as well as local governments. However, the top leadership's "pro-people" policy may not be well received by local governments which are pro-business. It is very likely that local governments selectively enforce some regulations while ignoring others, depending on the extent to which the enforcement would deter investors. Misalignment of interests between the central government and lower-level governments therefore could be a major impediment to the implementation of recent reform measures. In some cases, local governments turn new policies into more creative forms of discrimination.38 38

Facing central pressure to admit migrant children into local public schools, township governments in Ningbo city have responded by adopting a "separate but equal" policy. They designated one particular public school as the school for migrant children, replaced the full-time teachers with part-time instructors, and redirected local government education subsidies to the schools serving local students. See, Mingong zinu shangxue zaoyu "geli zhengce?" [Do Migrant Children Suffer "Segregation" in Education?], Nanfang zhoumo [Southern Weekend], 3 June 2004.

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Uncertainties remain whether Hu-Wen administration's new policies can provide fair conditions for migrant workers. However, with the number of migrant workers rising to surpass urban workers as the main Chinese industrial workforce, it is certain that such a large yet marginalized social group deserves more than offered. Rapid economic growth cannot sustain if it leads to a polarized social structure in which the vast number of migrant workers are reduced to a permanent urban underclass.

Labor Market Reforms under the Hu-Wen Administration 377 Appendix 1 Urban-Rural Income Ratio 1980-2004 Per Capital Income of Urban Households (yuan)

Per Capital Income of Rural Households (yuan)

Urban-Rural Income Ratio

1983 1984

439 458 500 526 608

191 233 270 310 355

2.30 1.97 1.85 1.70 1.71

1985 1986 1987 1988 1989

685 828 916 1,119 1,261

398 424 463 545 602

1.72 1.95 1.98 2.05 2.09

1990 1991 1992 1993 1994

1,387 1,544 1,826 2,337 3,179

686 709 784 922 1,221

2.02 2.18 2.33 2.53 2.60

1995 1996 1997 1998 1999

3,893 4,839 5,160 5,425 6,316

1,578 1,926 2,090 2,162 2,210

2.47 2.51 2.47 2.51 2.86

2000 2001 2002 2003 2004

6,280 6,860 7,703 8,472 9,422

2,253 2,366 2,476 2,622 2,936

2.79 2.90 3.11 3.23 3.21

Year 1980 1981 1982

Source: Various years of China Statistical Yearbook.

Chapter

14 Managing Social Unrest Cai Yongshun

Since the late 1990s, the Chinese government has revised its policies regarding a number of issues to accommodate citizen interests. In urban areas, the government time and again adjusted the pace of the reform of state-owned enterprises, especially large ones; it also mounted serious efforts to establish a welfare system for retrenched or retired people. Also in urban China, more than 70% of households owned their homes by the early 2000s, but it was not rare that some home owners' interests were violated by state or business actors. In 2003, the government revised its policy and adopted new measures to protect home owners' rights. In rural areas, the government began to tackle the major source of social conflicts in China, that is, peasants' financial burdens, by adopting the tax reform in 2000 and then abolishing the agricultural tax within five years from 2004. While these policy changes concern different groups of citizens, those people had all staged resistance that constituted significant pressure on the government for policy response. Why and how can citizen resistance leading to policy change be possible in this authoritarian regime? In dealing with citizen resistance, a government's reaction can be divided into police response and policy response. Police's 379

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response reflects not only the government's belief in the motive of those who take action but also its capacity for coping with social unrest. It thus shapes people's expectation of government response to their action, thereby signaling the degree of government (intolerance. Policy response is about how the government reacts to the causes that have led to people's resentment and their action. If police response fails to deter people's action, the government will have to address the sources of conflicts in order to prevent more resistance by introducing policy changes. To explore the relationship between citizen resistance and policy change in authoritarian regimes, one has to examine why the police's response fails to prevent persistent resistance and forces the government to adopt policy response. In China, the government's rightsviolating practices have given rise to popular resentment over a number of issues. But it takes more than resentment for resistance to take place. Citizen resistance becomes possible because government policies indicate not only risks but also opportunities. More specific, the Chinese government's attitude toward disruptive action of a political nature is unequivocally intolerant. But its response to citizens' non-political action has sent mixed messages; while it is reluctant to see well-organized and destructive action and is less tolerant toward action leaders, peaceful action aimed to achieve legitimate interests is tolerable. The mixed messages fail to deter citizen resistance and allow them to organize persistent, coordinated, and disruptive action, though such action has not threatened the political authority of the government. The cumulative pressure generated by numerous instances of social unrest indicates to the government that such action will not only persist but also escalate as long as the sources of conflict remain. As a result, the government sees the need of adopting policy response to maintain social stability and regime legitimacy. GOVERNMENT POLICY TOWARD SOCIAL UNREST IN CHINA In China, instances of social unrest are often defined as collective actions that cause social disruptions, such as demonstrations,

Managing Social Unrest 381

protests, traffic blockades, disruptive collective petitions, and more violent modes like violent confrontations with state agencies and officials.1 As in some former socialist countries, collective action directed at state agencies has repeatedly occurred in China. In the 1950s, there were many strikes taken by workers and students. 2 During the Cultural Revolution in the 1960s and 1970s, people's action created serious chaos in the country. In the 1980s, protests and strikes by Chinese citizens, including students, occurred repeatedly.3 As will be detailed later, socioeconomic changes in China since the early 1990s have triggered off tens of thousands of instances of social unrest. How are such instances of social unrest possible? In China, perhaps the most important opportunity for civil resistance is the discrepancies between high-level and low-level governments. Specifically, local governments are more concerned with local development and policy implementation, which might result in ignoring of citizen interests; the central government is more concerned about social stability and regime legitimacy. Therefore, when conflicts between local governments and citizens arise, there is a possibility that the central or high-level government may discipline local governments. 4 Thus, the central government's concern over social stability and regime legitimacy has shaped state response to social unrest. The most important criterion the Chinese government has used in dealing with social unrest is whether such action is political in the sense that whether it is aimed to overthrow the Party or the government or to destroy important state facilities. The 1989 Tiananmen incident and the repression of Falun Gong have sent a 1

The Research Group of the Public Security, Zhongguo tese zhi gongan yanjiu (A study of public security with Chinese characteristics) (Beijing: Qunzhong chubanshe, 1996). 2 Elizabeth Perry, "Shanghai's Strike Wave of 1957," The China Quarterly, No. 137 (1994), pp. 1-27. 3 Liu Jianming, Tianli minxin (Justice and people's will) (Beijing: Jirizhongguo chubanshe, 1998), p. 238. 4 Yongshun Cai, "Managed Participation in China," Political Science Quarterly, 119:3 (2004): 425-452.

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clear message to the public that political action is unacceptable. While the government's determination to stop political action is evident, most actions taken by the Chinese people during the reform period seem to focus on specific and often economic issues rather than overthrow the Party or the political system. In dealing with non-political resistance, government policies have sent mixed messages. One message is tolerance, and the other message is intolerance. The mixed messages have important implications for civil resistance in China. Message o f Tolerance There has been relaxation of the enforcement of law or regulations in China in the sense that civil resistance is tolerated although it may violate laws or government regulations. The government tolerates such activities because they are not regime-threatening. For example, in the four versions of the constitution of socialist China, the 1954 one did not grant people the right of strikes. While the 1975 one and 1978 one once permitted strikes, the 1982 constitution removed it again. But the denial of this right had by no means prevented strikes. For example, in March 1957, the Chinese central government admitted, "Over the past six months, the strikes of workers and students, the demonstrations of other people, and other similar incidents have increased markedly. In the whole country, there have been strikes of both large and small scale, with the participation of more than 10,000 workers and over 10,000 students."5 The central government attributed the unrest to the bureaucratic style of some leaders of state firms and schools and permitted the protests. It suggested that "only when seriously destructive or illegal activities occur can we send armies or the police to surround the masses or use violence."6 Likewise, despite the 1982 constitution, strikes have 5

The General Office of the All China Federation of Trade Unions, Jianguo yilai zhonggong zhongyang guanyu gongren yundong wenjian xuanbian (Selected Documents About Workers' Movement Issued by the Central Party Committee After the Founding of the PRO (Beijing: Gongren chubanshe, 1989), p. 1036. 6 Ibid.

Managing Social Unrest 383

occurred periodically in China. Student strikes had occurred repeatedly in the 1980s. In 1986, for example, students protested in eight provinces. For another example, according to an incomplete statistic of 15 provinces, there were at least 180 strikes by workers in 1993- The longest one lasted for 40 days, and the largest one involved more than 4,500 people. Strikes have been frequently used by workers in private or foreign firms.7 If the government is tolerant of law-violating collective action, it is also likely to tolerate other "rightful resistance" which often has a legitimate basis. 8 Consequently, government tolerance lowers the risk of participating in collective action because the authorities dealing -with these events are refrained from using force. For example, in Hunan province, an agricultural area where many instances of collective action by peasants have occurred, the provincial authority required the public security departments to be cautious about "the use of armed force, the use of arms, and the use of compulsory measures."9 Government tolerance of civil resistance has also been reflected in its concessions to the people and its punishment of misbehaving officials. For example, in order to prevent local cadres from using force in tax collection in rural areas, the central government regulated that tragic events (e.g. peasants' deaths) resulting from heavy financial burdens must be thoroughly investigated. Whenever there is one, it must be addressed, and none of them can be ignored. Those responsible for the events must be punished according to the law. "Those cadres whose work style leads to such events must be removed. The handling of such issues should be publicized for the purposes of the democratic and legal education of the masses."10 7

Zhang Zuoji (ed.), Zhongguo laodong tizhi gaigeyanjiu (A study of the reform of China's labor system) (Beijing: Zhongguo laodong chubanshe, 1994). 8 Kevin O'Brien, "Rightful Resistance," World Politics, Vol. 49, No. 1 (1996), pp. 31-55. 9 "Hunan sheng tuoshan chuli quntixing shijian" (Hunan province handles mass action properly), Neican xuanbia (Selected materials), No. 11 (2000), pp. 20-22. 10 Hunan ribao, 24 January 2002.

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These messages thus indicate to citizens that the cost of taking action to protect legitimate rights is not always prohibitively high. Although there is no guarantee that resistance will lead to success, it has also happened that citizens who staged collective action achieved their goals either partly or entirely, and responsible local cadres were punished. 11 On the other hand, civil resistance, in particular collective resistance, requires mobilization and organization. The government has also sent a message that those people who take the leadership in collective action may be punished. Message o f Intolerance A research report by Party organs in Sichuan province in 1998 admits that "over 95% of the large-scale collective events involve the organizing of some people. They seem to have a labor division, planning, and organizing."12 One important role of organizers in the Chinese context is to disseminate information. Individuals participate in collective action only 'when they know others will do the same. Due to the lack of organizations independent of the state control, this coordination of action often depends on the efforts of organizers. Second, as organizers or leaders bear more risks than ordinary participants, their emergence not only inspires confidence in participants but also reduces the risk they face. Finally, because organizers are often those who are more capable, they are thus more able to deal with government agencies or cadres than average participants. Able and articulate leaders will promote participants' confidence. Aware of the importance of leaders in collective resistance, the Chinese local government and the police department often adopt a policy that distinguishes the main leaders from average participants. 11

Thomas Bernstein and Xiobo Lu, Taxation without Representation in Contemporary China (New York: Cambridge University Press, 2003), Chapter 5; Cai, "Managed Participation in China." 12 The Ministry of the CCP Organization, 2000-2001 China Investigation Report, p. 290.

Managing Social Unrest 385

"To isolate and punish the minority and to win over, divide, and educate the majority — this is a strategy of taking advantage of the split, winning over the majority, opposing the minority, and dividing and defeating them." 13 In Hunan province, the public security department sticks to the policy of "targeting the minority, severely punishing the leaders, educating the majority, and maintaining stability." In dealing with law-violating behavior in collective action, the police would try to calm down the participants, collect evidence, and identify the ringleaders. Punishment will be imposed after the action was over.14 Hence, the old Chinese saying that "The first bird that comes out of the nest is the first to get shot" remains true today. In other words, people, in most cases the organizers, may be punished ex post even in non-political action, not to mention leaders of political ones like the 1989 Tiananmen incident or the recent Falun Gong. This policy of selective punishment has important implications for social stability in China. First, it abates collective action by inhibiting the emergence of organizers. Second, it encourages peaceful collective actions, when they occur. It is clear to prospective leaders that government response depends not only on what they say but also on what they do. Hence, violence is not a favorable choice because, as elsewhere, it "merely hastens and insures its failure because its actions increase the hostility around it and invite the legitimate action of authorities against it."15 In most cases, violent collective action is precipitated by unexpected emotional factors. Once violent confrontation occurs, it is common for leaders to be punished. Third, selective punishment helps reduce the scale of resistance. While cross-work unit or cross-region action did happen, the leaders bear the risks. If such action does occur and it 13

The Research Group of the Public Security, Zbongguo tese zhiyanjiu (A Study of the Public Security with Chinese Characteristics), p. 114. 14 "Hunan sheng tuoshan chuli quntixing shijian" (Hunan province handles mass action properly). 15 William Gamson, "The Success of the Unruly," in Doug McAdam and David A. Snow (eds.), Social Movements (Los Angeles, CA.: Roxbury Publishing Company, 1997), pp. 357-364.

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is consciously coordinated, it must be peaceful in order for the organizers to avoid punishment. In worker resistance, some workers even believed that acting with laid-off •workers from other enterprises may lower their chances for success because it would raise the government's suspicion.16 LIMITATIONS OF THE POLICE'S RESPONSE LN CHINA While the Chinese government's intolerance may reduce resistance, it can hardly eliminate it. On one hand, the message of tolerance suggests to citizens that protecting one's legitimate interests is possible. More important, that not all leaders who organized resistance have been punished indicates ambiguity in the government's message of intolerance.17 Therefore, government tolerance makes some people believe that organizing collective action is not always risky, although such a belief at times proves wrong. Moreover, knowledgeable leaders base their claims on laws or government regulations, thereby limiting local authority's discretion in meting out punishment. Therefore, government response to civil resistance has several limitations. First, as long as the sources of conflicts remain, civil resistance will persist because of the political space created by government tolerance. Second, as long as the political space exists, there is a possibility for citizen resistance to escalate into more destructive or violent modes if their legitimate interests are frequently violated. This is because some factors affecting the course of action may go beyond the control of both action leaders and the state authority. Third, the ambiguity in government intolerance enables citizens to organize coordinated action across work units, villages, sectors, or regions. These limitations have been reflected in the civil resistance in China during the reform period. 16

Ching Kwan Lee, "The 'Revenge of History': Collective Memories and Labor Protests in Northeastern China," Ethnography, Vol. 1, No. 2 (2000), pp. 217-237. 17 O'Brien and Li, "Popular Contention and its Impact in Rural China"; Yongshun Cai, "The Resistance of Chinese Laid-Off Workers in the Reform Period," The China Quarterly, No. 170 (2002), pp. 327-344.

Managing Social Unrest 387

F r e q u e n c y a n d Scale o f Resistance Government policy has failed to arrest the increasing tendency of instances of social unrest in China. Since the early 1990s, such instances have been numerous. Although information on those events is seldom released to the public, scattered information revealed by Chinese authorities, in particular the police department, indicates an increasing tendency. Such instances increased from 8,700 in 1993 to 58,500 in 2003, or by 6.7 times.18 Another source, which is perhaps the only publicly accessible one, also indicates that conflicts in China have increased. In China, the most basic mode of collective action is collective petitions or appeals (jiti shangfang or qingyuari) in which a group of people approach state agencies collectively. Collective petitions are often peaceful, but they may also escalate into disruptive action if participants fail to receive a reply from the targeted state agency. Many disruptive events are escalations of collective petitions.19 Instances of unrest generate pressure on the government not only because of their persistence and high frequency but also because of the number of participants in some cases. According to the Chinese police's categorization, a protest with less than 100 people is "small"; 100 to 500 people is "medium"; 500 to 2,000 participants is "large scale"; and over 2,000 participants is ranked as "special large-scale." In light of this categorization, most collective action in China falls into the "small" category. For example, in Hunan province in 1999, the average number of participants in the 800 protests was 75. 20 Similarly, between January 2000 and September 2002, there were 9,559 incidents of protests involving more than 863,000 people in Liaoning province, with the average number of participants in each incident being 90.21

18

According to these reports, the figures were released by the police department. Cai, "The Resistance of Chinese Laid-Off Workers in the Reform Period." 20 "Hunan sheng tuoshan chuli quntixing shijian" (Hunan province handles mass action properly). 21 Tanner, "Protests now Flourish in China." 19

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Yet there have been large-scale instances, and some were on such a large scale that they could easily create peaceful chaos for the government. Despite the tight control over the information on civil resistance in China, there have been reports that revealed a number of large-scale actions sometimes in great detail. It is no longer rare that police and even armies are dispatched to restore social order once such events occur. A research group of the Ministry of Organization of the Chinese Communist Party conducted an investigation of social conflicts in six provinces in 2000. The report states: "in recent years, the number and scale of collective actions have increased, often with hundreds or thousands or tens of thousands of participants."22

Degree of Disruptiveness and Coordination The power of civil resistance in China also lies in its degree of disruptiveness and coordination. According to the report of the Ministry of Organization, when taking dramatic actions, "workers often blocked bridges and roads, attacked Party and government agencies, and threatened Party committees and governments. They even resorted to violence and set things on fire. In doing so, they hoped to make the conflicts known to the public and attract attention from society as well as higher-level authorities."23 For instance, in a town in Liaoning province in 2000, more than 20,000 workers of a mining company joined by thousands of their family members smashed windows, blocked traffic, burned cars, and fought with armed police for days. The social order in the town was restored only after the government sent an army and more police there. 24 This is also true for some peasants: "when conflicts between cadres

22

The Ministry of Organization of the CCP Central Committee, 2000-2001, Zhongguo Diaochao baogao (2000-2001 China investigation report) (Beijing: Zhongyang bianye chubanshe, 2001), p. 68. 23 Ibid., p. 67. 24 James Kynge, "Chinese Miners Riot over Severance Pay," Financial Times, 3 April 2000.

Managing Social Unrest 389

and the people happened, some people held posters and shouted slogans, some set things on fire and carried out explosions, some destroyed cadres' living and work facilities, and others cursed, insulted, and even beat cadres. In Hunan province, one of a cadre's ears was cut off by peasants in a confrontation, and two cadres died in another conflict."25 Confrontation between citizens and state agencies has also been reflected in collective petitions to the government. Collective petitions directed to the provincial authority are common, and some are destructive. For example, in Jiangsu province, some people making petitions held sit-in demonstrations in front of the local state authority. Some held banners and shouted slogans, others blocked the gates of the Party committee or the government, and still others stopped the cars of leaders and blocked the traffic.26 In Anhui province in 1999, there were 272 collective petitions made to the provincial Party committee and the provincial government. In 208 petitions (or 76%), the people blocked the gates of the provincial authority or held sit-in demonstrations. 27 As to the degree of coordination, there has been collective action, such as protests or demonstrations, across work units, villages, sectors, or regions. In a high-profile case in Liaoyang of Liaoning province, workers from more than ten factories took to the streets to hold a nine-day protest in March 2002. Coordinated action has also been reflected in collective petitions to provincial governments. In Anhui in 2002, the provincial Party committee and the provincial government received 116 petitions with an average number of 54 participants each. Some of these petitions were obviously better organized than before, and cross-region coordinated petitions increased markedly. In those petitions, people from different places often formed unified demands and action plans and would not give up without a success.28 In Zhejiang province, some collective petitions The Ministry of Organization, 2000-2001, Zhongguo Diaochao baogao, p. 83. Jiangsu Yearbook 2001, p. 98. Anhui Yearbook 2000, p. 30. Anhui Yearbook 2003, p. 39.

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were made by people from different regions or sectors in and outside the province. 29 Similar tendency of better organized and crossregion petitions have also been found in other provinces. 30 Yet, these coordinated actions are not necessarily a political challenge to the Party-state, because they are based on issues of non-political nature. Cross-region action is possible because some people in different regions face the same problems. For example, one issue that had united a number of people in different areas was the treatment of demobilized officers who now worked in enterprises. These people were scattered in different regions, but they had the same hope of being treated as state cadres instead of enterprise employees. Hence, it is not surprising for these people to make cross-region petitions to the provincial or even central government. 31 Despite its non-political nature, such action points to the potential consequences if the government continues to ignore citizen interests.

POLICY RESPONSE In China until the late 1990s, the majority of collective actions had been taken by weak groups in society. In urban areas, disruptive action by laid-off workers, unpaid retirees, and employed workers in public firms undergoing ownership reform had been a serious concern of the Chinese government. 32 The Ministry of Public Security admitted that in 1998 and 1999, about a third of collective

29

Zhejiang Yearbook 2003, p. 71. Jiangsu Yearbook 2003, p. 352; Henan Yearbook 2003, p. 60. 31 Zhejiang Yearbook 2003, p. 71. 32 Cai, "The Resistance of Chinese Laid-off Workers in the Reform Period"; William Hurst and Kevin O'Brien, "China's Contentious Pensioners," The China Quarterly, No. 170 (June 2002), pp. 345-360; Feng Chen, "Subsistence Crises, Managerial Corruption and Labor Protests in China," The China Journal, No. 44 (July 2000), pp. 41-63; Dorothy Solinger, "The Potential for Urban Unrest: Will the Fencers Stay on the Piste?" in David Shambaugh, ed., Is China Unstable? (New York: M.E. Sharpe, 2000), pp. 79-94. 30

Managing Social Unrest 391

action took place in China because state-owned enterprises failed to pay salaries, subsidies, or pensions to their workers, including those who were laid off, and the rest was taken by peasants. 33 From 1995 to 2000, the number of employees in public firms decreased by 48 million, and many laid-off workers failed to receive basic allowance. The situation was worsened due to the tight labor market where the supply of labor greatly exceeded the demand. 34 The situation was particularly serious when massive layoffs began after 1997. In 1997, more than 12 million state workers were laid off, half of them failed to find jobs, and one forth failed to receive any payment. By September 1997, at least 1.95 million retired workers failed to receive their pension. 35 In the 1990s, demanding back pay and pension was probably the most important reason for workers' collective action. Central government officials also acknowledged that unpaid retired workers and unpaid laid-off workers were the two major sources of unrest in urban China.36 Worker resistance was an important reason for the government to adjust the pace of reform;37 it also generated serious pressure for the government to speed up the establishment of the welfare system. In 1998, when, Jiang Zemin, the then General Secretary, inspected a number of provinces, including the three industrial provinces in the northeast, he pointed out that the pace of reform and development must be acceptable for the people. Local officials at each level must see accommodating workers' interests as 33

Wang Darning, "Zhengque chuli qunti shijian, quebao wending dajiu" (Correct ways of handling group-based events and ensuring stability), Qiushi (Seeking the truth), No. 4 (2001), pp. 1-3. 34 Dorothy Solinger, "Labor Market Reform and the Plight of the Laid-off Proletariat," The China Quarterly, No. 170 (2002), pp. 304-326. 35 Mo Daquan, Gongzhi anquanwang (Establishing the safety network) (Beijing: jingji kexue chubanshe, 1998), p. 57. 36 James Kynge, "Chinese Miners Riot over Severance Pay," Financial Times, 3 April 2000; Hurst and O'Brien, "China's Contentious Pensioners." 37 Yongshun Cai, "Relaxing the Constraints from above: Politics of Privatizing Public Enterprises in China," Asian Journal of Political Science, Vol. 10, No. 2 (2002), pp. 94-121.

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a political responsibility which had to be accomplished by any possible means. 38 Local governments were thus required to make two guarantees: (1) to pay retired workers; and (2) to pay laid-off workers. Stateowned enterprises (SOEs) were required to set up reemployment service centers to help train and pay laid-workers. Meanwhile, the government also tried to speed up the establishment of the welfare system. The amount of funds that the central government provided to help laid-off workers and retirees increased from 18.9 billion yuan in 1998 to more than 98 billion yuan in 2001, or by more than five times. Between 1998 and 2001, the central government provided more than 86 billion yuan for the operation of the pension system; the number of retirees who were paid increased from 25.33 million in the end of 1997 to over 33.8 million in 2001. By 2003, about 22.5 million people received the minimum allowance. The government has also made efforts to help laid-off workers secure new jobs by implementing a number of policies, including tax reduction or exemption for firms that hire laid-off workers or for self-employed laid-off workers. Between 1998 and 2001, 16.8 million out of 22.5 million laid-off workers (or 74.7%) were reemployed. 39 Another major source of social conflicts in China is in rural areas where peasants are resentful with a number of issues, including taxation, loss of farmland, cadres' corruption, and environmental pollution.40 In 1998, the State Complaints Bureau received 460,000 letters and petitions made in person from across the country. Two thirds were written or made by rural residents.41 The Chinese government has long realized the sources of conflicts, especially peasants' 38

Liaoning ribao, 13 August 1999. "Jiedu zhongguo shebao baipishu" (An analysis of the white book on China's social security), Xinjinbao, 8 September 2004. To be sure, the achievements might be over-reported. Solinger, "Labor Market Reform and the Plight of the Laid-off Proletariat." 40 Kevin O'Brien, "Collective Action in the Chinese Countryside," The China Journal, Vol. 48 (July 2002), pp. 139-154. 41 Zhongguo gaigebao (China Reform News), 2 September 199939

Managing Social Unrest 393

financial burdens. Indeed, "Peasant protest and violence were a major reason why the Party-state sought to solve the burden problems." 42 But partly due to the limited financial resources of the government, the process was slow. Peasants' financial burdens are closely tied to the fiscal arrangement in China. After 1994 when the fiscal reform was introduced, Chinese local governments are under increasing financial pressure and many of the grassroots governments have to transfer the pressure to peasants, thereby leading to severe financial difficulty for peasants. Conflicts between peasants and rural cadres had increased since then. As revealed in a report of the State Council, at least 12 peasants committed suicide or were beaten to death in tax collection in 1994, and the number increased to 26 in 1996.43 Under the pressure of maintaining social stability and legitimacy, the Chinese government has adopted serious measures. In the 1990s, the most important measure taken by the central government was to limit peasants' financial burdens to 5% of peasants' average income of the previous year. But this regulation was frequently violated because local officials often collected extra fees under various pretexts. As a result, the tension between peasants and cadres persisted, so was peasant resistance. Although a number of local cadres had been punished for their abuse of power, peasant burdens remained one of the most conflict-generating issues in many areas in China throughout the 1990s.44 To prevent local governments from imposing extra fees on peasants, the Chinese government finally decided to adopt the fee-to-tax reform which basically abolished fee collection and unified tax collection in rural China, thereby limiting local officials' discretion in fee collection. This reform measure was first adopted in Anhui 42

Bernstein and Lu, Taxation without Representation in Contemporary China, p. 166. 43 Zhang Aichun, "Yige xiangdangwei shuji yanzhong de dangqun guanxi" (The Party-mass relations in the eyes of a township Party secretary), Nanfengchuang, No. 11 (2001), pp. 12-16. 44 Ibid., Chapter 4.

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province in 2000, and it reduced peasants' financial burdens by more than 30%. By the end of 2002, 20 provinces adopted the feeto-tax reform, and the reform was then extended to the whole country. On average, peasants' financial burdens decreased by 40%, ranging from 24 to 60%.45 In order to further address peasant burdens in a fundamental way, the Chinese government decided to abolish the agricultural tax within five years from 2004.

Policy Response and Social Stability in China Despite the Chinese government's serious efforts, instances of social unrest have kept increasing over the years. Does this imply that the government's efforts are ineffective? It is possible that government policies have not been effectively implemented, or there have been other issues that have caused new conflicts. The answer is not straightforward because of the lack of data on the composition of instances of unrest. But available evidence seems to suggest that government policies have had some impact on civil resistance. In urban areas, the government's efforts did achieve some outcomes although many problems remain. Before 2000, back pay and retirement pension were the major focus of workers' protests. While similar problems remained for some workers, more workers tended to focus on higher severance pay and acceptable forms of ownership reform after 1999-46 As most small- and medium-sized public firms in China have been privatized, ownership reform of large SOEs will likely be a source of conflicts in the near future. But in the Chinese industrial sector, large SOEs only accounted for a small percentage of the total SOEs.47 This may imply that with the completion of 45

Zhao Yang, "Guanyu 2002 nian noncun shuifei gaige shidian de chengxiao, wenti, ji jianyi," Zbongguo jingji shibao, 31 February 200346 Feng Chen, "Industrial Restructuring and Workers' Resistance in China," Modern China, Vol. 29, No. 2, (2003), pp. 237-258. 47 By 1995 when large-scale layoffs began, large state firms only accounted for less than five percent of the total state firms in China. State Statistical Bureau, Dayoushi (Perspective), (Beijing: Zhongguo fazhan chubanshe, 1998), pp. 214-215.

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large-scale privatization and government efforts to pay laid-off workers, instances of worker resistance may decline because the number of workers who will be affected has decreased. Available data suggests that petitions in some rustbelt areas in northeastern China have remained stable. Jilin is one of three industrial bases in northeast China and the reform of state enterprises has affected a large number of public firms and their workers. The governor of Jilin province also acknowledged that issues related to the welfare of laid-off workers and retired employees were the major reason for an increasing number of collective petitions in the province. After the reform of state enterprises began, the central government had provided help to the three provinces in northeast China (i.e. Liaoning, Jilin, and Heilongjiang). Collective petitions in Jilin reached its first peak in 1998 and remained stable till 2002. Similarly, petitions in Heilingjiang province have declined since 2000.48 In rural China, with the continuous measures of the central government, peasant burdens had not been as serious as before although poverty remains in many places. While comprehensive data is lacking, existing research on agricultural areas in the middle part of China suggests that peasant burdens became a serious issue that intensified local state-peasant relations after 1994 when the fiscal reform was introduced. The burdens were most serious between 1994 and 1997 and were alleviated to varying degrees after 1997. By early 2002 when the fee-to-tax reform was adopted in most provinces, peasant burdens were further alleviated. Hence, largescale peasant resistance due to heavy financial burdens has decreased. 49 In Anhui province which is the first province that adopted the tax reform, government officials admitted that the reform substantially reduced conflicts between cadres and peasants and contributed to social stability. Take collective petitions to the central 48

Heilongjiang Yearbook 2003, p. 80. Feng Yun, "Wokan nongcun xingshi" (Rural situation in my view), Gaige neican, No. 16 (2004), pp. 34-37. 49

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government in Beijing for example. In 2001, only 46 people from this province made nine collective petitions to the central governments. In 1997, Anhui province was the sixth largest province in terms of its number of people who made petitions to the central government. But its standing declined to below 20th in 2001.50 In Anhui, 236,200 people made collective petitions to government agencies at different levels in 2001, but urban citizens accounted for 60% of those people making petitions. This had seldom happened in this agricultural province.51 The increase in collective petitions was due to the diversification of participants in the province. The people making petitions extended from the weak social groups (i.e. peasants and workers) to include "students, teachers, scientific researchers, demobilized soldiers and cadres, and streamlined cadres at the grassroots level." In 2002, there were 546 collective petitions directed to the provincial Party committee and the government in this province. Those made by urban citizens accounted for 66% of the total, increasing by 56% compared with 2001.52 As a matter of fact, the case of Anhui is not an isolated one; it points to an important characteristic of social conflicts in China during the reform period, that is, the diversification of the sources of social conflicts. A similar pattern has also emerged in Jiangsu province which can be divided into the industrial south and the agricultural north. In this province in 1996, the 15 counties or cities that had most people making petitions to the central and provincial governments were all in the northern part. But after 2000, especially after the introduction of the fee-to-tax reform, an increasing number of petitions were made by people from the southern part of the province. A fast growing number of petitions were related to urban issues.53 The investigation of the research group of the Ministry of Organization also revealed that previously, the participants of collective action were mainly peasants and retired people, but "they 50

Anhui Yearbook, p. 28; Anhui Nianjian 2003, P- 39Anhui Nianjian 2002, p. 27. 52 Anhui Nianjian 2003, P- 39. 53 Jiangsu Yearbook 2002, p. 352. 51

Managing Social Unrest 397 Table 14.1 Main Causes of Citizens' Petitions before 2003 Main causes Urban area

1. Problems arising from reform of public enterprises and managerial misconduct 2. Disputes over land use and housing relocation 3. Legal or illegal financial institutions failing to pay bond buyers 4. Local government agencies' other abusive practices 5. Reform of non-administrative public agencies

Rural area

1. Peasants' financial burdens 2. Peasants' loss of farmland land or housing 3. Local cadres' corruption and abusive practice in managing public property (e.g. village financial affairs, land distribution) 4. Rigged village elections 5. Legal departments' misconduct or irresponsibility

Source: The yearbooks (1996-2003) of Anhui, Guangxi, Heilongjiang, Inner Mongolia, Jiangsu, and Jilin.

now also include employees, self-employed individuals, demobilized soldiers, and even cadres, teachers, and students."54 As represented in Table 14.1, the reasons that have caused citizen resistance in China are multiple. The diversification of sources of conflicts has no doubt contributed to the increase of aggregated number of instances of social unrest, making it difficult to assess the effect of the efforts that government has made to address certain issues. Does the increase of conflicts imply that the Chinese government faces a great challenge of maintaining social stability? To some extent, this is true as long as the sources of conflicts remain. But a significant outcome of the government's policy response is that large scale collective action in China is likely to decline. It seems that large-scale collective action are more likely to be taken by workers in urban areas than by peasants in rural areas. One reason is that it might be easier for workers to mobilize themselves because they are The Ministry of Organization, 2000-2001 China investigation report, p. 68.

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more concentrated. 55 For this reason, the Chinese government has been cautious about reforming large state enterprises. For example, the total number of SOEs declined by 42% from 1999 to 2002, but most SOEs that had been reformed were small or mediumsized ones and large SOEs increased by 11% during that period of time.56 While large-scale resistance did happen in rural China, the feeto-tax reform, if strictly implemented, is expected to reduce such resistance in the future. This has something to do with the scope of resentment. In rural China, there are not many issues that can simultaneously affect peasants of different villages, townships, or even counties as peasants' financial burdens did. While some issues, including the loss of farmland and environmental pollution, may affect peasants of several or more villages, it is not very common for them to affect peasants of different townships or counties simultaneously. In this circumstance, large-scale cross-region collective action will be possible only with significant coordination efforts by some leaders. But the high risks for the leaders in such action not only limit the frequency but also dictate the non-political nature of such action. Hence, with the abolition of the agricultural tax, it is likely that large-scale collective action in rural China will decline, though small ones may remain or even increase. CITIZEN RESISTANCE AS CONSTANT PRESSURE OF POLICY RESPONSE The above discussion, however, does not imply that small-scale resistance will fail to generate pressure for policy change. Existing research finds that disruptive action is likely to succeed when the aims and demands of the action are relatively limited, specific, and clear and when violence is adopted in combination with peaceful and conventional strategies.57 In China, citizen resistance often has 55

Cai, "The Resistance of Chinese Laid-Off Workers in the Reform Period." China Statistical Yearbook 2001, p. 401; China Statistical Yearbook 2003, 459. 57 James Button, Black Violence (Princeton: Princeton University Press, 1978). 56

Managing Social Unrest 399

specific goals. Although taking violent action involves risks, such action is not absent after citizens experience repeated failures in using regular channels. Thus, even small-scale resistance may generate pressure on the government when it is persistent and periodically involves violent confrontation, though on a smaller scale. The recent changes in land-use policies in China testify to the power of persistent resistance. Since the early 2000s, land use has become one of the most conflict-ridden issues in China. In rural areas, at least 65 million peasants lost their farmland between 1990 and 2003, and many failed to receive reasonable compensation. 58 Peasant resistance due to the loss of land is common. 59 Recent research by the Chinese Academy of Social Sciences in 2004 finds that conflicts arising from land use have exceeded the conflicts due to fee collection in rural China. Based on its analysis of peasants' letters and petitions, it found that complaints about land use accounted for 60%-70% of peasants' total complaints. For example, the research groups' analysis of 62,446 messages sent by citizens to a central media organization in the first half of 2004 suggested that 36% were about rural issues, and 69% of the rural issues were related to rural land use. The research group's survey of 632 peasants who made petitions to Beijing in 2003 found that about 73% complained about rural land use. Of its collection of 130 mass confrontations between peasants and police in 2004, 87 (or 67%) were due to land use. 60 58

Lin Chunxia, "Shuilai guanxin shidi nongmin de minyun" (Who cares about peasants who lost their land), Zhongguo jingji shibao, 2 September 2003. 59 Yongshun Cai, "Collective Ownership of Cadres' Ownership? The Non-agricultural Use of Farmland in China," The China Quarterly, No. 175 (2003), pp. 662-680; Xiaolin Guo, "Land Expropriation and Rural Conflicts in China," The China Quarterly, No. 166 (2001), pp. 422-439; David Zweig, "The 'Externalities of Development': Can New Political Institutions Manage Rural Conflict," in Elizabeth Perry and Mark Selden (eds.), Chinese Society: Change, Conflict, and Resistance (London: Routledge, 2000), pp. 120-142. 60

Yu Jianrong, "Zhongguo nongcun tudi jiufen cheng nongmin kangzheng jiaodian" (Disputes over rural land have become a focus of Chinese peasants' resistance), Liaowang dongfang (Eastern Outlook), No. 35 (2004), pp. 18-20.

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The Chinese government has adopted serious measures to deal with farmland use, though some problems remain. In early 2003, five ministries organized 10 inspection teams and carried out an investigation of the land market across the country. The investigations revealed serious problems and corruption in land use. For example, there were 6,015 economic development zones in China by 2003, which consumed a huge amount of farmland but only about 30% were approved by the state authorities. When the investigation report was submitted to the State Council, Premier Wen instructed that "land is the base of people's livelihood" and required serious measures to be adopted. The central government abolished 63% of the development zones in 2003- Local governments paid peasants 8.7 billion yuan in land-use compensation, accounting for 59% of the total amount owed to peasants. 61 In urban China, conflicts over land use largely focus on urban renewal and city construction. It is very common that urban citizens are forced to move elsewhere without reasonable compensation. Housing demolition has become a salient issue in many cities. The Ministry of Construction revealed that conflicts arising from housing demolition resulted in 26 deaths and 16 injuries from January to July 2002.62 The resentment generated by housing demolition is tremendous and the resistance is widespread, although it has been seldom reported that urban citizens have organized resistance of a scale comparable to workers' collective action. In 2002, for example, about 7,000 people approached the National Complaints Bureau to report their problems with housing demolition. The pressure posed by citizen resistance culminated in August and September 2003 when a citizen in Nanjing of Jiangsu province committed self-immolation in defending his home and another person in Beijing. Both cases were widely covered in the media.

61

Li Zhaoqing, "Zhongyang yan ni quxiao suoyou kaifaqu" (The central authority is considering dismantling all the economic development zones), Fenghuang zhoukan (Phoenix weekly), no. 17 (2004), pp. 5-6. 62 Zhao Ling, "Cheqian shinian beixi ju" (The ten-year history of housing demolition), Nanfang zhoumo, 4 September 2003.

Managing Social Unrest 401

Right after the self-immolation events, the central government dispatched several teams to several provinces to investigate housing demolition. The State Council issued an urgent directive to warn local officials against provoking social unrest, and housing demolition was suspended in many places. The directive acknowledged an increase in conflicts over housing demolition. "These events have affected social order and stability. Leaders of the State Council have taken this issue very seriously and have given important instructions."63 The directive regulated several measures to prevent housing demolition from threatening social stability. One is punishment of action participants: "Prompt and legal measures should be taken to deal with a minority of the people who take advantage of housing demolition to make serious trouble or to organize concerted action and threaten social order." Another is punishment of state agents: "If a large number of collective petitions occur due to the ineffective work of government agencies, the leaders or persons concerned should be punished." Yet, social stability cannot always be achieved through repression because there is always a limit to state power and because citizens' resistance can be lawful. Hence, the directive also stressed that citizens' interests must be respected, especially those of low-income families. But local governments had based their polices toward housing demolition on the directive issued by the central government in 2001, and that directive was ambiguous about some legitimate rights of home owners'. Consequently, the central government revised its policy by promulgating two new directives in the end of 2003- The two directives increase the amount of compensation for home owners, guarantee the basic needs of poor families, and regulate public hearings before compulsory housing demolition. Although the new directives may not solve all the problems arising from housing demolition, they provide new ammunition for citizen resistance.

63

See the website of State Resource and Housing Management Bureau of Beijing municipality, www.bigtfgi.gov.cn, 28 September 2003.

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CONCLUSION This chapter explores the relationship between civil resistance and policy change in China. By dividing government reaction to citizen resistance into police response and policy response, the chapter shows that policy change becomes possible when the police technical response fails to deter more resistance. Chinese citizens are able to engage in persistent action because of government policy toward citizen resistance. Research on social movements or protests has highlighted the importance of the "openness" of government for collective action. 64 In China, political opportunity as defined by students of social movements is largely absent. But there is latent opportunity in the Chinese political system, and it is manifested in government policies. Specifically, political space for citizen resistance in China arises from the discrepancy between the high-level and lower-level governments which have different priorities. The discrepancy shapes government response to civil resistance, thereby sending a mixed message in the sense that civil resistance with legitimate demands may be tolerated by the government. As a result, taking disruptive action has become an important mode of political participation in China. In China, the government has also used a mix of sticks and carrots. But this response is inadequate when the number of such events is not tens or hundreds but thousands or tens of thousands. In a context of drastic socioeconomic changes, sources of conflicts have increased. In other words, the police response fails to prevent more resistance which constitutes pressure on the Party-state in that it not only causes social disruptions but also undermines regime legitimacy, forcing the government to adopt policy response. But the Chinese government has maintained its reputation for not allowing political action with credible punishment. Such a reputation is important for an authoritarian regime to maintain political stability, as evidenced by the Communist government's inability to

64

Peter Eisinger, "The Conditions of Protest Behavior in American Cities," American Political Science Review, Vol. 81 (1973), pp. 11-28.

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repress solidarity in Poland. 65 In China, disruptive action is not regime-threatening, and it is manageable unrest. That policy change becomes possible often after citizens' numerous efforts of resistance indicates not only the possibility but also the difficulty of policy change in this authoritarian regime.

65

Roman Laba, The Roots of Solidarity (Princeton, N.J.: Princeton University Press, 1991).

Chapter

15 From Social Insurance to Social Assistance: Welfare Policy Change Edward Gu

INTRODUCTION A long time ago, Karl Polanyi1 pointed out that capitalist development was driven by two counter forces: efforts in support of releasing market forces and efforts in support social protection. In advanced capitalist economies, the development of the welfare state as a pillar of social protection was normally lagged behind of marketization. The welfare state is designed as an institutional supplement to the labor market to compensate for social risks including aging, (involuntary) unemployment, illness, injury, etc., in case the individuals concerned cannot be expected to (fully) meet their needs by their

1

Polanyi, K. ([1944] 2001). The Great Transformation: The Political and Economic Origins of Our Time. 2nd edition. Boston: Beacon Press.

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own efforts.2 The same can be applied to the market transition in transitional economies, including China. During the pre-reform era, the labor market was basically nonexistent in China.3 Urban sectors were governed by a state labor allocation system, in which most employees enjoyed lifetime employment (called "the iron rice bowl" in China). In the countryside, the labor force was controlled by collectivities, and with a household registration system labor mobility from rural to urban areas was strictly restricted. Under the configuration of a planned economy, China had a dual welfare regime comprising of a workplace-based welfare system and social welfare system. In the workplace-based welfare system, every workplace unit in urban areas operated as a mini-welfare state, which provided its formal employees with a wide range of fringe benefits including old-age pension, health care, housing, etc.4 The social welfare system targeted marginalized groups whose members had neither workplace nor family to be dependent upon. 5 China's market transition started in late 1978, beginning with the releasing of market forces. Despite tremendous resistance, the labor market had gradually replaced the formerly labor planning system to govern the allocation of labor forces by the mid-1990s.6 The iron 2

Elster, J., C. Offe and U. K. Preuss (1998). Institutional Design in Post-communist Societies: Rebuilding the Ship at Sea. Cambridge: Cambridge University Press. 3 In this regard, China was different from other state socialist countries in that the state labour allocation system had been partially dismantled and some components of market mechanism has been introduced in labor allocation and mobility in the Soviet Unions and Eastern European countries while the system largely persisted in China until the late 1980s (see Gu, E. (2001b). "Beyond the property rights approach: Welfare policy and the reform of state-owned enterprises in China," Development and Chang, Vol. 32, No. 1, pp. 129-150; Barr, N. (ed.) (1994). Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond. New York: Oxford University Press: 111-112. 4 Gu, E. (2001a). "Dismantling the Chinese mini-welfare state: Marketization and the politics of institutional transformation," Communist and Post-communist Studies, Vol. 34, pp. 91-111. 5 Wong, L. (1998). Marginalization and Social Welfare in China. London: Routledge. 6 Gu, E. (2001c). "Forging a labor market in urban China," Asian Affairs, Vol. 28, No. 2, pp. 92-111.

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rice bowl has been broken, and employment insecurities have become a severe socioeconomic phenomenon. 7 As in many other transitional economies,8 social protection in China was a loser during the early stage of the market transition. When concentrating on economic policies involving production and growth, social policy in general was neglected by the government during the first decade of the market transition.9 Later on, the functioning or mal-functioning of an emerging labor market induced a demand to establish a social protection system. Over the whole 1990s, major government efforts were made to transform the previously operating workplace-based welfare system into a social insurance system covering employees in urban sectors, so as to shift the responsibility of social protection from the workplace to the state. Social assistance, which was delivered through the social welfare system targeting marginalized social groups, was continuously marginalized (see Footnote 5). Yet it seems that this trend has been reversed after entering the new century. While consolidating the old social welfare programs, the Chinese government has introduced new social assistance schemes, namely minimum income support schemes, in both urban and rural areas. The scope of social assistance beneficiaries has been substantially expanded from narrowed defined marginalized social groups to all households passing means-test.10 The combination of social insurance consolidation and social assistance development signals that a new welfare regime is taking shape in China. Social insurance, social assistance, and universal transfer are regarded as major measures for welfare delivery, and the combinations 7

Gu, E. (2003). Labour Market Insecurities in China. Geneva: International Labour Organization. 8 Mandelbaum, M. (1997). "Introduction," In: Kapstein and Mandelbaum, Sustaining the Transition, pp. 1-9. 9 It is worth noting that the market transition was normally called "economic reform" in China during the 1980s. The term "market transition" became popular in China after the early 1990s. 10 Shang, X. and X. Wu (2004). "Changing approaches of social protection: Social assistance reform in urban China," Social Policy and Society, Vol. 3, No. 3, pp. 259-271.

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of these three measures constitute characteristic features of different welfare regimes. In this light, the most influential classification of welfare regimes is made by G0sta Esping-Andersen.11 According to him, three welfare-regime types or models can be ascertained as follows: •

•

•

In the liberal model, means-tested social assistance schemes predominate, while social insurance plans and universal transfers are modest (USA, UK, Canada, Australia, and New Zealand as typical examples of this model). In the conservative/corporatist model, employment-based social insurance is dominant, and it is supplemented by modest social assistance and universal transfers (Germany, France, Italy, Austria, and Switzerland as typical examples of this model). In the social democratic model, the welfare delivery is based mainly on citizenship-based social insurance and universal transfers (Scandinavian and Nordic countries, and the Netherlands as typical examples of this model).

The different combinations of welfare delivery mechanisms embody the differences in the principles behind these welfare regimes. On the one extreme, the state in the liberal model encourages the private provision of welfare through the market, the family, and the community; state welfare is carried out only in the case of private provision failure, targeting marginalized social groups whose members are not able to obtain social protection from other sources. On the other extreme, the social democratic welfare regime is characterized by universalism of welfare targeting and the so-called "decommodification of social rights," namely welfare entitlements not depending upon the participation of the labor market. The corporatist model lies in between. 12 For many social policy scholars, the liberal model is a reformed or modernized version of the poor-relief 11

G0sta Esping-Andersen focuses on welfare capitalism, and therefore his typology does not include welfare regimes in state socialist countries. Esping-Andersen, G. (1990). The Three Worlds of Welfare Capitalism. Princeton: Princeton University Press. 12 Pierson, C. (1998). Beyond the Welfare State. 2nd edition. University Park, PA.: The Pennsylvania State University Press.

From Social Insurance to Social Assistance: Welfare Policy Change 409

tradition, and it is operated in what Richard Titmuss 13 termed "residual approach," namely, state welfare targeting only residual or marginalized social groups. The social democratic model is something out of question to China. The Chinese government's emphasis on employment-based social insurance in urban sectors over the 1990s indicates the predominance of a so-called "corporatist principle" during the early stage of social security development in China. With this principle, the people are entitled to social rights not because of their citizenship but according to their status differentials. In the Chinese case, the status of formal employment and urban residence prevails. Yet as massive unemployment accompanied dramatic enterprising transition in urban areas, the number of people who lost their formal employment has soared, and they benefit little from the newly established social insurance system. In rural areas, in spite of a great success in alleviating absolute poverty, the problem of relative poverty has become severe. The vast majority of Chinese peasants fail to enjoy the share of China's remarkable economic growth they deserve, which is manifested by enlarging urban-rural income gap. Under these circumstances, reweaving a new social safety net has become a new focus for China's social policy over the past years. In fact, the new shift of China's social policy focus from social insurance to social assistance was initiated during the later years of the Jiang Zemin-Zhu Rongji era. After consolidating its power base in 2003, the new Chinese leadership led by Hu Jintao has proposed a new development strategy, which is epitomized by a new slogan of "constructing a socialist harmonious society," to shift China's development from an overwhelming emphasis on economic growth to a balanced and coordinated socioeconomic development. Along with this line, more shares of governmental social expenditures have been, and presumably will be, channeled to disadvantaged and vulnerable social groups in both urban and rural areas. Social assistance is gaining its significance in China's welfare regime, while social insurance remains as a major pillar of social protection. Titmuss, R. M. (1974). Social Policy: An Introduction. London; Allen and Unwin.

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This paper will systematically examine this ongoing social policy transformation in China. The following examination will be divided into five parts. The following section will give a brief outline of China's pre-reform welfare regime, in comparison with the welfare system in other communist countries. It will be followed by detailed descriptions of social insurance and social assistance development, respectively. Then some characteristics of the currently operating welfare regime in China will be examined. In the final section, I shall discuss the changing Chinese welfare regime in comparative perspective.

THE OLD REGIME: THE DUAL WELFARE SOCIALISM In one sense, communism or state socialism itself serves as a social protection system. As Michael Mandelbaum points out, the communist regime provided a floor beneath which no one could fall but also imposed a very low ceiling above which none could rise. It functioned as a social safety net, but its operation resembled a fishnet; everybody was trapped in it. In most communist countries, it was the government's obligation to furnish a job, shelter, and food to virtually every citizen. Through the planned economy, the prices of almost all goods and services necessary for people's basic livelihood were kept at very low levels. Most state socialist welfare regimes also guaranteed its citizens state-organized old-age pension and free health care.14 Meanwhile, the locus of welfare provisions in communist regimes were state-owned enterprises and other organizations in the public sector, which provided a wide range of social benefits from holiday homes, sanatoria, housing to child care for their formal workers and staff15 (also see Footnote 2). As these organizations were an integral part of the planned economy, the workplace paternalism in final analysis was a manifestation of the 14

Deacon, B. (1992). "East European Welfare: Past, Present and Future in Comparative Context," in Bob Deacon etal., The New Eastern Europe: Social Policy Past, Present and Future. London: Sage Publications, pp. 1-30. 15 OECD (1996). The Changing Social Benefits in Russian Enterprises. Paris: OECD.

From Social Insurance to Social Assistance: Welfare Policy Change 411

Party-state paternalism (See Footnote 14). Due to the domination of public-sector employment and the insignificance of the private sector, the workplace paternalism covers the vast majority of the working families, constituting a major pillar of the so-called "Soviet social contract" — a tacit agreement between the state socialist regime and the working class whereby the sate provides economic and social security in return for the workers' political compliance. 16 The basic framework of China's pre-reform welfare regime was similar with the communist welfare regime as above described, but it deviated from the normal version in two points: high urban bias and workplace domination. Unlike other communist countries, only urban residents in China could benefit from the planned economy by enjoying subsidized food, public utilities, housing, transportation, and so on. China never provided old-age pension and free health care, the two most important components of the communist social security system, to all its citizens in a universal manner as other communist countries did. Old-age pension and health care were incorporated into the workplace-based welfare system together with other fringe benefits. Workplace benefits were delivered only to formal employees in and retirees from state-owned enterprises (SOEs) and other public-sector organizations, who mostly dwelt in the cities.17 The workplace-based welfare system was divided into two parts according to the types of workplace units ("danwei" in Chinese). In China, all workplace units are subdivided in official documents and statistics into three categories: (1) enterprise units [qiye danwei\, units engaged in profit-making businesses; (2) public non-profit units [shiye danwei] including scientific, educational, professional, cultural,

16

Cook, L. J. (1993). The Soviet Social Contract and Why It Failed: Welfare Policy and Workers'Politics from Brezhnev to Yeltsin. Cambridge, MA.: Harvard University Press. 17 Walder, A. G. (1986). Communist Neo-Traditionalism: Work and Authority in Chinese Industry. Berkeley and Los Angeles: The University of California Press; Whyte, M. K. and W. Parish (1984). Urban Life in Contemporary China. Chicago: The University of Chicago Press.

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athletic, and health care organizations;18 and (3) administrative units [xingzheng danwei], i.e. governmental organs. 19 In enterprise units, welfare provisions were funded by enterprise profit through a so-called "labor insurance system"; while in other two types of workplace units, welfare provisions were funded directly by state budget. Actually, the workplace-based welfare system operating in enterprises had no insurance components despite the label of "labor insurance". All enterprises were ordered to set up "workers' welfare funds" from their profits to fund welfare provisions. "Labor insurance" is a term inherited from the past. Before the Cultural Revolution, all enterprises were required to join a so-called "labor insurance scheme" administered by the trade unions. In a sense, the labor insurance scheme worked as a social insurance program to fund social protection to enterprise workers. During the Cultural Revolution, the trade unions were forced to dissolve so that labor insurance scheme ceased working and every enterprise had to fulfill the welfare obligations on their own. In brief, every workplace unit had become a mini-welfare state or welfare society. After the Cultural Revolution, the trade unions have been re-established but they failed to resume social security functions, and the mini-welfare state maintained in operation. Although social insurance mechanism no longer exists, the old term "labor insurance" is still used to the workplace-based welfare system operating in enterprises. For 18

In the English-speaking world, the term "non-profit organizations" is reserved to refer to private organizations which do not pursue for profit. In fact, in market economies, many organizations are run by government and they function similarly with non-profit organizations in the private sector. They are normally called "public-service organizations" or briefly "public organizations." In China, most notfor-profit organizations are run by the state, and therefore it is not meaningless to create a term "public non-profit organizations" to refer to them. As a matter of fact, private non-profit organizations have emerged recently, and legally they are called "private non-enterprise units" [minban feiqiye danwei]. 19 Lu, F. (1993). "The Origins and Formation of the Unit (Danwei) System," Chinese Sociology and Anthropology, Vol. 25, No. 3 (Spring), pp. 7-92.

From Social Insurance to Social Assistance: Welfare Policy Change 413

instance, free health care delivered in Chinese enterprises is still called "labor-insurance health care."20 Due to the narrow coverage of the workplace-based welfare system and the absence of a social security system with universal coverage over all citizens, a social welfare system targeting marginalized social groups was established in the 1950s, and its basic framework changed little until very recently. Actually, the membership of marginalized social groups was not small in China as all peasants were excluded from the urban biased, workplace-based welfare system. The social welfare system is administered by the Ministry of Civil Affairs, and its beneficiaries are called "civil-affairs targets" (minzheng duixiang). In urban areas, civil-affairs targets comprised mainly of those who had no work ability, no workplace affiliation to be entitled with workplace welfare benefits, and no family to be rely upon before the new minimum income support schemes were introduced in the mid 1990s. In rural areas, civilaffairs benefits targeted the similar groups including elderly, the disable, orphans, and so on. In both urban and rural areas, veterans, disabled soldiers, dependants of soldiers, demobilized and retired soldiers, and even released prisoners and criminals' families are also targeted by the social welfare system. These civil-affairs targets are entitled to receive benefits in cash and in kind regularly or irregularly21 (also see Footnote 5). In the countryside, there was a communitybased health care system, namely the cooperative medical scheme, which covered most of health care expenses from peasants. During the market transition, the old welfare regime proved not to keep up with the development of market economies in China. On the one hand, the workplace-based welfare provisions led to tremendous dependency of workers upon their workplace, which 20

As being elaborated below, the free health care system previously operating in enterprises has been largely replaced by a newly established social health insurance scheme. But a small minority of urban population, typically victims of workplace injury, is still benefited from the old system. 21 Dixon, J. (1981). The Chinese Welfare System. New York: Praeger.

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cast negative impacts upon the formation of a uniform labor market across different socioeconomic sectors. Enterprises with poor performance were not allowed to go bankrupt for a long time until the mid-1990s since the reallocation of the labor force was a severe headache for local government. 22 On the other hand, the old social welfare system operating with a narrow targeting principle could not provide a social safety net to the people fallen into the new poverty, in particular laid-off workers. Welfare regime change seemed to be inevitable. DISMANTLING THE MINI-WELFARE STATE AND RESTORLNG SOCIAL INSURANCE The welfare regime change started with dismantling the mini-welfare state and the restoration of social insurance in the enterprise sector. This transformation was driven initially by the need of smoothing economic reforms, in particular the formation of a labor market, rather than by the need of providing social protection to workers. The goal of this reform was to transfer social security functions away from the enterprise, namely, to transfer the workplace-based welfare system into an earnings-related and contributory social insurance system. So far, a comprehensive social insurance system covering old-age pension, health care, unemployment compensation, workplace injury compensation, and maternity benefits have been established in urban China. Old-age P e n s i o n Insurance Pension reform was initiated in 1986, when the government introduced the labor contract system into SOEs. The old pension system which was based on lifetime employment became incompatible with the new labor system. In response to this situation, the State Council incorporated a social pension insurance scheme into the 22

In fact, it was as early in 1988 that the Chinese legislative body passed the Bankruptcy Law, but it could not be enforced until the mid-1990s.

From Social Insurance to Social Assistance: Welfare Policy Change 415

labor contract system. In 1991, pension reform was formally kicked off when the central government promulgated a decision on establishing a social pension insurance system for all workers in SOEs. The year of 1995 was a milestone for China's pension reform as a newly issued policy document formulated a basic framework for China's social pension insurance system — namely, all locally administered pension insurance funds were divided into two accounts: social pooling and individual accounts. The combination of social pooling and individual accounts indicated a Chinese effort to transform social pension insurance from a benefit-defined, payas-you-go model to a contribution-defined, funded model. In 1997, the State Council promulgated a policy document concerning the establishment of uniform social pension insurance system covering all enterprises with different ownership types. Key components of the new pension system are summarized in Table 15.1.

Table 15.1 Components of Social Pension Insurance System in China Coverage Funding

Fund structure

Eligibility for entitlement Benefit structure and level

Administration

All enterprise employees in urban areas, including migrant workers; and the self-employed also covered. 1) employer's contribution: 20% of average wage; and employee's contribution: 8%; 2) interests on fund savings; 3) local government funding if any deficit incurs. In all social pension insurance funds, social pooling and individual accounts are set up. Eleven percent of total contributions is deposited into individual accounts, while the remaining contribution into social pooling accounts. 1) at least 15 years of continuous insurance; 2) retirement ages: 60 for men and 55 for women. 1) Basic pension with a flat rate, i.e. 20% of local average wage, is paid from social pooling accounts; 2) all savings from individual accounts are paid with installment over 120 months (Ten years) as personal pension. Social pension insurance funds are managed by local social insurance agencies, which are administered by local labor bureaus at the municipal level.

Source: The State Council, "Decision of Establishing a Uniform Basic Pension Insurance System for Enterprise Workers," China Labour Yearbook, 1998, pp. 307-308.

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Since 1997, the Chinese government has been struggling to expand the coverage scope of the newly-established social pension insurance system. Figure 15.1 presents a time-series of coverage rates for social pension insurance since national statistics were available from 1990 onward. The chart shows that the coverage rates declined between 1995 and 1998, and they climbed again since 1999- Basically, the pace of increase remained rather slow, and the new system covered only 52.5% of employees and retirees in urban areas by the end of 2004. The universal coverage has not yet been achieved mainly for two reasons. First, the government regulations on the new pension insurance system do not offer universal coverage provisions. Formal employees in public non-profit organizations and government agencies are not covered by the new system and they still enjoy the workplace-based welfare benefits. In recent years, some pilot reforms are carried out in some localities to merge the workplacebased public pension system operated in non-enterprise public organizations into the new social pension insurance. But generally they encounter strong resistance from most beneficiaries of the old welfare regime. Basically, most formal employees in non-enterprise

SS*r-5S%

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From Social Insurance to Social Assistance: Welfare Policy Change 417

public organizations are reluctant to be incorporated into the social pension insurance system originally targeted for enterprise workers for both symbolic and substantial reasons. Symbolically, the pension reform would destroy their sense of membership of privileged social groups; substantially, the replacement rates under the existing public pension system are close to 100% of their previous wage level before retirement, which are much higher than replacement rates offered by the social pension insurance system. Second, the social pension insurance fails to cover all targeted enterprises as the government regulations are mandated. Basically, many private enterprises manage to escape their contributory obligations due to cost-saving considerations.23 At the same time, most migrant workers (or peasant workers as normally called in China) do not enroll in social pension insurance although the government mandates all the employers do so. The failure of compliance in this regard is large due to weak state capacity in implementing unpopular social and economic policy in China. As a matter of fact, not only employers but also migrant workers themselves do not want to enroll in social pension system. For most migrant workers, the current earning levels are already very low, and they need cash as much as possible for maintaining their present livelihood. To implement this unpopular social policy, the government needs more tools to compel employers in complying with the regulations, but nowadays local governments even do not know the exact numbers of migrant workers in areas under their jurisdiction.24 23

One of the tactics in doing this is to misuse probation. According to the government regulations on employment, there are no social insurance obligations for employees on probation. Many private enterprises, in particular those in the service sector, tend to lay off employees right before their probation expires and reemploy them once again on probation. 24 This observation is drawn from a policy consultation conducted recently by the author for the local government of the Haidian district in Beijing. Located in a most advanced area in China in terms of IT technological development, the Haidian government has no information system to monitor manpower dynamics under its jurisdiction. None of the officials know about the exact number of migrant workers in the district.

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Social Health I n s u r a n c e As the market-oriented economic reforms proceeded in the 1980s, the enterprise element of the free health care system began to erode. By the end of the 1980s, the workplace-based free health care system in enterprises became incompatible with the ongoing marketized economic system. Two institutional factors were critical to this change. One was that to tighten the budgetary constraints on enterprises, the government gave most of them financial autonomy, and enterprises, running in red for a long time had to go bankrupt. The other was that, as described below, health care providers moved towards financial autonomy. The financial autonomy for the enterprises resulted in the collapse of their "mini-welfare states": enterprises in poor financial health could not meet the expenditures of their employees' welfare demands, including free health care. The financial autonomy for the health care providers gave rise to provider-induced over-consumption, as the earnings of health care professionals got associated with the amount of services and drugs they prescribed to patients. The collapse of the mini-welfare states gave rise to larger "welfare states." Social insurance mechanisms emerged from below to replace the workplace-based free health care system. As early as 1987, an experimental risk pooling scheme to cover the expenses for treating severe illnesses was set up by a Beijing-based vegetable trading company. This measure spread to other workplaces, where many similar schemes were established, and also to the industrial sector. In addition, local governments set up risk-pooling funds for retirees. Due to their experimental nature, however, the coverage of such schemes was rather limited (see Table 15.2). Nevertheless, these efforts signaled that the health security system in urban China had begun to change from a free health care model to a social insurance model. From a comparative perspective, these risk-pooling schemes operated in a similar way to the sickness funds in the German social insurance system, although there is no indication that the Chinese experiments were an intentional imitation of the German model.

From Social Insurance to Social Assistance: Welfare Policy Change 419 Table 15.2 Locally, Sectorally, or Community-based Severe Sickness Risk Pooling Schemes in Urban China Number of Employees Enrolled in Risk-pooling Schemes (thousands) 2,679 3,746 7,026 7,912

Proportion of Total Number of Employees (%)

Number of Retirees Enrolled in Risk-pooling Schemes (thousands)

Proportion of Total Number of Retirees (%)

1.8% 2.5% 4.7% 5.3%

225 257 433 645

0.8% 0.9% 1.4% 2.0%

Source: China Social Insurance Yearbook, 1997, p. 311.

The turning point of this transformation was the so-called "two-Jiangs experiments" launched in 1994. With support from the government, the municipal governments in Zhenjiang and Jiujiang, two medium-sized cities, initiated social health insurance schemes across the cities. In the "two-Jiangs model," certain Singaporean-style arrangements for compulsory savings were incorporated into the German-style institutional framework of social insurance, a practice that has come to be called the "combination of social pooling and individual accounts" in China. Similar with the social pension funds, the health insurance fund was divided into two accounts, namely the "social pooling account" and the "individual account." The rates of distribution of funds to these two accounts varied from locality to locality (see Figure 15.2). Local variations also emerged on what health care expenses could be covered from what accounts. The year 1998 was a watershed in China's health care reform. At the end of this year, the central government issued a policy to extend the "two-Jiangs model" to all cities. The basic elements of this so-called "Basic Health Care Insurance for Urban Employees" can be summarized in Table 15.3. When the new policy was promulgated in 1998, the central government set a policy goal of completing the establishment of the

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Edward Gu Contributors

Funding Accounts

Employer 10%

Social Pooling Account

Employee

Individual Account 5%-7%

Figure 15.2 Basic Framework of Social Health Insurance in Urban China. Source: World Bank, Financing Health Care: Issues and Options for Washington, D.C.: The World Bank, 1997, p. 58 (minor adjustments made).

China.

new scheme by the end of 1999. The building of a new institutional framework, however, did go as smoothly as had been hoped. In fact, the Chinese government has been striving hard to achieve the goal of wide (if not universal) coverage from 1999 onwards. Every year, the central government holds a working conference to urge local governments to expand coverage. From the data presented in Figure 15.3, we can see that governmental efforts did bring about some positive impacts. There has been a steady growth in coverage of social health insurance. Nevertheless, there is still a long way to go to achieve universal social health insurance coverage over all urban employees as the plan targeted. The difficulties come from the following urban sectors: 1) Civil servants and formal employees in public-sector organizations: They are extremely reluctant to convert their existing free health care entitlements to social health insurance. Figure 15.4 shows that 4.0% of urban residents were still entitled to enjoy free health care in 2003. This privileged social group comprises of civil servants and formal employees in public-sector organizations excluding SOEs. 2) Employees in private sectors: Most of them are quite young, and it is less costly for them to enroll in commercial health insurance. 3) Self-employed people.

From Social Insurance to Social Assistance: Welfare Policy Change

421

Table 15-3 Components of Social Health Insurance System in China Targeted coverage All employees in urban areas, including migrant workers and the self-employed. 1) employer's contribution: 6.0% of wage; and employee's Funding contribution: 2.0%; 2) interests on fund savings; 3) local government funding if any deficit occurs. In all social health insurance funds, social pooling and Fund structure individual accounts are set up. All employees' and about 30% of employers' contributions are deposited into individual accounts, while the remaining contribution into social pooling accounts. Benefit structure Payment thresholds and ceilings are set for the social pooling account, and they are respectively about 10% and 400% of the local average annual wage. Co-payment must be introduced in the case of the social pooling accounts. The precise regulations concerning the payment from individual accounts are set by local government. Service delivery Health care services are delivered by accredited health care providers and pharmacies, and the accreditation is carried out jointly by local bureaus of labor and social security, health, and finance. Lists of insured health care services and drugs are regularly reviewed by local government. Administration All social health insurance funds are administered by the local labor and social security bureaus of municipal governments. Certain regulatory bodies are to be established to monitor the operation of the social health insurance funds, with representation from the relevant government departments, employers' organizations, trade unions, health care providers, and experts. Source: China Labour and Social Security Yearbook, 1999, pp. 121-123.

4) Informal employees including part-time workers and workers with short-time labor contract, and most of them comprise of migrant workers. As the goal of widespread (if not universal) coverage is yet to be achieved, the social health insurance has not yet occupied a dominant position in the health security system in urban China. Figure 15.4 shows that the coverage of the old health security regime, namely, the labor insurance scheme and the government health care

Edward Cu

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Self-Payment Commercial Insurance Social Health Insurance Cooperative Medical Scheme Labour Insurance Scheme Government Health Care Scheme 30

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Figure 15.4 Changes in Health Care Protection Composition in Urban China. Sources: National Health Service Survey, 1993, 1998, 2003-

scheme, decreased by 57.8% from 1993-2003, while at the same time the coverage rate of social health insurance increased by only 33-3%. These figures indicate that social health insurance has partially replaced the old health care regime, but some who have lost the entitlements to free health care are likely to have joined the

From Social Insurance to Social Assistance: Welfare Policy Change 423

ranks of self-paid patients. It is widely believed that most of them are unemployed persons. Out-of-pocket payment has become a dominant method of health financing. The proportion of outof-pocket patients in relation to the total number of urban residents was only 27.3% in 1993, but soared to 44.1% in 1998. The 2003 figure shows that the new round of health care reform from 1998 onwards has not reversed this trend. How to expand the coverage of social health insurance towards those who have no health security is among the biggest challenge for the Chinese government.

Unemployment Insurance Whereas unemployment insurance was generally developed late around the world, the establishment of an unemployment insurance system was rather early in China. The first regulations concerning unemployment insurance, entitled "Provisional Regulations for Waiting-for-job Insurance for Employees in State-owned Enterprises," were promulgated in 1986.25 Unlike in other countries,26 the Chinese government set up this system neither because of pressures from societal forces nor because the unemployment rate was so high that the government was forced to take action to provide the unemployed with income protection. As a matter of fact, unemployment rates in the mid-1980s were not high at all no matter how they were calculated and what definition of unemployment was applied. The year of 1985 actually recorded the lowest urban unemployment rate, 1.83%, over the whole reform era. Furthermore, the problem of unemployment in its narrow sense, namely the transition from employment to unemployment, was still almost non-existent during the first half of the 1980s. At that time, the iron rice bowl was not yet broken. 25

The text of the regulations (Chinese version) is available in China Labour and Personnel Yearbook, 1949-1987, pp. 1628-1629. 26 Korpi, W. (1978). The Working Class in Welfare Capitalism: Work, Unions and Politics in Sweden. London: Routledge; Stephens, J. (1979). The Transition from Capitalism to Socialism. London: Macmillan; Gosta Esping-Andersen, G. (1985). Politics against Markets: The Social Democratic Road to Power. Princeton: Princeton University Press.

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Similar with the case with pension reform, the unemployment insurance system was established as a result of ongoing changes in other institutional arrangements. In fact, two reforms in other realms prompted the Chinese state to build up an unemployment insurance system: 1) the implementation of the labor contract system in the state sector, effective from the first half of 1986 onwards; and 2) the passing of the "Enterprise Bankruptcy Law" at the end of 198627 (see also, China Labour Yearbook, 1990-1991, p. 276). As Barry Naughton 28 puts it, unemployment insurance was closely linked to the introduction of these institutional changes because it was anticipated by the government that permanent workers would be unemployed primarily due to firm bankruptcy and contract workers would become unemployed much more frequently due to non-renewal of labor contracts. Like the cases with the Bankruptcy Law and the labor contract system, the unemployment insurance system did not function until 1993. During the years between 1986 and 1993, the cases of firm bankruptcy remained rare and few contract workers failed to get their labor contracts renewed. As a result, a large amount of contributions accumulated in the unemployment insurance funds. In 1993, the central government issued a new policy document, transforming the 1986 provisional regulations into formal ones through minor adjustments. From 1993 onward, labor reforms accelerated in China, and massive lay-offs erupted in SOEs due to firm bankruptcy and enterprise restructuring (see Footnote 7). In dealing with massive lay-offs, a substantial proportion of unemployment insurance funds was spent on financing the implementation of active labor market policies to help laid-off workers reemployed. In response to the situation that the iron rice bowl had been genuinely broken and the labor market mechanism had replaced the state labor allocation 27

Song X., Z. Zhongjun and Z. Dingquan (1998). Zhongguo Shehui Baozhang Zhidu Jianshe Ershinian {Two Decades of Institution — Building for China's Social Security System). Zhengzhou: Zhongzhou guji chubanshe. 28 Naughton, B. (1995). Growing Out of the Plan: Chinese Economic Reform 1978-1993- New York: Cambridge University Press.

From Social Insurance to Social Assistance: Welfare Policy Change 425

system, the Chinese government promulgated a series of new regulations in 1999, revising the existing unemployment insurance scheme and transforming its coverage from only targeting employees in SOEs to universal coverage over all employees in urban areas. It is worthy noting that among five components of social insurance system, only unemployment insurance offers universal coverage within the scope of urban China. The key aspects of unemployment insurance system operating in urban China are summarized in Table 15.4. Since its national statistics were available in 1990, the coverage rates of unemployment insurance fluctuated around the level of 40% except for the years between 1997 and 1998 when lay-offs were most severe. The coverage rate of 1999 increased considerably from the relatively low level of the previous year largely due to the expansion of coverage scope from SOEs to all kinds of employing units in urban areas, including public non-profit organizations (Figure 15.5). Unlike the cases with pension and health insurance, the expansion of unemployment insurance coverage towards employees in public non-profit organizations received little resistance. Two Table 15.4 Components of Unemployment Insurance System in Urban China Coverage Funding

Eligibility for entitlement Benefit duration

Benefit level Administration

All enterprise employees in urban areas, including migrant workers. The self-employed are also covered. 1) employer's contribution: 2.0% of wage; and employee's contribution: 1.0%; 2) interests on fund savings; 3) local government funding if any deficit incurs. 1) registration as a job-seeker at public employment service agencies; 2) one year of continuous insurance; 3) involuntary unemployment; 4) actively job-seeking requirements. 1) maximum 12 months for those who have been insured for 1-5 years; 2) 18 months for those who have been insured for 5-10 years; 3) 24 months for those who have been insured for ten years and more. Flat rates between local poverty level and minimum wage, depending upon local discretion. Public employment service agencies run by local labor bureaus at the municipal level.

Source: China Labour and Social Security Yearbook, 2000, pp. 188-190.

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1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Figure 15.5 Unemploment Insurance in Urban China, 1995-2004. Sources: China Labour Statistical Yearbook, 2004, p. 571; 2001, p. 442. Note: Coverage rates are calculated on the basis of the total number of employees in urban areas.

reasons are crucial. On the one hand, labor reforms in public nonprofit organizations are under way, and introduction of the contract labor system into this sector means that its formal employees will no longer enjoy lifetime employment. On the other hand, as there was no equivalent part in the old welfare regime, employees in public non-profit organizations have no invested interests in alternative unemployment compensation schemes. Workplace Injury Insurance For a long time, payment for workplace injury compensation as an integral part of "labor insurance scheme" became an obligation for enterprises. Since the late 1980s, pilot reforms to establish social pooling workplace injury funds were conducted in some localities. The promulgation of the "Provisional Regulations of Workplace Injury Insurance for Enterprise Workers" in 1996 kicked off the shift of the obligation of compensating workplace injury victims from enterprises to the state. In April 2003, the formalized "Regulations on Workplace Injury Insurance" were promulgated. Two months later, the Ministry of Labor and Social Security issued some supplement

From Social Insurance to Social Assistance: Welfare Policy Change

427

Table 15-5 Key Components of Workplace Injury Insurance in Urban China Coverage Funding

Eligibility for entitlement Benefit structure and level

Administration

All employees in all kinds of enterprises, including migrant workers. 1) only employer's contribution required, and contribution rates depending upon risk ranking of different sectors; 2) interests on fund savings; 3) local government funding if any deficit occurs. 1) certification of workplace injury; 2) certification of disability degree; 3) certification of work inability. 1) payment for medical treatment expenses and hospitalization; 2) compensation in lump sum for victims and amount depending upon disability degree; 3) monthly compensation for those who have lost work ability; 4) compensation in lump sum for dependents of workers who have died due to workplace injury. Workplace injury insurance funds are managed by local social insurance agencies, which are administered by local labor bureaus at the municipal level.

Source: China Labour and Social Security Yearbook, 2004, pp. 191-192.

regulations to extend workplace injury insurance to migrant workers (peasant workers). The key components of currently operated workplace injury insurance scheme are summarized in Table 15.5Figure 15.6 shows that the coverage rates of workplace injury insurance had hardly changed since 1996 when the scheme was established across the country. In 2004, the coverage rate underwent a considerable increase due to the formalization of the scheme. As the government has tightened the regulations on workplace safety recently, it can be expected that the coverage of workplace injury insurance would be further expanded. Maternity Insurance It was as early as in late 1980s when some pilot schemes of social maternity insurance were experimented in some localities. In December 1994, the "Provisional Regulation on Maternity Insurance for Enterprise Workers" was promulgated. So far, the basic framework

428

Edward Gu 30% 3 Number of Enrollees {million}

25.9%

- Co\erage Rate

F 20.6%

211%

20.9'

1.- o /

— «

n 1993

1994

1995

1997

15%

37.81

139.1

ria.s

toSt

»4.1|

45.7

58.S

1998

1999

2000

2001

2002

2003

2004

Figure 15.6 Workplace Injury Insurance in Urban China, 1993-2004. Sources: China Labour Statistical Yearbook, 2004, p. 571; 2001, p. 444. Note: Coverage rates are calculated on the basis of the total number of employees (excluding formal employees in government units and public organizations) in urban areas.

of maternity insurance is still formulated by the 1994 provisional regulations, and the key provisions are summarized in Table 15.6. The formal regulation is being drafted and discussed, and it would be promulgated in late 2005 or in early 2006. Since social insurance replaced workplace welfare, the Chinese government has been making efforts to expand the coverage of maternity insurance. In 1995, right after the promulgation of provisional regulations on maternity insurance, the State Council issued an "Outline for Women Development in China (1995-2000)," setting a goal of establishing this social insurance scheme in all cities across the country by the end of the 20th century. This goal, however, had not been met. National statistical data shown in Figure 15.7 indicate that by the end of 1999 maternity insurance covered only 60.8% of female employees in the cities. In 2000, the Chinese government issued a new version of "Outline for Women Development in China (2001-2010)," which re-set in a realistic manner a goal of expanding the coverage of maternity towards 90% of female employees by 2010. As Figure 15.7 shows, the coverage rates have increased considerably from 2000

From Social Insurance to Social Assistance: Welfare Policy Change 429 Table 15.6 Key Components of Maternity Insurance in Urban China Coverage Funding

Eligibility for entitlement

Benefit structure and level Administration

All female employees in all kinds of enterprises; whether migrant workers are included are not certain. 1) only employer's contribution required, and the maximum contribution rate is 1% of payroll; 2) interests on fund savings; 3) local government funding if any deficit occurs. Not well defined. Normally minimum duration of continuous insurance should be required, and notifying the employer the pregnancy sometime before asking for maternity leave should be an obligation for insured female employees. 1) payment for procreation expenses; 2) compensation for maternity leave; 3) subsidy for family planning expenses. maternity insurance funds are managed by local social insurance agencies, which are administered by local labor bureaus at the municipal level.

Source: China Labour Yearbook, 1992-1994, pp. 662-66340 I Number of Enrollees (million)

35

- Coverage Rate (%) 30 •25 •20 15

30%

10 5 0 1993

1994

1995

1

2000

2001

2002

2003

Figure 15.7 Maternity Insurance in Urban China, 1993-2003. Sources: China Labour Statistical Yearbook, 2004, pp. 14, 571; 2001, p. 443; 1998, p. 23. Note: Coverage rates are calculated on the basis of total female employment in urban areas.

onward. By the end of 2003, its coverage reached a high level of 88.0%, near to the revised policy goal. In September 2004, the Ministry of Labor and Social Security issued a notice, urging local authorities to consolidate the existing maternity insurance scheme.

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It is widely anticipated that the goal of 90% of coverage would be hit in the near future. Above all, maternity insurance is a small component of the social insurance system. As the contribution rate for employers is only 1% of payroll, it is not very difficult for employers to comply with the government regulation. REWEAVING A SOCIAL SAFETY NET: SOCIAL ASSISTANCE EMPHASIZED While the Chinese government concentrated on rebuilding a social insurance system to provide income maintenance with urban employees, social assistance kept being marginalized during the early stage of the market transition. While many minor reforms were carried out to improve the functioning of existing social assistance programs, the targeting principle remained little change. During the years before the mid-1990s, all social assistance programs administered by the Ministry of Civil Affairs were imposed in a strictly residual approach. All those who had work ability were not qualified for claiming benefits, and benefits could be delivered only when it was proved that the targeted beneficiaries exhausted all other alternative poverty relief sources, in particular from the family and the kinship. The latter feature is condemned by Linda Wong (see Footnote 5) as "utilitarian Chinese familism." It was obvious that this traditional approach of social assistance could not respond to the need of the market transition. By the mid1990s, massive lay-offs erupted in the cities. Millions of laid-off workers lost their jobs, and the employment-based social insurance approach could not provide them with appropriate social protection. All in all, the social safety net inherited from the past had many holes through which many newly emergent poor people fell down to a desperate situation. Reweaving a social safety net became a must for the government. To a great extent, the Ministry of Civil Affairs performed well in responding to this need. Since the mid-1997, it has concentrated its efforts on developing a minimum income support scheme in the cities, which is called "Minimum Livelihood Security System" in China.

From Social Insurance to Social Assistance: Welfare Policy Change 431

All households whose income falls below the poverty line set by the municipal government are eligible for claiming benefits in cash and in kind. The test for work ability has been abolished, and the entitlement is now decided only on the basis of means (or exactly income) test. As in other reform realms, the new social assistance program was first experimented in some localities, and then it has been spread across the country with the central guild and support. The first experimental scheme with minimum income support started in Shanghai in June 1993. Its initiative immediately aroused the attention from the central government and other local governments. Some months later, Xiamen set up a second experimental scheme following the Shanghai model. The municipal governments in the cities with solid financial situations obviously treated this measure as an easily built show window for their political accomplishment. According to the record by Duoji Cairang29 then minister of civil affairs, the minimum income support schemes flourished in 206 cities by August 1997, counting one-third of total number of cities in China. In September 1997, the Ministry of Civil Affairs decided to expand this system to all Chinese cities. Two years later, a formal regulation on the minimum income support system was promulgated by the State Council. From Table 15-7 and Figure 15.8, we can find that since the central government decided to implement the minimum income support system across the country, the number of social assistance beneficiaries rocketed up. From 2001 onward, all existing other social assistance programs operated in traditional approach have been merged into the minimum income support scheme. By the end of 2003, 4.3% of urban residents benefited the new social assistance system (see Figure 15.8). A parallel development has been the expansion of social assistance in the countryside. The traditional social assistance programs inherited from the pre-reform era was implemented in a strictly 29

Duoji C. (2001). Zhongguo Zuidi Shenghuo baozhang Zhidu Yanjiu yu Shijian {The Study and Practice of China's Minimum Livelihood Security Schemes). Beijing: Renmin chubanshe.

432

Edward Gu Table 15.7 Number of Social Assistance Beneficiaries (Million) in Urban China, 1996-2003 Beneficiaries of Minimum Income Support Scheme

Beneficiaries of Other Social Assistance Schemes

Total Number of Social Assistance Beneficiaries

0.8 0.9 1.8 2.6 4.0 11.7 20.6 22.5

1.2 0.1 0.2 0.2 0.2 0.0 0.0 0.0

2.1 1.0 2.0 2.8 4.3 11.7 20.6 22.5

1996 1997 1998 1999 2000 2001 2002 2003

Sources: China Civil Affairs Statistical Yearbook, 2004, pp. 46, 49.

3 Number of Beneficiaries (Million) - Co«rage Rate

„ 0.3% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

0 6 %

2.1 0.3

0.5

0.3

0.3

0.3

0.4

. | l-T^l

| B^gl

| 1^31

0.3 |

I

0.4

0.2

0.3%

0 5 %

2.0

!f. .mM.mM.m

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure 15.8 Social Assistance in Urban Chin, 1985-2003. Source: China Civil Affairs Statistical Yearbook, 2004, pp. 46, 49.

residual approach. Only those who had no work ability and exhausted all other alternative support sources for maintaining basic livelihood were eligible to receive income support and other benefits in kind. From the mid-1990s onward, the Ministry of Civil Affairs has promoted a couple of new social assistance programs while consolidating the old ones. One of the most important operational

From Social Insurance to Social Assistance: Welfare Policy Change 433

principles for the new programs is to replace the previous test of work ability with means test. Along with this new principle, all rural households whose earnings are below locally decided poverty levels are eligible for claiming social assistance benefits. As a result, the number of social assistance beneficiaries increased considerably over the past years (see Figure 15.9). Apart from income support schemes, the Chinese government has also developed some categorical types of social assistance programs, providing certain social benefits in kind such as health care and housing for poor families in both urban and rural areas. Building up a health care safety net has been placed on the top priorities of agenda for social policy transformation, especially under the Hu-Wen administration. Clearly, this policy orientation was bolstered by the SARS outbreak in spring 2003 immediately after Hu Jintao and Wen Jiabao took power. In 2003, the Chinese government decided to establish a voluntarily-based health insurance scheme in the countryside, which is called the "new-type cooperative medical scheme" in China. After the interruption by the SARS outbreak, the Chinese government selected 333 counties to experiment the new scheme from 2004 onward. In 2004, the Chinese government proposed a new health care assistance scheme in rural areas, providing poor rural households with cash assistance to partially

12 .

r—-i Number of Beneficiaries (Million)

10 •

—•— Coverage Rate

/

"

0.9W 0.5%/

8 •

6

1.5%

.0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0 . 1 % / 11.'i

4 7.0 4.4

2 -

n -

•

R.R.w.H.ra.ara.ra.ra.fPi.Fi.lMl^.ll.ra.Fl, 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure 15.9 Social Assistance in Rural China, 1985-2003. Source: China Civil Affairs Statistical Yearbook, 2004, pp. 46, 50.

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Edward Gu

cover their health care bills. In 2005, a similar scheme was launched in the cities. CONCLUDING REMARKS: TOWARDS A LIBERAL WELFARE REGIME? From the above historical account, it is easily ascertained that China's social policy transformation during the reform era can be divided into two stages. The first stage was from the mid-1980s to the mid-1990s, and the second from the mid-1990s onwards. During the first stage, social policy reforms were largely supplementary to economic policy reforms. The major government efforts were directed to re-build a social security system in order to address the newly emergent social issues as a result of labor reforms, in particular the breakdown of the iron rice bowl. Social insurance became a dominant approach at that time. The goal of social insurance rebuilding was to shift social protection responsibilities from the workplace to the local government. The dismantling of the mini-welfare state resulted in the emergence of the new poverty. The newly established social insurance schemes could not perform social protection functions for the newly poor, especially the unemployed in the cities. When the existing social welfare programs inherited from the old welfare regime failed to perform a social safety net function, social assistance reforms became a new focus for the second stage of social policy transformation in China. The emphasis on social assistance also reflects the shifting focus of a new development strategy proposed by the new leadership from public-sector workers to vulnerable and disadvantaged social groups. Obviously, the changing focus does not mean that the Chinese government is withdrawing from its responsibility for social insurance to urban employees. As a matter of fact, some social insurance schemes, especially social health insurance and maternity insurance, have been consolidated in recent times in terms of coverage expansion. Clearly, universal coverage for social insurance in urban areas is still a goal for continuous welfare reform in China.

From Social Insurance to Social Assistance: Welfare Policy Change 435

Nevertheless, it is also clear that social assistance has regained its significance within the welfare regime in China. The dramatic growth in the number of social assistance beneficiaries has been examined above. If measuring the increase of relative importance of social assistance by indicators of expenditures, we can find a similar trend. From data shown in Table 15.8, we can find that the ratios of social insurance to social assistance climbed up from 1992 and reached the height of 30.5 in 1999, indicating the government's emphasis on social insurance throughout the 1990s. Since 2000, the ratios experienced a gradual decline, signaling the changing weight of social insurance and social assistance within the welfare regime. Of course, social insurance expenditures are normally higher than social assistance expenditures in any country, if both types of programs are in place, it is also the case for China. Table 15.8 Comparison of Social Assistance and Social Insurance Expenditures in China Social Assistance Expenditures (100 Million Yuan) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

17.6 24.5 24.3 23.1 27.2 34.5 44.1 44.4 62.5 68.4 78.2 107.8 172.3 245.6

Social Insurance Expenditures (100 Million Yuan) 151.8 176.1 327.0 482.1 679.9 877.2 1082.4 1339.1 1636.8 2108.1 2385.5 2748.1 3471.6 4016.4

Ratio of Social Insurance to Social Assistance 8.6 7.2 13.4 20.8 25.0 25.4 24.5 30.2 26.2 30.8 30.5 25.5 20.1 16.4

Sources: China Labour Statistical Yearbook, 2004, p. 565; 2001, p. 442. China Civil Affairs Yearbook, 2004, p. 279; 2003, p. 337; 2001, pp. 293-294; 2000, p. 310; 1999, p. 257; 1997, p. 295; 1995, p. 204; 1993, p. 224; 1991, pp. 228-229; 1990, pp. 320-321.

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Edward Gu

As pointed out in the first session of this paper, social assistance on the basis of means-test has found its way into the more liberally dominated Anglo-Saxon countries, while social insurance model is characteristic of the corporatist countries, mostly in continental Europe. If social assistance continuous to gain more weight in the total welfare provision, China's welfare regime will move towards a combination of predominant social assistance schemes and modest social insurance schemes, a typical feature of a liberal welfare regime.

Chapter

16 Governments, Markets, and the Health Care Sector O

-

Ake Blomqvisr

HEALTH CARE AND THE MARKET MECHANISM: SOME PROBLEMS Economic theory and the experience of China in recent years certainly are consistent with the idea that private ownership and free markets can be powerful tools to improve an economy's performance and the living standards of its population. In principle, the market mechanism could be used to allocate resources in the health services sector as well. Because people value good health, they are willing to pay for health care. In principle, therefore, all kinds 1

I am grateful to Gu Xin, Phua Kai Hong, and Lim Meng Kin of NUS, Gordon Liu, Wilson Zhang, and Ling Li of Peking University, Karen Eggleston of Tufts University, and to Hou Jianlin of the Beijing Center for Disease Prevention, for discussions about various aspects of health policy in China. An earlier version of this chapter was presented at the 2005 meetings of the Canadian Economics Association in Hamilton, Ontario where Lori Curtis gave helpful comments. My research assistant Loh Soo Fun helped assemble relevant literature. Financial support from the Faculty of Arts and Social Sciences, NUS, is gratefully acknowledged.

437

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Ake Blomqvist

of health services could be supplied by private firms or individual producers in the marketplace, with no public subsidy. However, as extensively discussed in the literature on health economics, health services have certain characteristics that reduce the ability of free markets to bring about efficient patterns of consumption and production in this sector.2 1. Some health services (those involving contagious disease) have "external effects" and thus a free market will produce too few of them. To state the obvious, free markets will not effectively combat the threat of an epidemic of avian flu, in the absence of government action. 2. Because ill health strikes randomly, it is highly desirable for patients to have some form of insurance against the potentially high cost of serious illness. But conventional insurance, under which patients only pay a portion of the cost of the health services they use, acts as a subsidy and hence may lead to more utilization than would be efficient. In the health insurance literature, this is referred to as the "moral hazard problem". 3 3. Most patients do not have the medical expertise necessary to decide what constitutes appropriate treatment for many kinds of illness. The so-called "information asymmetry" between providers (doctors) and patients, as well as the fact that health services have to be produced where the patients are, limit the effectiveness of competition as a restraint on pricing in the market for health services 2

The major current reference work on health economics is Culyer, A. J. and J. P. Newhouse eds. (2000). Handbook of Health Economics, Volumes 1A, IB. Amsterdam: Elsevier. Two important recent works that apply health economics to the issue of health system reform are Roberts, M. J., W. Hsiao, P. Berman and M. R. Reich (2004). Getting Health Reform Right: A Guide to Improving Performance and Equity. Oxford: Oxford University Press, and Kornai, J. and K. Eggleston (2001). Welfare, Choice and Solidarity: Reforming the Health Sector in Eastern Europe. Cambridge, U.K.: Cambridge University Press. 3 Another effect of being covered by insurance is that it reduces an individual's incentive to engage in behavior that reduces the risk of illness. This is sometimes referred to as "ex ante moral hazard"; the tendency for a person to use more health services than efficient after they have become ill is then referred to as "expost moral hazard".

Governments, Markets, and the Health Care Sector 439

and may give providers the ability to provide and charge for more services than patients would want if they were better informed. 4. Information asymmetry between buyers and sellers may also be a significant problem in the market for health insurance, since individual buyers do not have the expertise to properly compare the price and expected value of insurance policies with different degrees of coverage for different kinds of conditions and services. 5. Another type of information asymmetry may exist when buyers of health insurance are better informed than sellers about their own risks of different kinds of illness, giving rise to what is referred to in the literature as an "adverse selection" problem. It arises because those who know themselves to be at high risk of serious illness are more likely to buy insurance (or opt for generous insurance plans) than those who are healthier. This tendency may be a major source of market failure in the private insurance market, if insurers find it difficult and costly to distinguish between those at high and low risk. Without effective insurance markets, a market-based health care system cannot function effectively. While the problems associated with these sources of market imperfections are widely recognized, the question of what mechanisms should be used to overcome the problems remains controversial, and different countries use different combinations of regulation and direct government provision (either of health services or of health insurance, or both) to do so. The question of what constitutes the best form of government intervention (or equivalently, what constitutes an effective set of institutions) in the health sector is one that China's leadership will have to seriously address in the years ahead. The chapter is organized as follows. In the following section, I briefly discuss the main features of the health care system that existed in China before the reorganization of the economy that began in the 1980s, how the gradual dismantling of the earlier centrally planned economic system has affected the health sector, and recent initiatives that have been taken in the area of health system reorganization in urban and rural areas. In the following section, I turn to a brief review of the institutional approaches that have been used in various countries to mitigate the effects of major types of

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market failure listed above. Against the background of this discussion, I then return, in the third section, to the case of China and consider which of these approaches are likely to be best suited for the process of reorganizing and strengthening the Chinese health care system. CHINA'S HEALTH CARE SYSTEM: HISTORICAL BACKGROUND AND RECENT CHANGES 4 During the 1960s and 1970s, before the beginning of the economic liberalization and reform process that is still going on, questions of imperfections in the markets for health services and health insurance were largely irrelevant as China provided near-universal access to health care through a government-organized or mandated system. For those in urban areas, coverage was provided for workers and their dependents, as well as for retired individuals, through the work unit to which the person belonged. Work units in the government sector, in state-owned enterprises, and so on, were responsible for the health care costs of their members (beyond whatever user charges were imposed), and almost everyone belonged, directly or indirectly, to a work unit. Services were provided in clinics or hospitals that were owned either by enterprises or by the government. In the countryside, health care was funded (except for small user fees) through the agricultural communes to which the majority of the population belonged. The rural system was based on services provision at three distinct levels of government: local (village), township, 4

An extensive English-language literature on health care in China has emerged in the last ten years. Four references that provide a great deal of background information relevant to the description in this section are Liu (2002), Asian Development Bank (2002). People's Republic of China: Toward Establishing a Rural Health Protection System. (Report 090902, by Yuanli Liu, Keqin Rao, and Shanlian Hu). Manila: Asian Development Bank, and Bloom, G. (2004). "China's Health System in Transition: The Next Stage", paper presented at an International Conference on 'Comparative Health Policy and Reforms in East Asia' organized by National University of Singapore, and Meng, Q., L. Li and K. Eggleston (2004). Health Service Delivery in China-. A Critical Review. Draft report prepared for the World Bank.

Governments, Markets, and the Health Care Sector 441

and county. At the village level, care was provided by community doctors, nurses, and public health personnel 5 ; if any facilities existed at that level it was only a "health station" with a supply of drugs and some basic medical equipment. At the township level, there were health centers with perhaps 10-20 beds staffed by a qualified physician, while at the next level there was a county hospital with perhaps 200-300 beds and a team of more specialized medical personnel. During the 1980s and 1990s, the degree of health insurance coverage declined rapidly. As the share of state-owned enterprises in total urban employment declined, more and more people lost their automatic access to health care as the profit-making firms that replaced them did not assume responsibility for their employees' health care costs. At the same time, direct government subsidies to clinics and hospitals were reduced and these institutions became more and more dependent on patient charges and sales of pharmaceuticals to finance their operations. Effectively, therefore, health services providers became more and more dependent on the revenues they could generate by selling services to individual patients in the open market. Coverage of health care costs through private insurance remained limited to highly paid employees in a few modern firms, as private insurers were slow to enter the market. Without insurance coverage and with rising fees and charges, many individuals either chose to forego treatment or, in the case of serious illness requiring hospitalization, were unable to get it as they could not pay out of pocket. 6 In rural areas, the situation was even more difficult. With the abolition of the communes that started in 1979, most rural residents lost their access to subsidized health care, and as in the cities, clinics and hospitals became largely dependent on fees and charges paid 5

This was the period when China became famous for the so-called "barefoot doctors", workers who had received basic training in medicine and practiced as members of rural communes. 6 While government regulation was used to control prices of many services, the controls were only partially effective, and also gave rise to certain distortions that will be further discussed below.

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directly by patients, as government subsidies were reduced. Surveys have shown that even today, a large proportion of rural individuals who are classified as poor cite high medical costs as the main reason they fall in this category (see the references cited in Asian Development Bank,7 and as in the cities, many seriously ill individuals simply forego treatment, for financial reasons. Recent G o v e r n m e n t Initiatives In December 1998, the central government made a policy decision to establish a new urban social insurance program, to replace the earlier schemes that previously covered government employees (GIS) and workers in state-owned enterprises (LIS). At the central government level, management of the program is the responsibility of a new ministry, the Ministry of Labor and Social Security, that was created in 1997,8 but effective management and risk pooling is at the local (city) level. It is currently being implemented in many of China's large cities. The salient features of the scheme are as follows. Funding of the program is through a payroll tax paid jointly by employees (2% of wages) and employers (6% of wages). These contribution rates have been fixed by the central government. Part of the contribution (a little over half) goes into an individual account that belongs to the employee, and that can only be used to pay for medical expenditures. (In this sense, the scheme is similar to the system of Medical Savings Accounts, MSAs, that have been used in Singapore and elsewhere.) The rest goes into a social risk pool (SRP), which is managed by a social insurance bureau (SIB) that has been set up by each participating city government. The SRP functions like an insurance plan. Typically, it covers only costs of hospital treatment, and 7

Asian Development Bank (2002). People's Republic of China: Toward Establishing a Rural Health Protection System. (Report 090902, by Yuanli Liu, Keqin Rao, and Shanlian Hu). Manila: Asian Development Bank. 8 Liu, Y. (2002). "Reforming China's urban health insurance system", Health Policy 60, pp 133-150.

Governments, Markets, and the Health Care Sector 443

requires substantial deductibles and co-payments. (These may be as high as 10% of a worker's annual income; exact provisions vary across plans.) In addition, it specifies an upper limit on the benefits that are payable, equal to four times the average annual wage prevailing in the respective cities. For individuals who need hospitalization to treat serious illness with advanced technology, this limit may easily be exceeded. In contrast to the old GIS and LIS schemes, the SRP schemes cover only the employees themselves, not their dependents. Ultimately, the intention is that this social insurance plan will cover all urban employees. While coverage is still far from universal even for this group, recent statistics nevertheless indicate that enrollments have been growing rapidly, with plan membership in 2003 exceeding 100 million, constituting more than 36% of urban employees (see Gu,9 citing China Labour Statistical Yearbook 2003). In rural areas, there has been less progress. According to many recent policy pronouncements, the central government wants to strengthen a network of plans, referred to as a Cooperative Medical System (CMS), that will play a role similar to urban social insurance in rural areas. The intention is that the system will build on the existing three-tiered network of clinics and hospitals described above. However, even though a number of pilot projects have been organized, it is probably fair to say that success so far has been quite limited. A major difficulty appears to have been that under current policies the schemes cannot be made compulsory, even at the village level. As part of the central government's efforts to limit the burden of taxation on rural residents, limits have been set on the ability of local governments to impose taxes on the population, and since compulsory contributions to a CMS are equivalent to a tax, village residents cannot legally be required to contribute under current rules. The financial viability of CMSs, therefore, depends on the ability and willingness of rural residents to voluntarily pay the premiums for membership. 9

Gu, X. (2005). "Health Care Marketization in Urban China." EAI Background Brief No. 228. Singapore: East Asia Institute, National University of Singapore.

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INSTITUTIONAL APPROACHES TO DEALING WITH MARKET FAILURE IN HEALTH CARE If health policy and health reform will indeed be one of the Chinese government's priorities over the next several years, there will be increasing interest in the experiences that other countries have had in achieving broad health insurance coverage for their populations, and in trying to deal with the types of market failures that were described in the introduction. In the following discussion, I summarize what I believe to be some of the most promising institutional strategies, both from the viewpoint of being consistent with basic principles of economic analysis and in the sense of having been used with some success in other countries.10 Controlling Moral Hazard Economic theory teaches that it is efficient for people to be covered by insurance against the eventuality of randomly occurring serious illness and large health care expenditure. Collectively, the members of an insurance plan are better off as a result of the risk-pooling that removes (or at least reduces) everyone's fear of illness-related financial disaster, in return for payment of an (explicit or implicit) insurance premium. However, conventional insurance under which a third-party insurer pays for all or most of the cost of individuals' health services also gives rise to the moral hazard problem: When they do not pay the full costs themselves, patients have an incentive to utilize too many health services, and not enough incentive to opt for low-cost methods of treatment or low-cost service suppliers. To reduce the extent of the inefficiency that this effect creates, many insurance plans (private or public) require patients to pay out of pocket for at least part of the cost of the health services they use. This can be accomplished by imposing deductibles (under which 10

The principle that control of contagious disease is a function for which the government must assume responsibility is well understood and established in China, especially since the SARS epidemic in 2003, so I will not discuss this issue further (although it obviously is an important one).

Governments, Markets, and the Health Care Sector 445

patients are responsible for the entire cost of the health services they use up to some fixed amount per year), and/or co-payments (under which patients pay a share of the cost of their care). While deductibles and co-payments (often referred to collectively as "user fees") reduce the extent of the moral-hazard problem, they do so by reducing the completeness of patients' insurance coverage, something which also is economically inefficient. Thus large user fees represent, at best, an uneasy compromise between two undesirable effects: the moral-hazard effect, on the one hand, and incomplete insurance, on the other.11 Many health economists are also opposed to substantial user fees because they believe that, because of the information asymmetry between doctors and patients, most decisions regarding treatment methods and service utilization in the health care sector are effectively made by doctors, not by patients. Given this, incentives on patients (often referred to as demand-side incentives) are unlikely to be effective, either because they do not have much of an effect on services utilization, or because they reduce utilization of the wrong kind of services. A better approach, according to this logic, is to introduce supply-side incentives, that is, incentives on doctors and other providers, to make cost-effective decisions. Supply-side incentives will be further discussed below.

Medical Savings Accounts

(MSAs)

A variant of demand-side incentives that has attracted considerable attention in several countries (and is part of China's urban social insurance scheme) is the combination of user fees and MSAs. The 11

Insurance plans with cost sharing under which patients pay a fixed share of the cost of their care obviously reduce the probability of financial disaster if illness strikes, but does not eliminate the possibility. The same is true for plans with specific upper limits on the amount of benefits payable (such as the urban social insurance plan in China under which benefits are limited to an amount equal to four times the prevailing annual wage). In some countries, cost-sharing plans have 'stop-loss' provisions under which there is a fixed upper limit on the amount that an insured patient will be required to pay for health services in a given year.

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basic idea of MSAs is that individuals are required to set aside funds that can only be used to pay for health services (or health insurance), not for other purposes. (Singapore is the most well-known example of a country with such a system.) Since an MSA is the individual's personal property, those who pay for health services out of an MSA have an incentive to be conservative in the use of health services the same way that an individuals who pays out of pocket has, although not to the same extent since the funds can only be used in a restricted way. At the same time, accumulating balances in an MSA certainly, like insurance, will help some individuals gain access to health services that they might otherwise have difficulty paying for. However, a system of MSAs does not involve any risk pooling across individuals since the balances in MSAs are based entirely on past contributions by their owners (or by their employers on the account-holders' behalf), and therefore does not realize any of the economic-efficiency advantages of insurance. The principal rationale for an MSA system, therefore, is not that MSAs substitute for insurance, but rather a belief that they may be needed in order to offset a tendency for individuals to underestimate their future health care needs, and perhaps also in order to reduce the likelihood that individuals who fall ill will seek to have their health care costs paid for out of public funds.

Ways o f D e a l i n g w i t h I n f o r m a t i o n A s y m m e t r y i n t h e Health Services Market As noted in the Introduction, one likely consequence of allowing market forces to determine transactions in the physician services sector would be both high prices and a large volume of services, as a result of the information asymmetry between buyers and sellers (patients and doctors) that renders competition relatively ineffective in this market. As also observed, the problem becomes especially severe if consumers are covered by insurance, so that their incentive to look for sellers with low prices, and to avoid overuse of medical services, has been weakened.

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Given this, it is not surprising that almost all of the world's advanced countries have developed regulatory approaches and institutions to counteract the cost-increasing tendencies of asymmetric information. There are two principal approaches. One is for the government to introduce price controls on medical services. Examples of countries that have used this approach include Japan, Germany, and Canada; it is also used in the United States Medicare plan that covers persons over 65. The other approach is to modify the incentives on physicians so that their income does not depend on the volume of services they produce. We discuss both approaches in turn.

Price

Controls

At first glance, controlling the prices at which medical services are supplied seems an attractive strategy. On the one hand, a price ceiling reduces the financial burden on consumers (or their insurers) of paying for a given quantity of medical services. At the same time, the prices (fees) can be set at a level that reduces the incentive on physicians to "overtreat" patients (that is, to provide services which generate income for the doctor but do not yield substantial medical benefit to the patient). Government-imposed price controls in this market may, however, lead to problems. First, because there is such a wide range of illness conditions and treatment options, a system of price controls requires a great deal of administrative capacity: A controlled fee schedule will have to list hundreds of different procedures for physicians in general practice alone, and perhaps for specialist physicians as well. Care must be taken so that incentives will not be biased in favor of certain treatment approaches and against others. In China in recent years, a distorted pattern of hospital service production has arisen in some places as the fees for various kinds of standard interventions have remained regulated by government, while the fees which hospitals were allowed to charge for certain kinds of new and advanced treatments and pharmaceuticals were not regulated. Thus a paradoxical pattern emerged in which many

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hospitals concentrated on supplying highly advanced and costly treatments for which they could charge high fees, while not providing enough care to patients needing less advanced but more costeffective treatment of more conventional types; prescription of recently introduced patented drugs also increased, at the expense of less expensive generic ones. 12

Alternative

Payments

Mechanisms

Another way to counteract the tendency for costs to be high in private medical markets, especially when they are combined with conventional insurance, is to contract for medical services in a different way. In particular, health services may be paid on the basis of prepayment (sometimes referred to as prospective payment). In the previous discussion, it has been implicitly assumed that doctors and other medical service providers are paid on the basis of "fee for service". That is, doctors treat patients and then, after treatment has been rendered, give the patient (or his insurer) a bill listing the services provided, and the fees payable, for each type of service. Similarly, in a fee-for-service system, after a patient has been treated in hospital, the hospital submits a bill to the patient or the insurer, listing the number of days of hospitalization as well as other specific services provided (and perhaps also the drugs the person has been given), and the costs of each. (This method is sometimes referred to as itemized billing.) Under prepayment, the principle is that the provider is not paid on the basis of the quantity of services actually delivered. Instead, the payment is determined in advance, on the basis of some type of expected service quantity for a given category of patient. Two well-known examples of prepayment schemes are capitation, a method used to pay for the primary-care services supplied by general practitioners in the United Kingdom health care system, and the system of Diagnosis-Related Groups (DRGs) that was originally 12

Economist Intelligence Unit (1998). Healthcare in China into the 21st Century. London: The Economist Intelligence Unit.

Governments, Markets, and the Health Care Sector 449

designed to pay for hospital services provided to individuals insured under the United States Medicare plan. 13 Under the United Kingdom system of capitation in primary care, general practitioners are contractually obliged to provide necessary primary-care services to all those who have signed up on their patient list. The payment that the doctor receives for each patient in a given time period (say, a month) does not depend on the quantities and types of services actually provided. Instead, it is a fixed monthly amount that is paid to the doctor regardless of what services the patient has received during the month. Under the DRG system of paying hospitals, each patient is classified, on being admitted to the hospital, into one of several hundred categories that depend on his or her diagnosis as well as on certain other relevant patient characteristics (such as his or her age, presence of co-morbidities, etc.). The principle of the system is that the payment to the hospital then depends only on the DRG category in which patients were placed, not on the way they were actually treated (that is, whether they stayed in the hospital for a long or a short period, what diagnostic tests were performed, or what drugs were administered, etc.). Capitation for doctors and a DRG system for paying hospitals are both examples of what was referred to earlier as supply-side incentives, that is, incentives that try to control health care costs by giving providers, not patients, an interest in containing costs. Contrary to a system of fee for service, a prepayment scheme does not imply an incentive on the provider to supply more services to each patient. For example, under capitation in primary care, the payment that the doctor receives is the same whether the patient has made many visits or none, or whether the doctor has chosen a simple rather than an advanced method to treat a given illness. The doctor therefore, has an incentive to see their patients as infrequently as possible, and treat them in the simplest and cheapest way for any given disease 13

Capitation, DRGs, and other forms of prospective payment are extensively discussed in Dranove, D. and M. Satterthwaite (2000). "The industrial organization of health care markets", Ch. 20, pp. 1093-1139, in Culyer and Newhouse (2000), see also Scott, A. (2000). "Economics of General Practice", Ch. 22, pp. 1175-1200, in Culyer and Newhouse (2000).

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condition. Similarly, under a DRG system a hospital's payment does not depend on the quantity of service or cost to the hospital of treating a given disease episode. Thus, the hospital has an incentive to discharge the patient quickly, and to keep the number of diagnostic tests, and the cost of the drugs supplied, as low as possible.14 Because prospective payment methods such as capitation and DRGs imply a strong incentive on providers to keep costs down, it is important that they are used only in situations where there are mechanisms in place to also ensure that the quality of care does not suffer as a result. The function of quality control under such payment systems is sometimes performed by private insurance plans (such as "managed care" plans in the United States), sometimes by government, and sometimes by separate "purchasing agencies" at the local level (this method has been used in Sweden, and in the United Kingdom). Ways o f D e a l i n g w i t h I n f o r m a t i o n A s y m m e t r y i n t h e Market for Health I n s u r a n c e As was noted above, information asymmetry is likely to cause problems in private insurance markets, as well as in the markets for health services. A variety of institutional responses have been discussed or tried to counteract these problems. For example, to overcome the problems that individual consumers are likely to have when evaluating different insurance policies, government regulations may stipulate minimum standards of coverage in private health insurance policies. The problems that arise in private insurance markets because different individuals have different risks of illness are particularly 14

In the United Kingdom, the idea of keeping drug costs down through supplyside incentives has also been applied in the system through which primary-care doctors are paid by capitation for outpatient services. Under the so-called 'fundholding' scheme, General Practiotioners who had elected this option received an additional capitation amount, in return for undertaking to pay a portion of the drugs they prescribed for their patients, and a share of the cost of certain types of hospital care that their patients received following a referral by the doctor.

Governments, Markets, and the Health Care Sector 451

difficult to overcome. The adverse selection problem that may result when insurers cannot tell who is at high risk of illness, but individuals themselves can, may make health insurance very expensive, causing many people to remain uninsured or to acquire only minimal coverage. 15 Conversely, when technology becomes available that enables insurers to tell who is at high risk for particular kinds of expensive illness, they may find it profitable to spend a large amount of resources on trying to identify "good risks" and market their policies to them. (This is sometimes referred to as a strategy of "cream skimming".) This is both wasteful (health services resources are more efficiently spent trying to improve the health of those who are ill, rather than on identifying those at high risk of future illness), and inequitable (as those at high risk will have to pay high premiums, or will be unable to obtain insurance). The only effective solution to the cream-skimming and adverse selection problems consists in forming population groups based on some criterion other than risk of illness, within which risk pooling can take place. A common version of this solution in some countries consists in employment-based group insurance. Under such insurance, the risk-pooling group is the set of people working within the firm arranging for common group insurance coverage. Labor unions or professional associations sometimes also fill this role, arranging group insurance for their members. However, in most advanced countries, the institutional arrangement that has been chosen to overcome the problems of private insurance markets is simply for the government to take responsibility for the risk-pooling function, either by mandating universal membership in some type of social insurance scheme, or by itself acting as the insurer by funding health care out of general revenue. 15

As explained earlier, adverse selection tends to increase the cost of private insurance because those who know themselves to be at low risk of illness may choose to opt for insurance with modest benefits only, while individuals at high risk will remain insured in generous plans. But if most of those who choose to be insured in generous plans are high-risk individuals, the average cost of care in these plans will become high and their premiums will have to rise. In the limit, comprehensive insurance may become so expensive that no one wants it.

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WHICH INSTITUTIONAL ARRANGEMENTS ARE SUITABLE FOR CHINA'S HEALTH CARE SYSTEM? Against the background of the preceding discussion of institutional responses to market failures in the health care system in other countries, I now return to the case of China. Because the problems that arise in health system design are somewhat different in densely populated urban areas than in rural areas, the debate on health policy in China has made a relatively sharp distinction between the two, and I will follow this convention here. S t r e n g t h e n i n g t h e Urban Health Insurance S y s t e m As described in an earlier section, the Chinese government decided, some years ago, on some basic parameters for a system of publicly organized health insurance that would cover urban residents. With the creation of this scheme, China has taken an important first step in the direction of an effective system of health services financing for the urban population. To develop the system further, three broad issues need to be addressed. First, what strategies should be pursued over the next few years in order to achieve coverage for a larger share of this population, so as to come closer to the ultimate goal of universal coverage, and to overcome the problem of adverse selection that may arise when coverage is not universal? Second, what measures will be taken to enable private health insurance to play a larger role in supplementing the coverage in the basic plan? Third, to what extent will the Social Insurance Bureaus in China's large cities follow the pattern in advanced countries and strengthen the role of supply-side incentives when contracting with providers to deliver services to the insured population? I will briefly discuss each of these issues. Covering Adverse

a Larger Population Selection

and

Avoiding

In markets for individual insurance, adverse selection is particularly likely to be a problem since the risk of illness differs from one person

Governments, Markets, and the Health Care Sector 453

to another. As noted earlier, one reason for the predominance of group insurance in countries such as the United States is that group insurance partially overcomes this problem. However, a form of adverse selection may also arise in a system of employment-based group insurance, if firms differ substantially among each other in the average risk of illness of their employees. Recent experience in China suggests that this may be an issue in some cities.16 Since the percentage of wages that must be contributed to the individual and social pooling accounts are fixed, the social insurance plan looks particularly attractive to firms with older employees for whom expected health care costs are relatively high, but less attractive to (relatively new) firms with younger employees. As the former join the plan, but the latter do not, the contribution rates may end up being insufficient to cover the schemes' costs, and deficits may arise. Overcoming this problem may not be possible without making membership in the plan compulsory (although as further discussed below, perhaps with certain provisions for "opting out" by firms that prefer to offer their own independent plans to their employees). Even if the system gradually evolves so that most employees are covered, ensuring access to health insurance on reasonable terms for other population groups (dependents, the retired, the selfemployed, and unemployed persons) will require a combination of strong regulatory measures and, realistically, some degree of government subsidy. In social-insurance based systems elsewhere in the world, government subsidies to health care funding typically are implicitly targeted on the poor, as revenue for the health care system is collected through special payroll taxes or compulsory premiums that depend on a person's income. This model is of course more feasible in a country with a well-developed income tax system. Conversely, however, a system in which access to health insurance is dependent on evidence that a person has paid an 16

Gu, X. (2004). "Health Care Regime Change in Urban China: Unmanaged Marketization and Reluctant Privatization", paper presented at an International Conference on 'Comparative Health Policy and Reforms in East Asia' organized by National University of Singapore.

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income-dependent health insurance premium may, indirectly, be helpful in increasing public acceptance of, and compliance with, a system of broadly based income taxation, thereby strengthening the country's general tax system. Ensuring access to health care for the elderly poses a particularly important challenge, in part because they are the heaviest users of health care so that their per capita cost of care is high. Moreover, many elderly persons have limited income, and therefore may be unable to pay either for needed care if they fall seriously ill, or for health insurance. For this reason, governments in all countries play a major role in funding health care for this group, and the fact that China's population will be aging rapidly in the next two decades will make this a particularly significant issue there. To avoid burdening young taxpayers with paying large amounts for the health care of the old, countries like the United States and Singapore have schemes that force or encourage those of working age to save in anticipation of future health care needs. Under China's urban social insurance system, the contributions that are made to members' individual accounts (which are similar to Singapore's MSAs) can either be used to pay for health services before retirement, or saved. Designing rules that will enable this system to make a significant contribution to the expected costs of individuals' health care after retirement is likely to be an important challenge for the policy makers.

The Role of Private

Insurance

In comparison with government-organized health insurance coverage in other countries, a significant limitation of China's urban health insurance model is the upper limit on benefits. (As noted above, the annual value of benefits under the basic plans cannot exceed four times the average annual wage in the urban area where the plan is in force.) In other countries, risk pooling is usually more complete: Public coverage typically has no such upper limits. A variety of approaches have been used or proposed as methods of extending coverage above this limit. One option, of course, is

Governments, Markets, and the Health Care Sector 455

for workers to enroll individually in supplementary private plans with higher (or no) upper limits. However, the market for private plans is subject to the problem of adverse selection and thus such plans tend to be very expensive. Other possible solutions is for employers to offer supplementary coverage through group plans; if these are made compulsory the adverse selection problem can be at least partially avoided. Finally, the local plan in each city can offer its own supplementary plan, either on its own or through private insurers, but again if coverage is voluntary there are potential adverse selection problems.

Contracting and Provider Health Insurance Plan

Payment in the Urban

In the earlier discussion, it was noted that one method to counteract the anti-competitive effects of information asymmetry between patients and providers is to impose controls on the prices that providers can charge. Price controls can be imposed by government regulators. Alternatively, they can be negotiated between providers and insurers. The SIBs that are charged with managing the urban social insurance scheme in participating cities have the ability to influence the fees with -which their enrollees are charged. According to their terms of reference, one of their functions is to create a list of accredited providers and to negotiate with them about the method of payment and other terms according to which services will be provided to enrolled members. However, as also noted above, a well-established conclusion in the international health economics literature is that the use of price controls tends to be much less effective than the use of payments mechanisms that give providers an incentive to control costs (that is, supply-side incentives). The SIBs could also use their powers to introduce such incentives. By exercising their authority to negotiate methods of payment, SIBs could experiment with methods other than fee for service for doctors, or itemized billing for hospitals. For example, they could reimburse hospitals on the basis of prospective payment methods such as DRGs. In some cities, experiments have

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already been conducted with episode-based payment mechanisms to reimburse hospitals (see Footnote 8). 17 One important advantage with prospective reimbursement for hospitals (as in a DRG-based system) is that the payments can be structured so as to be inclusive of the cost of the pharmaceuticals that patients receive while hospitalized. Drug costs constitute a very large percentage of total health care costs in China today, and the net revenue from selling drugs to hospitalized patients makes up a large portion of the funds available to hospitals under the current system. A DRG-based system for funding hospitals can be structured so as to leave hospitals with the same net revenue as they currently have, but so as to remove the incentive they have under the current system to prescribe expensive drugs to patients, even when less expensive versions are available. The experience from the United Kingdom, and also from managed-care plans in the United States, suggests that payment of primary-care providers (such as "general practitioners" in the United Kingdom or "family doctors" in the United States) through some form of capitation may also contribute to more cost-effective patterns of medical care. Of particular interest in the Chinese context would be a combination of capitation and a system of compulsory referrals and what is referred to in the United Kingdom as "fund-holding". Under a compulsory referral system, approval from primary-care doctors is required before a patient may be hospitalized. Under fund-holding, the capitation amount paid to the primary care provider includes a fixed amount out of which the doctors (not the patients) pay a portion of the cost of the drugs they prescribe, and also a portion of the cost of the hospital services that their patients receive following referral from the primary care providers. Since they are allowed to keep at least a part of any unspent balances in the funds allocated for these purposes (or pay at least a part of any deficit), providers in such a scheme have an incentive to 17

Yip, W. and K. Eggleston (2004). "Addressing Government and Market Failures with Payment Incentives: The Case of Hospital Reimbursement in Hainan, China", Social Science and Medicine 58, pp. 267-277.

Governments, Markets, and the Health Care Sector 457

be cost-conscious when they prescribe drugs and refer their patients to hospital.18 At present, outpatient care in China's urban areas is typically paid for by patients on the basis of fee for service, either directly out of pocket, or (for those who belong to the social insurance plan) out of the balances in their individual accounts. Realistically, a system of capitation can only be used effectively if capitation contracts are negotiated collectively, for groups of consumers. One possible approach would be to use a system of capitation for all patients covered under the social health insurance plan in a given city. Funding for the capitation scheme would then come out of the contribution that otherwise would go to the individual accounts. One might object that compulsory prepayment of outpatient services through a capitation scheme would make consumers less costconscious than they would be if they had to pay the full cost of each outpatient service out of the balance in their individual account (or out of pocket). However, a capitation plan can be designed such that patients are required to pay a fee to the plan (i.e. not to the doctor) for each outpatient visit, even though the doctors themselves are paid via capitation. Moreover, while a capitation system may make patients less cost-conscious when deciding whether or not to seek treatment, in practice this effect may be more than offset by the fact that under a capitation system, doctors are more costconscious (for example, when deciding whether or not to schedule follow-up visits, or whether to recommend additional diagnostic procedures for each patient). 19 18

Further discussion of the experience with fund-holding in the context of the reforms that have been going on in the United Kingdom system since the 1980s can be found in Blomqvist, A. (2002). Canadian Health Care in a Global Context: Diagnoses and Prescriptions (Benefactors Lecture). Toronto: CD. Howe Institute. 19 Even if it is thought undesirable to require all social health insurance enrollees to belong to a capitation plan, another option that can be considered is to allow particular groups of enrollees (such as those working for given employer) to organize such plans. That is, employers could be allowed the option of using part of the contribution to individual accounts to pay for a capitation scheme to which their employees would belong.

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A referral requirement can be imposed by each social insurance plan simply by stipulating that payment of enrollees' hospital costs would be conditional on patients having been referred by a primarycare provider. If all primary-care providers in a city's social insurance plan were paid through capitation from the plan, this could be combined with a fund-holding scheme under which referring physicians paid part of the cost of their patients' hospital costs to the plan. However, if primary-care providers in capitation schemes were paid by employers (that is, not by the SIBs), a fund-holding system would not be effective since employers •would have no incentive to make primary care providers save on hospital expenditures: Fund-holding schemes are only effective when the costs of primary care and hospital care are paid by the same agency.20 An alternative approach to the contracting issue would be to allow private insurance plans to compete with the social insurance plan for the business of firms' employees. Under this approach, employers would be allowed to use all or part of the funds that would otherwise have been transferred into the individual and social pooling accounts to pay the premiums, on behalf of their employees, for approved private plans. That is, the employees would forego the coverage offered through the public plan, and substitute a competing private plan instead. A potential problem with this type of "opting-out" scheme is that it may give rise to some degree of cream skimming and adverse selection. However, regulatory measures can be used to overcome this problem, at least partially. Rural Health Insurance: Cooperative Medical Systems Ensuring that China's rural residents have access to an acceptable level of health care requires that two broad conditions are satisfied. 20

In a system where patients are required to pay part of the cost of their hospital bills (in the form of a deductible or a co-payment), capitation contracts between employers and primary-care providers could require the providers to pay part or all of the patient's share of these bills. Such an arrangement would, in effect, be equivalent to a partial fund-holding system.

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First, personnel and institutions that can produce health services of high quality have to be present within a reasonable distance for rural residents. Second, for those with serious illness, some form of insurance arrangement has to be in place so that they (and their families) would not be unable or unwilling to pay for this care. Contrary to the case in the urban setting, not much progress had been made by the early 2000s in assigning responsibility for meeting the second condition in the context of rural health care, beyond the general encouragement to rural communities to establish communitybased Cooperative Medical Systems (CMSs). A well-functioning CMS model has to solve several potential problems. First, in giving rural residents access to health insurance, it has to deal with the adverse selection issue discussed earlier (i.e. to avoid the problem that insurance becomes very costly if only individuals at high risk of illness join in the plan). In the urban health insurance system, the adverse selection problem is reduced because membership is employment-based: Most of those covered in that system are not individual members, but have joined the plan as a group, together with other employees. In rural areas where a majority of the population makes its living as independent farmers, employers cannot play this "grouping" role. Instead, it may have to be accomplished by some other kind of rural collective, such as a village government. However, villages will only be able to play this role effectively if membership can be made compulsory (see below). Second, a good system of rural health coverage also requires that the population is guaranteed access, when required, to care at each level (primary, secondary, tertiary). Most primary-care services are provided at the local (village) level, so it may also be reasonable to have village governments directly arrange for primary care for their residents. However, secondary and tertiary care is provided in township or county hospitals. Although the majority of the population in any given year will use only primary-care services, a wellfunctioning CMS must also have arrangements for guaranteed access to secondary and tertiary services for the minority who will need them. Since each episode of care at the secondary and tertiary levels

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of care typically is much more costly than the routine episodes of minor care that constitute most of the services delivered at the primary-care stage, an efficient system must also have a screening mechanism which ensures that only serious cases with an urgent need for care are treated at the higher levels. In the pre-reform system of health services delivery, this was ensured by requiring referral from providers at the lower levels before a patient could be treated in secondary and tertiary care facilities. Ensuring that such a screening/referral mechanism exists will be one important task in constructing an effective CMS model.

P r o b l e m s w i t h Existing CMSs Compulsory

verses

Voluntary

Schemes

Perhaps the main problem with the attempts that have been made so far to organize effective CMSs in various parts of China is the fact that they have been restricted by the government to be voluntary. While the restrictions on local governments to impose taxes are easy to understand, applying these restrictions to levies for CMS membership may not be desirable. Disallowing collective membership in CMSs in rural areas is similar to a hypothetical rule that would not allow employers to enroll employees in a group insurance plan on a compulsory basis. The problems of adverse selection that would arise in urban insurance plans if such a rule were enforced are likely to arise in enrollment drives for CMSs in rural areas as well, and may be one of the reasons why many voluntary CMSs have encountered financial difficulties. Unless compulsory collective membership is allowed, this problem is likely to persist. A major challenge for policy-makers, therefore, is to devise rules and regulations that would allow collective membership while at the same time ensuring that the tax burden of rural residents remains tolerable.21 21

This issue is emphasized as a critical one in Asian Development Bank (2002); see especially the Conclusion section.

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The Scope of Benefits Inevitably, enrollment of members in a voluntary CMS will be based to a large extent on individuals' perceptions of what benefits they are likely to receive from membership. Only a small minority of rural residents will require the services of secondary or tertiary care institutions (county or urban hospitals) in a given year; in a small rural community, only a few patients may seek care at this level even over a period of several years. For this reason, and also because individuals in rural areas may not be as aware as urban residents of what kinds of health care services are available in modern hospitals, the willingness to pay for insurance against low-probability but costly illness may not be very high in rural villages. For administrators of voluntary CMS schemes, this may be an important consideration in deciding on the benefit package that the scheme will offer. In particular, it may be difficult to market comprehensive benefit packages that will pay not only for all or part of the cost of the health services that are provided at the village or township level, but also for the rarely used (but potentially very costly) services that are provided in more advanced medical facilities. Indeed it has been reported that managers of many existing CMS have opted for benefit packages that emphasize coverage of relatively routine services that can be provided at the village or township levels only (cited in Asian Development Bank (see Footnote 7). But this means that, for those unfortunate enough to require expensive higher-level services, the cost may be so high that they and their families either choose to forego needed care, or end up facing persistent poverty if they get it. Although allowing local (village) governments to make membership compulsory may, to The current rules that do not allow village governments to collect compulsory CMS contributions are, presumably, intended to protect rural residents against excessive taxation imposed by officials. If present efforts to promote more representative and democratic government at the local level (see Bloom, 2004) are successful, the arguments against allowing such governments to have compulsory collective CMS membership should lose some of their force.

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some extent, alleviate this problem, information about the nature and cost of advanced treatment for seriously ill people may be quite incomplete among village-level government officials as well, so decision-makers at this level may find it difficult to make credible evaluations of the value of obtaining insurance against the cost of such care.22 This suggests that it might be better to give principal responsibility for organizing and managing CMS plans to township level governments, not villages.

W h i c h Level o f G o v e r n m e n t S h o u l d b e R e s p o n s i b l e for Organizing CMSs? If responsibility for organizing CMS plans is given to village-level governments, they would be expected to arrange for access to primary care either by operating their own health posts or clinics, or by contracting -with private providers. They would also have to negotiate with township and higher-level hospitals and health centers (whether government-owned or private) for the terms of access to the types of services they provide, including whether they would be paid on the basis of fee for service or some other way. Even a local, village-based system would allow for some degree of risk pooling with respect to individual health care costs. However, because a village is relatively small, local systems could come under considerable stress when there were individual cases, or clusters, of very serious and costly illness, especially if they needed to be treated in secondary or tertiary hospitals at the county level or above. For this reason, an efficient system would have to have some risk sharing between village-level collectives and higherlevel providers such as township hospitals and above. This could 22

It is interesting to note that the question what the scope of benefits in rural insurance should be, is analogous to that of the role of the upper limit on benefits in the context of urban health insurance. To some extent, private supplementary insurance with coverage beyond the basic scheme may have a role to play in the rural context as well.

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be accomplished, for example, by capitation arrangements under which villages paid township hospitals annual fees proportional to their populations, rather than on the basis of charges for the individual patients they had treated in a year.23 More generally, a better way to organize the system might be to have township hospitals be the CMS system managers and let them offer the equivalent of insurance plans to village governments. Under this arrangement, the plans would agree to provide their own services (and perhaps pay for the services of higher-level providers, such as tertiary hospitals) at subsidized rates, in return for negotiated annual per capita contributions from the village governments. (Services could still be provided for residents in non-participating villages on the basis of unsubsidized fees.) Such a system would be consistent with the way many existing CMSs are organized: Most are managed by township health centers which "market" their insurance plans in surrounding communities. A model based on CMSs organized by township health centers and marketed to villages would be quite similar to the system of managed-care plans marketed to employers that is the prevalent organizational form in the United States market for private insurance plans at present. In such a system, the "pooling" function (to overcome adverse selection) would be performed by the villages, while the task of ensuring access to higher-level services and negotiating payment arrangements with providers would be shared between the villages and township hospitals and governments. 24 23

According to recent reports, a CMS model under which responsibility for plan management would be given to county governments is now being considered. See Briefing Note No. 3, April 2005, in the World Bank's Rural Health in China: Briefing Notes Series. 24 In order to provide for an effective system under which village-based primary care providers would only refer to most urgent cases to higher-level providers, township-level CMS plans could enter into contracts with village-level primary-care providers that would give them an incentive to make cost-effective referral decisions. Contracts of this type are common in United States managed-care plans, and under the G.P. fund holding system in the United Kingdom as well.

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CONCLUSIONS With the benefit of hindsight, it now seems clear that the special characteristics which make the health care sector prone to market failure were given insufficient attention when the reorganization of the sector began in the 1980s. As a result, serious problems have developed, and the need for health system reform is now widely recognized. While the debate about reform may ultimately be wide-ranging and begin to consider the goal of universal comprehensive coverage on equal terms for the whole population, in the near-term future the objectives will be more modest. In evaluating possible policy approaches, two criteria seem likely to be important. First, can they be implemented without imposing a major cost on the public purse? Second, can they be implemented without imposing a large burden on the government's administrative capacity, by allowing a considerable degree of decentralization of decision-making and fund-raising? The social insurance scheme that is now being implemented in major cities certainly is consistent with both of these criteria. The important question now will be whether this system can gradually be expanded so as to cover a larger share of the population, and extend to groups that are harder to reach (such as the self-employed, the unemployed, and the elderly) without becoming much more complex and costly to the government. Reforms that make possible a constructive role for private insurance in keeping costs down, along the lines discussed in the chapter, and with limited special plans to cover those at the lowest end of the income scale, may be part of the answer. As for the role of the individual MSAs that are part of the current scheme, my conclusion is that their greatest potential contribution might be as vehicles for ensuring at least some degree of "pre-funding" of the high cost of health care for the elderly population. With respect to rural areas, my conclusion from the discussion in the chapter is that the most promising reform proposals are those that focus on an insurance system (along CMS lines) built around townships and township hospitals as the main agents that organize

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the delivery systems. To a large extent, funding could come from capitation payments through collective enrollment of village populations in the system, as well as from limited fees collected from individual patients. Changing the rules so that villages could collect premiums/membership fees on a compulsory basis would seem a high priority. However, it seems inevitable to me that even with these funding sources, there would ultimately have to be a considerable degree of cost-sharing with higher levels of government. As for methods of aggregative cost control, centrally imposed price controls and demand-side incentives such as deductibles and co-payments required from patients may all have useful roles to play. However, in a decentralized system, insurer-provider contracts that overcome information asymmetry problems through supplyside incentives seem even more promising. There is now considerable experience from various countries with methods of payment other than fee for service (such as capitation, capitation with fundholding, DRGs, etc.) and while the ideal system may be one that has elements of both, the world-wide trend is certainly in favor of more reliance on supply-side rather than demand-side incentives. Finally, it should be emphasized that there is a critical element in a well-functioning health care system from which this chapter has abstracted entirely, namely that of making appropriate use of existing and new medical technology. Ultimately, a health care system can only be effective if the doctors who treat patients are well trained in providing the treatment they choose to give, and if there is a mechanism to ensure that only cost-effective technologies and drugs will be used. To ensure that these conditions are met requires careful planning of the programs in the medical schools where doctors are trained, and studies by insurers, government agencies, and others, of the cost-effectiveness of different treatment and prescription choices.

Chapter

Population Development Strategy: The New Thinking1 Peng Xizhe

CHINA'S PRESENT DEMOGRAPHIC SITUATION The 1.3 billionth citizen of China's mainland, a baby boy called Zhang Yichi, was born at 0:02 AM, 6 January 2005 in Beijing Maternity Hospital. This symbolic event marks a milestone of China's demographic history. His birth came 10 years after China's 1.2 billionth citizen, and four years later than experts' predictions. Accounting for 20% of the world's total population, China's demographic dynamics have significant impacts not only on China's socioeconomic development, but also affect the demographic situation of the entire world. It is thus necessary to examine China's demographic profile as well as trends in its population policies. This chapter starts with a brief overview of China's demographic features. It then discusses in 1

The revision of the chapter is done by Lai Hongyi.

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detail about the new developments in China's population policies and concludes with a brief discussion of the ongoing debate over the policies. The first five years of the 21st century witnessed some new or continued demographic phenomena in China. China's population continued its growth, but the speed has slowed down. The population natural growth rate declined from 10.55%o in 1995 to 7.58%o in 2000 and further down to 5.87%o in 2004. No new estimate on China's total fertility rate is available, but a TFR around (or lower than) 1.8 is commonly accepted by researchers (Table 17.1). China's population is rapidly aging. The elderly people, aged 65 and over accounted for 6.96% of the population in 2000 and 7.6% by the end of 2004. The total elderly population increased from 86.87 million in 2000 up to 98.57 million in 2004, an increment of 11.70 million over this five-year period. More Chinese have become urban residents, either by changes in administrative clarification or by migration. It is reported that by

Table 17.1 China's Demographic Situation in 2004 Total population by the end of 2004 Total number of births Crude Birth Rate Total number of Deaths Crude Death Rate Net population increment Net population growth rate

1299-88 million 15.93 million 12.29%o 8.32 million 6.42%o 7.61 million 5.87%o

Urbanization Urban Population Rural Population Estimated Floating Population

542.83 million (41.76%) 757.05 million (58.24%) 140 million

Population age structure 0-14 years 15-64 years 65 years and older

279.47 million (21.50%) 921.84 million (70.92%) 98.57 million (7.58%)

Source: China Population Information Network.

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the end of 2004, 542.83 million mainland Chinese were classified as urban residents and accounted for about 41.76 of the total population. The rate in 2000 was 36.22, an increase of 5.54 percentage points, or more than one percentage point annually that is Chinese government's planned target. Rural-urban migration maintains its momentum. It is estimated that more than 10% of the Chinese, or 140 million, are on the move, compared to 70 million in 1993- These migrants accounted for 30% of China's rural labor force, and become an indispensable part of the urban labor force. In China, about 840,000 people were reported as HIV positive or AIDS patients in 2003. There is a sharp rise in HIV occurrence among people with identifiable risky behaviors such as drug injectors, male, transvestite and female sex workers and their clients. In addition, some people contacted AIDS virus through blood contamination. The ratio between male and female patients is narrowing from 9:1 in early 1990s to 4:1 at present. Sex ratio at birth remains a big challenge even though the Chinese government has applied rigid policy measures to fight with the problem. The reported sex ratio at birth in 2000 was 119-92, compared to 111.42 in 1990. Regional diversities in all of above mentioned demographic dynamics are remarkable. NEW DEVELOPMENT IN CHINA'S POPULATION FIELD Before going to speculate China's population policy, it is worthwhile to discuss the following five new developments related to population policy.

Population Issue has been Treated o n a Much Wider Socioeconomic and Environmental Context This is manifested by the launch of the national research project on China's population strategy in early 2004. The project is coordinated by three top Chinese officials: Jiang Zhenghua, Song Jian and

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Xu Kuangdi, involving more than 300 leading academicians, experts and scholars from various Chinese research and policy consultation institutes. It aims to assess the relationships between China's population growth on the one hand and overall demand for farmland, grain, freshwater, energy and other resources as well as social economic development on the other. While the original plan of the program divided the research into three groups with 21 subprojects,2 the coverage of the study has been enlarged later to wider subjects. This project is launched at the time when Chinese government is concluding its 10th Five-year development plan and drawing new plans for the next five years and beyond. It is expected that the program will provide basic data on population, draw up a mediumand long-term population development blueprint, and put forward strategic measures on population development and proposals on economic and social development. 3 While the project has been carried out initially at the national level, similar research projects are conducted at various localities, mainly provinces and major economic regions such as the Yangtze River delta region (Changsanjiao), the Beijing-Tianjin and Hebei region (Jing-jin-ji), and the northeastern region. Following the general guidance from the National Population and Family Planning Commission, these regional studies are expected to forecast the regional development trend of population size, quality, structure and distribution in a foreseeable future, examine the interactive relationships among many related variables, provide population development goals, population development modes, and policies and

2

"A Work Meeting of the Project Group on State Population Development Strategy Stresses on Accomplishing Well High-quality Research on Population Development Strategy in a Down-to-earth Manner and with High Efficiency," Chinese Demographic Daily ( ^ I S A n f R ) . , 1 3 April 2004, posted at http://www.cpirc.org. cn/rdzt/rd_sars_detail . asp?id = 172 5 • 3 See the speech given by Mr. Hua Jianming, the Secretary-general of the State Council, on the conference on China's national population development strategy, 27 February 2004.

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measures for coping with and promoting the coordinated socio economic development in the future. However, some of these researches mainly serve for the interests of the locality, and could contradict with the national strategy. At the same time, population and health becomes one of the 20 subjects of another national strategic research: The State Middle and Long Term Sci-tech Development Plan that is headed by Premier Wen Jiabao and launched in June 2003. Family planning and reproductive health is listed as the first of the seven issues to be studied in this sub-project. 2005 was the year for the drafting of the 11th development plan for all localities. Population issue was examined together with many aspects of the development, and it became one of the integral parts of the general plan. Demographers are once again in great demand not only for the family planning program, but rather for the urban planning, design of social-welfare facilities, restructuring of education system and medicare etc. The issue of population has been receiving more attention than it did in the past. In January 2003, Minister Zhang Weiqing of the State Family Planning commission wrote a letter to top State leaders, including Hu Jintao and Wen Jiabao (who became president and premier, respectively, in March 2003) to lobby for a change in the commission's functions and its name as well. In March 2003, the first session of the 10th National People's Congress approved the establishment of the State Population and Family Planning Commission. This change assigned the Commission more duties on drafting and coordinating population and population-related policies.

Population Policy is Implemented Much Closer with Other Social Policies For a long time, one of the major criticisms about China's population program is that it asked Chinese families to sacrifice their family interests for the sake of societal benefits. This is particularly the case in the rural areas, as peasant families without sons will face tremendous difficulties in supporting the elderly.

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After years' of advocacy, the Chinese government announced a pilot program in March 2004 in certain parts of the country that provided financial reward to farmers who were 60 and above and had not violated family planning policies in the past (1973-2001). Eligible elderly farmers who have no children, only one child or two female children are rewarded with a monthly allowance of at least 50 RMB, or 600 Yuan (approximately US$75) annually. For elderly couples living in remote villages, this additional income has a great impact on their living standards, and reduces the burden on their single children. The program was kicked off officially on July 23 on a trial basis in 15 provinces and municipalities in the western and central parts of China including Sichuan, Yunnan, Gansu, and Qinghai. 4 The award system has set up a special operational structure to prevent potential corruption. While the local Population and Family Planning Commission is responsible for identifying the eligibility, the awards are directly transferred into the individual bank account of these eligible persons. After pilot experiments, the program has extended progressively across the country in 2005. The provincial and national governments share the majority of the payments in those backward areas while the local government is responsible for covering the whole expenditures in rich areas. It is reported that in 2005, the program provided awards to 1.35 million elderly people in China's countryside with a total financial input of 850 million Yuan.5 Among the 1.35 million beneficiaries, 420,000 are living in eastern China who receive financial rewards that is 4

Details of the implementation regulation can be seen from "Circular from the State Council Office on Distributing Opinions by the Population and Family Planning Commission and the Ministry of Finance regarding Trial Experiments on Rewarding and Aiding Some Rural Families for Family Planning" (No. 21 Document issued by the General Office of the State Council in 2004) ( « f f l ^ - K ^ ^ / f $ f $ t £ l f f r § C j f i t e i I & » (Sfr&[2004121 -^)"). "Situation on Enlarged Trial Experiments with the Reward and Aid System in 2005," ("2005 ^ ^ a ^ H j ^ J ^ t r ^ T ^ ^ W t i M " ) , http://www.chinapop.gov. cn/jlfzsd/xgwj/t200506l0_23125.htm.

5

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usually higher than the national figure and entirely from the local government revenues (250 million Yuan in 2005). Despite the existing package of the incentive and disincentives that was designed in the 1980s along with the implementation of the one-child policy, implementation of China's population program mainly depends on administrative measures. This new program indicates a significant shift of China's family planning from purely "punishing those who have many children" to "rewarding those who have fewer children". And also, this change from fines to bonuses is one of the major policy measures of Hu Jintao's "propeople" orientation. It is reported that at the Central Working Symposium on Population, Resources and Environment convened in March 2004, President Hu Jintao and Premier Wen Jiabao made important instructions for the pilot project.6 In other words, this new program became possible under Hu Jintao's leadership. It is not only an important scheme by the government to improve population and family planning programs in rural China, but also a significant reform reflecting the concern of the Chinese government for practical interests of the rural people and its greater respect for human rights. As there is almost no government-sponsored social security system operating in large part of China's countryside, particularly in China's middle and west regions, this programme is currently operating independently in most localities. It is a good sign of Chinese government's commitment to solve the San-Nong (farmers, agriculture, and rural area) issues. At present, there are not many families that qualify under the program requirements; therefore the scheme puts little strain on state coffers. However, since the awards are supposed to be provided to those eligible elderly until their deaths from the government resources and considering the ever increased longevity of Chinese people and the enlarged coverage of this program, the sustainability of the program requires attention. It should 6

See the speech at the Press Conference on the System of Social Support for Some Rural Families Practicing Family Planning by Ms. Pan Guiyu, the vice-minister of the NPFPC on 9 June 2005.

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be operated together with the proposed establishment of China's rural social security system.

Local Authorities are Given More A u t o n o m y t o Modify t h e Local P o p u l a t i o n Regulation China's population program is implemented with a decentralized feature. Each locality can have its own family planning regulation in accordance with the central guidance and local conditions. Since September 2002 when the national law on family planning was in effect, family planning regulations have been modified in almost all provinces and autonomous regions and municipalities. While most of these changes are minor, the revisions in some provinces are worth noting. One of the examples of such a province is Shanghai. Shanghai's previous family planning regulation, which was first passed in March 1990, limits most couples to having one child. Only in certain cases, such as when both a husband and wife come from a singlechild family, or when a couple's first-born has a non-hereditary handicap, a married couple is entitled to have a second child with at least a four-year interval. Adopted at the 9th Session of the Standing Committee of the Twelfth Shanghai Municipal People's Congress on 31 December 2003, and has been promulgated since 15 April 2004, the new Regulation of Shanghai Municipality on Population and Family Planning has several profound revisions compared to the old one. 7 Most notable is that the new regulation allows more couples to have a second child without waiting for four years between births and divorced couples more opportunity to have a child from a second marriage. The four-year birth interval was set up in almost all provincial family planning regulations in case the second child is allowed for couples. Lifting this control in Shanghai will reduce the

7

English version of the regulation can be found from http://www.popinfo.gov.cn/ popinfo/pop_doczcwd.nsf/v_by4id/3l6l352475803E4D48256FC4002EEFFC.

Population Development Strategy: The New Thinking 475

momentum impact of the past demographic events on current and future population dynamics. It is beneficial to smooth Shanghai's age structure that is currently marked with big peaks and troughs. The new regulation concerning remarried couples is another change to adapt to the increasing phenomenon of divorce. Shanghai's revision has been endorsed by the central government as a special case. While these changes are viewed by many observers as big revisions, the basic principles of the one child policy remain unchanged at all but with more flexibility. In other words, Shanghai has pushed its modification of the family planning regulation to the limit of the present population policy. It is also a good example of the gradual transition from the rigid one-child policy towards a universal twochild policy as the single-child generation is entering the marriage market and begin child-bearing. Since new family planning regulation was enacted in Shanghai in April 2004, it is reported that 4,413 local couples have delivered a second child during that one-year period, 1.7 times the number reported during the previous year. Most of the rapid increase can be credited to couples who come from one-child families; and the proportion of second children from such families rose from the previous 5.05°/c^l0.02%. Efforts are Made t o Tackle S e x Ratio I m b a l a n c e There is no latest estimation on the sex ratio at birth in China. Researchers are still using the data from the 2000 national population census that showed an imbalance of 119 new-born boys for every 100 girls. There are regional diversities. Nevertheless, the imbalance is no doubt a national problem that has attracted wide attention. The government's attitude toward the problem changes from denial in the earlier years to condemnation and prevention in recent years. Discussions have focused both on the future impacts of the phenomenon and the economic, social and cultural reasons that have caused it. Among several causes of the phenomenon, pre-birth selective abortion is widely viewed as the direct one.

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The government is determined to take forceful measures to balance the currently unbalanced sex ratio by 2010.8 Realizing the root cause of the imbalance is the century-long son preference, one of the measures taken by the National Population and Family Planning Commission is the promotion of the "care for girls" project in 2003 aiming to protect the rights and interests of girls through incentives and trying to remove the deep-rooted traditional ideas. These include cash payments, privileges in housing, employment and job training for couples who raise a daughter. The payments will be doled out to families at different stages of the girl's life to prevent families from gaming the system. Some families with girls will also be exempted from paying school fees. Sex-selective abortion has already banned for a few years. A number of laws and regulations, such as The Population and Family Planning Law and the Regulations Prohibiting Fetus Sex Identification Other Than for Medical Needs and Sex Selective Artificial Abortions, have been implemented and expected to helping bring the problem under control. Similar regulations have been formulated and in effect in many provinces. It is reported in the last two years, 3,605 such cases, involving 2,409 personnel and 978 Ultrasound machines, have been investigated and settled cross China. However, as technologies such as ultrasound is widely available at affordable cost for Chinese farmers, and also due to lack of more efficient and feasible measures to implement these regulation, the problem remains serious. The government plan to bring the situation back to normal is some what an over ambitious one. In 2005, the crackdown on illegal sex identification so as to control the gender ratio of newborn babies was intensified. One of the actions is to outlaw the selective abortion of female fetuses by possible revisions to the Criminal Law. It is expected that criminalizing the ban would be a more effective deterrent than legal actions based on civil laws.

8

See Zhao Baige's speech broadcasted on China Radio International (CRI), 15 July 2005.

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The State h a s Acted t o Protect t h e Rights o f Rurat-Urban Migrants The new Chinese leadership has been working hard to reduce the gap between the rich and poor, between rural and urban and the east and the west. Rural-urban migration is viewed as an efficient policy measure to reach that objective. For instance, approved at the Third Plenary Session of the 16th Party Central Committee, "The Decision on Issues regarding the Improvement of the Socialist Market Economic System" stated as follows: Great efforts should also be made to develop the county-based economy, accelerate the pace of urbanization, unify urban and rural labor markets step by step and create a system for equal employment of urban and rural laborers, so as to create more job opportunities for farmers. Large-scale rural-urban migration is certainly an unprecedented new phenomenon in modern China. On the whole, it is a very efficient social enlightenment movement that has profound social and political implications with a relatively very small cost. Its demographic impacts and economic contribution are apparent in both rural and urban areas. On the other hand, it also creates a number of problems, most notably the dangers of crime and social tensions between regular city dwellers and temporary migrants. The most serious one, however in my opinion, is the challenge to the existing governance structure. The death of Mr. Sun Zhigang, the 27-year-old university graduate while being held in a detention and repatriation station in Guangzhou in March 2003, directed societal attention towards the plight of migrant workers generally. The government's response was prompt, but to some extent a little rash. The "holding and deportation system for vagrants and beggars in urban" were abolished and replaced by a new regulation on aid for vagrants and beggars in urban areas which came into effect from 1 August 2003- Reforms were announced by the Ministry of Public Security on 7 August 2003 involving household registration {hukou), travel, traffic management and fire control. The focus here is on taking concrete step to change the household registration system {hukou). Thereafter, many other

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policy measures have been introduced trying to protect the basic rights of migrants. Even Premier Wen Jiabao himself took action to help migrant workers get their payment in time. There are improvements in the general situation of rural migrants working in Chinese cities. However, as hukou is not only an essential tool of political and social control in China, but also a base for social segregation in terms of social welfare and many other entitlements. Therefore, changing the system needs time and should be done in a systematic and comprehensive manner. Furthermore, while there are many good reasons for the central government to actively promote the rural-urban migration and to facilitate the urbanization as well, there are also many reasons for the urban government to take action reluctantly. Unemployment of current urban labor force and the local budget system on social development, including education, health care etc. are among these concerns. Nevertheless, it is now accepted that ensuring equal opportunities for all migrants' children in cities to receive at least nine years of education is the responsibility of the government.

WILL THE PRESENT POPULATION POLICY END? There is no doubt that China's demographic situation has experienced continuous change over the years. It is also true that there are great socio-economic developments and gradual transformation of China's governance pattern. The debate on whether China should change its three-decade-long family planning policy continues with basically the two very different views on what the future holds. Concerns are more or less the same as that in the 1990s,9 but the debate is carried out in a more complicated demographic and socioeconomic context. There is consensus that a large population remains a major issue for China at present and a key factor obstructing future economic

9

See PENG Xizhe, "Is it Time to Change China's Population Policy?" China: An International Journal, Vol. 2, No. 1, March 2004, pp. 135-149.

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and social development. One side argues that although the country's total fertility rate has plummeted to 1.8, the birth rate is still not stable, and relaxing the policy will result in a rebounding surge in population growth. The other side holds that China's population pressure is exaggerated, and the relaxation of the policy will not cause serious problems. Given the large cohort of women in reproductive age at present and uncertainty about people's fertility desires, for the moment, at least, the former viewpoint has won wider recognition, particularly among the policy makers. It is commonly agreed that China's population problem in the coming years will become more complicated, and the size of the population is only one aspect of the problem. The quality, structure and distribution of the population will require more attention. Questions often mentioned include whether relaxing current population policy will slow down the process of population aging and help solve future social security problem, and whether policy change will bring the imbalanced sex ratio back to normal situation so that to prevent the social unrest caused by imbalance in future marriage market? There are pressing problems. China is in a period of the demographic windows with the richest supply of labor and the lightest burden of population dependency. If enough jobs can be created in this period, China can take the advantage of abundant labor force at present for economic growth before the aging population peaks in 2030. The golden opportunity will disappear in about 20 years' time nationally, and the demographic window will close thereafter. China must correct its social security system, during this period to avoid the occurrence of a disaster. The hot question is whether China should allow families to have more than one child in order to prepare for the future aging peak. Or alternatively, future policy debate should be concentrated on social security system. By the end of September 2004, 160.62 million people had basic pension insurance, and 119.41 million people had health insurance. Taking into account China's 1.3 billion population, these figures are rather low. Family support of the elderly still plays a major role, particularly in the countryside. As pointed by foreign

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researchers, "How China meets its aging challenge will determine whether or not it becomes a prosperous and stable developed country".10 The debate is escalated along with China's economic growth. While China is moving toward becoming a relatively wealthy society, its demands on natural resources are huge. The energy shortage and the rise of oil price at the international market are among those factors that are related to the population-carrying capacity of China. Researchers and officials are alarmed by the ever increasing ecological deficits and tense conflict between population and environment that will pose severe challenges to sustainable development. Population is one of the crucial factors that will determine China's future safety and security. The ongoing research project on China's population development strategy is one of such efforts to examine the relationship between population and all other development factors. The Chinese government announced this year that China would adhere to the current family planning policy. 11 Five population related problems are mentioned: large annual birth and net increase that lead to further growth of the total population, low quality of life of people including 60 million handicapped, the issue of migrant population, population structure including the unbalanced sex ratio at birth and population aging, and the issue of population security such as quick spreading of infectious diseases and HIV/AIDS. While political commitment on the concept of overall development of the people is assured, a package of policy measures is reaffirmed, including establishing and strengthening the benefit-oriented mechanism and coordinating various socioeconomic policies comprehensively; carrying out major projects to improve the quality of health, science and culture, and ideology and morality of the people 10

"The Greying of the Middle Kingdom — The Demographics and Economics of Retirement Policy in China", the Prumerica Financial and the Center for Strategic and International Studies (CSIS), 19 April 2004. 11 See: "China's Population Policy Focuses on the Importance Attached to people's Development", 4 July 2005, http://www.xinhuanet.com.

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of the country; build and strengthen the social security system, actively deal with the contradiction of population structure, and intensify integrated administration of sex ratio at birth; strengthening HIV/AIDS prevention. It seems most likely that, in my own opinion, the current population policy will remain in effect at least for the next five years, but more modification will be conducted at provincial level. The policy itself will be implemented in a much more comprehensive manner together with other social policies and along with gradual transformation of governance patterns at the local community level. The debate on population policy will continue, and demographers will face more demands in both academic research and policy consultation.

PartV Managing China's External Relations

Chapter

18 Bush's Asia Policy and United States-China Relations Ihao Quansheng

This paper examines recent developments in the Sino-United States relations by putting them in the context of the overall Asia policy of the Bush administration. Therefore, we will first look at the Bush administration's global strategy and the place of Asia policy in the hierarchy of United States foreign policy. Then, we can have a better understanding of the changing dynamics of American foreign policy towards China and China's response. These policy interactions have laid a foundation for the development of the Sino-United States relations as we enter the new century. In his recent comments on United States' Asia policy under the second George W. Bush Administration, former United States Ambassador to Japan Michael Armacost stated that "continuity rather than change is likely to be the watchword."1 Harry Harding characterized this in a different way, arguing that "What is different about the Bush 1

Michael H. Armacost, "What's Ahead for United States Policy in Asia?" PacNet 1, 6 January 2005. Accessed from listserv distributed by [email protected].

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administration, at least in its first term, is not so much the broad purposes of American foreign policy, but rather the ways in which those goals are being advanced."2 Keeping these thoughts in mind, it is essential to understand the main characteristics of the first Bush Administration's Asia policy, upon which the second's Asia policy will be built. In a Brookings Review article entitled "America Unbound: The Bush Revolution in Foreign Policy," Ivo Daalder and James Lindsay present three practices of American foreign policy under the guidelines of the Bush revolution: (1) a disdain for multilateral arrangements and institutions, (2) the full consideration of preemptive military actions, and (3) the forcing of regime change in rogue states.3 These foreign policy practices are based on two strains of revolutionary thought in foreign policy: first, in order to ensure American security, Washington may have to shed the constraints imposed by friends, allies, and international institutions; and second, the United States should fully utilize its strength to change the status quo in the world. These new ideas are labeled as "the new neoconservative framework" in United States foreign policy. Under these guidelines, the United States has launched its wars in Afghanistan and Iraq in the post-9/11 period. These two wars are very much along the lines of the above-mentioned three practices of the United States foreign policy in the Bush era. When one looks at Bush's Asia policy, specifically the policy toward East Asia, one may find that the practices are quite different than those guiding United States actions in other parts of the world. In the bulk of its foreign policies toward Asia, Washington has been the one to promote a multilateral institutional approach for major events in the region, and particularly the North Korea nuclear crisis. The six-party talks, consisting of China, Japan, Russia, South Korea,

2

Harry Harding, "Change and Continuity in the Bush Administration's Asia Policy" Robert M. Hathaway and Wilson Lee (eds.) George W. Bush and East Asia: A First Term Assessment, Washington, DC: Woodrow Wilson International Center for Scholars, 2005, pp. 31-43. 3 Ivo H. Daalder and James M. Lindsay, "America Unbound: The Bush revolution in foreign policy," Brookings Review, Vol. 21, No. 4, Fall 2003: pp. 2-6.

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North Korea, and the United States, were directly constructed and pushed by the United States in close consultation with other players, especially China. In the presidential debates toward the end of 2004, Bush forwarded the view that only a multilateral framework can deal with the North Korea crisis, as if he would not consider unilateral action at all (as the United States did in Iraq). By the same token, there was little discussion of a preemptive attack on Pyongyang. One has not often heard public remarks from Washington for regime change in the Asia-Pacific, including North Korea. Indeed, in the most recent fourth round of six-party talks (including China, the United States, North and South Korea, Japan and Russia) in July 2005, Christopher Hill assistant secretary of state of East Asian and Pacific Affairs and head of the United States delegation clearly stated that the United States views North Korea's sovereignty as "a matter of fact" and the United States "has absolutely no intention of invading or attacking the Democratic People's Republic of Korea (DPRK) and it remains prepared to speak with the DPRK bilaterally in the context of the six-party talks."4 One can sense the positive attitude of Washington towards the multilateral structure in solving the problem of the North Korea nuclear crisis. People may then wonder why there are such distinct differences between United States policy toward East Asia and toward Iraq. This paper will primarily analyze United States foreign policy toward Asia under the second Bush Administration and its implications to Sino-United States relations. It argues that East Asia, despite its enormous importance in United States foreign policy calculation, is placed lower than Iraq for the time being in the United States global strategy as long as there is a large United States military presence in the Middle East, which causes and accounts for different perceptions and strategies. In a later section, however, I will also discuss how China has reacted to the Bush foreign policy, as well as Beijing's strategy in its external relations in the Asia-Pacific region. The analysis will include scenarios for a possible changing of the tide 4

Edward Cody. "New Talks on North Korea Open With Fresh Strategy," The Washington Post, 26 July 2005b: p. A15.

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that may reverse the relatively favorable international environment Beijing currently enjoys. UNITED STATES GLOBAL STRATEGIC PRIORITIES In the post-World War II era, the United States foreign policy priorities have undergone several fundamental shifts. For quite some time, its first priority was to fight against Communism, which was centered on George Kennan's containment policy. In the post-Cold War era of the 1990's, the United States became the only superpower in the world, with its foreign policy priority shifting to the identification of potential challenges and its global leadership of all dimensions, including economic, political, and strategic. This process has since identified new obstacles, which actually began forming in the late 1980s. At that time, when Japan was identified as a potential challenge to the United States' dominant position, Japanbashing became a fashionable pastime. Polls conducted during this period indicated that more Americans were concerned with the Japanese rise than the Soviet rise, even before the collapse of the former Soviet Union. This momentum and focus on East Asia continued into the early 1990s and eventually came to rest on China. With its spectacular economic performance during the 1980s and 1990s, the rise of China has become a center of attention, both regionally and globally. During those two decades, China was gradually identified as a potential rival and challenge to the United States dominance. In his 2000 presidential campaign, George W. Bush made it clear that China was not a constructive strategic partner, but rather a competitor and rival. The target of United States foreign policy had shifted to China, and tension began to build. The peak of that tension between the two powers came in April of 2001 in the form of the EP-3 spy plane/Hainan incident. The mood in Washington was one of anxiety, as if the incident could have escalated into a military confrontation. The United States began to exhibit an increasingly clear policy toward Asia that I characterize in 12 Chinese characters — tai riben ya zhongguo qin taibei yuan beijing — meaning, "to emphasize Japan as an ally and downplay the importance of China, to get closer with Taipei and keep a distance

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from Beijing." This policy had a distinctive Bush flavor to it — it was not made of the same ingredients as the previous Clinton administration policies toward Asia, which put China into a constructive, strategic partner position, while at the same time carrying a "threeno" policy toward the issue of Taiwan (no Taiwan independence; no one-China, one-Taiwan; and no membership for Taiwan in international organizations that require statehood). At that time, particularly at the height of the EP-3 incident, it seemed almost inevitable that the two powers would clash sooner or later. But EP-3 taught Washington a lesson: it must take a close second look at precisely what United States interests in Asia would be worth an all-out war with another nuclear power. What would justify such a war, particularly since China has moved away, however slowly, from orthodox Marxism and largely adopted a free market economy (though it is, of course, still politically an authoritarian regime). Both sides realized how necessary it was for the United States and China to improve their communication over potential crisis issues in order to avoid unnecessary military confrontations. This reexamination of Asia policy began in Washington in the months following EP-3, but was largely catalyzed by the September 11 terrorist attacks on the World Trade Center and the Pentagon. A convenient, yet legitimate, reason for Washington to shift its foreign policy priority is the need for anti-terrorist coalition building. This war against terrorism has naturally become a centerpiece of United States foreign policy. Therefore, other considerations such as ideology, including anti-communism and the promotion of human rights, have been put in a secondary position. Geographically, the Middle East, namely Iraq, has become the top priority as there are several hundred thousand United States troops stationed there, whereas currently Asia has been prioritized as a secondary consideration. UNITED STATES STRATEGIC PRIORITIES IN THE ASIA-PACIFIC Before analyzing the priority shift in United States-Asia policy, I would like to make sure that we all understand the neo-cons and hardliners are not only in the mainstream of Bush foreign policy but

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also in the background of America's China policy. It may, from time to time, appear to switch to a more moderate and soft line triggered by some specific events, such as the September 11 terrorist attacks and influenced by strategic calculations (see later analysis on Power Transition theory). Yet, the neo-cons' thinking will always surface attempting to influence the directions of Washington's China policy. No matter how serious the competition between hard- and soft-liners in Washington's policy apparatus, one thing for sure is that both camps' policy choices are based on their understanding of how to best serve the United States national interest. Therefore, it is not unusual to see constantly changing winds and tones in Washington regarding its China policy. For example, there are hardliners in Washington that do not necessarily accept the softening of China policy after September 11. As Benjamin Schwartz argues saying, "hardliners, some of whom hold powerful positions in the current administration, see a hegemon on the horizon," 5 namely, China. Indeed, the Annual Report on China's Military Power, released by the Pentagon in July 2005 after several delays, projects a dramatic increase in China's power. The report emphasized China's expanded nuclear capacity that could strike "virtually all of the United States." It further argues that China's defense spending could grow to $ 90 billion in 2005, making it the world's third-largest military budget after the United States and Russia.6 This 45-page report paid close attention to China's military capacity vis-a-vis Taiwan. China not only expanded its naval operations, but also "qualitatively and quantitatively" improved its nuclear missile force. The report warned that this is giving China a second-strike capability against the United States.7 On the other hand, within the Asia-Pacific region the United States foreign policy priority is in line with its global call for a war against terrorism. Therefore, regions that either host or contain 5

Benjamin Schwartz. "Managing China's Rise." The Atlantic Monthly, Vol. 295, No. 5, June 2005: pp. 27-28. 6 US Department of Defense. Annual Report on the Military Power of the People's Republic of China, 2005. 7 Anne Scott Tyson. "Chinese buildup seen as threat to region." The Washington Post, 20 July 2005: p. Al6.

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terrorist elements have become top targets. Naturally, Afghanistan, and even some Muslim countries in Asia that have active Islamic fundamentalist movements, have attracted keen attention from Washington. Interestingly, in this task of the war against terrorism, China's partnership echoes its Cold War alliance with the United States against the Soviet Union. The second priority in the area is regional stability and peace. Therefore, to deal with the North Korean nuclear crisis is extremely important in Bush's foreign policy, as Pyongyang is part of the socalled "axis of evil." Interestingly, China is again very supportive and has actively participated in and hosted the six-party talks, thereby playing a leading role together with Washington. The next priority for Washington is the economic and trade prosperity. To maintain peace and stability in the region, economic development is fundamental. China has played a constructive role and with the United States operated as a major economic engine facilitating stable economic growth in the region, thus moving it even further away from the damage of the 1997-1998 Asian Financial Crisis. China's constructive role is even clearer when comparing it with the much diminished role of Japan, which suffered a decadelong economic recession throughout the 1990s (known as "the lost decade"). All of these positive roles that China has played have shifted its perceived image in the United States foreign policy. The only potential military confrontation between the two powers now exists in one area, the issue of Taiwan (which will be discussed later). Other issues such as human rights and ideological differences, although still important, have indeed been moved to a relatively low priority when compared to the strategic and economic priorities discussed previously. James Kelly, after serving as assistant secretary of state for East Asia and Pacific Affairs from 2001-2005 wrote a summary of United States-Asia policy under the first Bush administration. He noted four issues that were the focus of the United States-Asia policy: A) Engagement with China; B) Strengthening of alliances including Japan, Australia, South Korea, the Philippines and Thailand; C) Cooperation on counter-terrorism; D) Compacts of free

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association such as economic engagement, opening markets, business environment and regional cooperation. 8 With the above discussion of the priorities of the United States foreign policy in Asia, one may see clearly that the United States must work together with China to achieve its foreign policy interests; that is, to forge an anti-terrorist coalition globally that requires the cooperation of the great powers. Regionally, this includes China, Japan, Russia, and India. At the same time, maintaining and strengthening alliances has also become extremely important, including those with Japan, South Korea, and Australia. In this regard, the United States-Japan Security Alliance is critically important for Washington. In his article on the United States national interests in East Asia, Gerald Curtis argues that Washington's Asia policy for the past half-century has been based on the concept known as "hub and spokes," with the United States as the hub, projecting its power into the region by means of bilateral alliances (namely with Japan and Korea). Curtis continues to argue that this "hub and spokes" approach needs to be revised because of the development of a new international environment in the region. Specifically, he suggests that the United States interests in the region could be better served by the development of new multilateral approaches to security.9 The best example at hand is the six-party talks, which will provide a useful model for institutionalizing a potential Northeast Asia Regional Security Forum. This is the first time that a multilateral regional security institution includes both China and the United States (together with Russia, Japan, and South Korea). Along similar lines, Francis Fukuyama proposes a fivepower security dialogue as a permanent multilateral institution, one which would exclude North Korea.10

8

James A. Kelly. "George W. Bush and Asia: An Assessment" Robert M. Hathaway and Wilson Lee (eds.) George W. Bush and East Asia: A First Term Assessment, Washington, DC: Woodrow Wilson International Center for Scholars, 2005, pp. 15-30. 9 Gerald L. Curtis, "East Asia, Regionalism, and United States National Interests: How Much Change?" American Foreign Policy Interests, 26, 2004, pp. 199-208. 10 Francis Fukuyama. "Re-Envisioning Asia." Foreign Affairs, Vol. 84, No. 1, January/February 2005: pp. 75-87.

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One other regional security framework goes further south to include Southeast Asia. The increasingly active ASEAN Regional Forum, ASEAN plus three, etc., have moved beyond the economic scope in dealing with security issues. Washington has demonstrated its earnest interest in participating in this regional security forum. POWER TRANSITION THEORY AND AMERICA'S CHINA POLICY The theory of Power Transition attempts to develop a set of analytical tools to fully understand dynamics of international relations and to project future directions of power relationships. Over the years, it has been developed noticeably and has become "one of the most successful structural theories in world politics." 11 The Power Transition model focused on the relationship between the rising power and the existing dominant power. Historically, one can find the rising power in different periods, such as Germany, Japan, Russia and the United States itself. According to Robert Kagan, "the most successful management of a rising power in a modern era was Britain's appeasement of the United States in the late 19th century, when the British effectively ceded the entire Western hemisphere (except Canada) to the expansive Americans." He further argues the smooth process of this power transition is largely due to the fact that both powers "share a common liberal democratic ideology and thus roughly consonant ideas of international order due to that fact."12 Kagan said the cases of Bismarck's Germany and Meiji Japan were not as successful. How the dominant power deals with the rising power has become the key for a peaceful and stable transition or a violent war dynamic. This theory was utilized in the cold war era to determine changing patterns of strategy. Ever since the late 1990's, China has become a focus of world leaders, some of whom use this theory to 11

Douglas Lemke and Ronald L. Tammen. "Power Transition Theory and the Rise of China" International Interactions, Vol. 29, 2003: pp. 269-271. 12 Robert Kagan. "The Illusion of 'Managing' China." The Washington Post, 15 May 2005: p. B07.

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analyze the rise of China and project future directions of international relations. According to Douglas Lemke and Ronald Tammen, the next rising power in world politics is definitely China. They argue "if China continues to grow in power, as it has for the past few decades, it will surpass the United States as the world's dominant power sometime in the middle of this century."13 Many other scholars have made similar projections predicting the parity between the two countries will take place on or before 2050.14 They further suggest such jostling among great powers has corresponded -with the major wars of the past centuries. They raise an important point that the management of the relationship between the United States and China should become one of the most important agendas in the United States foreign policy. Jacek Kugler and Ronald Tammen have developed a "grand strategy" to deal with this power transition. They project the potential confrontation between the United States and China will be, as in the case of Germany and the USSR in World War II, "one between a very advanced nation and a developing giant."15 Therefore, how to treat China and how China responds to the world system is tremendously important. Unless we find ways to minimize China's dissatisfaction, the world will face the prospect of a global war. One of the key issues in the process of power transition is the degree of satisfaction of the rising power with the existing international system. According to Power Transitions: Strategies for the 21st Century, the most important factors to watch are: "relative power, degree of satisfaction, and the probability of conflict." The probability of conflict between the dominant power and the

13

Douglas Lemke and Ronald L. Tammen. "Power Transition Theory and the Rise of China." International Interactions, Vol. 29, 2003: pp. 269-271. 14 Emilio Casetti. "Power Shifts and Economic Development: When Will China Overtake the USA?" Journal of Peace Research, Vol. 40, No. 6, 2003: pp. 661-675. 15 Jacek Kugler and Ronald Tammen. "Regional Challenge: China's Rise to Power," Asia-Pacific Region in Transition. Honolulu: Asia-Pacific Center for Security Studies, 2004, pp. 50-51.

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rising power is greatest when the relationship between the two is characterized by parity which can be called, "the zone of contention and probable war."16 In the case of United States-China relations, this theory analyzed each side of policy choices and possible consequences. For the United States' part, according to Efird, Kugler and Genna, "different foreign policy stances by the United States toward China can be decisive in the choice between conflict or integration." They further argued that "a reconciliation of preferences between the United States and China will be very important in preventing war and achieving a structured, stable peace. If the United States and China are satisfied with the status quo, then high levels of cooperation are possible by 2050, avoiding the possibility of conflict." A reverse side of the picture is that if the two nations are dissatisfied with each other, "a major war between these two nuclear powers remains a distinct possibility." Therefore, "the choice of China as a strategic partner and China as a strategic competitor looms large." The authors believe that the second posture can lead to a new cold war "with potentially far more serious consequences than the United States-USSR confrontation."17 This school of thought has advised the United States foreign policy toward China to make the growth of the Chinese private sector "a matter of the highest priority."18 From the United States foreign policy apparatus' perspective, it is necessary to develop a consensus among all three of the key foreign policy establishments, namely, the political, economic and military elites. The peaceful transition of China's rise has no doubt depended not only the international environment but also its own internal

16

Tammen, Ronald, et al. Power Transitions: Strategies for the 21st Century. New York: Chatham House Publishers, 2000, p. 31. 17 Brian Efird, Jacek Kugler and Gaspare M. Genna. "From War to Integration: Generalizing Power Transition Theory" International Interactions, Vol. 29, 2003: pp. 293-313. 18 Ronald Tammen, et al. Power Transitions: Strategies for the 21st Century. New York: Chatham House Publishers, 2000, p. 31.

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development. Although the United States cannot play a direct role in China's internal transition, it can help "indirectly to create the conditions, wherein a strong domestic faction develops that is tied to the international marketplace, accepts international business norms and exerts some degree of influence over its friends and allies."19 In his address to the National Committee on United States-China relations in New York, Deputy Secretary of State Robert Zoellick said, "Uncertainties about how China will use its power will lead the United States — and others as 'well — to hedge relations with China. Many countries hope China will pursue a 'Peaceful Rise,' but none will bet their future on it." His address clearly reflects the current debate about America's China policy among United States policy makers. One of the main concerns in American foreign policy today is "uncertainty" about how China will use its influence. It seems that there is consensus in Washington that, as Zoellick stated, "We have many common interests with China."20 Central to Zoellick's address, however, was an appeal that China becomes a more "responsible stakeholder" in the international community and alleviate worries about the future of China's domestic and foreign policies: "China has a responsibility to strengthen the international system that enabled its success."21 The overall sentiment regarding America's assessment of the future direction of China's development can be summarized, as Brent Scowcroft states, "complex."22 One can expect that its China policy will continue to be a focus of policy deliberation and debates in Washington as China continues to rise for the years to come. 19

Ronald Tammen, et al. Power Transitions: Strategiesfor the 21st Century. New York: Chatham House Publishers, 2000, pp. 164-167. 20 Glenn Kessler, "United States Says China Must Address Its Intentions," The Washington Post, 22 September 2005: p. Al6. 21 Robert Zoellick, "Whither China: From Membership to Responsibility?" Issued by the United States Department of State, 21 September 2005. Available at www.state.gov/ s/d/rem/53682.htm 22 Brent Scowcroft's answer to the question raised by the author during a dinner meeting at Brookings Institution, 19 September 2005.

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TAIWAN'S POSITION IN UNITED STATES FOREIGN POLICY PRIORITIES Taiwan's position in United States foreign policy priorities has, like other policy areas, experienced ups and downs over the past 50 years. When the United States was engaged in a cold war with China, starting with the Korean War in the early 1950s, Taiwan was an "unsinkable aircraft carrier" to contain China, and was regarded as a strong hold for the anti-Communist camp. This assumption was shifted when both Washington and Beijing viewed Moscow as the greatest threat, stretching back to the 1970s in the so-called Moscow-Washington-Beijing strategic triangle. President Richard Nixon took the lead in opening up relations with China and downgrading the United States relations with Taiwan. However, relations with Taiwan were important enough to allow the United States Congress to pass the Taiwan Relations Act, which ensured the future sale of arms to Taiwan and a commitment to the peaceful settlement of the Taiwan issue. As discussed earlier, when the United States viewed China as a top challenge to its national interests at the beginning of the Bush administration, the United States relations with Taiwan had moved up. The commitment to Taiwan was so powerful that it prompted George W. Bush to pledge to do 'whatever it takes' to defend Taiwan. Strategic planners in the Pentagon made it clear that Taiwan was crucial to United States security interests in its Quadrennial Defense Review (QDR) in 2001. The QDR makes pointed reference to the "East Asian littoral," defined as the region stretching from south of Japan into the Bay of Bengal, including Japan, Taiwan, the Philippines, Indonesia, and Australia, as an area of core strategic interest.23 This is one of a few statements from Washington that undoubtedly includes Taiwan in its strategic interests. As we now understand very well, September 11 significantly changed perceived strategic interests in Washington. As noted in the 23

Quadrennial Defense Review Report, Issued by the United States Department of Defense, 30 September 2001.

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analysis above, China was no longer regarded as a challenger or rival, but rather a partner in many key United States interests, such as the war against terrorism and the North Korea nuclear crisis. Maintaining stability and peace in the region has become a top priority for the Bush Administration. Moreover, avoiding military confrontation with China over the issue of Taiwan is essential so that the United States can concentrate on the war in Iraq and other antiterrorism priorities. Therefore, one can sense that supporting Taiwan as a democracy and maintaining Taiwan's separation from China is still important to United States interests — however, at this juncture, it is not necessarily a high priority interest. From the perspective of the power transition school, it is essential to control territorial flashpoints. In the case of China, the Taiwan problem is the key. If there is a military confrontation between the United States and China over the issue of Taiwan, Washington must view the problem from a long-term perspective. In a confrontation with China, the United States may prevail, yet despite the initial success of the United States, the victory would be temporary, "It would only postpone the time when China will re-acquire control over Taiwan. That outcome is inevitable once China has passed the United States." Power transition theory warns that there are undesirable consequences for a victorious United States, that is, China's dissatisfaction with the status quo would be greatly deepened. Therefore, in recognizing the costs, the United States may choose not to engage in war if Taiwan unilaterally decides its independence. 24 This consideration has provided a foundation for President Bush to openly criticize the leader of Taiwan, Chen Shui-bian, for unilaterally altering the status quo in December 2003. In October 2004, then United States Secretary of State Colin Powell said that "those who speak out for independence in Taiwan will find no support from the United States." Mr. Powell made it even more clear by further stating that "Taiwan is not independent, it does not enjoy sovereignty as a 24

Tammen, Ronald, et al. Power Transitions: Strategiesfor the 21st Century. New York: Chatham House Publishers, 2000, p. 168.

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nation and the two sides should improve dialogue" and "move forward to that day when we will see a peaceful unification."25 This line of thinking has been echoed by scholars and policy analysts as well. As Robert Scalapino points out, in the long run, it may be possible to achieve a political relationship between China and Taiwan "based on federation or confederation, setting the issue of sovereignty aside." 26 One may understand that the rationale behind this line of argument is to avoid a potential military confrontation between the United States and China, which may be prompted by the pressure created from Taiwan seeking de jure independence. This kind of sentiment is supported by public opinion. According to one survey conducted in the United States by Zogby International, Americans consider China as their fourth most "importantally," after Britain, Japan, and Israel, and 59% of those surveyed hold positive views of China, up from 46% a decade ago. More importantly, although 51% of the American public continues to view China as a potential military threat, 75% oppose the military defending Taiwan if there is a cross-Strait confrontation.27 One can see a clear shift of Taiwan's position in terms of the United States foreign policy priorities in the sentiment of the American public. To sum up, although in a general sense maintaining Taiwan's separation from China is in line with the United States interests, this preference no longer occupies a high priority status. Rather, to maintain peace and stability in the Asia-Pacific, according to the power transition theory, the United States should uphold cooperative relations with China on a number of key issues such as the antiterrorist campaign and North Korea nuclear crisis, and should place this policy to a higher priority status. This shift of priority in United States foreign policy under the new Bush Administration prompted 25

See Colin L. Powell, "Interview with Mike Chinoy of CNN International TV" and "Interview with Anthony Yuen of Phoenix TV," 25 October 2004. Available at http://www.state.gov/secretary/rm/37366pf.htm 26 Robert A. Scalapino, "Asia-Pacific Security Issues and United States Policy," American Foreign Policy Interests, Vol. 26, 2004: p. 299. 27 ShijieRibao (WorldJournal), 14 January 2005: p. 1.

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a number of commentators in Washington to advocate a detached policy towards Taiwan. In a December 2004 Atlantic Monthly article Trevor Corson argues that if Taiwan insists on moving toward de jure independence and provoking a war with China, then "the United States should let Taiwan defend itself."28 General developments in the international environment since 11 September 2001 have been relatively positive with regard to China's security situation and the most significant favorable trend came from Washington, as its perceptions of China have largely reversed. On the other hand, however, Beijing should not take this favorable environment for granted. As a later part of this paper will argue, China should pay special attention to a possible change of tide. A most alarming indicator in February 2005 was the joint announcement by Washington and Tokyo that the issue of Taiwan would be a concern of the United States-Japan security alliance (see analysis later). OTHER FACTORS IN THE UNITED STATES POLICY TOWARD CHINA There are, naturally, factors other than security and strategic issues. The most prominent problem in this regard is in the economic dimension. There are at least four issues that may cause further friction in the economic dimension. First, the trade deficit and currency issues. The United States' increasingly large trade deficit with China reached a record high of $617.7 billion in 2004. This issue has been blamed by some policy makers as China's manipulation over currency issues, mainly the RMB (Chinese yuan) peg with United States dollars.29 Therefore, there has been call from United States side to increase pressure from China to let the yuan free-floating. To ease concerns from the United States and other Western partners, China has decided in July 2005 that it would no longer peg its currency to 28

Trevor Corson. "Strait-jacket." The Atlantic Monthly, December 2004, Vol. 294, No. 5: pp. 54-58. 29 David Barboza and Joseph Kahn. "China says it will no longer peg its currency to the United States dollar." The New York Times, 21 July 2005.

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the United States dollar and the value of the dollar fell from 8.27 yuan to 8.11 yuan. This action has further demonstrated the manageability of the frictions in the economic dimension in the two countries.30 The second issue is protection of intellectual property rights. Although China has made enormous progress, this is one of the remaining areas in which China is still far from the standard set up by the WTO, which China became a member of in 2001. The third issue brought controversy around China's export of labor-intensive, low-cost goods, primarily textiles to the United States. There has been discussion over whether the United States would impose more tariffs or should have a stricter quota system. The fourth major concern from the United States side is China's increasing bidding activity to purchase important industry and commercial items. The noticeable activities are primarily in four fields including: technology (example: Lenavo Group verses IBM), consumer goods (Haier Group verses Maytag); autos (Shanghai verses South Korea); energy (Cnooc verses Unocal). All of these attempts to purchase have brought headlines in United States papers and drawn concerns of national security (such as Unocal).31 As Senator Max Baucus (D-Montana) argues, "The offer by Cnooc, Ltd. for Unocal raises an important question: 'whether it is appropriate for stateowned enterprises to subsidize investment transactions to acquire scarce natural resources that are in high demand."32 He insists that the United States Congress should "take into account this type of subsidized acquisition may have on the United States economy and its potential threat to our national security interests." This argument is also echoed by another Senator Byron Dorgan (D-North Dakota). 33 There is another area for potential friction if not competition between the United States and China, namely, the process of East 30

David Barboza and Joseph Kahn. "China to stop tying currency only to dollar." The New York Times, 21 July 2005. 31 Ben White. "Bidding to Become a Bigger Player." The Washington Post, 19 July 2005. 32 "China's complex United States connections." San Francisco Chronicle, 17 July 2005. 33 "Senator Dorgan introduces bill to ban Cnooc buy of Unocal." Dow Jones News wire.

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Asia community building. The forthcoming East Asia summit in December 2005 in Malaysia and the development of a number of security-related regional organizations such as the Shanghai Six, have sparked serious concern in the United States because it is not included. There is no doubt that the United States would like to at least be part of, if not lead, the East Asia community-building process. And whether and how China and the United States can cooperate in this process presents a potential problem to both Beijing and Washington.34 Although some of the issues have drawn attention and concern national security, they are normally manageable and are similar to previous patterns when a newly industrialized society or economy had similar frictions such as the trade-war between Japan and the United States back in the 1980's and early 1990's. Although the economic frictions are not the focus of this paper, I would like to point out that they may from time to time affect the overall relations between the two countries. Yet, they will rarely move into a crisis stage since this is the area where the common interest may hold to present a win-win solution rather than in the security dimension, where it is more perceived as a zero-sum game. Nevertheless, as a Foreign Affairs article argues "Most of these charges have little merit. But the misunderstandings behind them have opened the way to a trade war with the United States and China — one that if it escalates, could do considerable damage to both sides."35 BEIJING'S STRATEGY As discussed earlier, the EP-3/Hainan Incident of April 2003 was a wake-up call for both Washington and Beijing. The two great powers realized that they needed to find a common ground in global politics to avoid potential military confrontation, which would 34

Zheng Yingping. "Meiguo yu zhudao dongya yitihua jincheng" (The United States would like to lead the process of East-Asia community-building). Zhongguo Zhanlue Guancha (China Strategic Review), Vol. 2, 2005: pp. 36-41. 35 Hughes, Neil C. "A Trade War with China?" Foreign Affairs, July/August 2005, Vol. 84, No. 4: pp. 94-106.

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be disastrous for the region. With the new impetus demanded by September 11th, the two countries moved towards a rapid improvement of their bilateral relations. In the period of 2003-2004, China has completed its leadership transition, namely from the third generation of leadership under Jiang Zemin to the fourth generation of leadership under Hu Jintao. The Sixteenth Party Congress of the Chinese Communist Party has further consolidated Hu's leadership of the Party and the state. Hu finally established his leadership of the People's Liberation Army, when Jiang turned over military power in September 2004. Under the leadership of Hu Jintao, Chinese foreign policy vis-a-vis the first and second Bush Administration has developed a strategy that simultaneously contained clear and ambiguous dimensions. Let me discuss the five strategies Beijing has adopted. First, China continued to focus on its modernization drive and economic development, which requires close cooperation with the United States in terms of market, technology, and capital. Therefore, there are frequent mutual visits of financial officers between the two countries. Second, Beijing has emphasized converging and overlapping interests between China and the United States including anti-terrorist campaigns, the six-party talks on North Korea, military non-proliferation, and other strategic and security issues. Third, while China maintains a careful stance not to challenge United States appearance in the region, it does actively promote regional economic integration. Particularly, the focal point is its relations with Southeast Asia, which is represented by the highly visible development of 10 + 1 (ASEAN + China) and 10 + 3 (ASEAN + China, Japan, and Korea). In this way, China has developed a "good neighbor" foreign policy in the region, which has largely changed its image with its Asian neighbors from a "threat" to an "opportunity." Fourth, China has developed a cordial relationship with major powers in addition to the United States. Beijing's relations with Moscow under Putin's leadership and with the European Union — Germany and France in particular — have all served to highlight China's courting of the major powers. Fifth, despite the above mentioned conciliatory and cooperative policy with its neighbors and major powers, China will not sacrifice

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its national sovereignty and core national interests. Beijing has made it clear that the issue of Taiwan lies within this category. While facing increasing demands for Taiwanese independence from within the island, China has intensified peaceful overtures to appeal to the Taiwanese people by dramatically increasing economic integration across the Taiwan Strait. At the same time, the PLA has also upgraded its missile deployment, as well as other military preparations, for a potential military showdown if there is a declaration of de jure independence from Taiwan. For this purpose, the China's People's Congress has actively moved to prepare its first anti-secession law. Internationally, China continues to be tough with regards to the issue of Taiwan by repeatedly warning Washington not to upgrade its defense cooperation with Taiwan. This harsh perception is reflected in the statement by General Zhu Chenghu in July 2005 that China would respond with nuclear weapons to a United States attack on Chinese territory.36 There are, however, ambiguous areas in Chinese foreign policy toward the Asia-Pacific, the most critical area to its national interests. First, it seems that Beijing has been undecided about how to deal with its economic superpower neighbor, Japan. On the one hand, China has made an all out effort to promote economic interdependence between the two countries and, indeed, they have become each other's number one trading partner (pushing trade with the United States into a secondary role). At the same time, political and strategic relations between China and Japan have been cold for several years. From Beijing's perspective, the course of the deteriorating relationship is largely due to Tokyo's attitude toward history. Prime Minister Koizumi's repeated visits to Yasukuni Shrine are the official reason for Beijing's refusal to resume mutual state visits. It is nevertheless also clear to Beijing that Japan is the most important security partner for the United States, and the United States-Japan strategic guideline will enable the two powers to jointly intervene in 36

"Report: China sends nuke warning to United States over Taiwan." CNN.com, 14 July 2005. Available at: http://edition.cnn.com/2005/WORLD/asiapcf/07/l4/ china. taiwan .nuclear, reut/

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a potential cross-Strait military confrontation. 37 South Korea and Australia have both made it clear that they will not be a part of such a confrontation over the issue of Taiwan, even if the United States is involved. Japan, on the other hand, has never ruled out such a possibility, instead more or less making it clear that it will be involved in such a scenario. There have been discussions about how to reduce regional tension by incorporating China into the Asian structure of security arrangements. As David Lampton suggested in his testimony before the United States Senate, "The most critical strategic challenge... is how to foster security cooperation between China, Japan and the United States. A structure not premised on a 'two-one' logic that inevitably has one party feeling left out and vulnerable." Therefore, he argues, "No major regional challenge in Asia can be effectively addressed without cooperation between Beijing, Tokyo and Washington."38 Another gray area is that Beijing is unclear of the role Washington may play in future cross-Strait relations. On the one hand, China has recognized Washington's enormous influence over Taipei. Therefore, Beijing has intensified its pressure on Washington to play a "brake" function in order to stop Taipei's drive toward independence. In this way, Beijing has seen some positive results from its efforts. The most recent examples include Chinese Premier Wen Jiabao's December 2003 visit to the White House, during which President Bush made a clear warning to President Chen not to alter the status quo of cross-Strait relations. Also, Secretary of State Colin Powell's comments during his visit to Beijing in October 2004 clearly illustrate the United States view that Taiwan is not a sovereign state and that the United States would not support the independence of Taiwan. With these positive results, it is only natural that Beijing may continue to press Washington to play a role.

37

Edward Cody. "China Protests United States-Japan Accord," The Washington Post, 21 February 2005a: p. A24. 38 David Lampton. "What Growing Chinese Power Means for America." Testimony before Senate Committee on Foreign Relations, 7 June 2005.

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On the other hand, China has been cautious about exactly what role Washington may play, as Beijing also realizes that the Bush Administration's foreign policy will be based primarily on its own national interests, which may not necessarily be in agreement with China's unification strategy. Beijing has been reluctant, for example, to participate in international, multilateral security frameworks that would include the issue of Taiwan. In other words, China wishes the United States 'would play a more active role in stopping Taiwanese independence, but would also like to constrain the Taiwan issue to a domestic, rather than international forum. At the same time, it is clear that Beijing has been quite positive in dealing with the North Korea nuclear crisis, having hosted and facilitated the six-party talks for the past few years. Let us now take a close look at the interactions among Washington, Beijing, and Pyongyang over the past few years. DYNAMICS OF THE WASHINGTON-PYONGYANGBEIJING TRIANGLE In the area of regional security in Asia-Pacific, there have been two hot spots for the past half-century since World War II, namely, Taiwan and the Korean Peninsula. Naturally, these two hot spots have also been a focal point of attention for both Beijing and Washington. Although the Taiwan issue is without a doubt the most critical problem in Sino-United States relations, developments in the Korean Peninsula have increasingly drawn attention from the two powers. This is particularly true with regard to the recent development of the North Korea nuclear crisis. On 26 July 2005, the fourth round of six-party talks began in Beijing as China continued to be the official host. Although all related parties cautioned that this open-ended conference may entail long, difficult negotiations the talks nevertheless began in a conciliatory tone. 39 These on and off talks are not without obstacles 39

Edward Cody, "Improved Atmosphere is Seen as N. Korea Arms Talks Resume," The Washington Post, 27 July 2005c: p. Al6.

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and delays. There was an 11-month break between the third and fourth talks. During this period, top Chinese and American diplomats kept in close consultation over strategies dealing with Pyongyang. On 12 February 2005, Chinese Foreign Minister Li Zhaoxing had a telephonic conversation with United States Secretary of State Condoleezza Rice to discuss how to handle the latest development in the North Korea nuclear crisis. Two days earlier, on 10 February, Pyongyang made the announcement that North Korea now possessed nuclear weapons and was withdrawing from the six-party talks.40 In this conversation, the two leaders agreed that both China and the United States would like to seek peace and stability on the Korean Peninsula and that the six-party talks should be restored as soon as possible. China's displeasure over this announcement could be seen in the uncensored criticism of the action that appeared in the Chinese news media and on Internet discussion boards (previously, similar discussions were generally removed from the Internet by Chinese authorities). It has long been clear that there is a consensus among the four major powers in the region — China, the United States, Russia, and Japan — that all oppose nuclear proliferation in the region in general and prefer a nuclear-free Korean Peninsula in particular, and all must put stability and peace as their top policy choices. China has certainly been in-line with this consensus, which became a foundation for the six-party talks beginning in August 2003. Within the space of just over a year, three different rounds of talks were hosted by the Chinese in Beijing in May 2005. From passively dealing with the North Korea issue to actively hosting the six-party talks, Beijing has gone through a major shift in its policy orientation over the past several years. In doing so, China has conducted highly visible and unprecedented shuttle diplomacy to ensure that North Korea comes to the negotiation table. 40

Anthony Faiola and Philip P. Pan, "N. Korean Declaration Draws World Concern: Nuclear Arms Assertion Spurs Calls to Revive Talks" The Washington Post, 11 February 2005: pp. Al, A20.

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In order to understand Beijing's future policy directions, we must look back at the four factors that influenced its decision to host the talks. First, China's foreign policy priority continued to be ensuring a stable and peaceful international environment so that it might concentrate on economic modernization. A nuclear North Korea would not be conducive to China's development. Second, a North Korea that is actively developing nuclear weapons would almost inevitably stimulate a new arms race in Northeast Asia, prompting both South Korea and Japan to consider their own nuclear options. With Sino-Japanese relations at a low, Beijing would definitely not want to see Japan move in this direction. Third, Beijing has its own national interests and foreign policy headaches around the issue of Taiwan, which requires close coordination between China and the United States in order to curb a possible shift in Washington's Taiwan policy. One incentive for Beijing to look for Washington's support on the Taiwan issue is China's cooperation on the North Korea nuclear issue. Therefore, Beijing moved from being a passive player to an active one to demonstrate its cooperative goodwill to Washington. Lastly, with these highly visible six-party talks, Beijing has portrayed itself as a responsible major power that can take the lead in handling difficult international issues, which has in turn increased China's international standing.41 China long ago dropped its view of North Korea as its close ally, although it still occasionally uses the expression "as close as lips and teeth" to describe its relationship with the country. This policy shift was completed over a decade ago when Beijing established formal diplomatic relations with Seoul in 1992. For the past few years, although there still is a close relationship between the two countries, Beijing has been willing to put pressure on Pyongyang from time to time to indicate its displeasure with the latter's development of nuclear weapons. In addition to political pressure, China also has economic means to exert this pressure. Seventy percent of North Korea's food and fuel is provided by China. In March 2004, when 41

Anthony Faiola, "United States, Japan Worry about N. Korean Withdrawal From Talks", The Washington Post, 20 February 2005: p. A30.

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Pyongyang test-fired its missiles, China cut off crucial oil supplies to North Korea for three days under "technical" pretenses. On the other hand, however, one must recognize the limits of Beijing's influence over Pyongyang. North Korea has certainly enjoyed its own independent foreign policy and autonomous decision making. One may even suspect that North Korea has enjoyed using the nuclear issue as a bargaining chip to play with its long-time rival, the United States. Furthermore, increasing trends of nationalistic sentiment in North Korea have also greatly counterbalanced China's potential influence causing Beijing to behave cautiously as it is keenly aware of its limitations.42 For example, last fall, the Beijing leadership was pressured by Pyongyang to shut down an influential policy-oriented journal, Zhanlie Yu Guanli [Strategy and Management, after the magazine published an article highly critical of the North Korean regime by suggesting that China should shift its policy toward North Korea in a more balanced direction.43 Although it is true that there are obvious overlapping interests between China and the United States in terms of policies toward the Korean Peninsula, one must take note of the major differences that still remain. Beijing has thus far refused to consider one major United States diplomatic goal, namely regime change, as its own policy option. The hardliners in Washington, particularly within the Pentagon, have long believed that an ultimate way to solve the North Korea problem is to facilitate regime change, as United States military forces did in Iraq (although the war option with North Korea has been constantly cautioned). Beijing, however, has made it clear that it does not favor a quick regime change, which may lead to the total collapse of the Pyongyang government. For one thing, this kind of collapse will send hundreds of thousands of refugees across the border into Northeast China. Refugees who have already 42

Scott Snyder, "Waiting Game" Comparative Connections: An e-Journal on East Asian Bilateral Relations. October-December 2004. Accessed from www.csis. org/pacfor. 43 John Rutwich. "China Orders Journal Closed Over North Korea Story." Reuters News Service. 21 September 2004.

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come from North Korea — the number is believed to range anywhere from 100,000 to 300,000 — have been an enormous burden on China. 44 Therefore, China does not want to see the further deterioration of this situation, such as what might occur following a regime collapse. Another undesirable consequence of this scenario is that a quick collapse of North Korea may bring United States military forces up to the Yalu River at the Sino-North Korea border — thus, China, for the time being, may prefer the Pyongyang regime exist to serve as a buffer between Chinese and American military forces. Despite the above mentioned differences, there is every reason to believe that the common interests between the two powers will prevail and the four factors behind China's decision to host the sixparty talks will remain. To be sure, this recent failure to stop North Korea's nuclear development may have triggered the pessimistic viewpoint among certain observers that the six-party talks should be dismissed.45 Others may believe, however, that such a conclusion should not be drawn quite yet. The very fact that Pyongyang has returned to Beijing to participate in the six-party talks in July 2005, has enhanced the later perception. As a matter of fact, Pyongyang did not abandon the six-party talks entirely; the recent mixed signals from North Korea indicate that it may at some point in the future come back to the negotiation table. Moreover, even if Pyongyang refuses to return to negotiations, there is a strong possibility that the remaining five nations will convene more rounds of discussions to coordinate their positions to deal with the challenge posed by North Korea's nuclear development. 46 In that scenario, North Korea will be increasingly viewed as the loser of the game, whereas China may enjoy a win for both its own interests and reputation. In the long

44

[Editorial] "Human rights of N. K. refugees," Korea Herald, 6 September 1999, accessed from www.koreaherald.co.kr/news/1999/09/_03/19990906_0318.htm 45 Aidan Foster-Carter, "The Six-Party Failure," PacNet 6A, 11 February 2005. Accessed from listserv distributed by [email protected]. 46 Ralph A. Cossa, "Pyongyang Raises the Stakes", PacNet 6, 10 February 2005. Accessed from listserv distributed by [email protected].

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run, the six-party talks may not only bring different parties to the table to work together on a peaceful solution for the region, but also present the possibility of institutionalizing a new security framework in the Asia-Pacific, whether it continues with six parties or evolves to five. CONDITIONS FOR A CHANGE OF TIDE In analyzing Bush's Asia policy and the development of Sino-US relations this paper has so far emphasized the fact that China has enjoyed a relatively favorable international environment with regard to its security, particularly since 11 September 2001. Washington and Beijing have also stepped up their consultation mechanisms over crucial and sensitive security concerns such as the issues of Taiwan and the North Korea nuclear crisis. This has not only resulted from America's need for its own national interest such as anti-terrorist coalition building, but also from a long-term strategic thinking based on such theories as power transition. I would like to emphasize, however, that Beijing should not take these favorable trends for granted. As we all know, it is only natural that there are ups and downs in international relations. A positive condition may change to a negative one over time — in this case, there are four scenarios that may change the tide, not only in the United States foreign policy toward China, but also in the general international environment with regard to China. First, as now commonly recognized, perception matters. A recent, frequently heard debate concerns the true implications of China's rise — is it a threat or an opportunity? China has been cautious for the past decade to downplay the concerns of its Asian neighbors of its security policy. The best example is how China put aside the territorial dispute with several Southeast Asian neighbors in the South China Sea. However, if China builds up its military and its intentions are misinterpreted as expansionist, then the perceptions may change. The negative tone of the Pentagon's 2005 Annual Report on China's Military Build-up, as mentioned earlier, is evidence of this perception change.

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Second, antagonistic political relations may promote hostile security policy. The best example in this regard is China's Japan policy. Japan has long been cautious not to offend China by openly including Taiwan in its military alliance with the United States, not only because of Japan's past colonial history, but also in recognition of Taiwan as a key national interest of China and a desire not to antagonize China. But beginning with a state visit by President Jiang Zemin to Japan in 1998, bilateral relations declined significantly. For the past four years, Beijing has refused to conduct state visits between the two countries' leaders to show its displeasure with Japanese Prime Minister Koizumi's visits to the Yasukuni Shrine. Japan has received the message of China's unhappiness, but on the other hand, Japan may now feel that it is not obliged to care much about China's reaction. In February 2005, a "two plus two" meeting occurred in Washington, including Secretary of State Condoleezza Rice and Secretary of Defense Donald Rumsfeld from the United States, and Foreign Minister Nobutaka Machimura and Defense Agency Director Yoshinori Ono from Japan. The meeting issued a statement indicating that the countries' had produced a "revised United States-Japanese strategic understanding," which for the first time included security in the area around Taiwan as a "common strategic objective."47 As a number of scholars also argue, this presumption may still shift; for example, if the Sino-United States relations spiral downward to a level of hostility similar to the EP-3 incident, then Taiwan's strategic position may move up in United States global calculation. 48 Actually, it is reported that an informal anti-Chinese submarine alliance among the United States, Japan, and Taiwan has been formed. This was revealed after

47

Edward Cody. "China Protests United States-Japan Accord." The Washington Post, 21 February 2005a: p. A24. Also see Shijie Ribao (WorldJournal), 19 February 2005, p. 1. 48 Paper presented by Robert Sutter, "Recent convergence in China-US views — Rethinking United States Policy Options," International conference on United States Taiwan Policy and the Dynamics of the Taipei-Beijing-Washington Triangle, 28 January 2005, American University, Washington, DC.

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the Chinese submarine intrusion into Japanese waters in late 2004.49 Third, one other possible scenario for a change of tide is if there are major setbacks in the domestic political and economic environments. The Tiananmen incident of 1989 dramatically shifted China's image in the world and it has taken several years, if not a decade, for China to restore its reputation. Therefore, if there is major political chaos or human rights violations, events similar to Tiananmen will most certainly cast China in a negative light and would significantly alter the United States (as well as other countries') foreign policy toward China. Fourth, it is understandable that Beijing will naturally have its own foreign policy, which may not necessarily be in line with that of the United States. Beijing, for example, has maintained cordial relations with both North Korea and Iran, which were part of Bush's "axis of evil." But, on the other hand, if Beijing gets too close with these so-called "rogue states" by providing large-scale weapons of mass destruction, or if China has unclear relations with states that harbor terrorists, then China's image may be reversed among Washington's policy makers. Already such complaints have surfaced, such as one commentator's criticism of "unhelpful China's... interference in the delicate nuclear negotiations with Iran."50 One may therefore suspect that, although the current trends favor China vis-a-vis Taiwan, Beijing should not take this for granted, as the tides may change, or even reverse, if there is a negative shift in United States-China relations. Therefore, Beijing needs to be very mindful of this possible change of the tide and try its best to prevent these conditions so that the current favorable environment might be sustained.

49

"Anti-Submarine Alliance Among United States, Japan, and Taiwan Triangle Against PLA." Qiao Bao [China Press], 3 December 2004: p. B4. 50 Dan Blumenthal. "Unhelpful China." The Washington Post, 6 December 2004: p. A21. Also see Robin Wright. "Iran's New Alliance with China Could Cost United States Leverage." The Washington Post, 17 November 2004: p. A21.

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CONCLUSION This paper has analyzed the Bush foreign policy in the global and regional context, with a focus on the United States-Asia policy and the impact on the Sino-United States relations. I have argued that, because of different strategic environments, the Bush Administration's foreign policy in the Asia-Pacific is quite different from that in the Middle East. The three characteristics of Bush foreign policy as mentioned earlier, namely unilateral action, preemptive military action, and the forcing of regime change, have largely been put aside while opposite policies are pursued in East Asia. The causes for the differences lay not only in the different strategic environment in the two areas, but also in the perceived difference in the status of priorities. Such a change from high priority to low priority (for example, regarding the Taiwan issue) can explain the changing attitudes and policies in the Bush administration. When we look at SinoUnited States relations and the issue of Taiwan, one clearly sees that Beijing has enjoyed a much better relationship with Washington after 11 September 2001. At the same time, Taipei has sensed increasing pressure from Washington to refrain from moving toward de jure independence. While enjoying this kind of relaxing break, Beijing should not take it for granted — the United States' order of priorities may easily shift when the international environment changes. To sum up, Sino-US relations can be characterized as a relationship of "wary interdependence", meaning the two powers are likely to be the only two superpowers in this century (one existing and one rising) to maintain stability and prosperity in the globe, the two powers inherently interdependent in virtually all dimensions including strategic, economic and political dimensions. At the same time, they are naturally watching the other closely with uncertain eyes in what I call, "wary interdependence." With the above analysis of the United States foreign policy toward Asia under the second Bush administration and its impact on United States-China relations, then Beijing may consider a number of policy choices to ensure its own peaceful rise.

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It seems that America's intervention in Taiwan's movement toward independence has had considerable impact on the island. Beijing's coordination and cooperation with Washington in this regard needs to be further strengthened. Beijing should not be afraid to discuss the issue of Taiwan in the international arena (although it considers the issue as a domestic affair) since it has already been internationalized. In other words, China should recognize that the involvement of the United States (and Japan) in the issue of Taiwan is a factual matter that is unavoidable; thus, they should attempt to turn this involvement in their favor. Along this line of thinking, Beijing may wish to establish a greater consensus among major powers, including the five permanent members of the UN Security Council, plus Japan and India, to pledge their commitment to discourage Taiwan's move towards independence. 51 By relieving the political pressure in China, perhaps China will allow Taiwan to enjoy an even greater presence in the international community in the areas of economic and cultural affairs. Beijing may wish to recognize that its Japan policy since the late 1990s is not working (if not completely failing), demonstrated by the joint United States-Japan statement in February 2005, which for the first time claimed the Taiwan area as a common concern. Nobody would deny the issue of history as important and that Koizumi's visits to Yasukuni Shrine continues to hurt the feelings of the Chinese people. But the question is how to solve this issue and how to relate it to China's strategic goals. One may ask whether stopping state visits and canceling summit meetings has solved the issue of history, and if having an antagonistic bilateral relationship is beneficial to Chinese interests with regard to the issue of Taiwan. Indeed, Beijing should conduct a thorough examination of its Japan policy and recognize that the fact that Tokyo's willingness to openly include the

51

This comment was made by Dr. Robert Pastor during the international conference on United States Taiwan Policy and the Dynamics of the Taipei-Beijing-Washington Triangle, 28 January 2005, American University, Washington, DC.

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Taiwan issue in the United States-Japan Security Alliance indicates a failure of Beijing's current Japan policy. Beijing may have to learn more subtle yet effective ways to indicate its displeasure over certain foreign policy issues. China has been sensitive with its policy toward North Korea, but at the same time is willing to demonstrate its unhappiness over certain North Korean moves. One example is China's suspension of oil provision for three days last year after Pyongyang's missile tests, which Beijing attributed to a technical issue. In this way, China sent a clear signal without causing either party to lose face. Similar skillful diplomacy could be used with Tokyo and/or Washington. Issues such as the involvement of Japan in the Beijing-Shanghai railway construction, or even the highly visible shuttle diplomacy for the six-party talks (a high concern of both Japan and the United States), are the possible occasions for such diplomatic bargaining. 52 But of course, when playing this kind of game, a supersensitive, cautious approach must be employed. According to the Power Transition theory, the most important foreign policy objective for the United States is to create a satisfied China. Washington understands fully that the Taiwan issue relates its core interest to China's core interest. A military confrontation with China over Taiwan, "even if successful during this early transition period, would not guarantee long-term security for that island." Therefore, "a United States military victory would damage long-term United States security interests."53 Power Transition theory suggests that the United States should try to include China in its alliance structure, or if that is not possible, to engage China and bring it into the existing international system to let China gradually accept prevailing rules and norms. Along this line, some scholars even suggest that China's participation in NATO or a similar organization is important because peacetime alliances aggregate nations with similar 52

"United States, Japan Worry about N. Korean Withdrawal from Talks." The Washington Post, 20 February 2005: p. A30. 53 Ronald Tammen, et al. Power Transitions: Strategies for the 21st Century. New York: Chatham House Publishers, 2000, p. 173.

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preferences. 54 We can see many characteristics of the Bush's China policy reflect this long-term strategic thinking. At the same time, it also reflects the policy debate within different schools in the Washington policy apparatus. We may expect continued policy debate among various schools of thought, such as the "neo-con", "liberal engagement" and "power transition" theories. As an Atlantic Monthly article argued, "Getting into a war with China is easy, you can see many scenarios not just Taiwan, but the dilemma is how do you end a war with China?"55 In conclusion, understanding foreign policy directions under the Bush Administration has enormous significance in the development of China in the new century. It is well known that China has been in a transitional stage, not only domestically, but also internationally. The rise of China has drawn attention from virtually every corner of the world. It is clear that the most important foreign policy issue that Beijing faces is its relations with the United States. Maintaining stable and cooperative relations and placing disagreements on a manageable level are absolutely crucial to regional stability and peace in the Asia-Pacific, as 'well as to the fundamental interests of both the peoples of China and the United States.

54

Jacek Kugler and Ronald Tammen. "Regional Challenge: China's Rise to Power," Asia-Pacific Region in Transition. Honolulu: Asia-Pacific Center for Security Studies, 2004, p. 53. 55 Robert Kaplan. "How we would fight China." The Atlantic Monthly, Vol. 295, No. 5: June 2005, p. 54.

Chapter

19 China and Northeast Asian Cooperation: Building an Unbuildable? Jae Ho Chung

The demise of the Cold War confrontation led to the growth and proliferation of three separate strands of forces around the world: namely, nationalism, regionalism and globalization. On one hand, the decline of ideology has reinvigorated the conventional sources of inter-state conflict and tension — territorial, ethnic, religious and other sovereignty-related issues — thereby expanding the room for nationalistic elements in international affairs.1 The extinction of nation-states and nationalities appears highly unlikely. On the other hand, border-crossing movements and integrative processes have also been accelerating, often at the expense of the individual state's sovereign rights. Inter-state migration, cross-border trafficking of people and goods, and international cooperation for the control of epidemic diseases and weapons of mass destruction 1

See, for instance, Walker Connor, Ethnonationalism: The Quest for Understanding (Princeton: Princeton University Press, 1994), Chapter 8; and Anthony D. Smith, Nationalism: Theory, Ideology, History (Cambridge: Polity, 2001), Chapter 6.

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are good examples in point. Norms and institutions have affected nation-states across the border. Global and regional trading regimes like the World Trade Organization (WTO) and North American Free Trade Agreement (NAFTA) illustrate one category of such integrative norms in operation, whereas the proliferation security initiative (PSI) demonstrates another.2 Nowhere are the contradictions between nationalism, regionalism and globalization more acutely felt than in Northeast Asia where the remnants of the Cold-War structure have yet to be completely dismantled. The region of Northeast Asia still boasts two strategic flashpoints — the Korean Peninsula and the Taiwan Strait — and is replete with mutual suspicion and distrust accumulated over its long tragic history.3 By way of history and geopolitics, China has been deeply involved in the intricate dynamics of both places of strategic importance. Northeast Asia also has other problems such as North Korea's nuclear weapons program, environmental degradation, resurgent tendencies of irredentism, and so on, which cannot be resolved by a single state alone. The core question is: Is China more inclined to deal with these regional problems bilaterally or more predisposed to forge regional networks for multilateral solutions? On the basis of empirical observations of some major trends, this study suggests that, while China has certainly become more proactive and forthcoming in participating in and facilitating regional cooperation in Northeast Asia, particularly under the reign of Hu Jintao, perceptual and structural hurdles still remain to be cleared or considerably mitigated at least for the establishment of genuine linkages for regional cooperation. And the task, it is argued, cannot be attained solely by China's efforts. 2

See Robert O. Keohane, International Institutions and State Power (Boulder: Westview, 1989); and Stephen D. Krasner (ed.), Problematic Sovereignty: Contested Rules and Political Possibilities (New York: Columbia University Press, 2001). 3 See, for instance, Gilbert Rozman, Northeast Asia's Stunted Regionalism-. Bilateral Distrust in the Shadow of Globalization (Cambridge: Cambridge University Press, 2004); and Charles Armstrong, Samuel S. Kim, Stephen Kotkin and Gilbert Rozman (eds.), Korea at the Center: Northeast Asia between Regionalism and Globalization (Armonk, N.Y.: M. E. Sharpe, 2006).

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The remainder of this article consists of four sections. The first elaborates on the contextual nexus between China's "new" diplomacy since the Tiananmen Tragedy and Beijing's proactive posture on forging regional networks of cooperation. The second section examines three types of limits and obstacles to regional cooperation in Northeast Asia: functional, historical and structural. The third section then discusses the practical difficulties China has encountered in promoting regional cooperation in Northeast Asia by looking at three cases of the Six-Party Talks (SPT), the trilateral Free-Trade Agreement (FTA) among China, Japan and Korea, and PSI. The final section offers some concluding observations regarding China and Northeast Asian cooperation. CHINA'S "NEW" DIPLOMACY AND REGIONAL COOPERATION China's foreign relations of the Maoist era (1949-1976) were best characterized by the huge gap between what Beijing wished to accomplish and what it was really capable of. Despite China's pronounced global aspirations — to become a competitor of "imperialist America" and the "revisionist Soviet Union," and to perform as the leader of the non-aligned Third World — it was invariably a regional player, at best, with very shaky foundations of national power. It was not until the reign of Deng Xiaoping that such a gap was painfully recognized and actually acted upon. 4 Having allied first with the Soviet Union and later aligned with the United States, China was keenly aware of the severe constraints imposed by strategic dependence on one superpower against the other. It was in 1982 that China formally adopted an "independent route of diplomacy" {duli zizhu waijiad). This new line of strategic reasoning, according to an analyst, "represents a retreat from its 4

The share of development aid for the Third World in China's total government spending was 6.7% in 1972, which sharply declined to 0.5% in 1983. See Zhimin Lin, "China's Third World Policy," in Yufan Hao and Guocang Huan (eds.), The Chinese View of the World (New York: Pantheon, 1989), p. 244.

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single-minded efforts of the late 1970s to build a matrix of strategic relations focused on confrontation with the Soviet Union...and a determination to deal with each country on its own merits and not to allow either to use China as a pawn in some geopolitical game."5 Freed from the constant preoccupation with Soviet hegemonism and American imperialism, Chinese foreign policy of the reform era shifted from emphasizing vulnerability, contention, and ideological purity to demonstrating confidence, reconciliation, and diplomatic flexibility.6 By minimizing the systemic constraints imposed by the superpower triangle, China became ready to maximize practical benefits with the world at large. Changes were clearly visible in China's relations with the Soviet Union, as well as in its dealing with countries with which it had hitherto maintained highly antagonistic relationships.7 "Omni-directional opening" (quanfangwei kaifang) became the key discourse of China's foreign relations since the 1980s. A watershed was created by the June 4th tragedy. The bloody suppression at the Tiananmen Square immediately led to the West's adoption of various sanctions against China. These aftershocks made the Chinese leaders seriously reflect on their foreign relations 5

Carol Lee Hamrin, "China Reassesses the Superpowers," Pacific Affairs, Vol. 56, No. 2 (Summer 1983), pp. 210, 212. For the centrality of the 1982 turnaround, see Nancy Bernkopf Tucker, Taiwan, Hong Kong and the United States 1945-1992: Uncertain Friendships (New York: Twayne, 1994), Chapters 7-8; and Jia Qingguo and Tang Wei, Lashou de hezuo — zhongmei guanxi de xianzhuang yu qianjing (Intricate Cooperation: The Current Situation of China-US Relations and Prospects) (Beijing: Wenhua yishu chubanshe, 1998), pp. 22-23. 6 See Wang Xuhe and Ren Xiangqun, Guo zhi zun — xin zhongguo waijiao jishi (The Prestige of China: Chronicles of New China's Diplomacy) (Hangzhou: Zhejiang renmin chubanshe, 1999), Chapter 5; and Wang Taiping, Xinzhongguo waijiao wushinian (Fifty years of New China's Foreign Relations) (Beijing: Beijing renmin chubanshe, 1999), Vol. 1, pp. 33-37. 7 On this line of argument, see Samuel S. Kim, "China and the Third World: In Search of A Neorealist World Policy," in Samuel S. Kim (ed.), China and the World (Boulder: Westview, 1984), pp. 189-205; and Zhu Hongqian, "China and the Triangular Relationship," in Hao and Huan (eds.), The Chinese View of the World, pp. 42-43.

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since the late 1970s and search for certain identities of their own. 8 They came to the conclusion that Chinese foreign policy should avoid depending solely on the West and need a regional focus that can be sustained irrespective of China's relations with the West. The key product of such reflections was the "good neighborly diplomacy" (rnulin youhao waijiao). It was China's first regional policy with an explicit emphasis on prioritizing the Asian region in Beijing's external relations.9 Since the early 1990s, after the adoption of the "good neighborly diplomacy," China became increasingly open-minded, proactive and forthcoming towards regional cooperation in Asia. The first manifest indicator of such changes was perhaps that Beijing sought hard to normalize ties with several countries in the region with which it had hitherto maintained very bumpy relationships. These countries included, most notably, Indonesia, South Korea, Malaysia and Singapore, in addition to such non-Asian countries as South Africa and Israel.10 In a nutshell, China appeared keenly aware that maintaining good dyadic relations was a precondition for forging regional cooperation on its own terms. Another sign of change was that China has also become increasingly open-minded and accommodating towards a wide range of ideas concerning regional cooperation and multilateral networks in Asia. On one hand, it was China's calculated response to the global trend — the rise of the European Union (EU), the establishment of 8

For the importance of the Tiananmen massacre as the watershed in United States-China Relations, see Robert L. Suettinger, Beyond the Tiananmen: The Politics of US-China Relations 1989-2000 (Washington, D.C.: The Brookings Institution Press, 2003). 9 Chen Xiangyang, Zhongguo Mulin youhao — sixiang shijian yu qianjing (China's Good-Neighborly Diplomacy — Thoughts, Practice and Prospects) (Beijing: Shishi chubanshe, 2004). 10 See, for instance, Rizal Sukma, Indonesia and China: The Politics of a Troubled Relationship (London: Routledge, 1999); Jonathan Goldstein (ed.), China and Israel 1948-1998: A Fifty Year Perspective (Westport, CT: Praeger, 1999); and Jae Ho Chung, Between Ally and Partner: Korea-China Relations and the United States (New York: Columbia University Press, forthcoming), Chapters 5-6.

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NAFTA, and the consolidation of the ASEAN. On the other hand, it was also Beijing's strategic move of adjusting the relative proportion of bilateralism and multilateralism in its management of external relations. That is to say, the leaders of China came to the conclusion that joining regional and multilateral networks would not necessarily hurt the vital interest or sovereignty of China.11 China's proactive diplomacy gathered further momentum towards the late 1990s. The sudden eruption of the Asian financial crisis put China in a unique position where Beijing's decision to devalue its currency could seriously affect the region as a whole. 12 It was in this unusual context that the new discourse of "great-power diplomacy with responsibilities" (fu zeren de daguo waijiao) was pronounced by Beijing. While debates went unabated as to the geographical scope and depth of such responsibilities that Beijing should shoulder, it was apparent that China's "new" diplomacy was about to surface.13 With the new foreign policy discourse in place — most recently, that of "peaceful development" — China's diplomacy became increasingly more proactive than simply reactive, and geared more toward agenda-setting than merely rule-accepting, thereby shedding its residual role in international affairs.14 In addition to the Greater Mekong Region Summit (GMS) which has just produced the Kunming Communique on intra-regional development plans worth $25 billion, China's active involvement in and dexterous utilization 11

For this increased confidence, see Evan S. Medeiros and M. Taylor Fravel, "China's New Diplomacy," Foreign Affairs, Vol. 82, No. 6 (November-December 2003). 12 For such perceptions, see Barry Naughton, "China: Domestic Restructuring and a New Role in Asia," T. J. Pempel (ed.) The Politics of the Asian Economic Crisis (Ithaca: Cornell University Press, 1999), pp. 203-223. 13 For the need for "great-power diplomacy with responsibilities," see Ye Zicheng, "Zhongguo shixing daguo waijiao zhanlue shi zai bixing" (It Is Inevitable that China Conducts Great-Power Diplomacy), Shijie jingji yu zhengzbi (World Economy and Politics), No. 1 (2000), pp. 9-10. 14 Zheng Bijian, "China's Peaceful Rise to Great-Power Status," Foreign Affairs (September-October 2005), pp. 18-24; Peng Peng (ed.), Heping jueqilun (On Peaceful Rise) (Guangzhou: Guangdong renmin chubanshe, 2005), pp. 13-26.

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of the ASEAN Regional Forum (ARF) as a venue of China explaining against the case of "China threat" is one crucial indicator of Beijing's keen interest in regional multilateral networks of cooperation. 15 The Treaty of Amity and Cooperation signed between China and ASEAN, China's initiatives on ARF Security Policy Conferences and the East Asian Summit, East Asian Think-Tank Networks (NEAT), and the China-ASEAN Free Trade Agreement (CAFTA) clearly point to Beijing's proactive and forthcoming posture on regional cooperation in East Asia.16 In a sense, the main locomotive of ASEAN plus three appears to be shifting from ASEAN to China, Beijing's denial of such intentions notwithstanding.17 A role of a more proactive facilitator was performed by China in its efforts and initiatives in establishing and cultivating the Shanghai Cooperation Organization (SCO). Begun as Shanghai-Five in 1996 for the limited goals of arms reduction and confidence building in the border regions of China, Russia and three Central Asian states, the SCO has since its establishment in 2001 been expanding in both its membership and function mostly under Beijing's initiative. In terms of membership, the SCO now boasts six full members, three candidate semi-members (India, Iran and Pakistan), and one observer state (Mongolia). In terms of function, too, the SCO is now empowered to deal with economic and security cooperation, antiterrorist, anti-separatist, and anti-extremist operations. China's role

15

See, for instance, Wu Xinbo, "China and Multilateral Security Cooperation in Asia," paper presented at the international conference on China and East Asian Regionalism, sponsored by Fudan University, London School of Economics, and Sciences Po. Paris, Shanghai, 7-8 January 2005. 16 In a sense, the late surge of China's role in the ASEAN framework was possible due to the unique setting of the organization. See, for instance, Alastair Iain Johnston, "The Myth of the ASEAN Way? Explaining the Evolution of the ASEAN Regional Forum," in Helga Haftendorn, Robert O. Keohane and Celeste A. Wallander (eds.), Imperfect Unions: Security Institutions over Time and Space (Oxford: Oxford University Press, 1999), Chapter 10. 17 See Kuik Cheng-Chwee, "Multilateralism in China's ASEAN Policy: Its Evolution, Characteristics, and Aspirations," Contemporary Southeast Asia, Vol. 27, No. 1 (2005), pp. 105-111.

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in the SCO has become crucial in setting agendas, in addition to offering low-interest governmental loans to its member states.18 China also played a leading role in initiating and hosting the three- and six-party talks on the North Korean nuclear conundrum, and implementing drastic tension-reduction measures with Russia, India and so on. China's proactive effort and design to weave expansive networks of Beijing-centered regional cooperation can be identified in many parts of the Asian region — often to the displeasure of the United States. In a nutshell, China has come a long way from staunchly resisting any hint on multilateral forms of cooperation.19 CHINA AND NORTHEAST ASIAN COOPERATION: SURVEYING THE MAJOR HURDLES Three perspectives seem particularly useful in assessing the state of affairs in Northeast Asian cooperation. They can be termed functional, historical, and structural viewpoints or approaches. Each of these has their own logic of regional cooperation and distinct limitations embedded in them. More important is their respective relevance to the role of China in facilitating regional cooperation in Northeast Asia. Functionalist Perspective This is perhaps the most popular and widely utilized view in accounting for inter-state cooperation in global and regional 18

See "Shanghai Cooperation Organization," ; ; and "Shanghai hezuo zuzhi Jiang zeng yindu yilang bajistan san zhunchengyuan" (SCO Will Add India, Iran and Pakistan as its New Semi-Members) last accessed on 15 July 2005. 19 In the few years since the late 1990s, there were lots of discussions on and references to the concept of "partnership" ihuoban guanxt) that presupposed a fundamentally "bilateral" dynamic. Given that we rarely hear about this concept these days, it may be taken as an indicator of China's drastically increased interest in multilateralism.

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schemes. The crux of the approach is that expanding trade, investment and human exchanges are bound to improve political ties and lead to normalized relations. Having adjusted its strategic posture through minimizing the systemic constraints, China could still have insisted upon the tenet of self-reliance. China instead chose to reach out to the outside world and join a wide range of regional and global networks of cooperation. A liberal-functionalist perspective would posit that China was in fact positively responding to the changing paradigm of world affairs at the time when the seed of a "grand thaw" was planted. 20 As a scholar aptly notes: (A) new "trading world" of international relations offers the possibility of escaping such a vicious circle (of military conflicts) and finding new patterns of cooperation among nation states... Nations (such as the United States and the Soviet Union) which focused primarily upon international and territorial competition often were unable to design a trading strategy of advancement and economic rejuvenation.21 A close examination of China's foreign relations since the early 1980s suggests that Beijing had put increasingly heavier emphasis on a cooperative strategy than on a confrontational one. Of course, this is not to argue to the effect that China has completely abandoned its military-political strategy: national security and territorial integrity still remain its top priorities. It is only suggested here that, given the failures of the Soviet Union and, to a lesser extent, of the United States to cope with their domestic economic problems, China did not find it difficult to realize that it was highly imperative to assign

20

Lawrence C. Reardon, The Reluctant Dragon: Crisis Cycles in Chinese Foreign Economic Policy (Hong Kong: University of Hong Kong Press, 2002), Chapters 7-8; and David Zweig, Internationalizing China: Domestic Interests and Global Linkages (Ithaca: Cornell University Press, 2002). 21 Richard Rosecrance, The Rise of the Trading State: Commerce and Conquest in the Modern World (New York: Basic Books, 1986), pp. ix, 223-

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more weight to the cooperative strategy in managing international affairs.22 At the core of this trading strategy lies a genuine desire for cooperation, which is generated only "when actors adjust their behavior to the actual or anticipated preferences of others, through a process of policy coordination."23 The reduction of confrontational ideology and dogmatic slogans in China's foreign policy was the manifest outcome of such coordination designed to promote inter-state and regional cooperation. Cooperative strategy usually finds suitable ground first in the economic realm — i.e. "economic cooperation enhancing political ties" {jingji hezuo daidong zhengzhi hezuo). Unlike military-security issues, inter-state cooperation in the economic realm is deemed much less risky and potentially more beneficial due to the heightened willingness to reciprocate and to the relatively low costs involved in the case of betrayal.24 China's more active participation in trade- and finance-related international organizations than in military and strategic ones is a good example in point.25 Spill-over effects are found in a wide range of cases. Expanding economic ties often led to the normalization of relations as the South Korea-China case best illustrates. Burgeoning exchanges also 22

See Seweryn Bialer, The Soviet Paradox: External Expansion, Internal Decline (New York: Basic Books, 1986). For China's acute learning from the Soviet case, see Lu Nanquan, Sulian xingwang sbilun (On the History of the Soviet Collapse) (Beijing: Zhongguo shehuikexue chubanshe, 2004), 2nd ed. 23 Robert Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984), p. 51. 24 Charles Lipson, "International Cooperation in Economic and Security Affairs," World Politics, Vol. 37, No. 1 (October 1984), pp. 1-23. 25 See Margaret Pearson, "China's Integration into the International Trade and Investment Regime," in Elizabeth Economy and Michel Oksenberg (eds.), China Joins the World: Progress and Prospects (New York: Council on Foreign Relations, 1999), pp- 161-205; Jianwei Wang, "Managing Conflict: Chinese Perspectives on Multilateral Diplomacy and Collective Security," in Yong Deng and Fei-ling Wang (eds.), In the Eyes of the Dragon: China Views the World (Lanham: Rowman and Littlefield, 1999), pp. 83-84; and Bates Gill and Evan S. Medeiros, "Foreign and Domestic Influences on China's Arms Control and Nonproliferation Policies," The China Quarterly, No. 161 (March 2000), pp. 89-92.

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facilitated the integration of scattered and dispersed economic dynamism in the region as CAFTA demonstrates. In many cases, spill-over effects were detected in transforming the main mode of interactions from private to governmental, from informal to formal, from economic to political and, quite often, from bilateral to multilateral. Once cooperation gained a foothold, both China and regional states immediately recognized the value of cooperation in trade, investment, tourism,- and cultural, athletic, educational and postal exchanges that followed. Consequently, in the minds of the decisionmakers, the "weight" of future cooperative exchanges was considerably enhanced. That is, the mutually beneficial nature of the initial cooperation made the participant states highly appreciate the prospect for continued and expanded interaction for the future.26 Problems and limits do exist, however. It appears that effects of cooperative trading strategy only spill over and do not always suffice to change the fundamental nature of inter-state interaction.27 The increase in regional interdependence is not automatically translated into the formation of regionalism. That is, as the two most notable cases of Sino-Japanese and cross-Strait relations illustrate, expanding economic ties does not always and necessarily alter the political nature of the relationship between the concerned states. The former case is rooted in historical and perceptual problems that economics cannot easily wipe out, whereas the latter originates from the territorial and structural problems. 28 26

See Robert Axelrod, The Evolution of Cooperation (New York: Basic, 1984); and Arthur A, Stein, Why Nations Cooperate: Circumstances and Choices in International Relations (Ithaca: Cornell University Press, 1990). 27 Erik Gartzke, "The Classical Liberals Were Just Lucky: A Few Thoughts about Interdependence and Peace," in Edward D. Mansfield and Brian M. Pollins (eds.), Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate (Ann Arbor: University of Michigan Press, 2003), pp. 96-110. 28 See Gilbert Rozman, "China's Changing Images of Japan, 1989-2001: The Struggle to Balance Partnership and Rivalry," International Relations of the Asia-Pacific, Vol. 2 (2002), pp. 95-129; and Lam Peng Er, "The Apology Issue: Japan's Differing Approaches toward China and South Korea," American Asian Review, Vol. 20, No. 3 (Fall 2002), pp. 31-54.

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Historical/Perceptual Approach Northeast Asia is full of tragic histories, painful memories and the wounds that never seem to heal. Despite the powers and benefits of inter-state cooperation mentioned earlier, attaining a fertile soil for it will be more than difficult mainly because of such historical backgrounds and perceptual problems prevalent in this region. Without consciously reflecting on the unfortunate past and resolving the intricate problems of memory and heritage, regional cooperation will be hard to accomplish, intermittent efforts notwithstanding.29 This historical-perceptual problem has three "faces." The first concerns the memories, wounds and pains associated with the unfortunate past shared by the region. Whereas the "German question" already became a bygone concept in the context of Europe once characterized with constant bloody wars, the "Japan question" still is a contemporary problem waiting to be resolved. It would be difficult, if not impossible, to lay down a genuinely meaningful framework of regional cooperation in Northeast Asia without first solving the "Japan problem."30 China is at the heart of this equation as Sino-Japanese relations have been a main dependent variable, while Korea-Japan dynamics constitute another. 31 Crucial discrepancies are found in terms of threat perception among the United States, China and South Korea concerning Japan. While Beijing and Seoul appear to share strategic concerns regarding the rise of a "militarist" Japan, the United States has no such worries whatsoever.32 Are China and Korea willing and capable of embracing Japan regardless of its position on the wartime past? If the answer is a negative, Northeast Asia is perhaps building an unbuildable.

29

Gerrit W. Gong (ed.), Remembering and Forgetting: The Legacy of War and Peace in East Asia (Washington, D.C.: CSIS, 1996). 30 See Nicholas D. Kristof, "The Problem of Memory," Foreign Affairs, Vol. 77, No. 6 (November-December 1998), pp. 37^931 See Rozman, Northeast Asia's Stunted Regionalism, Chapters 4-5. 32 See, for instance, Harris Poll #8, 31 January 2001, Table 2.

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The second face refers to the neo-traditional revival of irredentist tendencies. As noted earlier, with the demise of the Cold War and ideological skirmishes, more conventional sources of inter-state conflict have come to the fore. Most notably, territorial claims involving Dokdo, Diaoyutai/Senkaku, the Spratlys, and the exclusive economic zones (EEZs) tend to perform as crucial hurdles in promoting genuine cooperation in Northeast Asia.33 On top of that, history controversies have also erupted to put a damp on the overall atmosphere for regional cooperation in Northeast Asia. Japan's strenuous efforts to whitewash historical facts about its wartime atrocities — the most recent one being the Husosha textbook case — need no further elaboration. The publication of distorted history textbooks and intermittent non-sense comments by its politicians add fuel to the negative perceptions in the region of Japan. 34 In recent years, China also joined by claiming the entire history of Kokuryo — an ancient Korean dynasty — as China's "local history" (difang zhengquanshi),35 The third face refers to the geopolitical curse of Northeast Asia in which, historically, most of the major players were global powers with high strategic stakes in the region. Unfortunately, the interests of these major players have not necessarily coincided or always well aligned across the board. Quite the contrary has been the case, as demonstrated by the cases of the Russian gas pipeline and the North Korean nuclear conundrum. As a matter of fact, crosscutting interests 33

For the territorial disputes involving China, see Chien-peng Chung, Domestic Politics, International Bargaining and China's Territorial Disputes (London: RoutledgeCurzon, 2004), Chapters 3-6. 34 One Western media report characterizes Japan as the "The Republic of Amnesia." See The Ottawa Citizen, 28 June 2005. 35 For the "Northeast Project," see Nan Liming, "Hanguo dui zhongguo de wenhua kangyi" (South Korea's Cultural Objection to China), Yazhou zhoukan (Asia Weekly), 25 July 2004, pp. 16-17; Dong-a Ilbo, 3 December 2003, 25 August and 25 December 2004; Joong-ang Ilbo, 4 December 2003; and Washington Post, 23 September 2004. For the goals of the Northeast Project, see Ma Dazheng (ed.), Zhongguo dongbei bianjiang yanjiu (Study of China's Northeastern Border Areas) (Beijing: Zhongguo shehuikexue chubanshe, 2003).

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necessitate diverse groupings or line-ups depending on the policy issue concerned, thereby posing problems for regional coordination and cooperation. 36 Structural V i e w p o i n t Key problems and limits of regional cooperation are also rooted in the remnants of the Cold War structure and confrontational mentality in the Northeast Asian region. Despite the waves of detente on a global scale, the region of Northeast Asia is still plagued with confrontational alignments and realist perceptions, most notably in the Korean Peninsula and the Taiwan Strait. These structural and perceptual obstacles continue to prevent genuine frameworks for regional cooperation and identities from being forged. More specifically, the structural hurdle encompasses three different types of problems. First, it refers to the "path-dependent" problems founded largely on the United States-centered alliance structure best characterized by the hub-and-spoke system.37 The predominant role performed by the United States-centered alliance structure in the region and its totally bilateral nature has cultivated a soil not so favorable to multilateral frameworks for regional cooperation. As long as the United States maintains its status as primus inter pares in the region, the bilaterally oriented networks will continue to play a central role despite the intermittent efforts toward multilateralism. Second, East Asia's psychological ease with bilateral interactions may perhaps be rooted in the modus operandi and sub-consciousness inherited from the traditional Sinic world order (huayi zhixu). Although it had never been as explicitly stipulated as America's huband-spoke system was, the Sinic view of world order was mostly — if 36

Nicholas Eberstadt and Richard J. Ellings, "Assessing Interests and Objectives," in Eberstadt and Ellings (eds.), Korea's Future and Great Powers (Seattle and London: University of Washington Press, 2001), pp. 320-340. 37 See Robert D. Blackwill and Paul Dibb (eds.), America's Asian Alliances (Cambridge, MA: MIT Press, 2000).

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not totally — dyadic with China as the only civilization at the top. All other dynasties, tribes and royalties were to deal with China in a hierarchical manner and shared little horizontal linkages among themselves. 38 The region's receptivity to America's bilateral security and diplomatic arrangements might have been preconditioned by its long historical dealings with China. Third, despite the global demise of the Cold War, the reincarnation of a Cold-War type bifurcation could still come to the region of Northeast Asia. That is to say, if America's unilateralism should continue to stir up negative attitudes in the region toward Washington and if Sino-American rivalry should ripen, the China-RussiaNorth Korea ties may become solid again against the United States-Japan-South Korea bonds. The return of the confrontation between the continental and maritime allies as such will no doubt work against regional cooperation in Northeast Asia.39 CHINA'S ROLE IN NORTHEAST ASIAN COOPERATION: THREE EXAMPLES While, as noted earlier, China has been generally more proactive and forthcoming in promoting regional cooperation, significant variations are nevertheless found in the degree to which Beijing has scored success with regional initiatives and schemes of regional cooperation. In contrast with Southeast Asia where China's success with regional cooperation and multilateralism has been both apparent and remarkable, the same evaluation is not applicable to Northeast Asia. Three examples are thus provided here to show how difficult it has been for China and Northeast Asia to work toward the same goal and why.

38

See Mark Mancall, China at the Center: 300 Years of Foreign Policy (New York: Free Press, 1984); and Huang Zhilian, Yazhou de huaxia zhixu (China's World Order in Asia) (Hong Kong: Sanlian chubanshe, 1992). 39 For such a view, see Robert Sutter, "China Remains Wary of the US-led World Order," Yale Global, 18 June 2003 at , last accessed on 15 July 2005.

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C h i n a - J a p a n - K o r e a Free Trade A g r e e m e n t (CJK-FTA) Free Trade Agreements (FTA) are becoming increasingly popular around the globe. China has also been active and already signed an FTA with ASEAN, thus creating an economic region only smaller than North America and the European Union. It was also China that called for the signing of a Free Trade Agreement among China, Japan and Korea. In efforts not to be left out of a bilateral FTA between Japan and Korea under negotiations since 1998, Beijing suggested at the Phnom Penh summit in 2002 that studies be conducted on the feasibility of an FTA among China, Japan and Korea.40 Despite China's activism and efforts toward a CJK-FTA, little progress has so far been made. Of course, economic considerations were important as both Korea and Japan in particular have been highly concerned with the adverse impact of such an FTA on their agricultural produce market and farmers communities. While Korea has been more or less neutral toward a CJK-FTA scheme, Japan has been far more passive, if not negative, about a CJK-FTA although it has been more forthcoming toward attaining a bilateral FTA with Korea.41 Even in the negotiations for a Japan-Korea FTA, political factors have often played an important role. While the negotiations initially appeared to be making quick progresses, the Korea-Japan FTA negotiations are currently having a long stalemate since the sixth round in November 2004. The impasse has been due mainly to the Dokdo and textbook controversies stirred up by Tokyo.42 Political factors have also been a key obstacle to the negotiations over CJKFTA as the age-old enmity between Beijing and Tokyo — intermittently reinforced by problematic comments made by Japanese 40

Chia Siow Yue, "Economic Cooperation and Integration in East Asia," Asia-Pacific Review, Vol. 11, No. 1 (May 2004), p. 5. 41 See, for instance, "Japan Settles for 'Low-Risk, Low-Return' FTA Goals," Japan Times, 22 April 2005; and "Japan Cool to China Bid for a Free Trade Accord," International Herald Tribune, 20 May 2005. 42 "South Korea Blames Japan for a Free Trade Impasse," Financial Times, 28 June 2005.

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politicians — has been blocking the genuine efforts toward the regional multilateral scheme of cooperation. In a nutshell, history and perceptions still weigh in heavily even concerning the realm of economic cooperation in Northeast Asia.43 The Six-Party Talks (SPT) China's proactive and leading role in forging a non-economic multilateral framework of cooperation in Northeast Asia is most manifest in its effort to initiate and host the Six-Party Talks since 2003. Since Beijing had long been consistent in calling for the principle of noninterference with inter-Korean affairs, China's decision to participate in the four-party talk in 1997 was considered rather extraordinary. More importantly, Beijing's proactive effort to host the three-party talk and six party talks on the North Korean nuclear problem since 2003 came as a sheer surprise to the international community. Interpretations vary as to why China has become so proactive in forging a multilateral framework for resolving the North Korean nuclear conundrum since early 2003- Some say the change was due to Washington's pressure tactics, others attribute it to Beijing's worry over a possible military confrontation between the United States and North Korea, and still others suggest that China came to share with the United States the assessments of North Korea's improved nuclear capabilities. One additional factor was Beijing's newly pronounced foreign policy posture of "great-power diplomacy with responsibilities." A combination of these factors must have made China perform as the leading "facilitator" of SPT.44 43

Tang Sniping, "Institution Building under '10 + 3': Tackling the Practical Issues," Global Economic Review, Vol. 31, No. 4 (2003); and Kawai Masahiro, "East Asian Economic Regionalism: Progress and Challenges," Journal of East Asian Economics, Vol. 16, No. 1 (February 2005), p. 51. 44 David M. Lampton, "China: Fed up with North Korea," Washington Post, 4 June 2003; Joseph Kahn, "Turnaround by China: Center Stage as a Diplomatic Power," New York Times, 28 August 2003; and Jae Ho Chung, "China's Korea Policy under the New Leadership: Stealth Changes in the Making?" Journal of East Asian Affairs, Vol. 13, No. 1 (Spring/Summer 2004), pp. 7-11.

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As discussed in the previous section, Cold-War structural remnants and realist perceptions still dominate the politics in Northeast Asia. Despite Beijing's proactive efforts, the first two and a half years of the SPT failed to mete out a satisfactory solution to the North Korean nuclear problem. Only three rounds of SPT were held during this period without a visible solution. Not only did the United States maintain an ambivalent position concerning China's leading role in facilitating SPT, but Japan was also less than cooperative in dealing with the North Korean nuclear problem. 45 Furthermore, North Korea's astute bargaining tactics vis-a-vis China need no elaboration. It was even rumored that Beijing wished to shed its "sole" responsibilities by having SPT convened in each of the six participant countries, despite some earlier hint that China wanted to make SPT a China-centered regional security framework like the SCO.46 On 19 September 2005, the second stage of SPT's fourth round finally produced the joint statement on six items, including Pyongyang's commitment to abandon all nuclear weapons and existing nuclear programs. Despite the encouraging signs, however, optimism still is a luxury as the concerned parties have a long march ahead. Whether or not the SPT framework will be able to weather the process of agreeing upon action plans and verification schemes remains uncertain as the core issue is as much perceptual — i.e. the lack of trust between Washington and Pyongyang — as it is strategic and technical. A China-centered regional framework of problem-solving has nevertheless been tested with a reasonable degree of success. 47 SPT is a test product or pilot project that China has taken very seriously. While its life-span will undoubtedly depend upon the actual effect it may create on the denuclearization of North Korea, its future implications for the multilateral regional cooperation in Northeast

45

Other participant states have been critical of Japan's effort to link the abductees issue with the nuclear problem. 46 One knowledgeable Chinese admitted to the author that the idea of "BeijingSix" — a Northeast Asian equivalent of the Shanghai-Six — has been floating. 47 See, for instance, Michael Hirsh and Melinda Liu, "North Korea Hold'Em," Newsweek, 3 October 2005.

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Asia are perhaps much greater than we might simply take for granted. Proliferation Security Initiative (PSI) If China played a highly proactive and facilitating role in promoting the CJK-FTA and SPT, how has Beijing responded to similar multilateral efforts by other states, such as PSI? PSI is a United States-initiated measure of containing the proliferation of weapons of mass destruction, even at the expense of some sovereign rights of individual states. 48 Announced by President George W. Bush in May 2003, PSI has thus far been joined by 15 countries, including the three Asia-Pacific states of Japan, Singapore and Australia.49 China's official position on PSI has to date been two-fold. On one hand, Beijing agrees in principle that the spread of weapons of mass destruction need be strictly contained with some cooperative — global and regional — measures. On the other hand, Beijing also makes it clear that it has no intention whatsoever to join in such measures of boarding suspected vessels in high waters, which may violate the United Nations maritime laws.50 In the context of Northeast Asia, the main target of PSI is undoubtedly North Korea. Assuming that boarding the suspected vessel will not take place in the high waters out of the concern for the United Nations maritime laws, without the active support of China and South Korea, PSI against North Korea is not very likely to be successful. Given the "traditionally amicable ties" (cbuantong youyi guanxi) China has long sustained with North Korea, 48

PSFs scope is global in principle but it generally requires regional cooperation, i.e. cooperation of the neighboring states of the target country. 49 See Bureau of Nonproliferation, "The Proliferation Security Initiative," ; and Sharon Squassoni, "CRS Report for Congress: Proliferation Security Initiative," (last accessed on 3 July 2005). 50 "Zhongguo biaoming ju canyu fang kuosan anquan changyi" (China Refuses to Join PSI) (last accessed 21 June 2005).

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Washington is not counting on Beijing's support on this account. China's ambivalent posture on United States-initiated measures of regional security cooperation is manifest. CONCLUDING OBSERVATIONS It has been argued that the European experiences with regional integration and multilateralism are too often treated as an archetypal case rather than a — special — case.51 Just as Asia is no Europe, Northeast Asia bears little resemblance to Southeast Asia where multilateralism and regional cooperation appear to be more successful. Fundamentally, the question comes down to this: Can Northeast Asia go beyond the burdens of history and geopolitics? Despite China's proactive efforts and initiatives, particularly under the helm of Hu Jintao and the slogan of "peaceful development," the region of Northeast Asia is not very likely to get over with its painful memories and history. Equally important is the presence of the United States as the key player to be reckoned with. With two formal military alliances — with Japan and Korea — anchored in the region, Northeast Asia is clearly more important to Washington than Southeast Asia. America as the sole global hegemon — if not an empire — is bound to seek to have a say in many important regional issues. Often inevitable gaps in the perception of the United States and regional states may lead to tension and frictions in Northeast Asia, which will then reinforce the conviction of the United States that it need to reinforce its influence over the region.52 As the power gap between Washington and Beijing is further narrowed over the years, such a tendency may

51

See Shaun Breslin, "Studying Regionalism(s): Comparativism and Eurocentricism," paper presented at the international conference on China and East Asian Regionalism, sponsored by Fudan University, London School of Economics and Sciences Po. Paris, Shanghai, 7-8 January 2005. 52 See, for instance, Robert D. Blackwell, "An Action Agenda to Strengthen America's Alliances in the Asia-Pacific Region," in Blackwill and Dibb (eds.), America's Asian Alliances, Chapter 6.

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also accelerate, thereby further exacerbating the already fragile atmosphere for regional cooperation in the region. Inter-state cooperation, particularly on a multilateral basis, continues to pose a daunting challenge to Northeast Asia.53 The more painful memories and history the region shares, the more difficult for the regional states to trust each other even in economic realms, let alone security-related issues. Being a great chessboard of global politics and great-power diplomacy, the Northeast Asian region seems still barren for genuine regional cooperation. Increased interdependence rarely substitutes borders and patriotism, it appears.

53

This is true as well of East Asia in general, which goes through some divisive trends along the North-South axis. See, for instance, Hank Lim and Chyungly Lee (eds.), The Emerging North-South Divide in East Asia: A Reappraisal of Asian Regionalism (Singapore: Eastern Universities Press, 2004).

Chapter

China and Southeast Asia Cooperation: New Developments and Challenges Ihang Haibing

Based on the mutual efforts by both China and ASEAN, the cooperation mechanism and institutional base for China-ASEAN regional economic cooperation have improved gradually. Since the signing of the China-ASEAN Framework Agreement on Comprehensive Economic Cooperation by leaders from both China and ASEAN in Cambodia's capital Phnom Penh in November 2001, the steps toward regional economic cooperation have been pushed forward rapidly. The recent two agreements were signed in November 2004. The China-ASEAN Agreement on Trade in Goods and the China-ASEAN Agreement on Dispute Settlement suggest that the regional economic cooperation between China and ASEAN has entered the period of practical operation. Now, the ten-member ASEAN and China are discussing the construction of agreements on trade in services and investment. The ASEAN countries and China, dynamic economies in the world already with strong links in many important fields like agriculture, electronics, machinery, chemical, mineral, garment and textile, have seen their trade and investment ties grow substantially in a sustainable way in 541

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recent years. There are, however, still some problems in the process of deepening the regional economic cooperation, which need special attention from both sides; otherwise the regional economic integration process might be hampered. This article will discuss new developments and challenges existing after China and ASEAN initiated free trade area negotiation in 2001. Based on the analysis of the past achievement and new achievement in China-ASEAN regional economic cooperation, this article explores the weaknesses and problems involved in the cooperation. The first problem is the risk in the economic model of regional countries' development. China and most of ASEAN countries' economic growth mainly depend upon attracting FDI and promoting export, and both the capital resources and export market mainly focus on American and European countries. The second problem is limited capability of most ASEAN countries and China which may thwart the full realization of benefits of free trade area. The third problem is the lack of a converging force of the China-ASEAN free trade area. The coexistence of multi-level regional or sub-regional economic cooperation increased the barriers toward economic integration. In light of the above three points, how to correct the weaknesses and achieve the prosperity of Southeast Asia becomes a very important topic. HISTORICAL PROCESS AND THE NEW ACHIEVEMENTS OF CHINA-ASEAN REGIONAL ECONOMIC COOPERATION The historical process of economic cooperation between China and ASEAN can be divided into two phases. The first phase is mainly focused on getting in touch with each other and establishing communication (see Table 20.1). China officially recognized ASEAN in 1975In 1991, Foreign Minister Qian Qichen was invited to attend the 24th ASEAN Conference of Foreign Ministers, which witnessed the establishment of formal relations between the two sides. From 1991 to 2001, the trade and economic relations between China and ASEAN had been developing gradually, which finally led to the consensus to establish a free trade area.

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543

Table 20.1 Major Developments in China-ASEAN Cooperation in the First Phase 1975 July 1991 July 1992 July 1994

April 1995 July 1996

December 1997 November 2000 November 2001

China officially recognized ASEAN. Foreign Minister Qian Qichen was invited to attend the 24th ASEAN Meeting of Foreign Ministers. China became a Consulting Partner of ASEAN. with China as a Consulting Partner Country, Foreign Minister Qian Qichen attended the second ASEAN Conference of Foreign Ministers. In this meeting, two agreements were signed, which were concerned with establishing the ASEAN-China Joint Committee of Economic and Trade Cooperation and the ASEAN-China Joint Committee of Cooperation in Science and Technology. The first Consultation Meeting between China and ASEAN High Level Officials (Vice Foreign Minister) was held in Hangzhou. In the meeting of the 29th ASEAN Ministerial Meeting, China's status upgraded from Consulting Partner to Comprehensive Dialogue Partner. China attended first Informal Summit of ASEAN and China, Japan, South Korea (10 + 3). The fourth 1 0 + 1 Summit held in Singapore. In the fifth China and ASEAN 10 + 1 Summit, both parties agreed to establish a China-ASEAN free trade area in 10 years.

The second phase was marked by the signing of China-ASEAN Framework Agreement on Comprehensive Economic Cooperation by all the leaders on 4 November 2002. Hence, the China-ASEAN regional economic cooperation moved into the process of regional integration and entered a new historical era. This also marked the formal beginning of the free trade area between China and ASEAN (see Table 20.2). Since both parties agreed to establish a free trade area by 2012, by all account the China-ASEAN regional economic cooperation has reached a new level. There have been three following new developments in China-ASEAN cooperation since 2001. The first new development is that ASEAN-China bilateral trade exceeds 100 billion US dollars and the regional market integration process has been accelerated. According to statistics published by the Ministry of Commerce of PRC, China-ASEAN trade has increased by 18% since 1990 with ASEAN being the 5th trading partner of

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Zhang Haibing Table 20.2 Major Developments in China-ASEAN Cooperation in the Second Phase

November 2002

November 2002 April 2003 October 2003

October 2003 November 2004

November 2004

Leaders of China and ASEAN signed Framework Agreement on Comprehensive Economic Cooperation between China and ASEAN in Phnom Penh, Cambodia. Code of Conduct in the South China Sea Extraordinary Meeting on SARS between leaders of China and ASEAN was held in Bangkok. The seventh China-ASEAN 10 + 1 Summit was held in Bali Indonesia. Chinese Government declared to join the Treaty of Amity and Cooperation in Southeast Asia, and also signed Joint Declaration on Strategic Partner Relations toward Peace and Prosperity. China-Thailand Agreement on Zero Tariff Rate for Fruit and Vegetables was implemented. First ASEAN-China Expo held in Nanning, Guangxi Zhuang Autonomous Region of China. Chinese Government did this to push forward the Strategic Partner Relations toward Peace and Prosperity with ASEAN countries, as well as the negotiation and construction on a free trade area. Signed China-ASEAN Agreement on Trade in Goods and China-ASEAN Agreement on Dispute Settlement. Every ASEAN Member recognized China's market economy status.

China. In 2003, ASEAN-China bilateral trade reached 78.2 billion dollars. In 2004, ASEAN-China bilateral trade exceeded 100 billion US dollars for the first time, registering 105.88 billion dollars.1 After the signing of China-ASEAN Framework Agreement on Comprehensive Economic Cooperation in 2002, both sides accelerated the process of building the free trade area. In early June of 2004, Singapore followed Thailand's step to become a member of China-ASEAN Early-Harvest Plan. In this way, the trade liberalization process among these three countries has been accelerated. From the beginning of 2004 onward, China and ASEAN countries 1

According to trade statistics of China's Custom from 1990 to 2004, posted at the website of the General Bureau of Custom of PRC, at http://www.customs.gov.cn/ tongj ishuj v/index. asp.

China and Southeast Asia Cooperation 545

have started to decrease tariff rates for agricultural products. By 2006, about 600 agricultural products will enjoy zero tariff rates. In November 2004, both parties signed China-ASEAN Agreement on Trade in Goods and China-ASEAN Agreement on Depute Settlement. All the ASEAN members have recognized China's market economy status. China-ASEAN Agreement on Trade in Goods comprises 23 articles and three annexes. The agreement divides trade products from both parties into two kinds: normal products and sensitive products. The agreed schedule for reduction of tariff rate will be invoked completely. According to the agreement, China and six original ASEAN members (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) will reduce tariff rates of most normal products to zero before 2010. However, the other four new members of ASEAN (Myanmar, Cambodia, Lao and Vietnam) can wait until 2015. With respect to the few sensitive products, which were excluded from the zero tariff rate schedules, there has been binding agreement to reduce their tariff rates eventually (Table 20.3). The Agreement on Dispute Settlement deals with trade disputes between China and ASEAN and includes 18 articles. Based on dispute settlement mechanism under WTO system as well as analysis of the typical characteristics of a free trade area, the agreement addresses the following issues—the scope of related disputes, consulting procedure, conciliation and mediation, set-up, function, composition and procedure of the arbitral tribunal, enforcement of arbitral awards, compensation and suspension of concessions. The second new development in China-ASEAN cooperation in that institutional arrangement for regional economic cooperation has come into shape. The institutional arrangements for cooperation include: one highest cooperation mechanism and five working mechanisms. The China and ASEAN Summit meeting, which has been held annually since 1997, is the highest-level cooperation mechanism. Next to it are the following five parallel mechanisms that form the overall structure for the ASEAN-China dialogue: ASEAN-China Senior Officials Political Consultations, the ASEANChina Joint Committee on Cooperation (ACJCC), the ASEAN-China

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Table 20.3 Tariff Concession Schedule for the China-ASEAN Free Trade Area Covered items by HS code

Year

Tariff rate

2000

Average tariff rate of 3.87% inside ASEAN 0-5% for all ASEAN Members

all

all ASEAN members

above 85%

all

2001

Average tariff rate of 14% 0-5% for all ASEAN members

Singapore, Indonesia, Malaysia, Philippines, Brunei, Thailand China

2002

0-5% for all ASEAN members

all

2005

all

2006 2008 2010 2011

Average tariff rate of 11% for WTO members 0-5% for all ASEAN members 0-5% for all ASEAN members 0-5% for all ASEAN members Below 5%

2015

0% for all ASEAN members

all

2018

0% for all ASEAN members

all

2000

2001

90%

above 82% above 82% above 82%

Countries

Singapore, Indonesia, Malaysia, Philippines, Brunei, Thailand Singapore, Indonesia, Malaysia, Philippines, Brunei, Thailand China Vietnam Laos and Myanmar Cambodia all China-ASEAN FTA members Singapore, Indonesia, Malaysia, Philippines, Brunei, Thailand all ASEAN members

Joint Committee on Economic and Trade Cooperation, the ASEAN-China Joint Science and Technology Committee and the ASEAN Committee in Beijing (Table 20.4). The ACJCC acts as the coordinator of all the ASEAN-China mechanisms at the working level. The ACJCC oversees the ASEAN-China Joint Management Committee of the ASEAN-China Cooperation Fund, and works closely with ASEAN-China Business Council (ACBC). The ACJCC will review and approve cooperation projects to be financed by the fund.

China and Southeast Asia Cooperation 547 Table 20.4 China-ASEAN Regional Economic Cooperation Mechanism Top Cooperation Mechanism " 1 0 + 1 " Summit Meeting

i Five Operating Mechanisms

i ASEAN-China Senior Officials Political Consultations ASEAN-China Joint Committee on Cooperation ASEAN-China Joint Committee on Economic and Trade Cooperation ASEAN-China Joint Science and Technology ASEAN Committee in Beijing

The third new development in China-ASEAN cooperation is that the areas of cooperation have been continuously expanded under the framework of the China-ASEAN free trade area. The five cooperating areas include agriculture, information and communication technology, human resource development, exploitation of the Mekong River, and mutual investment. Coordinated by Asian Development Bank (ADB), the Pan-Asia railway connecting ASEAN countries and China has been put on the agenda. Part of the navigating lane of Lancang River and Mekong River has been connected. The cooperation between China and the ASEAN countries has undergone substantial development. There is also a China-ASEAN Cooperation Fund aiming at providing support for human resource development, training classes and seminars. China will add another five million dollars to this China-ASEAN Cooperation Fund in order to ensure the smooth implementation of China-ASEAN cooperation projects. Moreover, the Chinese Government will invest 15 million dollars to set up a special fund for Asian regional cooperation. As a demonstration of its support for ASEAN's integration, China has attached great importance to using the China-ASEAN Fund in support of the Human Resource Development Project in the Vientiane Action Plan.2 2

See the speech made by Premier Wen Jiabao at the 8th China-ASEAN Summit, "Deepening the Strategic Partnership Relation, Enhance Comprehensive Cooperation", posted at Xinhua News Agency website, at http://news.xinhuanet.com.

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Generally speaking, as Chinese Premier Wen Jiabao pointed out (at the 8th China and ASEAN Summit on 29 December 2004), progress has been made in four following areas in regional economic cooperation between China and the ASEAN. First, continuous dialogue on political issues enhanced mutual trust. Second, closer economic relations upgraded the level of cooperation. Third, dialogues on security issues brought out effective cooperation. Fourth, mutual cooperation expanded into every aspect with more abundant contents. Besides the four ministerial cooperation mechanisms, i.e. foreign affairs, economy, transportation, custom, the two parties added another two ministerial cooperation mechanisms. They are cooperation among Advocate-Generals and Ministers in charge of Juvenile Affairs. Mutual cooperation has been enhanced in many fields such as finance, agriculture, transportation, information and communication, public health, human resource, education, traveling, culture, science and technology as well as interaction of peoples. 3

CHALLENGES IN DEEPENING CEONA-ASEAN REGIONAL ECONOMIC COOPERATION Because of efforts by China and ASEAN in pushing forward regional economic cooperation, the cooperation mechanism and institutional basis have been improved greatly. Against the background of globalization, Southeast Asia grasps the opportunity and has achieved rapid growth. All countries in this region enjoy fairly high economic growth rates. According to the Chinese Statistic Bureau, China's economy grew at 9.5% in 2004. In 2004, ASEAN countries witnessed the fastest growth since Asian Financial Crisis. It is estimated that ASEAN economic growth rate in that year was 6.2%, higher than the 4.5% in last two years.4 According to ADB, in 2004 and 2005 annual 3

"Chinese Premier Wen Jiabao Spoke on Four New Developments in China-ASEAN Cooperation", http://news. enorth.com. en. 4 Wang Xiaomin, "Analysis and Prospect of ASEAN's Economic Development", available at the website of Chinese Academy of Social Science, at http://www. cass.net.cn/webnew/file/2005082632534.html.

China and Southeast Asia Cooperation 549

economic growth of developing countries in Asia-Pacific region can reach 7% and 6.7% respectively, East Asia 7.3% and 6.8%, and South Asia 6.4% and 7.2%, respectively.5 This relatively rapid growth benefits from the recovery of the world economy, especially the obvious driving effect of global trade. However, with the gradual deepening of China-ASEAN regional economic cooperation, the possible contribution of bilateral trade to intra-regional economic growth still has a lot of room for improvement. Given their current developing level, China and ASEAN have more competition than complementation due to similar trade and industry structure. With respect to attracting FDI, both parties are direct competitors, not major investors of one another.6 The disadvantages of China-ASEAN regional economic cooperation mainly lie in the lack of mutual trade dependence, mutual investment flow, economic infrastructure and cohesion. The first challenge is as follows—China and most of ASEAN countries achieve economic growth mainly through attracting FDI and promoting export. Their common dependence on American and European markets makes these economies vulnerable to impact of foreign investment and market changes. Asia is composed of 15 countries and regions. Among them seven countries or regions constitute the most active part of world economy (including Chinese Mainland, Chinese Hong Kong, Malaysia, Singapore, South Korea, Chinese Taiwan and Thailand). Except for South Korea and Taiwan, five of these seven economies are included into the scope of the China-ASEAN free trade area, and all the above-mentioned economies that had experienced extraordinary growth had a high investment ratio. According to the statistics published by the Secretariat of ASEAN, in 2003 ASEAN countries had 20.3 billion dollars inflow of foreign investment. Data given by China's State Statistics Bureau suggested that in 2004 China permitted 5

ADB: Asia Development Outlook 2004 Update, p. 120, see the electronic version available at http://www.adb.org. 6 John "Wong and Sarah Chan, "China-Asia Free Trade Agreement Shaping Future Economic Relations", Asian Survey, Vol. XLIII, No. 3, May/June 2003, p. 88.

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the establishment of 43,664 enterprises with foreign direct investment, increasing by 6.3% compare with 2003. The contracted FDI reached 153.5 billion US dollars in 2004, up by 33.4% from 2003, and the amount of FDI actually invested was 60.6 billion US dollars in 2004 with an increase of 13-3%. But it is difficult to sustain economic growth that merely relies on investment. If the investment ratio gets down, economic growth will consequently suffer. Another impressing phenomenon was the rapid increase of exports and the ratio of exports to GDP. China and ASEAN countries follow a similar path of generating economic growth through attracting foreign investment and promoting exports. The export-orientated economic growth pattern has high dependence on overseas market. China and ASEAN countries have similarity in this dependence on overseas market, which has increased the region's economic risk. The degree of internal trade dependence between China and ASEAN is still much lower than that on markets of US and EU. Although in 2004 the trade volume between China and ASEAN countries passed the 100 billion dollars level, it still lagged far behind the level of the US and EU markets (see Table 20.5). ASEAN ranked 5th in China's top 10 export markets, but it accounted for only 7.2% of total exports, which was much lower than 21.1% of US and 18.1% of EU.7 In addition, China and most ASEAN countries' central banks have accumulated large amount of reserve in US dollars, which are used to purchase American long-term bonds. Until the end of December 2004, Asian countries have got a position of 1.2 trillion US dollars value of American bonds, including about 1 trillion US dollars worth of long term bonds or bills. The data of US Department of Finance also demonstrated that in the past three years capital inflow from Asia accounted for 40% of total capital inflow to America. And this ratio nearly reached to 50% in 2004.8 We have to keep in mind that if America's huge trade and budget deficits remain at a dangerously high level, they would in turn 7 8

Source: website of Ministry of Commerce, PRC. Chinese Business Journal, 28 February 2005.

China and Southeast Asia Cooperation 551 Table 20.5 China's Imports from and Exports to Major Countries and Regions in 2004 (in One billion US dollars)

Countries and regions

Volume of export

Increases compared with last year %

Volume of import

China, Hong Kong Japan South Korea ASEAN EU Russia US

100.9 73.5 27.8 42.9 107.2 9.1 124.9

32.3 23.7 38.4 38.7 36.9 51.0 35.1

11.8 94.4 62.2 63.0 70.1 12.1 44.7

Increases compared wii last year % 6.1 27.3 44.3 33-1 28.8 24.7 31.9

threaten the stability and balance of world economy. Hence, this market risk can be significant. United States, EU and Japan are now major export markets for China and ASEAN countries. About 56% of China's exports and 57.4% of exports of four ASEAN countries (Singapore, Malaysia, Thailand and Philippines) are targeted at the markets of developed countries.9 According to the data published by ASEAN Secretariat, in 2003 ASEAN total exports reached 430.491 billion US dollars, including 56.918 billion dollars of exports to 15 countries of EU, 61.354 billion dollars of exports to United States, and 26.999 billion dollars of exports to China. In the top 10 export markets of the original six ASEAN countries, United States has a share of 14.2%, the EU 13.3% and China 6.4%.10 Hence both China and ASEAN rely heavily on the exports markets of developed countries and can be vulnerable to disruption at these markets. The second challenge is that although regional economic cooperation between China and ASEAN does not lack institutional support, limited capability of some member countries has impeded 9

John Wong and Sarah Chan, "China-Asia Free Trade Agreement Shaping Future Economic Relations", Asian Survey, Vol. XLIII, No. 3, May/June 2003, p. 88. 10 ASEAN Statistical Yearbook 2004, see the electronic version available at http://www.aseansec.org.

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Zhang Haibing

the full realization of benefits of the free trade area. The limited capability of countries refers to limited capability of integrating with the world economy, reflected in the amount of outward investment and limited trade, a low level of development, underdeveloped infrastructure, etc. From an institutional perspective, the success of regional free trade area should at least include following aspects— pushing forward by major members, guarantee and improvement of compulsory institutional restraint, effectively managed organization, economic aid plan in support of balanced development in the region.11 From a practical viewpoint, the successful experiences of EU's regional integration suggested that the following are important elements for regional economic cooperation—formation of ideas for cooperation, selection of major countries, appropriate discovery of common interests, effective implementation of policy instrument, and effective institutional restraint.12 As far as the China-ASEAN free trade area is concerned, the institutional framework for regional cooperation has come into being. Observing from the aspect of new development of the China-ASEAN free trade area, we can say that the governments have done many supporting works and constantly strived to eliminate barriers to the establishment of the free trade area. However, the ratio of bilateral trade to total trade is still low, accompanied by a relatively small scale of mutual investment. The major reason still lies in weakness in regional economic basis, which means that most of the member countries have a low level of economic infrastructure construction, such as roads and transportation, logistical network, technical platform, etc. In addition, there exists the issue of regional development gap in both China and ASEAN countries. Nearly half of the ASEAN countries (Table 20.6) face the same challenges in the fields of poverty reduction, education and environmental protection. 11

Liu Jun, Legal Aspects of Regional Trade Arrangement, Chinese edition, Zhongxin Publishing House, 2004, p. 8. 12 Zhang Haibing, "Lessons from the Process of European Integration to be learned by East Asian Integration", World Economic Research (Shijie Jingji Yanjiu), No. 4, 2003, p. 75.

China and Southeast Asia Cooperation 553 Table 20.6 GDP per capita Current price (US dollars) Country Brunei Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam China

1996

1997

17,096 317 1,167 396 4,766 109 1,184 25,127 3,134 337 667

16,227 320 1,128 360 4,672 100 1,157 25,147 2,656 361 726

2000

2001

2002

11,961 12,670 12,751 265 295 291 488 693 731 259 285 329 3,257 3,485 3,881 144 210 189 896 980 1018 20,892 20,611 22,757 1,900 2,046 2,029 361 374 403 758 788 852

12,121 283 688 328 3,698 162 924 20,553 1,887 415 921

12,070 296 820 333 3,924 175 959 20,823 2,050 439 989

1998

1999

2003

2004

12,971 15,612 314 310 973 1,165 362 415 4,198 4,624 167 179 973 1,013 20,987 24,740 2,291 2,521 481 534 1,272 1,097

Sources: ASEAN Secretariat, http://www.aseansec.org/13100.htm, IMF World Economic Outlook Database, September 2005, http://www.imf.org/external/pubs/ft/ weo/2005/02/data/dbcdatm.cfm.

Hence enhancing the construction of infrastructures in China and ASEAN countries is an important and arduous job. With respect to adjustment of goods for trade and industrial structure, both China and ASEAN countries need to enhance their cooperation further. The continuous increase of bilateral trade does not mean the deepening of economic integration and mutual dependence, Singapore being the only exception.13 There are complementarities in goods of natural resource between China and ASEAN countries, but there exists huge competition in the area of manufactured goods. China's economic growth will expand imports of raw products such as energy and timber, but as far as those labor-intensive manufactured products with low content of technology are concerned, the competition between both parties is very clear. How to solve this problem? Some scholars suggest that it could be handled by specialization and specific division of labor in agriculture, manufacturing industry, and 13

According to statistics from Department of Asian Affairs of Ministry of Commerce of PRC, since 1990, trade volume between Singapore and China has been accounting for 1/5 to 2/5 of total trade volume between ASEAN and China. In 2003, trade volume between China and Singapore was 19-352 billion dollars, with the amount of 2004 being 26.684 billion dollars.

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service industry especially tourism between both parties. For example, ASEAN countries can increase imports of agricultural products (such as corn and beef) from China, as well as investment in areas of service industry that witness an increase in demand in China (such as consulting, finance, education, management and urban area planning etc.) bringing benefits to ASEAN countries. From the viewpoint of China, it can gain profit through different labor advantages. For example, China has advantage in processing of tomato and many goods such as fruit, flowers, and vegetables. It can also enhance cooperation with ASEAN in such advantageous areas as agricultural machinery, Chinese medicine and food processing.14 There is still relatively low mutual investment, which suggests that regional economic growth still needs a local driving force. Even though China attracts a large amount of foreign capital, the investment inflow from ASEAN countries remains limited. On the other hand, China's investment in ASEAN countries occupies even smaller share in the total foreign investment in ASEAN countries. China has relatively low investment in ASEAN countries compared with countries like Japan, United States, EU and South Korea. According to latest statistics from ASEAN, from 1995 to 2003, FDI from China only amounted to 0.29% of total FDI entering ASEAN countries. Even when added with Hong Kong, this ratio is only 3.55%, with a large margin in comparison of the EU (28.83%), the United States (16.47%) and Japan (12.90%). Recently China and ASEAN have signed Agreement on Trade in Goods under the CAFTA framework. The negotiations on Trade in Service and Investment are also underway. The cooperation in such areas as trade and investment will be enhanced greatly. The third challenge is that the China-ASEAN free trade area lacks a strong converging force, and China-ASEAN cannot act as one union. In addition, the coexistence of multi-level regional or sub-regional economic cooperation increases the bargaining cost of Southeast Asia's further integration. 14

Nicolas Lardy, Integrating China Into the World Economy, Brookings Institution, Washington DC, 2002, p. 14; Frederick W. Crook, "The WTO Impact on China's Agricultural Sector", China Business Review, March-April 2002, p. 16.

China and Southeast Asia Cooperation 555

Beside the China-ASEAN free trade area, there are other multilateral or bilateral free trade arrangements including ASEAN or its members. Some of these are still in the process of official discussion and study. When ASEAN and China reached an agreement on the free trade area, ASEAN also discussed bilateral free trade agreements with Japan and South Korea, respectively. Some scholars have commented as follows on this issue: "ASEAN signed Framework Agreement on a free trade area with China. At the same time ASEAN signed or is preparing to sign similar Free Trade Agreement with Japan and South Korea. It also started the process of modifying old or signing new cooperation treaty. Although these actions demonstrate its usual balanced foreign policy, we cannot ignore the implied intention of deterring and restricting China by using the power and influence of United States and Japan." 15 For example, Thai Prime Minister Thaksin visited New Delhi on 3 June 2005, which was his third visit to New Delhi in five years. The Foreign Affairs Ministry spokesman Sihasak Phuangketkeow remarked: "Rather, ASEAN, through its engagement of both China and India, is a bridge, a conduit. There is enough room for both India and China."16 Thailand sees India as the key to reducing dependence on the US market. So all kinds and levels of bilateral agreements between member countries of ASEAN-China FTA and outside countries have been established, which in the long run will increase the bargaining cost of Southeast Asia deep, wide and uniform regional integration. What is the future of Southeast Asia cooperation? Whatever is the mode, "10 plus 1" or "10 plus 3", ASEAN plays an important role in East Asia regional economic cooperation. In 2003, India also tried to set up closer economic relations with ASEAN. This shows that the special status of ASEAN in Asian regional economic cooperation. At the same time, China is also showing interest in establishing cooperation mechanism with India. Why don't ASEAN and China act as one 15

Qiu Danyang, "China-ASEAN Free Trade Area: China's Peaceful Rising in Terms of Geo-economics", Contemporary Asia-Pacific, No. 1, 2005, p. 12. 16 Nirmal Ghosh, "Thaksin in India to keep FTA talks going", The Strait Times, 4 June 2005.

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union and talk with India to build FTA between ASEAN-India-China? One reason is diversity, and the other is that China and India are too big for ASEAN to handle even as its partner. The internal cohesion of ASEAN has also faced challenges. Some NICs with rapid economic growth signed agreement with countries outside ASEAN to set up bilateral free trade arrangement, with a view to have more development opportunities. For example, Singapore signed free trade agreements with Japan, New Zealand, Australia and United States at the same time .The Philippines has also reached a bilateral free trade agreement with Japan. Thailand, Brunei and Malaysia are negotiating bilateral free trade agreements with Japan. Improving cooperation with external countries and areas is necessary for ASEAN countries and China, but deep cooperation inside ASEAN and ASEAN-China is most important. In short, China and ASEAN need to pay more attention to inside cooperation and achieve balanced development between them.

CONCLUSIONS In conclusion, with respect to the China-ASEAN free trade area, based on the gradual improvement of institutional framework, the key to further deepening of regional economic cooperation is to promote intra-regional mutual trade and investment as well as regional cohesion. In the era of globalization, ASEAN and China will face more and more challenges. In my view, if most of ASEAN countries and China remain outward looking and emphasize bilateral free trade agreements with outside countries, instead of paying more attention to becoming more closed, their cooperation will lose its internal power and weaken the status of the Southeast Asia as a whole in the world. The China-ASEAN free trade area should consider more about regional building such as improving internal trade, FDI, tourism, transport, human resources training, and communication, which will bring more benefits in the future.

Index

Absentee ownership, 271, 274 Administration, 14, 16, 23, 25, 43, 57, 65, 72, 74, 77-78, 82-84, 86, 88-89, 91, 95, 97, 107, 110, 122-124, 154, 164-165, 173-177, 180, 192-196, 199, 201-204, 206-207, 211-216, 267, 269, 311, 313-314, 316, 347, 351-352, 364, 367-370, 374, 376, 415, 421, 425, 427, 429, 433, 481, 485^87, 489-491, 497^99, 503, 506, 514, 517

Administrative procedures, 195 Administrative punishment, 197-198, 214 Administrative reform, 192 Adverse selection in health insurance, 439, 451^53, 455, 458-460, 463 Advertising revenue, 145 "A harmonious society" (hexie sbehui)., 72 Allianz, 254 American Express, 254 ASEAN Regional Forum(ARF), 24, 525 Asset management companies, 15, 253 Association of Southeast Asian Nations (ASEAN), 24-25, 29, 232, 240, 493, 503, 524-525, 534, 541-555 Audit storm, 204 Auditing reform, 155, 170, 174-175, 183, 185-186, 188-189

Administrative Law, 166, 192, 195, 198, 200-201, 210 Administrative legalization reform, 155, 163, 165, 185-186, 188 Administrative licensing, 14, 196-199, 209, 215 Administrative litigation, 14, 196, 210-212, 214 Administrative management system, 195

557

558 Index Bank of America, 249 Bank of China, 254, 362, 373 Bank of England, 254 Basel I, 257 Basel II, 257 Basic subsistence guarantee, 341 Bond market, 16, 252, 255 Building better governance, 103 Cadre recruitment reforms, 155, 182 Capitation payments in primary care, 465 Centrally Administrated Enterprises (CAEs), 16-17, 270-271, 273-275 Central Military Commission (CMC), 4, 6, 10, 34, 85, 91 Chambers of commerce, 104,109-111, 113-117 China, 3-26, 28-29, 34-42, 45-48, 50-53, 58-59, 61-77, 83-85, 87-95, 97-105, 107, 109-110, 114-117, 119-120, 122-136, 138-141, 143-146, 148-150, 154, 156, 158, 161-166, 171-175, 179-181, 191-200, 202, 204-216. 219-257, 259-275, 277-299, 301-313, 315-319, 323-339, 342, 344-347, 349-350, 352-367, 370-371, 373, 375, 377, 379-388, 390-400, 402-403, 406-407, 409-437, 439-445, 447, 448, 452-454, 456-458, 463, 467-480, 483, 485-517, 519-531, 533-539, 541-556 China and Southeast Asia, 29, 541 China Banking Regulatory Commission (CBRC), 244, 254, 256-257 China development bank, 252 China Insurance Regulatory Commission (CIRC), 256

China Securities Regulatory Commission (CSRC), 244, 254-257, 269, 272 China's peaceful rise (peaceful development), 9, 23, 24, 29, 524, 538 Chinese constitution, 67, 191, 203, 229 Chinese government, 18, 20-22, 71, 117, 162, 193-194, 196, 200, 210, 265, 302, 318, 343, 355, 366, 379-381, 386, 390, 392-394, 397-398, 400, 402, 407, 409, 416, 420, 423, 425, 428, 430, 433-434, 444, 452, 469-470, 472-473, 480, 544, 547 Chinese style checks and balances, 65 Citigroup, 249 Citizen resistance, 20, 379-380, 386, 397-398, 400-402 Civil resistance, 381-384, 386, 388, 394, 402 Collective action, 212, 380-381, 383-392, 396-398, 400, 402 Collective petitions, 336, 381, 387, 389, 395-396, 401 Commission for Disciplinary Inspection, 153, 157, 165, 168-169, 171-173, 175, 186 Company Law, 261, 272-273 Constitution, 13, 45, 51, 67, 88, 96, 132, 171, 173-175, 181, 186, 191-192, 194-195, 203, 229, 364, 382 Constitutional change, 192 Cooperative medical system, 22, 443, 458-459 Cooperative strategy, 527-528 Corporate bond market, 252 Corporate governance, 16, 28, 253, 255-256, 259, 267, 270-271, 274-275 Corporatization, 263, 271, 274

Index 559 Corruption, 7-8, 10, 13-14, 17-18, 27, 47, 49, 68, 88, 103, 138, 148-149, 153-155, 158, 164, 170, 184-185, 197, 204-210, 215, 288-289, 298-299, 316, 331, 350, 390, 392, 397, 400, 472 Criticism of "public intellectuals", 101 Critique of non-liberalism and Washington consensus, 11, 27, 97, 117 Decommodification of social rights, 408 Deductibles and co-payments in health insurance plans, 443, 445, 465 Demand-side incentives in health care, 445, 465 Democratic consultation, 12, 104—109, 116-117 Department of Propaganda, 12,119, 122, 125, 127 Derivative products, 255 Development, 7-9, 11, 14-15, 23-26, 29, 34-35, 38, 41, 43, 4 5 ^ 6 , 51, 54, 57-59, 64-66, 68-73, 87-90, 104-105, 108-111, 113-114, 116, 124, 130, 132, 135-136, 138, 144, 146, 175, 187, 189, 191-193, 196, 198, 202, 204-205, 209-211, 215, 220-241, 248, 252, 255, 286-290, 298, 301-302, 305, 307, 309-312, 316, 319, 324-327, 329, 331, 339-340, 342-343, 345-349, 352-354, 372, 375, 381, 391, 399-400, 405^07, 409-410, 413, 417, 428, 431, 434, 440, 442, 460-461, 467-471, 478-480, 485, 491-492, 494, 496, 500, 502-503, 506-508, 510-511, 517, 521, 524, 538, 541-545, 547-549, 552, 556 Diagnosis-related groups (DRG), 448-450, 455^56, 465

Disruptive action, 20-21, 380, 387, 390, 398, 402-403 Disruptiveness, 388 Dual track pricing system, 260 East and Southeast Asia, 17, 286, 291, 294-296, 298-299 Employee share option plans, 254 Employment environment, 363, 367-370, 374 "Enclosure" movement (quandi yundong), 73 Enterprise groups, 261 Enterprise restructuring, 424 Equity markets, 15, 251-252, 257 Factional politics, 6-7, 65, 87-88 Factions, 6, 10-11, 27, 44, 65-66, 83, 85 balance, 4, 6, 26, 29, 44, 85, 140, 146-147, 205, 250, 253, 269, 315, 368, 457, 476, 529, 551 economic technocrats, 6-7 overlap of identity, 103, 205, 316 Factors of production, 221, 260, 303 Falun Gong, 381, 385 Fee contrals in health care, 21-22, 239, 327, 345, 350, 406, 410-414, 418-423, 433-434, 437, 439-441, 443-449, 451-459, 461-465, 478 Financial depth index, 246 Financial Services Authority (FSA), 244, 257 Five strata, 334 Foreign direct investment, 17, 226, 228-229, 240, 277-279, 283, 285, 288-290, 299, 550 Four income groups, 326-327 Free health care, 410-411, 413, 418, 420, 422 Free trade, 15, 24-25, 227, 232, 240, 520-521, 525, 534, 542-547, 549, 551-552, 554-556

560 Index Free Trade Agreement (FTA), 227, 521 Free trade agreements, 15, 232, 534-556 Fundholding in primary care, 450, 465

Hu's political skills, 4, 7, 84, 154-155, 182, 184-185, 187 Hu's successor, 4, 27, 34, 36-39, 41-42, 44, 53, 56, 76-77 Hu-Wen New Deal, 3, 9, 12, 18, 26

General administration of press and publication, 122-123, 176 Gini coefficient, 19, 326-329, 331, 347 Global financial stock, 244-247 Globalization, 82, 97, 99-100, 140, 220, 240, 242, 280, 298, 330, 519-520, 548, 556 Goldman Sachs, 254 G0sta Esping-Andersen, 408, 423 Governance, 6, 8-9, 11-13, 16, 25, 28, 31, 38, 49, 89, 91-93, 103-104, 110, 117, 138, 153, 163, 175, 179-181, 191, 193, 195, 199-201, 204-205, 215, 253, 255-256, 259, 261, 267, 270-271, 274-275, 325, 342, 477-478, 481 "Good neighborly diplomacy", 24, 523 "Governing capacity", 8, 67, 76 Government debt securities, 247 Government response to protests, 380, 385-386, 402 Greater Mekong Region Summit (GMS), 24, 524

ICBC, 248, 254 Ideological foundation, 303 Income gaps (urban-rural, regional), 329-330, 337, 345 Income inequalities, 18-19, 27, 323, 346, Independent directors, 254, 256, 272 Independent rating agencies, 255 Information asymmetry in health care markets, 438-439, 445-446, 450, 455, 465 Insider control, 271 International accounting standards, 253 Internet, 11, 67, 89, 94, 119-120, 124, 128, 139, 146, 169, 202, 204-205, 507 Intra-CCP partisanship, 87 Investment creation, 291 Investment diversion, 290—291 Investor compensation scheme, 254 IPOs, 255

Health care safety net, 433 Hollowing out, 277-278 Household responsibility system, 222, 307-308 Hu Jintao, 3, 5, 7-8, 12, 24, 33, 41-42, 52-53, 61-68, 71, 77-78, 80-81, 85-86, 88-91, 93, 95-98, 116, 122, 133-134, 136, 153, 182, 194, 209, 215, 323, 339-340, 345, 409, 433, 471, 473, 503, 520, 538 Hukou system, 19, 232, 351, 353-356, 359, 365-366

Japan question, 530 Jiang Zemin, 4-5, 7, 10, 38, 42, 50-51, 53, 58, 62, 71, 77, 86, 91-93, 131, 194, 347, 391, 409, 503, 512 Jiao Guobiao, 119 Karl Polanyi, 405 Labor insurance, 21, 363, 412-413, 421-422, 426 Labor market segmentation, 356-357, 359, 361, 363-364, 367 Labor market, 19, 351-359, 361, 363-365, 367, 369, 372, 374, 391-392, 405-408, 414, 424, 477

Index 561 Labor mobility, 19, 351, 355-357, 359-360, 363, 365, 367, 373, 406 Labor reforms, 424, 426, 434 Labor shortage, 361-363, 367 Laid-off workers, 20, 26, 331, 334, 341, 368, 386-387, 390-392, 395, 398, 414, 424, 430 Land abuses, 18, 302, Land appropriation, 203,309-311, 313-316 Land market, 303, 309, 311-312, 315, 317-318, 400, Land policy, 9, 18, 302-303, 309, 311, 315-316, 318 Large and medium-size enterprises, 265-266 Large scale instances of unrest, 388 Latin America, 17, 245, 278-279, 286-288, 290-291, 294-299 Laura Cha, 256 Law administrative licensing, 14, 196, 197, 198, 199, 209, 215 Law enforcement, 94, 166, 192-193, 200-201, 207 Law on administrative litigation, 210-212 Law on administrative punishment, 197 Law on administrative review procedure, 198 Law on civil servants, 198, 200 Law, 8, 11, 13-14, 20, 22, 27-29, 31, 40, 42, 48, 58-59, 67, 75, 79, 81, 88, 93-97, 114, 127, 155-156, 163, 165-167, 176-177, 179-181, 183, 187-188, 191-207, 209-216, 231-232, 250, 261, 268, 270-273, 281, 309, 311, 313-314, 316, 363-365, 369, 371-372, 375, 382-383, 385-386, 401, 414, 424, 474, 476, 504, 527, 537 Laws and regulations, 93, 193, 195, 198, 201, 214, 231, 363, 369, 372, 476 Lawsuits, 212

Lay-off workers, 261 Leadership succession, 4-7, 10 age and two-term limits, 5 institutionalization, 4-5, 33, 37, 39-40, 64, 96, 106, 155 Two-line leadership, 10, 35-42, 49, 50 two-step installation of the core leader, 5 Lee Kuan Yew School of Public Policy, National University of Singapore, 243, 259, 440, 443, 453 Legal development, 192, 215 Legal liability, 212 Legal system, 26, 192-193, 200-201, 203, 214-215, 232, 241, 298 Li Changchun, 120, 133, 136 Li Keqiang, 78-79, 81 Li Yuanchao, 6, 78-81 Lifetime employment, 406, 414, 426 Linda Wong, 430 LiuYandong, 78-81 Liu Yunshan, 77, 79, 81, 101, 120, 126 London School of Economics (LSE), 244 Managed health care, 4, 7, 10, 16, 132, 248, 253, 260, 341, 381, 384, 415, 427, 429, 442, 450, 453, 456, 463, 552 Market reform, 19, 68, 131, 278, 289, 303, 351-353, 367, 369, 374, 391-392 Market transition, 358, 364, 406-407, 413, 430 Marketization, 4, 226, 405-406, 443, 453 Mass media, 13, 122, 125, 127-130, 143, 177, 202 Maternity insurance, 427-430, 434 McKinsey Global Institute, 244-247 Media and public opinion reform, 155, 170, 175, 183, 185, 188

562 Index Medical savings accounts/individual accounts, 415, 419, 421, 442, 445, 454, 457 Message of intolerance, 384, 386 Message of tolerance, 382, 386 Michael Mandelbaum, 410 Migrant rights, 363 Migration, 18, 222, 227, 232, 240, 351356, 358-361, 363-366, 368-369, 375, 468-469, 477^78, 519 Minimum income support, 407, 413, 430-431 Minimum subsistence guarantee, (also known as Minimum livelihood security system), 341-342, 430 Mixed messages, 380, 382 Mobility (inter-generational, intragenerational), 19, 73, 84, 92, 105, 323-324, 331-332, 334, 337-339, 345-346, 348-349, 351, 355-357, 359-361, 363-365, 367, 373, 406 Moral hazard in health insurance, 231, 438, 444-445 Multilateralism, 29, 524-526, 532-533, 538 Municipal pension funds, 257 Newspapers and periodicals, 141-142 Non-liberal/disciplinary state, 94 Non-performing loan (NPL), 15, 28, 249-250, 253 North Korean nuclear problem, 535-536 Nurturing the big while letting go the small SOEs (zhuada fangxiao), 261 Old-age pension, 406, 410-411, 414 "open selection and appointment of officials", 156, 345-346 Organization Department, 78, 80, 120, 135, 157-159, 160, 164 Ownership diversification, 263, 266

Party principle, 33, 127 Party's Image, 12, 119, 121, 134 Paternalism, 410-411 Peasants' tax burdens, 379, 393-394, 397-398 Pension reform, 414-415, 417, 424 People's Bank, 207, 258, 362, 373 People's Congress (or National People's Congress, 51, 74, 85-86, 113-114, 124, 136, 157, 159, 161, 173, 175, 179, 181, 192, 199, 346, 364, 471, 474, 504 People's Political Consultative Conference (or Chinese People's Political Consultative Conference, 6, 85, 113, 157, 159, 161, 179, 364 Peter Cooke, 254 Petitions, 11, 95, 135, 170, 336, 381, 387, 389-390, 392, 395-397, 399, 401 Police response, 379-380, 402 Policies for income redistribution, 3, 5, 7-12, 17, 19-20, 22-23, 34, 36, 43, 47, 51, 57, 62-63, 68, 77, 86, 88, 93-94, 100, 124, 127, 129, 137-138, 141, 170, 226-227, 229, 237, 279, 298-299, 301, 303, 307, 316, 318-319, 323-324, 330, 338-339, 342-344, 346, 348, 353, 365, 368-369, 373, 375-376, 379-380, 382, 392, 394, 399, 402, 407, 424, 439, 443, 450-451, 467-468, 470-472, 480-481, 486, 489, 496, 509, 514, 528 Policy change, 62, 72, 74, 379-380, 398, 402-403, 405, 479 Politiburo, 120, 122, 126, 133 Political reform, 4, 26, 38, 40, 51, 62-63, 76, 87-89, 104, 109, 117, 148, 154-156, 174, 182, 184-185, 187, 189

Index 563 Population policy, 23, 469, 471, 475, 478-481 Populism, 7, 62, 64 Poverty (relative and absolute), 8, 18, 21, 73, 302, 319, 323, 325-327, 329-331, 339-340, 346-350, 395, 409, 414, 425, 430-431, 433-434, 461, 552 Power transition theory, 490, 493-495, 498-499, 516 Price/earnings multiple, 255 Princelings, 6, 10, 80, 83 Private debt securities, 247 Proliferation security initiative (PSI), 520-521, 537 Propaganda machinery, 120, 122, 127 Property rights, 18, 198, 250, 301, 303, 313, 318-319, 406, 501 Prospective payment in health care, 448-450, 455 Protest, 9, 19-20, 26, 63-64, 69-70, 93, 95, 302, 331, 336, 381-383, 386-387, 389-390, 393-394, 402, 505, 512 Public notification, 117 Reform era, 19, 323-324, 329, 331, 337-338, 406, 423, 431, 434, 522 Regional cooperation, 24, 492, 520-521, 523, 525-526, 528, 530-533, 536-539, 547, 552 Regional development programs, 347 Regularized Party representative meeting, 165, 183 Residual approach, 409, 430, 432 Responsibility and resignation reform, 183 Results of redistribution policies, 346-350 Retired workers, 391-392

Rewarding programme, 472-473 Richard Titmuss, 409 Rule of Law, 8, 13-14, 20, 28, 31, 67, 88-89, 97, 187-188, 191-194, 198, 205, 211, 215-216, 231, 375 Ruling in accordance with law, 95 Securities industry, 251 Selective punishment, 385 Sex ratio, 23, 469, 475-476, 479-481 Shanghai Cooperation Organization (SCO), 24, 525-526 Shanghai Stock Exchange, 251 Shenzhen, 64, 70, 74, 131, 176, 180, 210, 227, 251, 270, 281, 308, 316, 347-348, 358, 362 Sinic world order, 532 Sino-US relations, 43, 48, 511, 514 Six-Party Talks (SPT), 29, 486-487, 491-492, 503, 506-508, 510-511, 516, 521, 526, 535 Social assistance, 21, 22, 405, 407-410, 430-436 Social conflict, 324, 335, 337, 379, 388, 392, 396 Social development Qsbebui jiansbe), 72 Social disruptions, 380, 402 Social health insurance, 21, 413, 418-423, 434, 457 Social insurance, 21-22, 405, 407^10, 412, 414-415, 417-419, 425, 427-428, 430, 434-436, 442-143, 445, 451-455, 457-458, 464 Social mobility, 19, 73, 323-324, 331-332, 334, 337-339, 345-346, 348-349 Social pension insurance, 21, 414-417 Social policy, 21, 406-410, 417, 433-434 Social protection, 27, 405, 407-ilO, 412, 414, 430, 434

564 Index Social risk pool, 442 Social security, 20-21, 93, 342, 347-350, 352, 357-359, 361-363, 366, 371-372, 374-375, 392, 409, 411-414, 421, 424-427, 429, 434, 442, 473-474, 479, 481 Social stability, 8, 94, 124, 138, 318, 334, 336-337, 368, 380-381, 385, 393-395, 397, 401 Social stratification, 19, 323, 331, 335 Social unrest, 100, 138, 227, 368, 379-381, 387, 394, 397, 401, 479 Source of conflict, 394 Southern metropolitan daily, 148-149 Special economic zones, 75, 227, 281, 308 State Compensation Law, 212-213 State socialism, 410 State-owned Assets Supervision and Administration Commission (SASAC), 16, 267-270, 274-275 State-owned enterprises (SOEs) reform, 16-17, 21-22, 28, 98-99, 224, 259, 260-263, 265, 267, 269-271, 274-275, 341, 392, 394, 398, 411, 414-415, 420, 424-425 Strikes, 64, 70, 74, 381-382, 383, 438, 445 Succession strategy and power consolidation, 42 Supervision and discipline reform, 170 Supply-side incentives in health care, 445, 449, 452, 455 Surplus labour, 222, 224, 240-241, 308, 363 Taiwan or Taiwan Strait, 29, 48, 67, 88, 504, 520, 532 Technological progress, 15, 220, 224, 229, 235, 237, 241, 303 Ten social strata, 332 Tertiary sector, 15, 232-233, 241

The ameliorative state, 11, 93 The Chinese Communist Youth League (CCYL), 64-65, 76-80, 82, 84-85 The Cultural Revolution, 26, 77, 80-81, 129, 307, 381, 412 The elitist coalition, 7, 11, 66, 82-84, 86-87, 90 "The intra-party democracy", 66, 164-165 The middle stratum (middle class), 334-335 The military's role in Chinese politics, 26, 39, 53, 121, 174, 191 The Ministry of Civil Affairs, 341, 413, 430-432 The Ministry of Labor and Social Security, 362, 371-372, 374, 426, 429, 442 The People's Liberation Army, 34, 503 The planned economy, 410-411 The populist coalition, 7, 10-11, 66, 82-84, 86-88, 90 The rise of China, 278, 290, 297-299, 488, 493-494, 517 The Shanghai Gang, 6-7, 10-11, 65, 83-85, 87 The workplace-based welfare system, 406, 411-414 Tiananmen incident, 95, 131, 381, 385, 513 Tony Neoh, 256 Total factor productivity, 224 Township and village enterprises, 222, 308 Trading strategy, 527-529 Transparency and accountability, 150, 193 Transparency reform, 155, 163, 167-169, 183, 185-186, 188

Index 565 Transparency, 8, 14, 27, 67, 150, 155, 163, 167-169, 183, 185-186, 188, 193, 198, 201, 203-205, 208, 257, 350 Tuanpai (political leaders who have advanced their careers through the CCYL), 6-7, 11, 64-65, 76-83, 85 Turnover rate, 259, 36l Unemployment insurance, 93, 366, 374, 423-425 Universal coverage, 21, 413, 416, 420-421, 425, 434, 452 Universal transfers, 408 Urban health insurance, 22, 442, 452, 454-455, 459, 462 Urbanization, 15, 22, 69, 107, 232-234, 241, 339, 349, 468, 477-478 US foreign policy, 485-492, 494-495, 497, 499, 511, 514 Welfare regimes, 21, 408, 410 Welfare state, 21, 93, 405-406, 408, 412, 414, 418, 434

Wenjiabao, 3, 6, 10, 38, 62, 64, 70, 85-86, 116, 136, 137, 148, 199, 323, 339, 342, 433, 471, 473, 478, 505, 547, 548 Workplace injury insurance, 426-428 Workplace unit, 406, 411-412 World Bank, 98, 206, 222, 224-226, 230, 233-234, 236, 238, 241, 257, 286, 324-328, 331, 346, 349, 355, 420, 440, 463 World Trade Organization, 15, 98, 193, 520 WTO law, 198, 214 WTO, 14-15, 28, 91, 98, 128, 191, 193, 195, 198, 200, 201, 214-215, 232, 240, 254, 274, 501, 520, 545-546, 554 Xinhua news agency, 78, 89, 101, 122-124, 132-134, 136, 547 Xiong Deming, 134, 137 Xitong, 127 Zeng Qinghong, 4, 7, 65, 77, 83, 85-86 Zhang Baoshun, 65, 78-79 Zhu Rongji, 6, 44, 85, 347, 409

CHINA INTO THE HU-WEN ERA Policy Initiatives and Challenges

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This volume is an updated survey and assessment of the recent policy initiatives of Hu Jintao and Wen Jiabao, which have come to be known as the Hu-Wen's New Deal. Individual chapters are written by scholars from different academic disciplines and backgrounds. These scholars come Irom Singapore, the United States, Australia, Korea, Hong Kong, Taiwan and Mainland China. Topics cover the patterns and process of leadership succession, emerging political factions, social unrest, sources of economic growth, income disparities, social security reform, land use policy, banking reform, corporate governance, labor and population policies, rule of law, and changes in the Party and ideology. On the external aspects, discussion includes China's changing relations with the U.S., Japan and ASKAN. In many ways, the Hu-Wen leadership today is still coming to grips witli the same issues and problems as discussed in this book.

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