Skip to content

Dangerous Milk Formula Sold in New York

According to a report from The Epoch Times, dangerous baby milk formula that caused babies heads to swell due to malnutrition was found in a local Chinatown supermarket in New York City. The Agriculture Department of New York City put an immediate ban on powdered milk imports from Xinjiang province, China, and is investigating whether all sales of powdered milk products should be restricted in the United States.

New York agriculture officials found that seven brands of powdered milk produced by Xinjiang Ili dairy company lacked the necessary requirements of protein, milk fat, calcium and magnesium set forth by the U.S. Food and Drug Administration. The Chinese government food inspection agency also considers the powdered milk products by Xinjiang Ili to be inadequate. The supermarket manager where the milk was found said that the products were purchased recently from a U.S. distributor and were not imported directly from China.

The New York Agriculture Department ordered all supermarkets in Chinatown to stop selling powdered milk products imported from China and is investigating the distribution company selling Xinjiang products. All powdered milk products have been removed from all supermarkets in Chinatown.

People were in an uproar last April when inferior powdered milk found in Fayang and Anhui provinces caused babies’ heads to swell while the growth of their lower body was stunted. More than 189 babies suffered from malnutrition that left at least 12 dead. Another incident in Guizhou province caused 150 children to become seriously ill from drinking staphylococcus-laced powdered milk.

Many blame the government’s lack of immediate action for the rash of contaminated food products on the market in China. Even after a product was found to cause serious illness and even death officials were reluctant to take action.


Milking China for Product Quality Control

“Warning – Follow instructions exactly. Prepare bottles and teats as directed. Do not change proportions of powder except on medical advice. Incorrect preparation can make your baby very ill……”

The above is typically found on labels of any brand of baby milk formula on most supermarket shelves in the West. However, following the instructions exactly wouldn’t have made much difference to little Yang Kaili, who may suffer permanent brain damage after being fed fake formula milk made in her homeland – China.

The news of the fatal formula milk, produced in over 140 factories across China, shocked the world. The LA Times reported in May 2004 that 13 babies died and more than 170 suffered serious malnutrition as a result of drinking the fake baby formula powder.

Many mothers in rural China turn to baby formula because they cannot produce enough of their own milk. The cheapest baby formula on the market, “Star of the Grasslands”, has been supplied for the past two years. The price made it very popular with many mothers, including Kaili’s mother. One month after Kaili started drinking the baby formula, her little head started to swell, her skin turned bright red and her eyes were reduced to slits. A similar agonizing fate has been suffered by hundreds of babies across China who drank the same baby formula.

In America many may not even think twice when buying baby formula for their babies. However, the Epoch Times recently reported that the fatal baby formulas made in China are also available on the streets of New York. Agriculture officials found that seven brands of powdered milk produced by Xinjiang Ili dairy company lacked the necessary requirements of protein, milk fat, calcium and magnesium set by the U.S. Food and Drug Administration.

This substandard milk formula is yet another example of the lack of quality control inside China’s factories and forced-labor camps. Numerous cases have also been reported in Epoch Times regarding other harmful products that are available to the consumers. For instance vegetables pickled in poisonous industrial salt and chemicals, and poisonous colorings added to noodles. According to the Asian Labor News database, a popular new type of rice grain called ‘laborer grain’ (min-gong liang) was found to contain carcinogens (an ingredient that could cause cancer). These incidents will no doubt make consumers think twice before buying ‘Made in China’ products.

An increasing number of major enterprises are shifting their production to Asia, attracted by the cheap labor. However one company’s cost cutting, could lead to thousand of people being poisoned. Is it worth it? Imagine buying a pair of Puma shoes that were sewn and glued by workers forced to work up to 16.5 hours a day, from 7:30 in the morning to midnight, six or seven days a week, for wages of just 31 cents an hour. According to The National Labor Committee, Puma is making a net profit of $12.24 per hour on each of their employee in China. Annually, Puma is reaping a profit of $38,189 on each worker. In a single factory, Puma’s profit from the workers can reach over $92 million a year.
With jobs and production lines shifting to Mainland China, what are the real costs and benefits at the end of the day? As China continues to report rapid economic growth, thousands of Americans are sinking into unemployment. On July 2, 2003, the American Textile Manufacturers Institute (ATMI) published a shocking report stating that more than 1,300 textile plants in the U.S. would have to close by early 2004, resulting in the loss of over 630,000 jobs. The U.S. textile and apparel clothing market will be entirely dependent to China if protective measures were not implemented in a timely manner.

Evidence suggests that consumers and manufacturers are finding it difficult to ignore the human cost and as well as workers’ rights when considering trade with China. In 2001, Swiss confectionary giant Nestle ordered 100,000 toy rabbits from the Beijing-based Mickey Toy Corporation. The toys were produced under inhumane conditions. Hundreds of women, many of whom were illegally detained Falun Gong practitioners, were forced to work up to 20 hours a day. Some were beaten or tortured if the quota was not fulfilled. What lies beneath the story is behind the production of each rabbit which lies incredible pain and suffering.

In recent years, the hair product industry has experienced a marked growth. Various hair accessories have flooded into U.S. and the world’s biggest manufacturer, Henan Rebecca Hair Products Inc, occupies one fourth of the U.S. market (June 22, 2003, issue of March into the International Big Circulation). Few people realize that Henan Rebecca Hair Products Inc, a multi-million dollar corporation, thrives because of slave labour.

It is naive to suggest that business is not about profits, but who said that profit and humanitarian concerns have to be mutually exclusive? Apart from the benefits of outsourcing and the increased profit margins, where do human lives fit in? Perhaps replacing “Made in China” tags with “Made in a Chinese Labor Camp” is one option? Inadequate transparency of information is not going away on the Mainland. These Asian partners will continue to do more than raise an eyebrow for the concerned consumer and prompt suppliers will have to re-consider the ethics of their business decisions.

The alarming lack of product quality control, the violation of workers’ rights in China is a grim reality hanging in the favorite business destination of the corporate world. One thing is for sure, the consumer can only hope that tragedies like the baby formula will not be exported to other countries or harm any infant wherever they are.

Alexandria Brysk is a correspondent for Chinascope.

Filling in the GAP

Adam Smith’s idea to “never to attempt to make a home what it will cost him more to make than to buy,” is a perfect description of the philosophy behind Chinese product manufacture. It is this cheapest form of produce that allows us to keep up with today’s throw away fashion ideology. Yet when asked, most U.S. consumers today will say they prefer to buy American brands and U.S. made products. However, with the influx of foreign goods — U.S. imports totaled $1.2 trillion in 2002, 11% of U.S. GDP — buying American is no longer practical in some instances and impossible in many others. Price often takes precedence over other priorities such as quality, durability and style. So while “Made in America” may no longer be as important as we once believed; are we really getting our money’s worth? What is the real cost of using cheaper clothing manufacturers to create a sustainable business future for America?

In recent times, China has become the world’s biggest textile and clothing exporter, selling $42 billion of clothing and textile manufactured products overseas in the first half of 2004. This has led to a crossroads situation in countries like America, where the National Council of Textile Organizations is predicting that 650,000 U.S. jobs will be lost by 2007 as 1,300 textile factories close due to the ability of retail outlets and fashion houses to outsource their products to countries like China.

Yet it appears that cheaper is not necessarily better for the producers who are choosing to manufacture in China. Certainly, the idea of going to China must have been causing a few headaches for some managers from America’s second largest clothing retailer Gap Inc. Recently The Gap Inc. (trademarks include Gap, Banana Republic, Gap Kids, Gap Shoe Stores, Baby Gap Store) has found out the hard way that China was not a suitable environment for its business. In a nutshell the Gap has cancelled contracts with 42 of its clothing manufacturers in China for breaching Gap’s labor standards this year. The Gap announced the changes in its Social Responsibility Report (SR Report), which described the company’s internal investigations into the labor practices of its factories worldwide in 2003. The report detailed that 9% of China’s 464 factories producing merchandise for Gap were dropped. This placed China at the top of the list for compliance violations in the case of Gap’s factories, when compared to other nations. China is one of the 50 countries that Gap outsources its labor to, but also the source for the largest production. In 2003, 16% of Gap’s merchandise came from China, but according to the SR Report there were “unique and complex compliance challenges” involved. One example of these challenges includes the difficulty of addressing workers’ needs and grievances “in a country that does not recognize workers’ right to associate freely outside of government approved organizations.” The report said the reason such a high number of factories were dropped as Gap’s suppliers is due to the “concealment of overtime and unwillingness to share complete and accurate information.” Over 50% of the factories failed to fully comply with local laws. 25 to 50% had poor records of the age of their workers, unclear wage statements and poor working environments, such as a lack of first-aid kits, personal protective equipment, operational safety devices on machines, and proper means of storage for flammable and hazardous materials. Investigators found physical coercion and verbal abuse violations occurred in as many as 25% of the factories. Also, common were violations of local legal working conditions and restricted access to Gap internal inspectors.
Since the release of the Report, human rights groups such as Sweat-shop Watch have praised Gap for its openness and movement towards better working conditions in its factories. Such positive feedback for Gap’s actions have quelled old accusations of labor abuses as well as placing pressure on other clothing and manufacturing companies with factories abroad to follow suit. Global corporations like Wal-mart might follow the trend, after observing the precedent set by Gap. Knowledge is an empowering tool for both the consumer and the producer as it allows us to create sustainable economic opportunities for ourselves and others in this global community. So what have we learned from America’s clothing giant built on the two of the most popular fashion items, of jeans and T-shirts? It shows that multinationals such as Gap Inc., can set social and business trends, that can reach beyond the borders of countries. After all, they are already setting global trends with their jeans.

M. Ho, and Victoria Kelly-Clarke are correspondents for Chinascope.

What Lies Beneath: Beijing 2008 Olympic Games

The highest aim of the Olympic Games is set out in the Olympic Charter: “encouraging the establishment of a peaceful society concerned with the preservation of human dignity.” Yet of all the nations in the world which could have hosted the next Olympic Games, the International Olympic Committee (IOC) has picked China the country generally viewed as the biggest violator of human dignity.

From the issue of Tibet, to the persecution of Falun Gong practitioners, Christians, Catholics, democracy activists and human rights advocates, China’s human rights record is appalling. Visitors to the 2008 Olympics will not need to go far to view this modern history of China. Attendees of the cycling, marathon and triathlon events will only need to look around their venue—Tiananmen Square.

Can the world forgive and forget?

Tiananmen Square, or the Gate of Heavenly Peace, was originally constructed for citizens to air their case before the Emperor without fear of reprisal. In more recent times, however, it has been the site of the worst bloodshed and repression that modern China has known. In the past 15 years many have seen the 1989 massacre of student democracy activists, and the arrest of thousands of Falun Gong practitioners.

While these simple paradoxes are enough to cause some people to reconsider their attendance at the 2008 Olympics, it appears a far more pressing issue is coming to the surface. Corruption has dogged the IOC and the host nations for the past few years. While corruption scandals in the past have generally focused on the IOC and its officials, many Chinese nationals are concerned that China’s centuries-old custom of corruption will affect the Beijing games. As 22-year-old student, Sun Rongrong, expressed to the BBC World News Service in 2001, “There is a widespread fear that billions of dollars in Olympic-related construction projects will end up filling the pockets of corrupt officials.” (The BBC World News Service, Saturday, 14 July, 2001, ‘Beijing Revels in Olympics Victory’.)

It certainly appears that this fear was well founded, as the Auditor General of China’s National Audit Office (CNAO), Li Jinhua, reported on January 31 that there were cases of embezzlement amounting to 16.5 billion yuan (~$2 billion) uncovered by government audits in 2003. Local CNAO offices conducted the audits, which were focused on revenue and expenditure statements of public organizations in 26 provinces, regions and cities.

The audits revealed a full spectrum of accounting misconduct. Minor infractions took many forms, such as not reporting income and expenses according to regulations. More serious infractions were also common, such as many departments giving out fines without justification, abusing expense accounts, and not banking department funds into correct treasury accounts. Investigators also revealed that more than 290 grassroots public organizations had secretly set up 1325 state treasuries, to which they which directed over $700 million yuan (~$90 million).
Bottom Line

The CNAO report also disclosed that government officials at various levels of the government had misused more than $2 billion in 2003, with the 2008 Olympic committee also fingered for embezzlement. CNAO found that the sporting body had used more than $15 million inappropriately by spending on private housing for staff, and by diverting funds into other investments. One can only imagine the amount of corruption surrounding the pool of $33 billion used to build the Olympic infrastructure in Beijing. However, this widespread fraud will mean that all sorts of bribes and crooked deals may have taken place, which brings up the issue of the safety of the construction projects. In the past, newly built infrastructure like highways, high rise buildings and public housing were found to be unsafe due to corrupt officials cutting costs on these projects. An example of this is seen in the above mentioned CNAO report which also revealed that during last year’s investigations on the use of funds for treating and preventing water pollution in the Three Gorges Dam, from the area around the city of Chongqing and the Hubei Province, it was discovered that the amount of contaminants entering the dam area was unclear, as part of the special teams established to prevent and treat water pollution were unable to reach the discharge standards. China seems to be sweeping all this under the rug, a nasty habit it has developed when dealing with people’s live. It begs the question of how large is the façade and is the West going to implement any real checks and balances on China’s Olympic preparations.

Bad taste in the mouth
So far, the picture being painted is that the world is haunted by a shadow of doubt about China’s human rights record, its endemic corruption and its ability to fulfill the role of Olympic host. Altogether, this creates a bad taste in the mouth, like the aftermath of accidentally drinking sour milk. If it looks bad, and smells bad, it probably is bad, so do you really have to taste it, in spite of everything?

Did you know these facts about China?

Electricity is scarce in Beijing especially during summer, resulting in frequent “brownouts” (planned blackouts) and blackouts.

Construction companies and government officials related to the Olympics are being investigated on corruption charges.

Traffic congestion is a major problem in Beijing, as motor vehicles become more affordable for the Chinese. This has resulted in high levels of pollution, infrastructural problems and traveling difficulties.

Government newspaper says for every120 men there are 100 women.
Xinhuanet reports about a plastic surgery epidemic in China, with children as young as 3 years old being given dimples by their parents.

Energy Bureau of the State Development and Reform Comission reports China’s output of primary energy was equal to 1.603 billion tons of standard coal last year, up 11% over the previous year.

According to the China Daily, China discharged 19.27 million tons of sulfur dioxide in 2002, 90% of which came from burning coal, and 200 million tons of ash and solid waste.

The average wage for worker in Guangzhou this year is 22, 446 yuan (~$2750) , 9.2% higher than 2003 according to Asian Labor News.

Priceless ancient artifacts and historical residential sites are being demolished to make ways for new residential and office buildings for the 2008 Olympics.

Victoria Kelly-Clarke is a correspondent for Chinascope.

Lost in Translation

‘No problem’ is a common phrase used by the Chinese. It does not, however, actually mean ‘we don’t have problems here’; it is normally used as a friendly expression by Chinese people to engage an English speaker. As business increases between the East and West, giving a good impression and ensuring a professional relationship may not always be easy. After all even if both parties are from the same culture, issues are almost inevitable, but where there are problems there can be solutions.

Following is a shortlist of some tips that offer some insight into some of the do’s and don’ts in contemporary China. There are different practices in different parts of Asia, some are more Westernized than others, for instance in Hong Kong and Singapore business meetings and contracts can be conducted in English. However this may not be the case for Mainland China, the doors are open for business to the West, but there could be some social and cultural practices that make it a challenging process. In other words, doing business in China may come as a reality check for many, where good business judgment and plans could be clouded by cultural or social differences. So rather than have awkward looks and silences, communication could be lost in translation. This commentary therefore offers some interesting and insightful points which offer a general guide to your next encounter with Chinese businesses.

√ This Time It’s Personal

Your friendship and relationship network is the key to everything in China. Try to become friends with everyone, and keep it personal. You may have the best deal and the most enticing offer, but in the end that’s just business. Your Chinese counterpart may well be asking ‘What’s in this for me, personally?’ They are far more likely to sign a contract with someone they know and trust, so getting to know them is even more important than discussing the details of your contract. A good bottle of scotch and a box of cigars have much the same implications as they do in the West, and may just speed things along.

√ Always Have Your Cards Handy

Business cards are important. Please ensure you acknowledge and compliment your Chinese counterparts’ business titles printed on their cards. Titles are everything in China — they might not always be explanatory but are significant.

√ Respect Authority

Of all the friends you make in China, the government officials are the most important. They will sign the authorizations and certificates. In other words, they are your local business guarantor who will make or break your deal.
√ Be Generous

Be aware of all favors done for you, and be prepared to respond in kind.

√ Look for the Signals

Don’t look surprised about the expectation of offering a bribe, as you may well encounter this sooner or later. If you don’t recall receiving any signals, this may explain why things are not running so smoothly at present.

√ Bring Your own Interpreter

It is always wise to have your own interpreter with whom you maintain a long-term relationship. They can interpret for you not just the literal meaning of words, but also the social implications, and spot signals you may have missed. However, you cannot always assume a third-party interpreter will be impartial and accurate.

√ Talk the Talk

Learn a few basic Chinese words and sentences. This is a great icebreaker — but make sure you get the vernacular right. Do your associates speak Cantonese, Mandarin, or a regional dialect such as Shanghaiese?

√ Any Other Name

Acquire a Chinese name for your business. Do however always check what it means. Chinese is phonetic so you need to make sure it doesn’t sound like something unflattering. The last thing you need is a name that makes you sound ridiculous; for example, the name Marcus translated incorrectly could sound like “horse manure.”

K. Song & Max Dobson are correspondents for Chinascope.

The Petition System in China

China’s petition system is not considered part of the judicial system, as one might expect. It is a special apparatus of the Chinese Communist Party and the government, and it has played an important role in modern Chinese history. One director of the Appeals Office at the Ministry of Public Security stated, "The petition system in China originated from people writing letters to our leaders, bringing up problems and suggestions. This dates back to the Yan An times, 1936 to 1948, when people wrote letters to Chairman Mao to make suggestions. In the beginning, the leaders reviewed and handled the letters personally. Later, as more people wrote suggestions, a secretariat office was set up to handle the letters."

In 1950, the Party Central Committee withdrew the Office of the Political Secretariat and established the Office of the Secretariat of the Central Party Administration for the sole purpose of processing petitions and meeting with those who came to file petitions. In November 1950, the Party Central Committee issued regulations requiring "Party Committees at district, provincial and regional levels to establish designated offices or personnel for processing petitions, and to set up systems for registration, research, transfer, inspection and filing." In June 1951, the State Council also issued regulations stating, "The People’s Government at the county level or above must delegate to certain offices to designate staff within the initial budget and billets who will be responsible for handling petitioners and letters from the people, and establish an information desk or reception room to receive people who come and visit." Under instructions from the Party Central Committee and State Council, many local governments set up organizations and designated staff to handle petitions and petitioners.

According to a document formulated by the Office of the Chinese Communist Central Committee and the Office of the State Council entitled "Regulations of Functionality, Internal Structure, and Personnel of the National Appeals Bureau (February 13, 2000)", the National Appeals Bureau reports to the Party Central Committee Administrative Office and to the State Council Administrative Office. The objective of the Bureau is to process letters and receive visitors to keep the appeals channel open for the masses. The routine work of the Bureau is to "report to the leaders in the Party Central Committee Administrative Office and the State Council Administrative Office any important suggestions, complaints, and problems reflected in the appeals letter and visits." The Bureau is also required to "study the information gathered in the appeals, conduct further investigation, and propose suggestions on specific policies and guiding principles."

Since 1950, there have been significant changes from state and party leaders reviewing petitions to where things stand today. The implications have also changed a great deal. The window of the appeals office has become the focal point of various social conflicts, as handling petitions is now a matter of social stability.

For example, the petition system played an unprecedented role after the conclusion of the Cultural Revolution. At the time, the Office of Appeals at the Ministry of Public Security had over 70 staff members. Everyday, three to four hundred people lined up, waiting for their cases to be overturned on the basis of wrong or false information leading to their arrest and conviction. From that point on, people started to view the appeals office as a place to overturn injustices. In fact, the Ministry of Public Security has indeed set forth four responsibilities for the appeals office: to internally monitor the Ministry, to receive messages from the public and pass them on to the leadership, to assist the public and help them resolve problems, and to safeguard social stability.
The responsibilities of the appeals office have changed, but not its operation. The most popular way to solve problems is to transfer cases. While Beijing oversees the rest of the country, it cannot take care of everything. Most petitions are transferred back to the local governments. Those who file these petitions follow the paperwork. If the local government cannot resolve the problem, the petitioners are sent back to Beijing. This process became a cycle that petitioners are forced to follow.

Currently, governments at all levels face major challenges in dealing with petitions:

The number of petitioners is increasing

From the State Council to provinces, regions and counties, there are offices where people visit and file petitions of grievances. According to statistics of the Appeals Office of the Ministry of Public Security, it has handled between 50,000 to 60,000 petitions per year in recent years. The Supreme Court and Supreme Procurator have handled around the same number of petitions. This amounts to over a million petitions per year.

Pressure on the local government

The Central Government pays much greater attention to problems brought by petitioners in Beijing. If many petitioners from the same area go to Beijing, the local officials are subject to punishment. Therefore, suppressing people who file petitions has become a new priority for local governments. In some places, people have been hired to monitor the homes of petitioners, but this has not been effective in stopping them from going to Beijing.

The root of the problem

Government departments are obsessed with bringing petitioners under control, but they tend to neglect the root cause of the petitions. A director in charge of one appeals office stated, "First of all, the public has more knowledge of the law in general, and the people are now different from the old days, when they did not know the law and shied away from lawsuits. Secondly, corruption has brought about many problems." He further pointed out that corruption and fraud at the village level have brought about many problems and weakened the state’s power at the local level. This director believed that inadequate initial handling of cases has also contributed to the rise in the number of petitions.
Inadequate system

Each petition or letter received by the Ministry of Public Security is registered in the computer. Those not under the jurisdiction of the Ministry of Public Security are transferred to the responsible departments. Those under its jurisdiction are sent via official memo, depending on the case, to the provincial department of public security. As for in-person visits by the petitioners, the same procedures apply. Staff members handle petitions differently depending on the situation. Possible actions include sending official memorandums to lower levels of public security departments requesting disposition, requesting the provincial departments of public security to provide results of preliminary investigation and written status reports, persuading petitioners to leave if the matter does not fall under the jurisdiction of the Ministry, and issuing transfer letters to those that need to go to different agencies.

An experienced appeals office staff member characterized the content of the petitions as "an infinite variety of social problems." Most of those who file petitions are from the countryside. They do not have much education, have little knowledge of the law, have no connections with people in power, and have no money to file lawsuits. Most of them sincerely and doggedly believe in the Communist Party and that the Party will find justice for them. When the local petition offices do not resolve their problems, they go up one level, hoping to find someone higher up in the government to champion their cause. Most of them end up in Beijing through this process.

The Appeals Office summarizes the cases in the petition via a "Petition Digest" as feedback to the leaders of the Ministries. One staff member stated, "Sitting here at the reception window of this office, you may come across anything, crimes, street safety, fires, matters involving foreigners ¡­ Any business the Ministry of Public Security handles, we have it. Anything it does not have, we have it also." Their greatest fear? That someone who petitioned at their office will make trouble at Zhongnanhai or Tiananmen Square, which would inevitably bring unwanted scrutiny and probably punishment from their superiors. They know that if the problem were not difficult or controversial, the petitioners would not have risked the high probability of retribution to come to Beijing.

Wen Jiabao Reaffirms Macroeconomic Control Policy In a State Council Meeting

The State Council held its executive meeting, originally scheduled for July 5, on July 12, to discuss and review the economic development and achievements of macroeconomic control efforts, and to plan the government’s economic tasks for the second half of this year. Due to conflicting opinions on certain issues, the meeting lasted one day longer than the arranged one and a half days. The standing committee members of the Political Bureau, including Zeng Qinghong, Wu Guanzeng and Luo Gan, were in attendance on the last day of the meeting. All the ministers of related ministries attended the meeting, hoping to reach agreements, balance different opinions and shelve discrepancies.

Conflicts between the “pragmatic group” and the “expeditious group”

Ever since the 1990s, there have been internal arguments and differing opinions, both within the Political Bureau and the State Council, on the direction of economic development and the implementation of macro-control measures. Consequently, the so-called “legal scientific group” and “political indicator’s group” gradually evolved. The communities of political and economic analysts refer to them as “the pragmatic group” and “the expeditious group,” the former being led by Wen Jiabao and Wu Yi, with the latter being led by Huang Ju and Zeng Peiyan.

Wen Jiabao firmly maintains that macroeconomic control measures are necessary

Using a series of statistical illustrations, Wen Jiabao firmly concluded during the State Council meeting that macro-control is desperately needed, in spite of its late adoption. Macroeconomic control has seen its initial positive effect, but it is still not fully implemented. It faces some obstacles from the individual wills of senior officials in the Communist Party and government, mainly related to egoism and regionalism. If we do not directly face and overcome these hindrances, the overheated and uncontrolled economy will resurface. During establishment and development of the economy, those obstacles that defy scientific and pragmatic principles would cause serious damage and consequences, said Wen.

Three fatal problems

According to a report released in mid-June by a research department within the State Council, there are three critical problems in the national economy: the over-investment in fixed assets, the overly-rapid growth of production, and the nearly uncontrolled increase of money supply and growth of bank loans. Since 1999, the economic policy has been overemphasizing the index of the Gross National Product (GNP) and its growth rate, so that the national economy has developed abnormally, and is now on the brink of being off track. These three problems have disturbed and hindered the national economy’s development toward a steady, rapid, healthy and effective path. The direct, indirect and cumulative losses have reached 800 billion to 1.2 trillion yuan, which is equal to 6-9% of GNP, the report states.
The regional economy remains overheated nationwide

According to a survey report of the State Council, since the fourth quarter of 2002, the economic development in 28 provinces, autonomous regions, and municipalities have overheated. By the end of June 2004, 21 of them remained overheated because their fixed assets investment is still growing too fast. Compared to the same period in 2003. investment in the fixed assets was 82% higher in Jianshu Province, 77% higher in Shandong, 75% higher in Shanghai, 72% higher in Guangdong, 70% higher in Hunan, 70% higher in Liaoning, 60% higher in Henan, and 65% higher in Zhejiang.

At present, the shortage of electricity supply has reached 27%. The railway freight is running at 44% over its capability. 22% of the oil supply relies on imports, and increases 12-15% per year. There is a shortage of 20 categories of raw materials, which must be imported.

Wen Jiabao raising prominent problems to be solved

Wen Jiabao stated at the executive meeting of the State Council that the cabinet should not, at any circumstance, attribute the problems to the previous administration. The current cabinet should take the responsibility to deal with and resolve the conflicts and problems in a scientific, truthful, and pragmatic manner.

While summarizing for the work of economic development in the first half of the year, Wen Jiabao raised the following issues:

1. Many leaders in some areas or government agencies are out of mind. They use every excuse to make the economic development as rapid, diverse, and as large-scale as possible.

2. The scale of investment in fixed assets is excessively large. Structure of the investments overlaps.

3. The tension between supply and demand for coal, electricity, oil and transportation is difficult to resolve in a short-term, or even a longer period of time.

4. Overall economic achievements are weak. The expansion of internal needs is relatively narrow.

5. Unemployment rate is so high that it seriously affects and jeopardizes social stability.

6. The “three farming-related problems” are still very pronounced, although some progress has been made. Policy implementation remains poor.

The conflicts on the macro-control/overheated economy issue

The conflicts on the issue of macroeconomic control/ overheated economy within the State Council and local governments are as follows:

1. Was it necessary and effective to take macroeconomic control measures during the previous stage?

2. Whether the policy of macro-control and the soft landing of the economy should be continued?

3. Whether the growth rate of national economic development should be controlled below 9% or go above 10%?

4. Shall the economic and financial independence of local governments be regulated or deregulated?

5. How will the central government deal with conflicts and contradiction on policies and measures, between the central government and local governments?

Source: August, 2004 issue of Qianshao Magazine

Is China’s Economy on a Balanced Path?

[Editor’s note: This is an article translated from Boxun ( Analysis of the aggregate supply and aggregate demand with the statistical data from China’s offical publication indicated a potential imbalance within the economic system. The original article was written in 2002. In order to reflect the current changes, the editor has updated the article with most recent data available, while keeping original analysis intact.]

The mainstream economists and the press have left the public the following impression about China’s economy: the speed of economic development is extremely fast, once termed "taking flight" and now using the buzzword "8%"; the Chinese people live a relatively comfortable life; and China’s GDP and its foreign trade have resulted in record numbers. Some media claimed that the achievements we have made in our national economy in the past thirteen years have not happened in two hundred years. It sounds like some miracles have been performed in China. While many economies in the world are decelerating and some even in recession, it sounds like only China’s economy is an exception, and it is growing rapidly in a "healthy, stable and continuous" mannerit can sustain this growth until the middle of the century until it exceeds that of the United States, presently the largest and the premier economy in the world.

Looking back at China’s history, when its economy was truly in good shape, such as the economic adjustment period between 1963 and 1965, the press usually did not hype the success. On the other hand, when the national economy was in dire straits in 1960, major media reported on a daily basis that "the situation is great", "the situation is extremely good", or "the situation is excellent across the board." Between July and September of 1967, when the whole country was in chaos and embroiled in violent riots, the media stated unanimously, "The situation is not simply good, but is great, and in fact, it has never been better!" It is apparent that one cannot judge the situation of the national economy merely by reading what the state media say.

Furthermore, many aspects of the macroeconomic data about the Chinese economy are hardly convincing.

For instance, while China’s economy is said to be developing at a healthy pace, how can one determine if a national economy is truly healthy? In my opinion, the first criterion should not be the speed of development, but whether the aggregate supply and aggregate demand is in balance. This is analogous to the growth of a child. When the child grows too fast, he gets taller, becomes very skinny, and his body loses the balance and thus may not necessarily be healthy. In comparison, let us look at the supply and demand on the development path.
Aggregate supply

Many renowned economists have addressed in the TV programs that China has two treasures-investment growth and foreign trade. "With these two treasures, China’s economic growth is balanced and the supply and demand are balanced," they claim. However, such reasoning is not logical. With the growth of investments and foreign trade, there is no guarantee that the economy is balanced in terms of overall supply and demand. As the data shows, the overall supply in China far exceeds the overall demand, and it results in a tremendous imbalance. This year, there is no supply shortage in any single merchandise, and the supply of 86% of Chinese products exceeds the demand, with the total value of the overstocked inventory reaching as high as 4 trillion yuan (~$482 billion). This number was 1.33 trillion yuan (~$160 billion) back in 1996 and 3 trillion yuan (~$361 billion) in year 2001. Within one year, it exploded to 4 trillion yuan (~$482 billion), which is equivalent to 41% of the GDP. This is a terrifying ratio, yet in China, nobody seems to be worried. On the contrary, everybody seems to be exuberant in celebrating the success. To put this in perspective, this ratio generally does not exceed 1% in Western countries.

Let’s look at this from another angle and examine new residential home sales. According to statistical figures, in the first five months of 1999, both real estate investment and the total square footage of newly constructed homes are 30% higher than those for the same period of the prior year. However, the square footage sold increased only by 13.65%. In other words, the non-occupancy rate is very high. The real estate supply in the three years between 1995 and 1997 was 440 million square meters, with non-occupancy rate of 16%, a "dangerous rate" called by experts. However, this was ignored. As predicted, the non-occupied areas of the newly constructed homes reached as high as 120 million square meters at the end of July 2002. This is 30 million square meters more than three years ago. The non-occupancy rate reached 26% – 4 times as high as that of the U.S., 8 times that of Hong Kong, and 2.5 times the internationally recognized alert level. Nevertheless, even today, new structures are being built across the country. Every construction firm is racing to build luxurious skyscrapers, and new home sale prices refuse to decline in spite of the high non-occupancy rate. From January to July of 2004, the total square footage of newly constructed homes is 118 million square meters, a 12.9% jump over the same period last year. The square footage of unoccupied commodity housing amounted to 96.8 million square meters at the end of July 20041.

As good indicators of aggregate supply, the domestic inventory rate and non-occupancy rate of commodity housing only show the supply is far beyond the demand. With the ongoing construction of "basic infrastructure" and enormous investment in power plants, gas pipelines, large ethylene projects, or manufacturing industries, the already great aggregate supply will surely become even greater as compared to the demand.
So as investments and production increase, the overall supply builds up. With less overall demand, merchandise is harder to sell, the businesses environment becomes even more challenging, and so on. The end result is the proverbial vicious cycle.

The obvious solution to the problem is to expand the overall demand, to provide an outlet for the overall supply and circulate the corporate capital. This way, businesses will be able to continue to produce and make profits to avoid bad loans, which in turn will improve the capital and labor market. To expand the overall demand, economists have been appealing for "expanding the domestic demand". This is certainly the right idea, because China’s exports account for only 20% of its GDP. While this is much greater than United States’ 7%, it is not much better than that of the European nations. In spite of the global economic depression, the total amount exported has grown significantly. Ultimately, 80% of the GDP must still come from domestic demand.

So how is China’s domestic demand?

Aggregate demand

Let us first look at the Chinese people’s purchasing power. As a starting point, let us take a look at the total amount of wages paid, which is presumably the majority of the legal income in the country. This number in 1999 was 987.545 billion yuan (~$119 billion) and reached 1.066 trillion yuan (~$128 billion) in 2000. I was unable to locate the 2001 figure. My estimate is that it was about 1.2 trillion yuan (~$144.58 billion) in 2002 and should not be much higher than that, as no major raises were executed nationally. The nationwide pay raise in 2001 cost the government 70 billion yuan (~$8.43 billion) for the 45 million workers. Even if all of the 70 billion yuan went back to the consumer markets, it is still a trivial amount compared to the 3 to 4 trillion yuan worth of overstocked merchandise.

The table in the previous page contains the calculation for the wage ratio leading up to the year 2003 based on the data from China’s Statistical Yearbook and State Statistic Bureau.

The above figures are all based on the prices for that year, and they do not include the inflationary adjustment. Therefore they are not "comparable prices" and cannot be used to represent an indicator for increment or decrement. Note that total wage figure includes the sum of all workers’ wages from state-owned, collectively owned enterprises and other economic entities. The wages include: 1) Hourly wages; 2) Base wages; 3) Position wages; 4) Piece rate wages and additional piece rate wages; 5) Yields; 6) Various subsidies; 7) Overtime wages; 8) Other wages. In the China’s Statistical Yearbook, in addition to various economic entities, state-owned economic entities also include: 1) Government organizations, Organizations of various political parties and social organizations; 2) Organizations for scientific research and technological services; 3) Organizations for education, entertainment, arts, various broadcasting, film, and TV industries; 4) Healthcare and sports industries and social benefits; 5) Other services.
The above figure clearly shows that the total wages account for only a small portion of the GDP. In addition, its ratio relative to the GDP has decreased in most of the years since the economic reform.

The national average monthly wage for salaried employees was short of 460 yuan (~$55.4) in 1995. Even in 2001, that number was around 780 yuan (~$94.0). In Beijing, where the cost of living is fairly high, the average monthly wage was around 1000 yuan (~$120.5). Note that these numbers do not take into account inflationary factors, but raw numbers for those years.

In 2004, the average monthly wage is about 1,183 yuan (~$142.5), but still low compared with wages in other countries. In 2003, the United States’ average monthly wage was 45.8 times, Japan’s was 28.2 times and Korea’s 13.7 times that of China’s3. Korea’s average GDP growth rate in the twenty years of "miraculous" economic development between 1962 and 1982 was merely 8.3%, compared with the China’s average growth rate of 9.6%, as calculated based on GDP figures from 1978 to 1999. In the early 1960s, Korea’s per capita national income was around $90, with a lower average growth rate for 20 years, how come its average monthly wage is more than 10 times higher than China? Where did the rest of our money go, given that our wages make up such a small portion of the GDP?

Outside of salaried employees, most urban residents do not have high incomes. According to public records, 2001 was considered a year where urban families had significant improvements in their income. The average annual disposable income of urban families totaled 6,860 yuan (~$826.5) in 2001, which was 8.5% higher than that of 2000 after inflation was factored in. Assuming the average head count in a family to be 3.58, the average monthly disposable income per capita was a miserable 159.68 yuan (~$19.2).

Disposable income is defined as "the actual remaining income of the surveyed urban families after income tax, property taxes and other routine repeated payments are subtracted." However, the disposable income number is often inconsistent with the national total wage, even though both numbers were officially published by the central government.

As reported on the Internet, a spokesman from the State Statistical Bureau claimed that the average per capita disposable income of urban residents in the first quarter of 2002 was 1,752 yuan (~$211.08), a 7.5% increase on an annual basis. It was a 6.9% increase after inflation was factored in. This really puzzled me, because the annual average per capita income should have been 7,008 yuan (~$844.34), so that the total disposable income of the 360 million to 380 million urban residents would have totaled 2.5 to 2.7 trillion yuan (~$301.1 to 325.3 billion). In reality, the total national wage amount was only 1.1 to 1.2 trillion yuan (~$132.5 to 144.6 billion). I once suspected that the spokesman had mistaken per family with per capita, but such an assumption still does not make sense, because the total disposable income based on "per family" would end up at 0.69 to 0.75 trillion yuan (~$8.31 to 9.04 billion), which would be too low. By and large, the numbers are inconsistent. If the number came from a random sampling, then the per capita disposable income of 7,000 yuan (~$843.37) would result in a total urban income that was 1.5 times higher than the national total wage. Could it be that the urban residents’ "extra income" would total 1.5 trillion yuan (~$180.7 billion)?
Now let us look at what makes up the income of farmersthe core of the Chinese labor force.

The State Statistical Bureau also claimed that in the first quarter of 2004,the per capita income of Chinese farmers was 834.3 yuan (~$100.5), a year-over-year growth of 13% in current price. This number, I believe, was a bit exaggerated. If the number were true, the annual per capita cash income of the farmers would be 3,337.2 yuan (~$402.1). With a rural population of about 1 billion, the total income of all the rural residents would wind up at 3.3 trillion yuan (~$401.2 billion) – a quarter of the GDP. Is this possible4?

Even according to the State Statistical Bureau, the per capita income of farmers was only one third of that of urban residents. Since 1990, the farmers’ saving ratio has been consistently decliningat a rate of 5% decline every five years. In 1999, only 23.7% of their income was saved. Therefore, the total savings of China’s farmers totaled 1.4 trillion yuan (~$169 billion) in 1999, or 1,400 yuan (~$169) per capita. The State Statistical Bureau and the Central Bank have not published the increase of rural savings in recent years. The farmers are very unlikely to have spent 3.3 trillion yuan (~$401.2 billion) in a year. As a result, the total purchasing power of the farmers is probably slightly less than that of the urban residents.

We now turn to the situation of the Chinese people’s savings from a macroeconomic perspective.

From the beginning of the economic reform till 1999, with the exception of 1995, the incremental savings rate has never exceeded the total wage. However, the incremental savings were still incredibly high. It was almost equivalent to 80% to 90% of the total wage. In 1995, the year-over-year incremental resident savings unbelievably surpassed the total wage of that year, 4.4 billion yuan (~$530 million) higher than the total wage of that year.

As I learned that resident savings set a new record of 8 trillion yuan (~$964 billion) at the end of May 2002, and the fixed term savings ratio increased from 26.3% in late 2001 to 56.1% in May 2002, I realized that these facts strongly signaled that corruption was rapidly spreading across the country. In the three quarters from September 2001 to May 2002, the resident savings in China increased by one trillion yuanfrom 7 trillion to 8 trillion! This is equivalent to 1.25 trillion yuan (~$151 billion) on a yearly basis. As we discussed above, the total wage of the country was only 0.98 trillion yuan (~$118 billion) in 1999, 1.06 trillion yuan (~$128 billion) in 2000. What is clear is that the increased savings will far exceed the total amount of wages. The savings exceeded the total wage by only 4.4 billion yuan (~$530 million) back in 1999. In 2002, it was at least 100 billion yuan (~$12.05 billion) more.

In January 2003, the residential saving reached 9.1 trillion yuan (~$1.1 trillion). One year later, in January 2004, the number jumped to 10.9 trillion yuan (~$1.3 trillion). The 1.8 trillion yuan (~$220 billion) increase in saving again exceeded the 1.16 trillion yuan (~$140 billion) of total wages in 20035. It is apparent that unknown sources of funds are pouring into the savings of ordinary residents. Given the widespread reports of corruption, it is apparently accelerating even more rapidly.
The degree that the wealthiest Chinese are corrupt was especially alarming in 2002. Two issues are particularly clear:

1) Wages are how laborers survive from day to day. It cannot all flow into residential savings. According to inflated calculations by modern economists, even assuming that the percentage for food expenditure according to Engel’s Curve has reached 50% and China has made great achievements, China’s salaried residents must use at least 500 billion yuan (~$60.24 billion) for food, and farmers’ food costs amount to a big number. Among the urban population of 360 million, each person will spend on average 109 to 115 yuan for food each month. In addition, one person will spend an average of 120 yuan on clothing, transportation, education, medical expenses, and housing. These routine expenses will almost use up the total wage, not counting illegitimate sources of income.

How much can an ordinary urban resident save each year? How much can an ordinary farmer save each year? In my estimate, if the annual growth of the total long-term savings from all of our residents can reach 200 billion yuan (~$24.1 billion), it would be a reasonable number, accounting for one tenth of the total wage. In contrast, the actual net increase of the savings on a year over year basis reaches 1.45 trillion yuan (~$174.7 billion), which is 14 to 15 times higher than expected. This means that more than 90% of the newly saved money in banks, especially the fixed-term savings, does not come from salary.

2) Given that the newly added resident savings do not come from normal wages, where do the 1.3 trillion yuan a year of additional savings come from? The only likely answer is corruption.

China’s official data of economic statistics is probably not the most reliable source for conducting serious studies on the country’s economic issues. However, those figures from the published statistics did show us some alarming potential problems in the economy. The results from the analysis clearly indicate that the growth of China’s economy is far from a balanced one. Adding to the problem is the rampant corruption. We don’t know how much of the excessive aggregate supply is absorbed by corruption. Even if large portion of it are absorbed, the economy is still away from a stable and healthy track.

1. Data updated by the editor.
2. Table updated by the editor, the chart created with the data in the table.
3. The calculation updated with 2003 data by the editor.
4. 2004 data is provided by the editor.
5. Recent years’ data added by the editor.

Li Zhining is a scholar from Institute of Economic Research, Chinese Academy of Social Sciences