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Guangming Daily Commentary: (We) Must Be Alert on the Velvet Revolution

Guangming Daily is one of the five biggest Communist Party newspapers in China. The recent democratic movement in Central Asian countries, referred to as the "velvet revolution" or "color revolution," has caused great concerns and worries to the Chinese communist government. Chinese state-run media have followed the events very closely and have published numerous articles both as commentaries and as news reports. A Guangming Daily article "(We) must be alert on the ‘Velvet Revolution’" on May 27, 2005, was a typical one and was one of the most widely posted articles of its kind on Chinese websites.

"Recently, one ‘velvet revolutions’ (a.k.a. ‘color revolutions’) after another took place in Georgia, the Ukraine, and Kyrgyzstan, attracting attention all over the world. The so-called ‘velvet revolution,’ which is directed by the United States to overthrow incumbent governments, requires us to be on high alert.

"Firstly, the so-called ‘velvet revolution’ has it own characteristics for us to trace. In fact, it is not a revolution, but a coup d’etat to subvert a political power by means of peaceful ‘street politics.’ (Sometimes it does not necessarily exclude use of violence, but mostly it does not resort to violence). Certainly this is not something new. During the end of 1980s and the early 1990s, the dramatic political changes in the former Soviet Union were called a ‘velvet revolution.’ Afterwards, it happened in the former Yugoslavia. Nowadays, these same old tricks have been used in some countries of the Commonwealth of Independent States (CIS) again. The ‘velvet revolution’ can be put into two categories. One is to change the nature of a regime in a socialist country from the socialist proletariat regime to a capitalist bourgeoisie dictatorship. The other is to change the ruling power in capitalist countries to be pro-U.S. (or more pro-U.S.) ones. For China, it is somewhat more important to learn our lessons from the first type of coup d’etat.

"Although two types of ‘velvet revolution’ are different in nature, they have something in common and they have some characteristics to trace. For those ‘velvet revolutions’ that have taken place already, they roughly followed these steps:

"The first step was to create public opinion favoring subversion of the government. Comrade Mao Zedong had said, to overthrow a government, you must always create public opinion first and then do ideology work. The revolutionary class must do so and so does the counter-revolutionary class. This is an undeniable truth. The same is true with the ‘velvet revolutions’ covertly orchestrated and supported by the United States.

"The second step is to establish a political organization. An opposition organization is then set up on the basis of creating public opinion to confuse people’s thinking. With the organization, you may influence more people. At first, it is an informal organization and the next step is to establish an oppositional party. In a socialist country, to allow the establishment of a so-called ‘informal organization’ is actually to permit the public to carry on anti-communism and anti-socialism activities in an organized manner. And, to go along with the establishment of an oppositional party is to implement a multi-party political system. However, to adopt the multi-party political system will inevitably bring the end of communist party’s leadership, which will create an opportunity for a bourgeoisie political party to take over.
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"The third step is to look for an influential person, who is liberal and pro-America with a certain commanding ability, as leader of the oppositional group to bring together those who try to overthrow the ruling power. Once the time is ripe, he can lead the public to attack the ruling power and organize a new regime under his leadership. Preferably, this person is trained by the United States government, or has close contacts with American institutions, and must have a pro-America tendency, and therefore be reliable.

"The fourth step is to use an unexpected event or the election, under the banner of democracy and freedom, to organize activities of ‘street politics,’ such as demonstrations, parades, rallies, worker strikes, student walkouts, taking over public squares, attacking governmental agencies and so on, pressuring the government to give up power. The ‘street politics’ is like a ‘one-way street’ that cannot be negotiated with reason. Whatever the oppositional group does is democratic. For the government not meeting the satisfaction of the United States, whatever it does is against democracy. Then, if the oppositional group receives a small number of votes, they would claim election fraud. A re-election must be held or it is not democratic. If the oppositional group carries on illegal activities, including attacking the presidential office and the congressional building, it is democratic. If the government tries to stop them, it is not democratic. In a word, they use ‘democracy’ to tie the hands of the government that the United States is unsatisfied with, and to set free pro-American oppositional groups.

"It can be said that, for the so-called ‘velvet revolution,’ the ideology work is its foundation, to organize important figures to lead the opposition group is the key and unexpected events are opportunities they can use. And their goal is to establish a pro-America regime.

"The United States has a deep understanding of the regularity of success in each ‘velvet revolution.’ After the success in Georgia, the Ukraine, and Kyrgyzstan, the United States could hardly wait to do it in Belarus. At the meeting with Belarus oppositional leaders on April 21, 2005, U.S. Secretary of State Condoleezza Rice declared, ‘It is the time for Belarus to change now.’ She proposed four main directions: supporting independent media and establishing new public media, speeding up the development of the mass movements, organizing an opposition union and electing single presidential candidate [for the opposition union] to compete against incumbent President Lukashenko in the 2006 presidential election.

Secondly, the United States orchestrated all of them from behind the scenes. The ‘velvet revolution’ which implements the United States’ interest has taken place in various countries. On the surface, their purposes were to pursue ‘democracy’ for the people and to change the ruling regime, but there was a black hand behind it all manipulated them. What they have implemented was totally in the U.S. interest and to serve U.S. strategic needs.
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"The United States is an imperialist country ruled by monopolistic bourgeoisie. Its fundamental interest lies in overseas expansion to promote hegemonies. After the Cold War, the United States gained the position of ‘the super power’ and accelerated its steps in a plot to implement hegemony in the world and to build a uni-polar world. International political powers became severely unbalanced. As a result, the American hegemonies appeared aggressive and reckless. ‘To protect the world from past disasters, there must be one leader and only one leader,’ and the United States is ‘most capable to lead this world,’ said former U.S. President Clinton. After the ‘9.11 incident,’ U.S. President Bush said, ‘around the world, all the nations must choose. They are either with us, or they’re with the terrorists.’ These statements fully demonstrate the bullying and overbearing character of the United States. The United States’ position as the super power will not have a fundamental change in a short period of time, and this kind of global hegemonism will not change either. As to the nature of the U.S. imperialism, we should have a clear understanding. Don’t have any unrealistic wishful thinking. As to the danger of a U.S. manipulated ‘velvet revolution,’ we should be highly vigilant and should not lower our guard.

"There was one thing in common while the United States carried out the ‘velvet revolution’ — all under the banner of democracy. The United States would first brand those regimes, which it was not happy with, as ‘being undemocratic,’ ‘dictatorship,’ ‘anti-humanity,’ ‘violating human rights’ and so on. Then they would instigate the opposition groups to stand out for democracy. This is most deceiving. Is there anyone who doesn’t want the democracy? Between the end of 1980s and early 1990s, when East-European countries in the former Soviet Union experienced dramatic political changes, the United States just used this trick. In the beginning of this century, the same trick was still utilized in Georgia, the Ukraine, and Kyrgyzstan. For example, on October 7, 1989, in Berlin, the capital of democratic Germany, demonstrators who gained support from the United State shouted loudly outside the Republic Palace where the ‘National Day’ reception was held. Their slogan was to demand ‘democracy.’ On October 9, 70,000 people attended the parade and protest in Leipzig. What they demanded was ‘democracy.’ The socialist regimes in East-European countries in the former Soviet Union all collapsed under the impact of ‘democratic street politics.’ After entering the 21st century, the United States also used the tricks of ‘democracy’ and ‘fair election’ to force the rulers of former Yugoslavia Milosevic government and previous regimes in Georgia, Ukraine, and Kyrgyzstan to step down be replaced with obedient pro-U.S. regimes. In the Ukrainian election incident, for instance, while supporters of the opposition group were asked: ‘Why did you support Yushchenko?’ Many people replied: ‘Supporting Yushchenko is to support democracy.’ This trick has never failed in each case. The United States wanted to use this trick toward China as well.
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‘China’s progress toward democracy should have a time table.’ Rice shouted recently prior to her visit to China. It seemed that she couldn’t wait any longer. Having learned from this historical experience, we must widely educate vast members of the Communist Party, officials, and the public about Marxist democracy ideology, to distinguish the boundary between the proletariat democracy and the bourgeois democracy, to righteously criticize the bourgeois democracy and to expose the real nature of the United States to promote ‘democracy.’ At the same time, we must adopt realistic and effective measures to enhance and glorify the socialist democracy and to truly manifest people being the master of their own country. This is an urgent task while we are confronted by the United States with its aggressive attack of promoting the ‘velvet revolution.’

"To realize the ‘velvet revolution,’ the United States will not hesitate to provide financial support. As long as the ‘velvet revolution’ has taken place in a country, the oppositional groups in that country will have financial support from the United States. Anti-government activities, including ideological propaganda, ‘street politics’ and organizing elections, need a lot of money. But most of the oppositional groups don’t have enough funding. They cannot help but depend on the United States for disbursements. In this aspect, the United States is extremely generous and not concerned about how much it will cost. In the Ukraine, while the opposition groups, led by Yushchenko, organized large-scale demonstrations which needed to gather people from every region to the capital Kiev, the United States provided, through NGOs, such as the Soros Foundation, the money for charter buses and labor. (It is said they paid every person US$10 per day, which is far beyond the local daily wage.) Also, tents were set up on the Square for overnight stays. During the process of the ‘velvet revolution’ in Georgia, in the name of assistance from NGOs the United States had done all the preparation work beforehand, such as how much money they would spend, which anti-government organization should be subsidized, whom they would cooperate with, etc. In 2004, to subvert the Belarus Lukashenko administration, the United States allocated US$89 million to support Belarusian independent media, oppositional groups, domestic organizations, and business groups. In 2005, the U.S. Senate announced that they would allocate special funding of US$5 million to subsidize the opposition groups in Belarus. It is said the funding that the U.S. government allocates to ‘promote democracy’ is as high as US$1 billion.

"It is worth noting that the United States usually accomplishes the preparation for the ‘velvet revolution’ through non-governmental organizations, and the same is true of doing the ideology work. Behind the façade of the cooperation and exchanges, scientific research and so on, various foundations carry on penetration and select candidates who could be of use in the future. This type of covert activity can change and influence quietly. Its impact will not be known until the right time comes. Thus, we must treat this kind of foundations and organizations seriously and scrutinize them carefully. Don’t hanker for a small gain, but forget one’s integrity.
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"The United States emphasizes on training ‘backbone members’ who could lead the public. Ukraine’s Yushchenko was selected by the United States as the ‘leader.’ All of them have accepted the overt and covert help from the United States. Some of them also had taken ‘democratic education’ in the United States.

"We should take serious consideration of various methods used by the United States for promoting the ‘velvet revolution.’ We realize that the United States regards China (the only great country of socialism in the world) as a thorn in its eyes and wants to get rid of it badly. Just as what Deng Xiaoping pointed out: the U.S.-led Western countries ‘are engaging in the third world war without gun smoke— to have socialist countries peacefully transformed’ (‘Deng Xiaoping Literature Selections,’ volume 3, page 344). The United States stepped up its strategies of Westernizing and splitting China and tried to plot a ‘velvet revolution’ in China. Under the support from the United States, members of the bourgeois liberalization are also ready to make trouble. The best illustration was the ‘people’s amendment of constitution’ in 2003. Therefore, we must learn a lesson from the ‘velvet revolution’ hat have already happened and prevent them from happening (in China).

"Thirdly, the prevention of the ‘velvet revolution’ is system engineering. Under current international and national situation, the risk of the ‘velvet revolution’ is a reality. To prevent the ‘velvet revolution,’ we must enhance the national dictatorial tool. Under the situation that the political turmoil appears, utilizing law enforcement to keep the stability of the political situation and social order is totally necessary. Just as what Deng Xiaoping pointed out: ‘In a long period of time, the strength of the proletariat, as a newly arisen class to take the power and to establish the Socialism, is weaker than that of Capitalism. Without relying on the dictatorship, it cannot resist the attack of the Capitalism. To firmly insist on Socialism must firmly insist on the proletariat dictatorship, which is called the people’s democratic dictatorship.’ He added, ‘Using the strength of the people’s democratic dictatorship to fortify people’s political power is righteous thing. There is nothing unreasonable.’ (‘Deng Xiaoping Literature Selections,’ volume 3, page 365 and 379). The democracy and the dictatorship are united. Only by adopting dictatorial rule toward the extremely small number of enemies can we fully safeguard most people’s rights of democracy. WE should adopting a dictatorial rule toward the liberalization activists who created the troublesome ‘velvet revolution,’ by requiring them to be obedient and not allowing them to speak and act casually, and dealing with them righteously and reasonable through legal procedure when they violate criminal law. Doing so won’t damage our country’s reputation. We should not have any concern over this matter.

"However, in regard to the ‘velvet revolution’ that jeopardizes the stability of a political situation, it is far from enough if we rely on the law enforcement authorities to deal with it. We must focus our attention on prevention.
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"First of all, we must strengthen the Marxist leadership in our mind and do the ideological work well. Comrade Hu Jintao has mentioned this issue many times. He said, ‘Ideology has long been an important battlefield where hostile forces struggle fiercely with us. Loss of control in this battlefield can cause social turmoil, or even lose power. The hostile forces want to turn a society into chaos and subvert a regime. Usually, they always break open a breach from the ideological domain first and start to confuse people’s thoughts. We may look at the lessons of the dramatic change in Eastern Europe and the disintegration of the Soviet Union. At that time, Gorbachev proposed the ‘multiplicity of ideology,’ the so-called ‘openness’ and giving up Marxism in the instructional position of the ideological domain, which finally caused a clamor for the ideological trend of non-Marxism and the anti-Marxism. It became a very important reason for the disintegration of the Soviet Union and the collapse of the Soviet Communist Party.

"Next, in terms of organizations we must ensure all levels of leadership are firmly held in the hands of Marxists. This is the key issue as to whether the Communist Party can strengthen its own ruling status and prevent a ‘velvet revolution.’

"Thirdly, the most fundamental issue is to consolidate and strengthen the class foundation of the Party. In socialist countries, the so-called ‘velvet revolution’ is actually an intense class struggle. The power balance of classes determines winner or loser."

http://guancha.gmw.cn/show.aspx?id=2711

Communist Billionaire Rong Yiren

Rong Yiren, a Chinese billionaire and former vice president of China, and Communist Party member since 1985 died of illness in Beijing on Wednesday night October 26, 2005, at the age of 89.

Top Chinese leaders bade farewell to Rong Yiren in the hospital, where Rong’s body was covered with a Chinese Communist Party flag and surrounded by flowers and cypress leaves.

According to Xinhua News Agency, the Communist Party officially declared Rong as an "outstanding representative of the national industrial and commercial circle in modern China," a "superb state leader," and a "great fighter for patriotism and communism."

Rong’s life was closely intertwined with the agenda of the Communist Party and the turbulent history of China.

Rong was born in Wuxi City, China’s Jiangsu Province, on May 1, 1916, five years after Sun Yat-sen (1866-1925) was inaugurated in Nanjing as the provisional President of the new Republic of China on January 1, 1912.

<>Rong was educated at Shanghai’s élite British Christian-run St. John’s University, China’s most prestigious college at the time. In 1937, he took over the family business and started to manage flour and textile mills and banking companies.

<>By 1949, when the communists led by Mao took over Shanghai, Rong had become the descendant of Rong Desheng, a Shanghai textile and flour entrepreneur and one of pre-Mao China’s wealthiest men.

For reasons unkown to us all, Rong chose to stay and work with the new communist government, though the majority of his family members and friends had took their wealth to Taiwan, Hong Kong, and the United States.

In 1956, when private companies were nationalized, like those who did not flee communism, Rong "surrendered" his wealth to the communists. In 1957, he was appointed Vice Mayor of Shanghai and later moved to Beijing where he became Vice Minister of Textiles.

From 1966 to 1976, Mao Tsedong unleashed the Cultural Revolution in a bid to hang on to power and destroy "capitalist roaders" when millions of Chinese suffered from the protracted harassment and imprisonment. Rong’s background made him an obvious target for "re-education."
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According to some accounts, his home in Beijing was ransacked, his art collection smashed and looted, and his assets confiscated. He was reportedly beaten, denounced, humiliated by Red Guards, and made to work menial jobs as a janitor.

At the end of the Cultural Revolution, communist China was at a dead end — the economy was completely grounded. As a last resort to maintain Communist power, Deng Xiaoping "rehabilitated" Rong for Deng’s "open door" policy to attract foreign investments.

In 1979, at the Communist Party’s behest, Rong founded China International Trust & Investment Corporation (CITIC). Based in Beijing, 60 percent of the company was owned by the state and 40 percent was owned by Rong, according to some accounts.

Little known to the world, on July 1, 1985, Rong became a Communist Party member. At a time when membership in the Communist Party was no longer the requisite to survive, one cannot but wonder about the unspoken reason of his admittance in the Communist Party.

Under the auspice of the Communist Party, CITIC quickly grew into a global conglomerate with diverse holdings, from airlines, banks and property, to aluminum smelting factories and timber operations. Rong was instrumental in promoting a new open door image for the Party.

During the pro-democracy protests in Beijing’s Tiananmen Square in 1989, Rong issued an open letter calling on the Communist Party’s top leaders to work with the students.

In 1993, Rong was elected Vice President of China and retired in 1998. In 1999, Forbes magazine reported that Rong was the richest man in China, valuing his net worth at US$1 billion.

Some observers outside China dubbed him as the success of capitalism over communism. But there is little doubt: In China, Rong could not have been rich but for the need of the Communist Party. Few, if any, of those who surrendered their wealth together with Rong in the 1950s nationalization are to be found.

Steven Tian is a correspondent for Chinascope.

Ear Acupuncture: Wonder of Chinese Medicine

Ear acupuncture, also known as auricular acupuncture, is a method of treating a variety of physiological and psychological health problems by the stimulation of certain acupuncture points on the external ear. Similar to classical body acupuncture, ear acupuncture was discovered in China over 5,000 years ago and is still widely used as an effective therapeutic method in Chinese medicine today.

The auricle of the ear is an unique microcosm that can display complete information about the whole body. The human body’s twelve yin and yang channels on the hands and feet all reach the ear either directly or indirectly. In "The Chapter of Verbal Enquiries" in Ling Shu (Spiritual Junctures), it says, "In the ear, all of the energy channels are put together." In "The Chapter of Essays on Words of Gold and Truth" in Su Wen (Questions of Simplicity), it says, "Red from the south goes to the heart, opens on the ear, hides spirit in the heart." So, we can tell one’s congenital physique from one’s ear color, high or low position, thickness, flat or round shape, and firmness. We may even be able to tell the pathologies of many generations from the ear’s shape and appearance.

How do we judge the actual situation of the internal organs by observing the ear’s color, shape, or thickness? In "The Chapter of Organs" in Ling Shu, it says, "If the ear is black and small, the kidney is small. If the ear is thick, the kidney is big. If the ear is high, the kidney is high. If the back of the ear falls then the kidney is low. If the ear is firm, the kidney is firm. If the ear is thin the kidney is weak. If the kidney is small then it is safe and difficult to be injured. If it is firm, it does not get sick. If the kidney is big, it is empty and an empty kidney causes deafness or tinnitus."

The distribution of acupuncture points on the ear auricle is like an inverse embryo with the head down and the hip up. The various positions on the body have corresponding points on the ear. It is not surprising to see the pathological changes of any position in the body from the ear. For example, a slanting wrinkle on the earlobe can be seen on a person with coronary disease, a ring-like hollow around the ear auricle, called a plum pattern, can be found on a lung cancer patient’s ear, a person with schizophrenia has indentation on the pinna of the ear. Even loss of a tooth will show up on the ear.

People usually misunderstand that Chinese medicine is capable of only treating and curing chronic illnesses. Actually, other than emergencies such as amputations and surgical organ removal because of serious internal bleeding, Chinese medicine is actually the best choice for many urgent and acute illnesses. This is because, 80 percent of patients who visit emergency rooms are forced to go there because of suffering from symptoms that cannot be controlled. The pains or the symptoms of the illnesses are beyond their tolerance level, and they cannot wait for an appointment that might be two or three months down the line. The patients feel helpless and have to seek urgent help from the emergency services. Acupuncture can promptly treat, control, and cure many acute illnesses and take patients out of danger.
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It may be to one’s surprise that one of the major characteristics of ear acupuncture treatment is stopping pain with obvious curative effectiveness. In fact, using acupuncture treatment to treat acute diseases is not a new invention. It has a long history in China. Many such cases are documented extensively in ancient Chinese books. For example, Shi Ji: Bian Que Chronicles described how Bian Que, a famous Chinese doctor who lived during the Period of Warring States, used acupuncture to bring back a prince who had been pronounced dead for half a day. In the book Prescriptions for Emergency Cases written in the Eastern Ji Dynasty, Ge Hong described how to use acupuncture to bring people back from heart failure and other complicated, acute illnesses such as cholera. In the book Theories on the Root Causes of Various Diseases written in the Sui Dynasty, Chao Yuanfa wrote how to use acupuncture to treat stroke and other acute heart problems. In Essential Emergency Prescriptions, Sun Simiao of the Tang Dynasty wrote extensively on using acupuncture to treat acute diseases such as stroke, severe vomiting and diarrhea, urinary obstruction, uterine bleeding, lung problems, swollen midriff, snake bite, rabies, epilepsy, and other acute illnesses. He indicated that these treatments were highly successful in clinical applications.

China’s Energy Consumption and The Idea of an Energy Efficient Society [1]

In the 1980s and 1990s, China’s energy consumption elasticity averaged 0.4. That is, for every one percent of GDP growth, the energy consumption increased by 0.4 percent. Based on this number, the government made the assumption, in its long-term development strategy, that China’s energy consumption elasticity would reach 0.5 by the year 2020. However, China’s energy consumption growth in the past few years has far exceeded the economic growth rate. In fact, the energy consumption elasticity in 2003 and 2004 surged to 1.32 and 1.6, respectively. This demonstrates that China has entered the era of Heavy Manufacturing.

China’s Energy Consumption Structure Is Showing a Trend of Reversal

In the early 1990s, light industry and heavy industry products were virtually equal in terms of total industrial output. By the end of last year, the percentage of heavy industry products rose to 67.5 percent. That figure climbed to 69 percent in the first seven months of this year. Because the energy consumption in heavy industries is generally four times that of light industries, China’s transition into the stage of heavy manufacturing will inevitably lead to higher energy consumption, a common characteristic shared by industrialized nations when entering the same stage.

When industrialized nations enter the heavy-manufacturing stage, energy consumption is more dependent on oil and natural gas than on coal. Oil and natural gas, called clean energy resources, generate more heating value while producing less harmful gas. Thus, despite accelerated energy consumption, nations using clean energy resources cause significantly less environmental damage despite accelerated energy consumption.

However, the same shift in its energy consumption has not occurred during China’s industrialization. As a matter of fact, the percentage of oil consumption in relation to overall energy consumption decreased from 24.6 percent in 1999 to 22.7 percent in 2004. Despite the 15.7 percent of annual growth in crude oil imports since 2000, with a record 120 million metric tons imported last year, oil usage in relation to overall energy consumption dropped because of a slowing in the growth of domestic oil production. Is this reversal of the pattern of energy consumption temporary or is it an indication of a long-term trend? My answer is the latter, because two major factors limit China’s long-term shift to oil-based energy consumption.

The first factor is the unavailability of world energy resources. China is short of oil resources. It has been predicted that China’s maximum annual oil production is 200 million metric tons. Compared to China, the oil consumption per capita in many industrialized nations is far greater. In the United States, per capita oil consumption is 28 barrels. That number is 17 in Japan or Korea. In contrast, China’s per capita oil consumption is 1.7 barrels, one sixteenth of the United States, and one tenth of Japan or Korea.
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While the United States is the largest consumer of total energy, Japan and Korea boast that they have the most efficient energy users of all industrialized nations. By the standard of Japan and Korea, in 2030 when China accomplishes its industrialization, its annual oil consumption will amount to 3.6 billion metric tons, out of which 3.2 billion tons will have to be imported. World oil resources, however, are just not that abundant. Currently total annual oil production stands at 4.5 billion tons, out of which only 2.2 to 2.3 billion tons are tradable. Even taking the future growth of world oil production and trade into consideration, the world’s oil supply falls far short of the demand from China.

Japan and Korea, both lacking in oil resources, are forced to rely on world resources to accomplish their transition from a coal-based energy structure to an oil-based one. These two countries, with small populations, have fairly low levels of total oil demand despite high per capita oil imports. China, with its huge population, has such a high demand that it will be impossible to accomplish the energy structure shift by relying on world resources. In 2003, China’s imports of crude oil and oil products totaled 120 million tons, while that number surged to 150 million in 2004, 40 percent of the newly added trade volume for that year. Many people have even attributed the surge in oil prices to the increasing demand from China. Despite the rise in imports, the percentage of oil in relation to total energy consumption in China continues to drop. This phenomenon reflects how hard it is for China to rely on world resources to accomplish the transition of its energy consumption structure.

The second major factor lies in the ever more severe international conflicts caused by China’s enormous oil imports. This will be an increasingly serious constraint on China’s oil imports. As a matter of fact, developed nations own over two-thirds of the tradable oil in the world. In 2004, U.S. oil imports reached 640 million tons, while that number was 620 million tons for the European Union, and more than 200 million for Japan. When the growth in China’s oil imports exceeds the growth in the amount of international tradable oil that is already owned by the developed nations, it will certainly create pressure on those developed nations. China’s conflict with them will be inevitable. That is, when China’s demand for oil imports reaches a certain threshold, not only will economic feasibility be an issue, but political and military security issues will come into play as well.

Oil is a key factor in every country’s economy. Therefore it is a focal point of the economic, political, and military fights among large nations. Since 2001, the United States has launched military assaults in Afghanistan and Iraq. Recently it has been actively conducting "color revolution" [2] in some Central Asian nations. In addition, in the name of anti-piracy, it has established its military presence in the Malacca Strait. America’s military actions in the past few years center around the oil resources in the Middle East and Central Asia. If China’s oil demand relies too heavily on the imports from these regions, not only will its economic security be unpredictable, but its political independence will be challenged also. Thus, even if it were economically feasible to rely on overseas resources to accomplish China’s conversion of its energy consumption structure, it is politically unsafe.
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In conclusion, in the long run, China’s industrialization can hardly be achieved by completing an energy structural change similar to that of other developed nations. Because of its abundant coal resources compared to its oil resources, however, China will surely rely more heavily on coal in its future development. As a result, the continued increase in coal usage in China’s overall energy consumption and the drop in oil consumption will become a long-term trend in China.

China’s Environment in the Next 10 Years Will Continue to Deteriorate

If China’s energy structure becomes based on coal when it enters the heavy-industry era, it will surely face ever-mounting environmental problems. As of today, no country has ever accomplished its industrialization based on a coal-based energy structure. Presently, the discharge of harmful gases in China due to coal burning accounts for 65 to 90 percent of the total, exceeding 80 million metric tons annually.

Based on the growth rate of China’s energy consumption and the drop in its oil consumption since 2000, China’s total energy consumption is expected to reach nine billion metric tons of standard coal by 2020, with the weight of coal consumption surging to 75 percent, or the equivalent of 9.5 billion tons of raw coal. The harmful gases that this amount of coal will emit when burned, based on current environmental standards, will reach 400 million metric tons, a fivefold increase from its current level. Such a tremendous amount of harmful gases will be catastrophic.

Some people may ask: If entering the Heavy Manufacturing era is the root cause for the surging energy consumption and its resulting environmental disaster, can China bypass this stage? Because of the potential issues of resources and investments in Heavy Manufacturing, many people are debating whether China should take this route.

The reason is that at the current per-capita income level, many people have a demand for durable goods- including housing and automobiles-which has to be supported by heavy industry. Therefore whether China should develop its heavy industries is related to the question of whether the Chinese people should increase their demand for high-grade consumer goods. Evidently this is not a question for debate, but a question of Chinese people’s pursuit for a better life. Without this pursuit, what is the meaning of China’s modernization and development of social productive forces?

Some people use the example of Hong Kong and Singapore to demonstrate that domestic demand for heavy-industry products can be fulfilled through international exchanges. Unlike the issue of oil, for the economies of millions or even tens of millions of people, domestic demand for heavy-industrial products can indeed be satisfied by international allocation and exchange, so that the domestic economies can bypass the stage of Heavy Manufacturing. Nevertheless this is impossible for as large an economy as China’s, with such a huge population. It is equally impossible for China to bypass the stage for oil, steel, chemical, or mechanical industries. China’s modernization, therefore, must take the path of Heavy Manufacturing. The result is that its consumption of energy cannot be cut back.
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Still others argue that because China intends to construct an "energy efficient society," China can reduce the demand for energy by taking the path of a "cyclic economy." For example, using scrap steel will reduce energy consumption and the emission of harmful gases by over 90 percent. I have to remind the readers that a "cyclic economy" takes the approach of recycling and reusing the processed resources. To develop a large-scale cyclic economy, one must have a society in which a large amount of products have reached the end of their life cycle. This is the reason why there can be a cyclic economy in developed nations, while in developing countries this possibility is limited.

In modern China, over half of the steel is consumed in real estate, with 20 percent in mechanical industries, and only five percent in the auto industry. As of 2004, 60 percent of the total housing square footage in urban areas was built in the past five years, and 60 percent of the automobiles and machinery has been in use also for only five years. Assuming the average use cycle for housing is 50 years, and that of automobiles and machinery is 15 years, then in the next ten years, China will not have large quantities of used steel to recycle. The story will be the same for other colored metals and plastic. Thus, one cannot expect China to accomplish large-scale energy saving by developing its cyclic economy.

As China’s coal usage continues to accelerate, the country will easily reach the limit of its environmental tolerance in just a few years. If China cannot bypass the path of heavy and chemical industries and the world resources cannot support China to accomplish its shift from coal-based to oil-based energy structures, China’s industrialization must take a whole new path.

We often talk about how China should take "brand-new industrialization approaches." By this we mean that it needs to grow from extensive to intensive production. From the relationship between energy and environment, the word "new" should reflect how China should take a brand-new technological approach that has never been taken before by any country, namely, to accomplish its industrialization on the basis of new energy resources and new raw materials. China’s new industrialization should be not only new as compared to its past, but new to the whole world.

Since China’s developing industrialization is a brand-new process, the path of exploration will surely be full of difficulties, and the process will naturally take an extended period of time. Before it can successfully switch to the new industrialization approach, China must rely on traditional energies and raw materials for an extended period of time. As the burning of coal continues to weigh heavier in its overall energy consumption, China’s environment will further deteriorate. We must be able to foresee the future, and increase our investment in the protection of our environment. Only this way can we ensure that, in relying on coal, China’s economy can sustain its growth on the path of traditional industrialization.
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The Key to Building an Energy Efficient Economy Lies in Production, not in Consumption

The shortage of resources in China’s economic development raises urgency in China to develop an energy efficient society. To save energy, China must examine two aspects. One is production, and the other is consumption. In production, China must save resources. That is, it must focus on the efficient use of resources. China must also encourage consumers to reduce consumption. Out of these two aspects, which one should be emphasized in an energy efficient economy? Personally I believe the emphasis should be on production, not consumption.

From the perspective of consumption, it means encouraging a thrifty lifestyle, which is contrary to people’s desire for a better life. Japan has the most efficient use of national resources, and is a role model for an energy efficient economy. This does not contradict the fact that for every 1,000 Japanese people, there are 600 cars. Regardless, China must encourage its citizens to have a thrifty lifestyle and thrifty habits.

One might question, why not use economic measures such as taxation to constrain the demand for large housing and cars with powerful engines? As part of the pricing components, higher taxes for resource-intensive consumer products will certainly suppress the demand for such products. However, if the market pricing already reflects the degree of scarcity of the resources, consumers will naturally make rational decisions based on their income level and the price of the product. For example, as the gas price surges, many consumers are expected to give up their plans to purchase cars or to choose to buy less powerful cars. Therefore as long as the market pricing mechanism continues to be effective, the government does not have to interfere in order to suppress consumption.

There is another proposal to use taxation to raise resource prices in order to save the resources. Personally I disagree with such an idea. China’s own resources are not enough to help it achieve modernization. China has been more and more deeply involved in world resources and market ecosystems. As China’s demand for resources increases, the prices for the world’s resources will follow suit and increase. As a result, all nations that import resources from the international resource market will have to share the burden of rising prices, which makes China’s burden much lighter. If China unilaterally raises resource prices domestically, it is equivalent to automatically giving up the advantage of utilizing cheap world resources. By the same token, if demands for world resources from other countries like India increase, China will be forced to share the consequences of rising prices for these resource products. Therefore, as long as the resource prices accurately reflect the scarcity of the resources, China has no need to proactively raise its domestic prices.
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Currently, waste of resources in China’s production is widespread. The main reason for such waste is due to backward equipment and technologies and the small scale of its enterprises. In many manufacturing sectors, including steel, concrete, electricity, mechanical, and construction industries, the consumption of energy and raw materials per unit of product output far exceeds the average in developed nations. Therefore, there is tremendous potential for saving in these industries. Developing an energy efficient economy is not merely an issue of ideology, but more importantly, an issue of material basis. We must take legislative and economic means to force the elimination of some backward production equipment. By using financial subsidies, government-backed discounts for loans, and accelerated depreciation, we can encourage companies to quickly eliminate obsolete equipment and purchase more advanced equipment. In addition, we should strictly regulate the technological and scale levels that China should possess, and widely encourage economies of scale.

The Key to Efficient Production Lies in Incremental Efficiency

Production efficiency can be divided into two categories: incremental efficiency and stock efficiency. In its middle stage of industrialization, China has to consume a lot of new resources every year. Incremental efficiency is to improve efficiency in extracting and processing resources in order to raise the utilization rate of resources. Stock efficiency is to recycle and reuse the processed products, which is also called "cyclic economy."

Developing incremental efficiency and stock efficiency requires large investments from the government and society. With limited financial and social resources, emphasis needs to be selective. From the perspective of China’s industrialization, production efficiency in the next ten years should be focused on incremental efficiency. This is because the development of a cyclic economy requires the accumulation of a certain amount of products. Take steel as an example. Generally there are two criteria used in assessing the development of an industrialized country. One is steel production per capita. The other is the amount of steel stock per capita. Developed countries, after industrialization, own an average of 700 kilograms to one metric ton of steel production capacity per capita, with a per capita steel stock of 10 metric tons.

Once the per capita steel stock reaches 10 metric tons, the steel production capacity gradually retreats, because demand for consumer products is basically satisfied. Renovating products usually takes the form of replacing new for old. The obsolete and abandoned products, such as cars and buildings, often contain a large amount of metal. The recycling rate for abandoned metal products can often reach 80 percent, which provides ample room for the development of a cyclic economy. In the steel industry of developed countries, steel manufacture using electric stoves produces 80 percent of their total steel output because the raw materials in their stoves are comprised mainly of scrap metal. China as a developing country, however, has the per capita steel output of merely 200 kilograms, and steel stock of 1.5 metric tons per capita as of last year, because of its limited economic development. So far, steel manufacture using steel ores still makes up 85 percent of the steel output, while only 15 percent comes from scrap metal. Furthermore 60 percent of the scrap metal is actually imported from abroad.
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In summary, the emphasis of production efficiency should be on improving the utilization efficiency of incremental resources. As China’s economic scale is already very large, with its metal stock as high as that of Japan, there is still a lot of room to develop a cyclic economy. It is better to start right away, though.

The Most Critical Resources Are Land and Water

It is the non-tradable resources that are the ultimate bottleneck for China’s economic development.

Efficient production is to save the usage of various production elements. Because of the variations in different countries in the natural condition of various production elements, the usage density of the production elements varies as well. With international trading, the production elements that are scarce in one country can be obtained through trading with other countries. Nevertheless, some production elements, including land and water, cannot be obtained via trade. As a result, in economic development, the non-tradable resources are the ultimate bottleneck that cannot be overcome.

While China boasts vast land and abundant natural resources, because of its large population, its per capita land is less than 1,000 square meters (1,196 square yards). Industrialization must then rely on farmlands. It is even more urgent and important to save the use of land than the use of any other tradable resource. Saving the land is also the most important approach in maximizing wealth output with the least input of production elements. As is demonstrated by many developed nations, two-thirds of the wealth in a nation is in the form of real estate. Food will disappear after it is consumed; clothing is tossed when it is worn out; cars are just durable goods that also depreciate. Real estate is the major form of wealth that can be preserved.

As land is very scarce in China, without improving the efficiency of land usage, China will go astray on the path of an increase-without-development economy. For instance, the plot ratio (or floor area ratio) among China’s recently constructed buildings is very low. China’s gross plot ratio (the ratio of building floor area versus the building area) averages at 0.5. Even in crowded Shanghai, that number is less than 0.8, compared to 2 in Tokyo, 1.6 in Hong Kong, and 1.2 in Taipei. Even in the Zhuhai Triangle and the Yangtze Triangle where land resources are extremely scarce, buildings with five or six floors are common in the downtown areas.

Recently, I visited a city in Zhejiang Province. I learned that all land development plans thereh had reached the limit of the city’s capacity. Nevertheless, most newly constructed homes are buildings with six or so floors. This year the land use in Zhejiang Province approved by the central government is merely 230,000 Mu (37,950 acres), with 40 percent of it reserved for projects by the central government. The allotment of land usage for each city averages 20-30 Mu (3.3-4.95 acres), while the allotment for each county is less than 1,000 Mu (165 acres). This has resulted in a dramatic decrease of investment growth in Zhejiang Province.
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Other provinces, including Fujian, Guangdong, and Shanghai, are facing the same problem. As a result, it is said that China’s economic growth has been experiencing regional changes, showing the "Cold" East and "Hot" West phenomenon.

To find new room for growth in the East, builders have to raise the floor area ratio of already used lands, that is, by demolishing old buildings and building new ones. In the past five years, China has witnessed an increase in demolition. On the average, demolition accounts for 20 percent of all building area. Based on my rough estimate, assuming that the value of the demolished buildings is half of the new ones, the loss of real estate values as a result of demolition in recent years totals 50 to 60 billion yuan (US$6.25-7.5 billion) on an annual basis. So far, the demolished buildings are mostly old and used ones. If the lack of land forces the builders to demolish many relatively new buildings in urban areas, the wealth loss will be even greater, leading to the state of increase without development.

The shortage of water is also a serious issue. Despite the lack of water resources in China’s North, many northern regions have invested a lot in the so-called "pillar industries" which have a high water consumption, including steel, chemical, and building materials industries. When the water resources can no longer sustain the growing demand, production cannot be carried out normally and investments are wasted, even with the new technologies that save energy and mineral resources.

Under China’s special situation, turning China into a nation with the most efficient utilization of land and water resources in the world is the most important task in developing China’s efficient economy.

Footnotes:
1. The article was combined from two articles originally published in the 25th and 27th issues of "Internal Reference for Reform."
2. See Wikepedia at http://en.wikipedia.org/wiki/Color_Revolution: Color revolutions or Flower revolutions are the names given collectively to a series of related movements that developed in post-communist societies in Central and Eastern Europe and are possibly spreading elsewhere including some places in the middle east. Their participants use mostly nonviolent revolutionary change to protest against governments seen as entrenched and authoritarian, and to advocate democracy, liberalism, and national independence. They usually also adopt a specific color or flower as their symbol, and the protests are notable for the important role of NGOs and particularly student activist organizations in organizing creative nonviolent resistance.

Wang Jian is the Vice Secretary-General at the Chinese Macroeconomic Research Society.

A Failed Meeting or a Failed Party?

There is a saying: "If you are confident that you know the Heavenly Empire, it means you don’t know it." Chinese politics has baffled generations of China scholars. The October 8-11 recently concluded Fifth Plenary Session (Plenum) of the 16th Central Committee of the Chinese Communist Party (CCP) was a typical one.

Speculations over the Plenum results have kept China analysts busy. Many think that the CCP leader, Hu Jintao, who became both the Party boss and the military chief last year, would use the meeting to consolidate his power base. Yet the critical motions proposed by Hu Jintao all suffered setbacks at the meeting. There was no sign of political reform, as many had hoped. Some committee members raised critical issues that challenged the validity of the political system. The concluding communiqué issued after the Plenum was nothing but unbridled propaganda concerning the 11th Five-Year Plan (2006-2010). There was not a single word on the shuffle of the top apparatus as many analysts had anticipated. This casts serious doubts on the boasted success of the Plenum.

During the Plenum, in contrast to the intrigue of closed-door elite politics, local CCP organizations arrested thousands of people who had come to appeal their grievances to the CCP leadership in Beijing. Mobs directed by CCP local authorities brutally beat a representative of the National People’s Congress in the remote southern village of Taishi in Guangdong Province. Although such suppression has been common occurrence in recent years, having them conspicuously exposed to the world press during the CCP Plenum cast a satirical glow on the fanfare of the Plenum theme "A Harmonious Society" and signified the overall ineffectiveness of the CCP rule.

Toppled Arrangements

It has been a CCP tradition to use the Central Committee meetings to make key personnel shifts. Deng Xiaoping twice used the fifth plenary sessions (in 1980 and 1985) to arrange for his henchmen to take up important positions.

This Fifth Plenary Session was the first Central Committee meeting since Hu Jintao became the real CCP boss, that is, being both the General Secretary and the President of the Military Commission of the CCP Central Committee. Many believed that Hu would place his trusted followers in Shanghai and Beijing, the two power centers. Early this year, Hu tried to replace Chen Liangyu, the CCP chief in Shanghai who has close ties to Jiang Zemin, with Liu Yandong, a protégé of Hu. Liu, however, declined the offer. It was rumored that Hu would try it again in the Fifth Plenary Session. In addition, Li Keqiang, the CCP chief in Liaoning Province, was rumored to be up for a new key post. The post-Plenum communiqué, however, revealed no such change. Hu’s failure to arrange for key posts indicated that Hu might have suffered setbacks in the meeting.
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Another signal of the failed meeting was that all five major motions put forward by the Political Bureau of the CCP did not get onto the agenda. Those motions were all of the "Sunshine Bill" type. The bills would have required: (1) All top-level CCP officials and their family members to reveal their revenue sources; (2) All top-level CCP officials to reveal to the departments or provinces of which they are in charge the employment and education of their family members; (3) All top-level CCP officials to encourage their sons and daughters to go to work in remote areas; (4) That the CCP General Secretary at the provincial level not serve more than one term both as the CCP Secretary as well as Governor; (5) All top-level CCP officials and CCP-controlled government organizations itemize their public relations expenditures.

This suggests a powerful force against any political change within the Party. By shelving those motions, this behind-the-scenes force successfully challenged Hu Jintao’s newly established authority.

It is ironic that the CCP, a political party that has done so much economic engineering, has failed with all its political motions. In fact it would be much appreciated if the CCP would indeed focus on taking care of its affairs by formulating a five-year political agenda to rectify itself, leaving the economics to functional departments and the private sector.

The meeting also failed to exert its authority and discipline by successfully appointing the coordinators of panel groups. The Fifth Plenary Session was divided into eight discussion panels: the CCP Central Committee and Departments of the State Council, the People’s Liberation Army (PLA), the Northeast group, the North group, the Northwest group, the Southwest group, the South group, and the East group. Of the eight panels, except for the Northwest and the PLA groups, the other six panels did not accept the coordinators the CCP Political Bureau originally appointed. Based on that fact, Hu Jintao had to admit a lack of centralized CCP authority.

The weakening of centralized CCP authority may be beyond the study of factional politics. The communiqué of the Fifth Plenary Session revealed nothing about the factional struggle. The CCP leadership deliberately left the Chinese public ill-informed about the instability within its top leadership, since leakage of a failed CCP authority could be exceedingly dangerous and lead to unexpected results for the entire CCP political system. Therefore, it became a tacit imperative for the CCP leadership to uphold a superficial consensus, for which Hu developed the official title "A Harmonious Society."
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A Hollow Blueprint

A high-level CCP conference is usually a two-sided enterprise: There is a polished façade, and then there is the dirty backyard. The façade is for public relations work and entails discussions of long-term plans. The backyard is where the "dirty linen" gets hung out, typically involving the shuffling of personnel and the reallocating of seats, both of which reflect the results of muddy power struggles. For the façade, the CCP uses its propagandized media to make it center stage. As for the "dirty linen," the CCP tries to conceal it as much as possible.

The only agenda the Plenum released to the public was the 11th Five-Year Plan (FYP). After taking over power from Jiang Zemin at the 16th CCP Congress in late 2002, General Secretary Hu Jintao and Premier Wen Jiabao sought to distinguish themselves from Jiang by hoisting the banner of a "Putting-People-First Leadership." The new 11th FYP crystallized their close-to-the-people approach by laying out a grandiose roadmap for the country’s "scientific development."

In this 17,000-word document, the new plan pretends to take into consideration the welfare of disadvantaged groups, the uneven development between China’s East and the West, as well as environmental concerns. The CCP proclaimed that the newly approved 11th FYP signified a transition from a "government-oriented" economy to a "market-oriented" economy and thereby merited the new title "Five Year Blueprint" (FYB).

However, an in-depth analysis shows that, by every measure, the new 11th FYB is nothing but another grandiose illusion to woo the general public.

First, the use of the FYP has failed repeatedly. The CCP imported the idea from the Soviet Communist Party. From 1953 to 2005 the CCP has executed 10 FYPs, with an interruption of three years (1958-1960) due to the failure of the Great Leap Forward. The 10 FYPs have not helped China catch up with the developed world, which has instead watched as the gap has widened. Let’s compare China with three other entities-Taiwan, Hong Kong, and Macao-that all share the same Chinese cultural tradition. In 1949 when the CCP took power, the four were economically at the same level. After more than 50 years, the per capita GDP for communist China is only US$1,200. The per capita GDP for the other three non-communist Chinese entities is Taiwan US$13,000 and Hong Kong and Macao each over US$20,000.

Russia stopped the failing FYP practice 14 years ago. The CCP did not. One has to wonder why a superficial term change from "FYP" to "FYB" would prevent the history of failure from repeating itself.
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Secondly, the new FYB cannot ensure that it can close the gap between the rich and the poor. In recent years, this gap has widened to an unprecedented extent. According to an official Chinese estimate, China’s Gini coefficient has reached 0.47, among the top Gini scores in the world. International analysts have graded China’s Gini even higher at 0.54 (varying from zero to one with the higher number closer to socio-economic inequality).

Such a gap and the resulting dissatisfaction resulting from a sense of relative deprivation have given rise to massive riots in Chinese society. Reduction of this gap of inequality requires improvement in a social security system, which in turn requires allocating more money. However, the fundamental cause of the inequality was the notorious corruption by CCP officials that drained the money generated by the "GDP miracle." The annual cost of CCP officials’ corruption has been as high as close to 20 percent of the annual GDP. The money annually smuggled out of China, mostly by family members of high-level CCP officials, has already exceeded the annual influx of foreign investment.

The 11th FYB may help the CCP leadership to achieve high GDP rates. Yet, with the mechanism for corruption unchanged, an ever-larger pool of money will continue to flow into CCP officials’ pockets at the expense of the socially disadvantaged and the social security system. In a CCP-controlled game where both the referee and the player are on the same side, how can the socially disadvantaged and a weak social security system compete with the candid conspiracy of a CCP leadership "referee" and "players" composed of the vast majority of greedy CCP officials?

Thirdly, the 11th FYB failed to lay out the details of how to promote social equality among a total of 900 million rural inhabitants. The blueprint included at least five subsections detailing rural policies. The CCP seized national power largely due to the support of peasants. Since the communist regime came into power, however, it has never given peasants land as promised. "Rural collectives" rather than individual peasants own land in the countryside, as stipulated by law. The local CCP officials have been using this murky ownership situation to sell land-use rights to urban developers, in which members of the "Iron Triangle"— the CCP government officials, bankers (appointed CCP officials) and developers — share the booty. To the victor go the spoils! The peasants are the helpless victims. The new blueprint did not address this core issue at all.

While the new FYB promised to help implement democratic management in the rural areas, there were few details on how to realize this rosy promise. In fact, the local CCP officials in townships and villages are powerfully opposed to those policies. Peasants call those CCP officials "bandits" to allude to roving rebel bands led by the CCP guerrilla forces during the years of "revolution." Those officials are beneficiaries of the CCP rule and have developed various formal and informal taxes to exploit the peasants. They have every vested interest in fending off rural democracy to protect their autocratic kingdoms. It would be impossible to carry out the proposed policies without eradicating the entire CCP apparatus at the local level.
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This points to a core irony: Is it possible for the top CCP leadership to remove its local power base to consolidate the central power? The answer, as evidenced by an incident that occurred in the middle of the Fifth Plenary Session, is "No." On October 9, a delegate to the local People’s Congress was brutally beaten while trying to investigate an election in the village of Taishi. A reporter from the U.K.-based newspaper The Guardian and an interpreter accompanied the delegate. The purpose of the organized brutality was to threaten the villagers of Taishi, who had tried to oust their corrupt chief and elect their own local leaders. The incident was just one of a million such incidents in villages all over China. That the Plenum tolerates such persecution makes a mockery of its proposal for rural democracy.

In sum, without transforming the norms of the totalitarian CCP, it is highly doubtful that mere terminology modification in the new "FYB" will lead to a market-driven socio-economic boost to drastically reduce long-existing social inequalities. In light of the elite power struggle, the new FYB is just another political tactic to attack by innuendo the previous "GDP worship" of Jiang’s developmental model.

Dong Li holds a Ph.D. in Political Science from Columbia University. He is a China specialist who provides news analysis for New Tang Dynasty Television based in New York City.

China’s Economic Reform: Under the Glamorous Surface

In the almost three decades since China started its economic reform, China’s economic might and political clout have become hot topics in political circles worldwide. "Made in China" has become a way of life all around the world. China’s rapidly growing cheap labor force has both made China the "world’s factory" and emerged as a potential consumer market of dizzying proportions. China’s economy seems more open than most other transitional economies. China’s accession to the WTO further convinced the world that the Chinese Communist Party (CCP) is committed to making China’s economy open to and integrated with the world economy as a free market economy. Scholars and economists have been analyzing China’s economic issues, and providing suggestions and solutions for problems that have been plaguing China’s reform as if the CCP will ultimately make the right choices. For fear of missing out, businesses stumble over one after another seeking a share of China’s market. They have an optimistic outlook of what the reform will bring. Nevertheless, the world’s governments have very little concept of the creature that China is becoming, except that its power can no longer be ignored.

The Plan

When Deng Xiaoping visited Hong Kong and the United States, his grand plan — to build a modern economy under the iron fist of the CCP — was already set. Deng did not care much about Marxist ideology, but he had even less tolerance for political freedom. At the time, his colleagues either didn’t understand his plan or didn’t agree with it. The old guard wanted less economic reform while his new vanguard tried to push for political reform. It took the June 4 Tiananmen Massacre and Deng’s repeated urgings in the ensuing years for the CCP’s leadership to finally pick up on Deng’s idea.

From the outset, the concept was clear: The CCP wanted only the science, the technology, and all the technical stuff that made a market economy work and to deflect any Western ideas and values from entering China. Not only that, the CCP also shielded China from any Western financial, monetary, and economic forces that could significantly influence or affect China’s own system. The CCP also didn’t intend to genuinely change the foundations of its power such as property ownership, its commanding power over the economy, or its other power over the society.

With little resistance from ideology, the CCP reformers have had quite a free hand in transforming the economy. The CCP created and showcased "special economic zones," which seemed at the time improbable both to the world and to the people inside China. China’s economic gate seemed more open than ever before. The CCP also allowed foreign banking, communication, legal services, and other industries to set up shop in China. Meant to be experiments, these foreign entities could operate only under very restrictive conditions, even though the CCP had no intention of letting them become material. The CCP even created a special environment and community for foreign expatriates to enjoy even more "freedom" than in their home countries. All these strategies helped the CCP to create the illusion from very early on that the leadership was determined to carry reforms all the way to the end, that is, to the establishment of a free market economy, and that anything else was just "technical" and a matter of time. Combined with China’s cheap labor, blazingly fast pirating and copying of foreign technologies and products, low overall consumption, a nonexistent distribution network and other infrastructure for foreign companies to market and sell their goods, and the governmental control of China’s trading companies, China has been able to appear very open, more open in fact than other transitional economies as far as trade barriers are concerned. This, in turn, further enhanced the illusion of the CCP leadership’s reform resolve. This illusion reached its climax when China signed the WTO accession agreement.
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Of course, the economic genie released by the CCP will eventually consume it no matter how hard the CCP tries to prevent such a scenario. But there is no indication so far that the CCP is even willing to reduce or limit its power. On the contrary, there is every indication that the CCP will use whatever force or brutal measure necessary to crush any group and/or movement that is perceived as undermining the CCP’s rule. Obviously, the CCP needs to maintain its foundational roots— its Party branches — if it wants to keep its presence in society. The CCP needs to maintain its commanding power in managing the economy if it doesn’t want to reduce its economic role to that of Greenspan’s, [1] and the CCP needs to retain its supreme position in making and interpreting the law if it doesn’t want to become obsolete. Therefore, the plan started with these fundamental limitations.

The Practice

Ironically the CCP’s reform plan has never progressed very far. When the CCP started the reform, state-owned enterprises not only dominated the economy, they actually were the economy. They were also a major part of the CCP’s social and power base. If the CCP could plan anything, this was all it could plan for. This was indeed what the CCP really hoped for. By opening up to the outside world, the CCP hoped that the state-owned enterprises would then be equipped with modern technology, machinery, and production methods. By introducing and adopting certain market factors, the CCP hoped that the state-owned enterprises would have the incentive to perform. In addition, the CCP hoped that the state-owned enterprises would adopt modern and scientific management; be productive, efficient and competitive; become the power engine of the new economy and revenue source for the central government; and, more importantly, solidify the CCP’s vital social and power base.

The CCP tried, failed, tried again, failed again, tried once more, and failed once more. [2] The CCP first freed the managers from planned quotas to allow them to respond to the market needs and let them take responsibility for their production. It then changed "surrender of profit" to taxation to give the managers more incentive to outperform. The CCP tried to get private investors to take on a fraction of the ownership of those enterprises in hopes of shaking up the management. It later even tried to turn the enterprises’ debt to shares and sell them on the stock market. The CCP finally decided to let the smaller and weaker enterprises go and concentrated on protecting the bigger ones. But none of these strategies worked, even with the protection of a dual pricing system that gave room for the enterprises to catch up with subsidized financing from state banks. What was worse, every time a new strategy was instituted, it created a huge opportunity for the managers and Party officials to steal state assets. The opportunities were so lucrative and the pickings so easy that corruption soon became an institutionalized feature of the CCP and the economy. The enterprises’ property and assets have been disappearing under various schemes. Many of them, usually the better ones, simply changed their ownership from the state to the managers at little or no cost to the managers. The corrupt and money-losing state-owned enterprises have racked up huge bad debts, affecting all four major state-owned banks. Based on the internationally accepted Basel standard, these banks are now insolvent. The CCP’s latest move is to allow the enterprises to sell the previously restricted (non-salable) shares to the already drained stock market. If earlier attempts are any indication, a few will come out ahead, way ahead. But the enterprises themselves and the investing public won’t be among them.
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Case One

A state-owned power plant in Changge City, Henan Province, went through privatization in 2003. At the time, the power plant was one of a handful of profitable, state-owned enterprises in Changge City with a total value of 101 million yuan (US$12.6 million) including a net asset of 32 million yuan (US$4 million). Strangely enough, the plant general manager, Liang Beiling, and several other managers were able to buy the plant for 15 million yuan (US$1.85 million) with a one-time cash payment using a method called "MBO" or "Management Buy-Out."

The new, privately owned company has 35 stockholders. Its chairman is still Liang Bailing. The only difference is that the power plant has a new name, the "Changge City Hengguang Thermal Power Co. LTD."

How did they do it? Liang Beiling, the plant general manager prior to the privatization, was also the principal buyer in the privatization process. By using his power as the general manager, he hired a firm to re-appraise the value of the plant. The result was shocking. A profit-making company was transformed into a company with a 36 million yuan (US$4.5 million) debt. Liang then devised a "reward policy," which gave the management buy-out group a 30 percent break on the purchase price. In addition, Liang instituted a policy providing a 25 percent price break if the buyers made a one-time cash payment. Management established one self-rewarding policy after another, with the result that a 101-million-yuan plant is now a private company controlled by former plant manager Liang Bailing, who owns 19.46 percent of the shares.

Case Two

In 1999, before privatization, the assets of the state-owned Dingxi County Department Store included a three-story office building near Dingxi Railroad Station, a new office building, and two residential buildings.

To prepare for privatization, the retail department store expanded this three-story railroad station building by adding four more floors. Wang Xueli, the store’s legal representative, did not provide any information about the expansion to the appraisers. Accordingly, the railroad station building was appraised at 45,785 yuan (US$5,500) as a three-story building.

In August 2000, the assets were finally transferred from the state to the new private company, which then had a total capital of 500,000 yuan (US$60,000), 490,000 of which was owned by Wang Xueli, the former legal representative of the state-owned department store.
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The greed and deception continued. Wang forged a receipt showing that the new private company had paid a fictitious company for construction work. With that receipt, Wang obtained a title certificate showing that he owned the assets from the second floor to the sixth floor of the railroad station building. In May 2002, Wang Xueli sold these five floors to the new private company.

According to a Chinese government investigation, Wang misappropriated a total of 2,140,882 yuan (US$258,000) through the privatization of this state-owned department store.

Case Three

On October 28, 1999, as part of privatization, Anhui Mobile Communication Co., Ltd. (AHMCC) registered a private mobile phone company with two million yuan (US$241,000) in initial capital, 20 percent owned by AHMCC and 80 percent by the AHMCC Workers’ Union. The initial capital was paid via the following fund transfers:

AHMCC wired 400,000 yuan (US$48,000) to the new mobile phone company for its 20 percent. On October 13, 1999, AHMCC wired 1.6 million yuan (US$193,000) to its Workers’ Union. The next day, the Workers’ Union wired the 1.6 million (US$193,000) to the new private mobile phone company to pay for its 80 percent ownership.

Soon after, AHMCC requested that 1.17 million yuan (US$141,000) be raised from its top management and employees. Once the 1.17 million yuan was raised, on January 13, 2000, the new private mobile phone company returned 1.6 million yuan to the Workers’ Union, which forwarded the 1.6 million yuan to AHMCC that same day.

From the end of 1999 to early 2002, the private mobile phone company was so profitable that its shareholders received hefty dividends: The top four senior AHMCC managers each received dividends of 86,500 yuan (US$10,422), the 15 mid-level AHMCC managers 57,600 yuan (US$6,940), low-level AHMCC employees 28,000 yuan (US$3,373), and AHMCC retirees 18,700 yuan (US$2,253).

Why is this private mobile phone company so profitable? Through a Chinese government investigation, it was discovered that AHMCC diverted high revenue business to the private mobile phone company to benefit AHMCC’s own management and employees.

… … …
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The real economic "genie" released by the CCP, the real impetus behind the reform miracle is the people, the people in the rural villages and townships, and the private entrepreneurs in the urban areas. The private sector struggled and succeeded, even under stringent restrictions and absolutely no bank funding and in the face of arbitrary bullying from CCP officials for more taxes and/or bribes. It is this private sector that attracted foreign merchants and manufacturers to China to purchase goods and set up factories to produce more goods. It is this private sector that started to fill the stores worldwide with "Made in China" labels. It is this private sector that has supplied the domestic market with abundant merchandise of all kinds and that has played a major part in raising the nation’s living standard. It is also this private sector that created sufficient wealth to enable the country to develop at a mind-boggling speed. Deng Xiaoping reportedly admitted that this was unexpected and not something he had anticipated. [3] Despite the CCP’s desire to boost the size of the private sector in order to claim market economy status, it is very likely that the private sector has already been responsible for more than 50 percent of the economy for some years. [4]

China’s export industry has overwhelmed the world and has paid its dues in helping to carry the reform this far. In 2004, total exports stood at US$593.4 billion, a 35.4 percent increase over 2003, which itself is an increase of 34.6 percent over the year before. [5] There is no doubt that it will continue to grow. But this only works well for labor-intensive industries, and China has already dominated most of them in product lines such as toys, apparel, footware, and household electronics. In the capital-intensive or technology-intensive industries, China’s chief advantage of cheap labor loses its critical value. Certainly China has and still is producing a very impressive number of engineers, but it is no comparison to the virtually unlimited supply of cheap manual labor. Furthermore, it will be harder to find willing foreign corporations to move their high tech development centers to China if they face the certainty of losing their technological lifelines. As for China, any indigenous effort will certainly be taken on by the state-owned sector, whose managers are questionable for such a challenge.

Another vital component of China’s economy that has kept the reform going this far is the dizzying speed and scale of capital spending and development. It certainly satisfies China’s ego to have the "largest, tallest, fastest," and other superlatives in the world. But the evidence of excess and waste is abundant. In 2003 and 2004, China built so many steel factories that the country’s needs won’t exploit their full capacity until 2010. [6] It is well-known that the return on China’s capital investments is extremely low and much of it is wasted. But this is the only way to keep the economy growing at a sufficiently high speed to generate enough jobs to absorb laid-off workers and migrant workers from the countryside. Since 2003, the fixed capital investment accounted for a whopping 47 to 51 percent of the GDP [7] and 75 percent of the GDP growth in 2004.
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The Outlook

Western scholars and economists have long warned about the fragility of the Chinese economic bubble. To their astonishment, whenever the bubble seemed about to burst, the CCP was able to stave off catastrophe by slowing development temporarily and then speeding ahead to make the bubble even bigger. Under market economy conditions, this bubble would no doubt have burst long ago. But in China, the CCP controls all the financial institutions and owns all the major investment projects. It can ignore all these danger signs as long as people don’t rush to the banks to take their deposits out and inflation remains under control. The financial resource that has made it possible for the CCP to do this comes from the super high savings rate of Chinese household depositors and the large amount of seignorage (the amount of real purchasing power that a government can extract from the public by printing money). [8] Chinese household savers have put away large sums of money into the banks year after year. Total household deposits, as a percentage of GDP, rose from about two percent in 1978 to 22 percent by 1994. [9] From 1994 to 1998, household depositors pumped an average of 770 billion yuan (US$96 billion) a year into their bank accounts, doubling the amount of the previous five years. [10] The total household deposit hovered at around 60 percent of GDP from 1997 to 2001. The increase of the urban work force and household wealth, coupled with the lack of a personal credit/checking system, demanded increasing amounts of cash just to satisfy people’s daily needs, which enabled the CCP to print large amounts of cash with little inflation effect. In addition, the longer cash stays in people’s hands, the more it loses value due to inflation. This combination provided essentially free revenue for the CCP, which averaged an increase of 6.85 percent of GDP from 1986 to 1990 and an increase of 8.09 percent of GDP from 1991 to 1999. [11] These financial resources have enabled the CCP to use the sheer growth of the economy to mask the deeper and fundamental problems the CCP has created.

But these problems are real and growing more severe by the day. The CCP’s insistence on reviving its state-owned enterprises without genuine ownership change has resulted in the complete failure to transform these enterprises. As a result, much of these enterprises’ assets have been stolen by their managers and the collaborating CCP officials, making more and more of these enterprises unsalvageable. At the same time, corruption has become an institutionalized feature of China’s system— it is simply everywhere. These inefficient and money-losing enterprises have created such huge bad debts that the state banks are crippled and unable to perform their financial functions. Increasing numbers of workers are being laid off and pushed out into society. To alleviate this pressure, the CCP has resorted to massive, mindless capital investment projects, which can only make the matter worse over time. The unnaturally high growth rate, combined with poor planning and rampant corruption, has made the situation nothing short of disastrous.
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Over the years of reform, the CCP has been able to hide these problems by high growth and high spending. But the growth rate of exports is unlikely to be sustained in the future, and the high growth in capital investment can only make the matter worse and the bubble bigger. The third component of GDP is consumption. If consumption increases, it will result in fewer deposits in the banks and may cause higher inflation.

It may be as futile to try to predict when this bubble will burst as to predict the same for stock markets elsewhere in the world. Even in an economy as free as in the United States, the last stock market bubble lasted much longer and reached a much larger size than many could have expected. As we have learned from China’s reform history, the Chinese bubble can get much bigger, but so will the damage when it bursts.

The private sector is still capable of cleaning up this mess. If the restrictions on the private sector are lifted, if they can be on the same footing as the state-owned enterprises in terms of growth and size and obtaining financing from banks, they will very likely and almost surely be able to grow and expand, to take over the weaker state-owned enterprises, to absorb workers who need jobs, and, finally, to start to improve the nation’s overall productivity and efficiency. In order for this to happen, the CCP has to accept genuine migration to private ownership, has to restrain itself from interfering and obstructing private enterprises’ business activity, and has to let an independent judiciary preside over the courts of commercial law. In essence, the CCP has to be prepared to wrap up and head to the exit. It is squarely confronting the very economic forces it released.

One group of scholars has long argued that economic reform should be but a small part of a constitutional transition. [12] Without reform, the constitutional system under which the CCP holds the monopoly of all political power, the CCP’s vested interests (its Party officials) will hijack the economic reforms and reap most of the benefits at society’s cost. Some of the scholars further point out that if such economic reform succeeds, China will be following in the footsteps of pre-Second World War Germany and Japan.

Given the history of the CCP’s willingness to use any means to keep itself in power, given the serious problems that are brewing with increasing intensity under the glamorous surface, given the more and more apparent fact that the CCP has become the proverbial "cow on the track" of the speeding reform train, and given the fact that the CCP has been increasingly relying on nationalism to rally its people, this warning should not be neglected— not by the world and especially not by the Chinese people.
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Footnotes:

1. Alan Greenspan is Chairman of the Board of Governors of the Federal Reserve System in the U.S. and Chairman of the Federal Open Market Committee, the system’s principal monetary policymaking body.
2. He Qinglian, China’s Trap, Chapter 3.
3. Fishman, Ted, China Inc, P. 74.
4. Chandrasekhar, C.P., Frontline, "How Large is China’s Private Sector?" Vol. 22, Issue 21.
5. World Bank, China Economic Indicators – Cumulative, http://www.worldbank.com.
6. Macabe Keliher, "Red Lights Flashing for China’s Economy," Asia Times, http:://www.atimes.com.
7. World Bank, China Economic Indicators – Cumulative, http://www.worldbank.com.
8. Lardy, Nicholas. China’s Unfinished Economic Revolution, P. 184.
9. Ibid, P. 14.
10. He Qinglian, http://www.mlcool.com/html/01090.htm.
11. Ashima Goyal and A.K. Jha, Economic and Political Weekly, October 15, Vol. 39, 2004.
12. Jeffery Sachs, Wing Thye Woo and Xiaokai Yang, Economic Reforms and Constitutional Transition, Perspectives, Vol. 1, No. 6.

Hua Yi is a freelance writer based in New York.