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China’s Ultimate War Plan: For Taiwan, We Will Fight at Any Cost!

Todayat the newspaper stand, a headline on QiaoBao (China Press)[1]caught my full attention: PLA Prepares for the Ultimate War.

Referringto Hong Kong based "Wenhui Bao", the "Qiao Bao" articlesays, "A Taiwanese affairs expert in Beijingquoted a statement given by Chinese Defense Minister, Cao Gangchuan, to CNNduring his visit to the U.S.last year (2003). He highlighted the strong resolve of the PLA (People’sLiberation Army) on the Taiwanissue. Mr. Cao Gangchuan said, "The PLA is ready to fight the Ultimate Waragainst Taiwan Independence forces."

Inorder to understand why the Communist mouthpiece newspaper used the word"Ultimate War", I searched for Cao Gangchuan’s original speech inGoogle.

Inover a dozen different websites in China and abroad, I found thefollowing original report on Cao Gangchuan’s statement.

"In UStime 5:25 on October 29, Cao Gangchuan answered CNN reporter’s question.

"CNNsenior reporter on Taiwan Affairs asked Cao: ‘Mr. General, we heard that Taiwan willsoon hold a national election. What’s the opinion of Chinese government and themilitary on this election? What action will be taken? Thanks. ‘

Cao: ‘Chinesegovernment has consistently insisted on peaceful resolution of Taiwanreunification issue. But in order to maintain our national unity, we do notrule out use of force. The Chinese government has the determination andcapability to resolve the Taiwanunification issue. To maintain national unity, the PLA is not afraid of war.Our determination can be summarized as. We would fight to death to keep Taiwan, wewould do it if it needs to turn the island into a place where not a singlegrass can grow.’

Currentlythe U.S.government has not published any comments on this." (posted on Chinese StudentWeb )

Internetreaders on several websites questioned the authenticity of the quotation. Theycan’t believe the Chinese Communists are indeed as cruel as snakes andscorpions. Do they really mean to turn Taiwan into a place where not asingle grass can grow?

Afterreading Qiao Bao today, I can believe that Cao Gangchuan indeed said thosewords. Therefore, the experts in Beijingindeed interpret this as the "Ultimate War."
CaoGangchuan’s high profile threat to start a large scale destructive war in frontof the Americans was not Communist China’s first act of aggression. It’s not anempty treat. It’s Communist China’s real war plan.

MaoZedong claimed during a 1957 Moscowconference that, "There is nothing to fear even if a nuclear war killsseveral hundred million people. That can only transform the entire world intosocialism."

In1992, during a meeting to cascade the Communist Party Polibureau decision, theCCP Military Committee Vice Chairman Yang Shangkun said, if the U.S. sent troops to oppose a Chinese invasion toTaiwan, the ChineseCommunist would start a "Destruction Strike" upon U.S. soil.

In 1996, the Chinesecommunist government staged a missile war game near the TaiwanStrait. Chinese leaders Li Peng, Qiao Shi and Xiong Guangkai,together with the Communist newspaper People’sDaily launched a verbal assault against the U.S. They swore that if the U.S. dares to defend Taiwan,the Chinese Communists will launch "nuclear strikes" against the U.S.

Becauseof this long-term plan, the Chinese Communists went all out to develop weaponsof mass destruction, including Shenzhou, a series of manned spaceships that hadclear military purposes. Also because of this plan, Mr. Cao Gangchuan, head of China’s weaponsof mass destruction industry, was promoted to be defense minister.



[1] Qiao Bao (also called China Press) isan overseas Chinese Newspaper echoing the voice of Chinese Government.

Propaganda Machine Weaves Intricate Web: Case Studies of China’s Media

“Ignorance is Strength,” exhorted the fictional Party in George Orwell’s novel 1984. In today’s Chinese Communist Party, this axiom is alive and well. In addition to outright censorship and blocking sensitive news, the state propaganda machinery puts together a mosaic of half-truths and one-sided reports. The result is that the consumers of such“news” form what seem to be their own opinions while being controlled by the state.

The misinformation is not limited to the masses. Even China’s high-ranking officials are fed and deceived with filtered news. They become narrow-minded, and consequently are unable to gain individual perspective or make sound judgments based on the situation’s development. The reason Deng Xiaoping issued the order to “shoot to kill” during the June 4th massacre in 1989 might have a lot to do with the exaggerated reports on the“turmoil” by the Beijing municipal authorities.

The media blockage and filtering of overseas news during the past few years have further aggravated the problem.  To investigate the problem, I conducted two case studies: the state media’s spin of the SARS outbreak and coverage of the Taiwan elections.  During the SARS outbreak last year, there was a common suspicion in the outside world that the Chinese government was covering up the real situation, which the Chinese government repeatedly denied. Furthermore, on April 3, 2003, the Health Minister at the time, Zhang Wenkang, declared that China had effectively contained SARS. Zhang’s statements indeed boosted everyone’s confidence. In order to find out if the government reports on SARS were objective, I read over 400 articles posted on since the beginning of the year up until April. Here are some “facts” that were reported:

  • When SARS broke out, specialists from the Central Government to the local governments conducted joint diagnoses and treated the patients together. As a result, the patients were discharged from hospitals and regained their health.
  • Bad elements  stirred up panic, yet the government put a timely end to the rumors and provided a stable environment.
  • An extremely small number of anti-Chinese forces overseas suspected that we have covered up the facts, yet the majority of countries and people in the world do not believe what they say, and the Guangzhou Trade Fair this year will seethe largest number of overseas trading partners than ever.
  • Tourists from overseas are providing testimony to prove that it is safe to travel to China.
  • Experts from the WHO also stepped forward to praise China for effective cooperation and taking the proper measures.
  • There is no significant problem, though later on I found that while the Chinese media deceived the experts, they made use of the polite encouragement from the experts and removed the warnings from the same people.
  • The borders are open, and overseas experts have been granted permission to visit Guangdong Province, though later I found out that permission was delayed for another 20 days.

The reports make everything seem so transparent.  One is made to think, “What news can the Chinese government be hiding?” Also, one would feel a strong sense of pride for the responsible attitude the Chinese government took towards the people’s well being. In retrospect, when I read some reports from the overseas media at the time, I really did feel that some of the reports had“ulterior motives.”

This lasted until April 20th, when the State Council announced that SARS had broken out on a large scale and dismissed the Health Minister and the Mayor of Beijing. Only then did I realize how much I had been deceived.

In the case of the Taiwanese election coverage,instead of outright lies, the state media used a variety of news items to paint a picture of panic and despair surrounding the election. The immediate and obvious goal was to put down Taiwan, but on a deeper level, the goal was to discredit the institution of democracy through blaming and associating various social issues and unpleasant things with Taiwan’selections. The following are some of the headlines on the Chinese Xinhua News Agency website’s “Important News from Taiwan” section leading up to and following the election.

  • Taipei County: Man Shot Blind on the Street[03-29 15:58]
  • Most College Students Think Elections Are Abusing Power and a Waste [03-29 15:05]
  • Five Hundred Thousand People Gather to Protest against Unfair Election [03-2721:49]
  • Earthquake of 4.8 on the Richter Scale Hits Jiayi, Taiwan[03-26 14:14]
  • Taiwanese Continue to Protest against Unfair Election. Stock Prices Keep Dropping [03-26 09:48]
  • Taiwan Election Chills Tourism [03-26 08:59]
  • Taiwanese Fishing Ship Wrecked Near Fujian,Fishermen Rescued [03-25 21:17]
  • Guns and Bullets Seized in Yunlin,Taiwan [03-2611:01]
  • Hunger Strike Starts to Protest against Election [03-25 19:07]
  • Under Unstable Political Situation, Taiwan Businessmen Buy Real Estate Overseas [03-25 15:30]
  • Taiwan Businessmen Buy Real Estate in Shanghai and Hong Kong after 3.20  [03-25 10:53]
  • Taiwanese Emigrate after Election [03-24 13:29]
  • Pessimism and Bad Economy after Taiwan Election [03-24 16:32]
  • Number of Mental Disorders Soars after Taiwan Election [03-24 14:52]
  • Warning of Taiwan Health Department: Enterovirus Infection on the Rise since March [03-24 09:59]
  • Two Dead, Six Injured at a Taipei Construction Site [03-24 09:07]
  • Kaohsiung:Bribery Case Going to Court Next Month. Make-Up Election Made Possible [03-2313:59]
  • After effect of Election: Four Suicides on the First Workday [03-23 12:27]
  • Taiwan Official Announcement: 4.61% Unemployment Rate in Feb. Almost Five Hundred Thousand Unemployed. [03-23 09:34]
  • Taiwan Stock Plunges, Hits Eight-Year Low [03-23 09:32]
  • 560 Rifles Missing from a Police Station in Tainan [03-23 09:28]
  • Instant Loss on Taiwan Stocks Reduces 47.5 Thousand yuan (about $5.7 thousand)of Assets Per Person[03-23 08:27]
  • Taiwan:Sixty-Nine-Year-Old Man Dies from Heart Attack in Voting Station [03-22 15:44]
  • Most Taiwan Businessmen Pessimistic about “Three Exchanges” and Feel Alienated after Election [03-22 15:07]
  • Taiwanese Protest against Unfair Election and Request Recount [03-22 11:17]
  • Taiwan:Psychotherapy Patients Increase by 50% [03-20 08:36]
  • Taiwan Police Seize Gang’s Ammunition  [03-19 10:40]
  • Strange Disease during Taiwan Election: Swollen Gums and Chin Pain [03-19 16:14]
  • Hong Kong Media: Chen Said “Taiwan Cannot Lose.” But Taiwan Has Lost for the Past Four Years. [03-18 16:37]
  • Families against Each Other and Unhealthy Mentality during Taiwan Election[03-18 10:08]
  • How Taiwan Election Affected My Life: “I Cannot Escape from Political Farce” [03-17 08:23]
  • Suicide Rate Soaring in Taiwan.Government Hurries to Find Solution. [03-16 12:44]

The culmination of these articles is an impression in the reader’s mind that democracy and free elections lead to a higher suicide rate, plunging stock market, increase in strange diseases, mental disorders, emigration, pessimistic attitudes, a bad economy, accidents at construction sites, earthquakes,shootings, protests, and general chaos and turmoil. When stated outright, the conclusion seems ludicrous, but the continuous propaganda over the course of months and years has proven to be quite effective. This is exactly where the danger lies in an environment of misinformation and self-deception.Everybody, including the masses, officials at various levels of government, the media themselves, and even the central leadership, are deceived by the virtual reality mutually created on the foundation of bias and one-sided information.

Furthermore, the like and dislike of the leaders will reinforce the bias of the media and news reporters. In the end the situation will further deteriorate when people start to deceive each other; the authorities are deceived by reports from their subordinates, and the subordinates are misled by the instructions from higher authorities. The result is a web of lies woven on top of lies, creating a society that is detached from reality. During the short history of the Chinese Communist Party, many things have happened that look rather ridiculous from today’s perspective. Years later, people wonder how such things could have happened, but while it was unfolding, everything seemed so natural. One of the reasons for this is that people were all living an all-encompassing, fraudulent existence during the events, and could not perceive that anything was amiss.

Sima Tai is a freelance writer inWashington D.C.

Development Projects Devastating China’s Ecosystem

Prof. Yang Yuming, one of the major proponents of environmental protection in China and the Vice President of the Southwest Forestry College of China, recently received the Parker/Gentry Award for Conservation Biology from the Field Museum in Chicago. According to the Field Museum, "established in 1996, the Parker/Gentry Award honors an outstanding individual, team or organization in the field of conservation biology whose efforts have had a significant impact on preserving the world’s natural heritage and whose actions and approach can serve as a model to others." This article resulted from a special interview by Epoch Times with Professor Yang regarding the protection of the ecosystem in China before the award ceremony.

Professor Yang revealed that the horrendous damage to the ecosystem caused by cutting down trees to plant eucalyptuses by the Jinguang (Sinar Mas) Group Co., LTD is no less harmful than the construction of the Nu River Dam. Prof. Yang remarked that it was his responsibility and mission to protect nature and the ecosystem of southwestern China. He believes that only through exchange and collaboration with international organizations, can Chinese experts be effective in protecting China’s natural ecosystem.

Lumbering Followed by Eucalyptus Planting Will Cause Big Damage

The Sinar Mas Group of Indonesia was founded by Mr. Huang Yichong. Its businesses focus mainly on paper, agriculture, finance, and real estate. Headquartered in Singapore, the Pulp and Paper Group (Asian Pulp & Paper Co., Ltd., or APP in short), a subsidiary of the Sinar Mas Group of Indonesia, was established in 1994 and is one of the largest paper manufacturing and sales corporations in Asia.

According to Prof. Yang, eucalyptuses originated in Australia. Because of its rapid growth rate, it is widely used in paper production. The Sinar Mas Group has invested heavily in renting or purchasing tracts of land to plant eucalyptuses. What seems beneficial to everyone, growing the trees, processing them and then paying taxes, can actually have tremendously negative consequences. This directly harms China’s ecosystem, and the negative consequences are long lasting and irreversible.

The Yunnan Province Branch of Xinhua Net reported on October 20, 2003, "The Sinar Mas Group has targeted the investment environment in the Wenshan (Wen Mountain) Autonomous Region of Zhuang and Miao ethnic groups. It has built the base for fast-growing forests covering 5.5 million Mu (1 Mu is equivalent to about 1/6 acre). Recently the project has been launched with efforts from both parties, and will soon be implemented across the board." The article highly praised the Governor of Wen Mountain Autonomous Region, who personally led the implementation of the project, as well as the oversight committee and government of the Autonomous Region, who formed the Wenshan Leadership Group to integrate the forestry, pulp, and paper components. The article reported that the overseas investors were very satisfied with the promptness and efficiency of the local government in carrying out this project.
Prof. Yang pointed out that the Sinar Mas Group plans to grow eucalyptuses in an area as large as thirty million Mu. What consequences will such a large-scale effort have? As Prof. Yang indicated, "Most experts I’ve talked to in the fields of forestry, agriculture, ecology, and biodiversity are against this project. In the last few decades, we have carried out systematic research in the biological characteristics and ecological patterns of eucalyptuses. In the meantime, we have also conducted long-term tracing, investigation, observation, analysis, and study of both the positive and negative impacts that eucalyptuses have on the ecosystem and the ecological environment of a certain region. The conclusion is that it causes the deterioration of the soil, and its consumption of the soil’s nutritional elements and deep underground water far exceeds that of ordinary trees."

Prof. Yang continued, "When a tree species grows in its original habitat, its characteristics and ecological effects are in harmony with the environment and the organisms around it. However, when it is taken out of its original habitat, its original advantageous characteristics such as its strong ability to adapt can potentially become harmful characteristics to its environment. The eucalyptus is such an example. When it grows in its original habitat in Australia, it is perfectly fine. When it is moved to a new habitat, it has a strong tendency to suppress the native species, growing at the expense of other species. The latter start to recede, and eventually, the eucalyptus forest becomes barren outside of the eucalyptus itself. There is no grass, shrubs, or smaller trees. Many other species simply cannot compete with it. The eucalyptus is an enemy of Yunnan’s biodiversity."

According to Prof. Yang, the large-scale development of the eucalyptuses in the late fifties and sixties did have significant positive impacts on the recovery and reforestation of the barren hills, and it was a boost to economic development at that time. Eucalyptus leaves can be refined to produce eucalyptus oil, which is a significant source of income for farmers when sold to medical and chemical manufacturers. Although lumber from eucalyptus trees is not suitable for furniture or other high quality products, it is good material for producing paper. However, introducing eucalyptuses into an extremely biologically diverse region such as the valley regions of Xishuang Bannai, Ximao, Wenshan, Dehong, Linchang, the Three Rivers (Nu River, Lancang River, and Jinsha River), where internationally protected biodiversity is at stake, will certainly reduce the local biological diversity. Furthermore, eucalyptuses will consume tremendous amounts of nutrients and water from the soil, leading to extremely harmful impacts to the soil’s water balance. It is very difficult to grow other plants once eucalyptuses are grown and then cut down.

Experts’ Assessment Ignored, "Planting on Bare Mountains" Is a False Claim

If experts consider the large-scale eucalyptus planting so harmful, why is this project still going forward? Prof. Yang said, "During the Yunnan Economic Development Seminar called by the Governor and Deputy Governor of Yunnan Province on November 27 of last year, which was attended by experts from various professions, I clearly stated my opinion. I talked about the pros and cons of Sinar Mas Group’s eucalyptus planting. I explained that we absolutely should not plant eucalyptus trees on a large scale in Yunnan from the viewpoint of forestry, biodiversity, and ecological protection. At the time, the leaders smiled without saying anything. As a specialist and scholar, one shouldn’t arbitrarily comment on what one doesn’t know. I knew I must speak up. I had to unequivocally state my academic opinion. The Sinar Mas Group does not have the backing of the scientific experts, nor was it brought in by entrepreneurs. They came in through a certain channel. They also knew they couldn’t possibly pass an expert’s assessment, so the assessment was simply skipped and the whole thing began with an order from the Yunnan Province: it had to be done, with no room for discussion."
Professor Yang said with distress, "The harm caused by the eucalyptus trees won’t be less than that of the Nu River Dam. The plan is not just to plant a few thousand or tens of thousands of Mu. The plan is to cut down nearly 30 million Mu of forest, and that’s 5% of the total area of Yunnan Province. The entirety of Xishuangbanna, Simao and Wenshan…it’s likely that almost all of the mountainous regions that are worthwhile will be lumbered and replanted. The Sinar Mas Group says it is utilizing barren mountains and wastelands to plant trees, but that’s not true. When the Yunnan Province Forestry Investigative Planning Agency was doing the planning with them, they found much of the land to be woodlands, and natural woodlands on top of that, though it is true that some were secondary growth forests. These locations were favorable from a transportation and logistics point of view. These woods enjoy wet climate and good conditions. After a few years, secondary growth characteristics will gradually disappear, and they may be restored to primary forests if the original trees are allowed to grow. But if we cut down these secondary forests, including the natural forests, and plant Eucalyptus trees instead, it will be almost impossible to restore these areas. Why? Simply because this foreign species is an enemy of biodiversity, and many other species cannot coexist with it."

Quantifiable and Unquantifiable Losses Caused by Eucalyptus Planting

Professor Yang analyzed the quantifiable and unquantifiable losses caused by replacing existing trees with Eucalyptus trees: The concept of green GDP was raised in the international community as early as ten years ago, but it was not until the past one or two years that it really made its way into the domestic newspapers. The concept of green GDP is that when calculating the GDP, one should deduct the cost to the environment, just like deducting the cost of manufacturing. The cost to the environment consists of a tangible part and an intangible part, and at least the tangible part can be calculated. However, at the moment the leadership and economists are not interested in the environment and only talk about GDP growth. They don’t care about the environmental cost.

As to the tangible part, Professor Yang gave an example, "In order to plant eucalyptus trees, you need to cut down the existing trees. The value of the felled trees can be calculated. Additionally, there might be a tree among those cut down whose value far exceeds the acre of eucalyptus you plant afterwards. Suppose there’s a Dalbergia sissoo inside, a very precious species. In 1983 when we went to do inspections in Xishuangbanna, a Japanese person saw a dead Dalbergia sissoo tree. At that time, color TVs were very rare in China and he was willing to give up two Hitachi TV sets. At that time a Hitachi TV set was about $3,000. To him, that tree was worth $6,000. That was inconceivable to the local people. Species like the Dalbergia sissoo are especially popular in the secondary growth woods in Xishuangbanna and Simao. We could list out these types of trees one by one. The soil erosion caused by planting eucalyptus trees on a large scale, the harm it causes to the soil, and other such considerations are tangible and can be calculated."
Other factors are intangible. Professor Yang said, "There are other types of value, for example medicinal plants. We haven’t discovered it, can’t calculate its value, and of course can’t use it. What is currently considered useless may turn into a priceless treasure tomorrow. Take rubber as an example. Before Columbus came to the New World, the coverage of rubber trees in Brazil didn’t exceed 200 square kilometers. If a significant logging effort were launched beforehand, it probably would have destroyed the rubber tree, and we would not be able to benefit from it today. Rubber is just one example, and there are many species whose value is much higher than rubber. Right now just because the eucalyptus can be used to produce paper, those precious woods are being felled, and nobody is concerned."

"The existence of a tree species contributes to the ecological effect to the surrounding environment. For example, it stabilizes the carbon dioxide ratio in the air, the oxygen released adjusts the climate, and it may serve as habitats and water sources for other organisms. These are things that we cannot calculate at the moment. But the intangible part, if you could truly quantify it, would likely be much greater than the tangible part. None of these costs are being taken into account. The value of the paper pulp that is produced is weighed against the small amount of money spent for renting the land and planting the Eucalyptus, and that is what they used to determine the cost. Meanwhile, the other tangible and intangible costs as a result of felling the woods are not considered. You tell me, is this type of GDP growth meaningful?"

Forests Being Cut Down, Experts’ Effort to Stop It Are Ineffective

What is the status of the Sinar Mas project? Professor Yang said, "The contract has been signed, the plan has been made, and many trees have been felled—at least a few thousand Mu. At the Lancangjiang River area, I saw with my own eyes a natural bamboo forest, the largest natural bamboo forest in China, being cut down. This bamboo forest was about 70 thousand acres in the 1970s. Later it gradually shrank, and what is left now is only about 20 to 30 thousand acres. If we continue like this, this forest will be gone. The largest planted bamboo forest is in Zhejiang Province. A planted forest cannot be compared with a natural one, and a natural forest is very rich in terms of biodiversity."

Professor Yang continued, "Although experts are voicing their objections, this project has always pushed forward as a government action, basically forcefully carrying out a directive. The Deputy Director and the chief engineer of the Yunnan Province Forestry Investigative Planning Agency talked to me about these things. This was an order from a higher level. It has economic benefits, and he has to do it. He was also very distressed upon seeing that large stretches of good woodland are being rented out at the rate of one or a fraction of one yuan (about 12 US cent)  per Mu, and the lease is often for decades at a time. What follows is existing trees being cut down and eucalyptus trees being planted."
"The country originally had many rigorous policies, laws and regulations regarding forestry. I don’t know why none of them are being enforced when it comes to this issue of the eucalyptus. My academic mentor and I are trying very hard to stop it. We want to persuade the government to be prudent, not to take on projects blindly, but to conduct an assessment first. Another part is to search for other tree species, especially primeval species, to replace the eucalyptus. So we are trying to tackle this matter in a proactive way. But it is very hard to make progress on this. It is said that the Sinar Mas Group has a very strong background."

Known Ecological Consequences Should Serve as Warnings 

Professor Yang urges everybody to pay attention to this little known Sinar Mas project, whose potential harm is a match for that of the Nu River Dam. He said, "Currently our country has proposed a scientific development outlook of being comprehensive, holistic, and coordinated. We shouldn’t be like before and think that development overrides everything, as if as long as we continue to grow, everything will be fine. In reality this kind of ‘development’ is limited and one-sided. Many ecological disasters don’t show up immediately. It takes years, even decades, for the effects to show up. Once they show up, it is extremely difficult to reverse them. Even if you spend time and money that’s ten or hundred times what you put into it originally, you still may not be able to restore it to its original state."

To support his conclusion, Professor Yang used several examples where ecological destruction could not be reversed. "One example is the excessive herding in Northwest and Inner Mongolia. After severe over-herding, the sheep ate even the grass roots. It would have been shocking if sandstorms didn’t follow. Another example is the flooding of the Yangtze River. That was the result of large-scale logging in the upper reaches of the Yangtze River, the Jinshajiang River region, in the 60s and 70s. I’ll give a third example. The soil in southern China is relatively thin for the most part. After the surface soil is brushed away, you’ll see stones. This is called rocky desertification. Years ago the production of sugarcane fell short, and sugar prices were high. So, Yunnan Province felled trees on a large scale and planted sugarcane. As a result they quickly made money, and lots of it. However, the cutting down of so many trees caused large-scale soil erosion. After two to three years of sugarcane planting, the soil fertility suffered, and they couldn’t plant anything anymore. The original woods became bare mountains and bald ridges. Rocky desertification won’t cause sandstorms as normal desertification would, but restoration is more difficult."

Translated from

Financial Crisis in Rural Areas

[Summary:  In order to make a fair assessment of China,it is important to look beyond metropolises like Beijingand Shanghai.This article is a research report by the study group led by Xiwen Chen at the Development Research Centerof the State Council. After the investigation of XiangyangCounty of HubeiProvince, Yanling County of HenanProvince and Taihe County of JiangxiProvince, the report comes to the conclusion that governments at the county leveland in rural areas are facing severe financial difficulties. According toestimates, currently the lowest-level governments in villages and towns allover the country have debts of about 300 billion yuan (~ $36 billion).Including debts incurred by the county governments, the total debt is estimatedto be over 500 billion yuan (~ $ 60 billion).]

Since the reform of thefinancial and tax systems in 1994, while there is improvement in the overallfinancial situation, the finances of the counties and the countryside in mostareas run behind their expenses. Quite a lot of counties and towns are facingsevere financial difficulty, and this problem is not just a simple economicone. It has severely affected the smooth operation of the political authoritiesat the grass-roots level, as well as the development of the rural socialservices. It has become a critical factor that affects the political and socialstability of the rural areas.

Four MajorProblems Expose the Severe Financial Crisis in Counties and Rural Areas

Currently the financialpicture of income and expenditure in counties and rural areas has been clouded,causing a lot of difficulties for accurately depicting the financial situationin rural areas. The study group of the DevelopmentResearch Centerof the State Council has analyzed three typical rural counties in central China –Xiangyang County of Hubei Province, Yanling County of Henan Province and TaiheCounty of Jiangxi Province. According to the investigation, there are foursigns of a severe financial crisis:

First, the finances of thecounty and rural areas follow a model of just getting by, managing to paysalaries only. The administrative costs of the best of these three counties,Taihe County of Jiangxi Province, accounts for 71% of the primary expendituresin the year 2000. The public finances of Yanling Countyhave gotten to a point where even if the government takes on nothing, there isno way to guarantee the payment of salaries. Its actual financial capacity is80 million yuan (~ $10 million), but the salary expenditure is 96 million yuan(~ $11 million). The public finances of Xiangyang Countyare in the most difficult situation of the three counties. In the year 2000,the financial capacity of the whole county is only 198 million yuan (~$23.8million), but the salary expenditure is 154.82 million yuan (~ $18.6 million),which accounts for 80% of the total financial capacity.

Meanwhile, the financesfor the villages and towns are in much worse shape than that of the counties.The report takes Dama Town and Mafang Town of Yanling County of Henan Provinceas examples. Besides paying salaries, the actual capital shortfalls are atleast 2.278 million yuan and 3.657 million yuan. "These two towns’finances are past the ‘make-a-living’ stage, but have deteriorated to the pointof ‘begging.’ Moreover, because of the decline of their financial credibility,the situation has become more and more difficult. The public finances of thetowns have come quite close to total collapse."
The second probleminvolves budget shortfalls and increasing unplanned revenue. Since the countygovernment doesn’t have legislative power, an important means to make up forbudget shortfalls is using extra-budgetary channels to collect fees and fundingfor all kinds of administrative services, and this is done on a significantscale. In the year 2000, Xiangyang County listed 550 types of fees foradministrative services, 110 departments were involved, and the fees collectedamounted to 64.1 million yuan (~ $8 million), 90 million at its peak. Theextra-budgetary revenue accounted for 30% of the financial revenue in Xiangyang County,44% in Yanling Countyand 69% in Taihe County. Most of the revenue will go backto the original company after going through the books. This kind of managementof budgetary and extra-budgetary funding has weakened the ability and scope ofcentralized control of public finances.

Third, counties areheavily in debt, and the financial base is facing bigger and bigger risks. Inthe year 2000, XiangyangCounty had a directfinancial debt of 289.25 million yuan (~ $35 million), which accounted for140.3% of the available revenue of the whole county. Year 2001 was a peak yearfor due debt payment, as 158.4 million yuan (~ $19 million) came due. Among thepayments due, the principal and interest of the loans by mutual funds, theWorld Bank and the finance working fund are guaranteed by the CentralGovernment’s tax returns. If they cannot be paid by the due date, they arededucted from the tax return and come directly out of the "make-a-livingmoney." If the financial liability is not paid by the due date, it isdeducted directly from the funding. The county’s tax revenue is only about 26million yuan (~ $3 million) per year, so this county will face much difficultyin getting its finances straightened up. It will be very difficult for them topay for salaries and normal administrative expenses. Also, its towns’ debtshave not been included yet. This county’s 17 towns have an average debt of24.11 million yuan (~ $3  million). The debt of Taihe Countyis at more than 90 million yuan (~ $10.9 million), which accounts for 57% ofthe budgeted revenue. YanlingCounty, including boththe county and its towns, has incurred financial debt of 140 million yuan (~$17 million), most of which is incurred by its towns, which amounts to 120million yuan (~ $14 million).

Finally, the countygovernments are not able to provide the most basic public services for therural areas. Because of the financial difficulty, except for paying salaries,the governments have no funds to do anything else. The funding for ruralcompulsory education comes mainly from taxes, fees and education fundraisingfrom peasants. A report said that currently the county public appropriationscover only about 15% of the medical staff’s salaries in the health departments.There is almost no investment from upper-level public finance to the countyhealth services, which leads to bad facilities and low quality servicesprovided by the rural healthcare organizations. At the same time, medical costshave gone up rapidly. The farmers are overloaded with heavy burdens of medicalpayments, which many of them cannot afford. Not being able to afford healthcareand being driven into poverty by unexpected large medical expense have becomevery prominent problems. Except for fighting for special central governmentfunding, the county governments have made almost no investments in agriculture.
The County andDistrict Level Financial Crisis Affects the Rural Area’s Stability

The county and districtlevel financial crisis has serious consequences for agriculture and ruraleconomic development. They can be summarized into four aspects.

First, the fundamentalgovernment financial crisis has increased the burden on the farmers. Overtaxingis one aspect. Based on the situation of the three counties, it is clear thatagricultural tax is a major source of income at the county level. In the year2000, the four agricultural taxes accounted for 44.5%, 27.6%, and 50.7% of theincome of the county governments of Xiangyang, Taihe, and Wulin, respectively.If we take into account the Butcher Tax, which is classified as an Industry andBusiness Tax, the tax revenue related to agriculture accounts for an evengreater proportion in the county and district government income. In addition,this trend is accelerating. As the financial burden of the county and districtgovernments increases, and because it is harder to keep up growth on theIndustrial and Business Tax, more and more effort has been put into collectingthe Special Agricultural Product Tax to keep up with the ever-increasinginfrastructure costs. The collection of the Special Agricultural Product Tax isrelatively arbitrary, because it is calculated according to the number ofpeople in each family. The problem of over taxation is very serious. Theestimated amount of the Special Agricultural Product Tax in Xiangyang Countyis 8.5 million yuan, however, the annual tax obligation designated to thatcounty is 46 million yuan. This accounts for only 18.5% of the required taxamount.

Second, given the factthat there is no tax legislation, the local governments collect a variety offees to pay for different expenses. The local governments are arbitrarilycollecting money, asking for fees and allocating this income. This isdrastically increasing the burden on farmers outside of normal taxation.

The investigation foundthat the burden on the farmers is directly related the county and districtlevel financial crisis. Out of the 59 families investigated in the threecounties, the average income of a farmer is 2,652 yuan (~ $321), with the taxburden at 291 yuan (~ $35), which accounts for 10.9% of the income. The taxburden on each farmer differs greatly for different counties. It is 292 yuan (~$35) in Wulin Countyin Henan province, accounting for 6.5% of theaverage income; 163 yuan (~ $19) in TaiheCounty, accounting for 8.3%; and anamount of 415 yuan (~ $50) in XiangyanCounty, accounting for25%. In addition, the lower the income of a family is, the higher the taxburden rate is.

The county and districtlevel governments squeeze the financial resources of the village levelgovernment so much that the village government can hardly provide any socialservices to the farmers. It’s common for the county and district levelgovernments to make up budget shortfalls from funding allocated for publicservice, sometimes even tapping into the villages’ funds. For the threecounties that were investigated, all of them had this problem. When thecounties faced financial hardship, they squeezed out funds from the villages tomake up the budget shortfall.
The Dama district only hada total of 1.51 million yuan (~ $0.18 million) available to them in the year2000, and their most essential expenses amounted to 5.12 million yuan (~ $0.6million), leading to a 3.63 million yuan (~ $0.44 million) shortfall. This gapwas made up by borrowing money from the district management department and thevillages. In the year 2000, money from the above two sources accounted for 50%of the district government’s actual spending. If the agricultural tax is takeninto account, then 80% of the actual spending came from various taxes paid bythe farmers.

The investigation of the12 villages found that the county and district level governments did notprovide them with financial assistance. Money only went out of the villages,which were heavily in debt. Out of the 12 villages, 10 were in debt. Onaverage, each village owed 0.8 million. Overall, 96% of the villages in Xiangyan County and over 80% of the villages inWulin and Taihe were in debt. In TaiheCounty, the farmers wererelatively less burdened, and each village owed 48,000 yuan (~ $5,818). In Wulin County,each village owed 12,400 yuan (about $1,503). In Xiangyang County,the amount was shockingly high, as each village owed 1 million yuan (~ $0.12million). The investigation found that a considerable amount of the debt owedby the villages was due to higher-level government budget shortfalls. In recentyears, more and more families are accumulating unpaid taxes. In Xiangyang County, the villages’ debt caused byfarmers not paying due taxes was 440 million, accounting for 47.8% of the 930million debt owed by the villages across the county.

The investigation foundthat the village organizations provided only very limited services to thefarmers. The expenditure at the village level government was very low. Onaverage, each village only used 93,000 yuan (~ $11,272). The main expense wasthe salaries of the village leaders. On average, each village paid 23,300 yuan(~ $2,824) for the village leaders’ salaries. Because the higher-levelgovernments took away most of the villages’ financial sources, the salaries ofa considerable number of the village leaders could not be reliably paid. Thepayment of village leaders’ salaries was very commonly delayed. The leaders insome villages had not received salaries for three years. The expenses used forthe farmers’ social welfare were considerably limited. Most of the expenseswere used in hosting guests, subscribing to newspapers and magazines, andvarious expenses required by the higher-level government such as trainingsessions. Village leaders expressed that the required expenses from thedepartments at the county and district level were numerous. In this way, thosedepartments further exploited the villages’ scant financial resources. Theinvestigation shows that because of the poor financial situation of thevillages, the village level governments were functioning less and lesseffectively, and a considerable number of village level organizations wereabout to fall apart.

Third, the smoothoperation of fundamental government departments is severely impacted. In orderto ensure the stability of those departments, the salaries must be paid, andthe government departments must run normally. The investigation found that inaddition to being insufficient for the normal functioning of those departments,the small amount of allocated funding for public expenses is putting intojeopardy paying for necessities such as electricity, telephone services, andtransportation. Because the district and county level governments have such lowincome and there are not enough subsidies from higher-level governments, theallocated public expenses have been reduced gradually in recent years in orderto pay salaries. The current investigation concludes that the public financialcrisis faced by the rural areas is not just a simple economic problem. Thecrisis may lead to the paralysis of the rural government and organizations.
Fourth, transferring thefinancial crisis to farmers pits them against the core governmentorganizations. The severe conflict between the two parties has become asignificant factor affecting political and social stability.

The salaries of thegovernment officials come mostly from taxes paid by the farmers. If the burdenon the farmers is reduced, the salaries cannot be guaranteed. If the salariesare guaranteed, then the farmers’ burden cannot be reduced. In such asituation, the government and the farmers are more and more likely to be atodds. The village leaders are elected by the farmers, but the leaders cannotrepresent the interests of the farmers. They spend 60% to 70% of their energycollecting taxes from the farmers and cannot provide any meaningful service.Therefore, there is much tension between the two parties.

Translated from

Chen Xiwen, Deputy Chairman of the Development Research Centerof the State Department.
Han Jun, director of department ofRural areas of the DevelopmentResearch Centerof the state council.

New Challenges to China’s Economy

[Editor’s note: Chinese premier Wen Jiabao openly stated that China’s economy has showed signs of overheating and would stall the economic reform and development if not properly handled. He has since ordered government entities to take immediate measures to cool down the economy by tightening bank credit and limiting the scale of investment. So far, these measures have not been well executed.  They have met tremendous resistance, particularly at the local government level. Below is an excerpt of an article published on a government website on June 14, 2004 by a government economist analyzing the current economic crisis of China. This article is regarded by some analysts as a different voice from the central government resisting Wen’s economic tightening policy.]

Primarily, economic growth is experiencing more and more restraint from lack of natural resource and environmental factors. In the year 2003, the economic growth rate of 9.1% was highly dependent upon the enormous consumption of raw materials. Over the course of the year, China used 260 million tons of steel and steel products, 1.5 billion tons of coal, and 830 million tons of cement, accounting for 25%, 30% and 50% of the world total consumption of each type of raw materials. However, the GDP volume in 2003 is only about 3.9% of the world’s total. This inefficient style of management and production is completely unsustainable.

The second consideration is that there are many imbalances in the current economy. The rate of investment is out of balance with the rate of consumption. In the past few years, the investment remained the main source of growth. If consumption cannot keep up with the investment, over-production will occur in many industries. The ratio of investment was 38% in 2001, 39.4% in 2002, and 45% in 2003. With the rising ratio of investment, the ratio of final consumption has been decreasing. The ratio of final consumption was 59.8% in 2001, 58% in 2002, and 53% in 2003. Our current ratio of investment is about twice the world average, while the ratio of final consumption is 24% lower. One reason for the low level of consumption is that farmers in rural areas don’t have enough disposable income to pay for the consumption expenditures. The second reason is that the widening inequality in the income distribution has been harmful to consumption growth. According to the study of College of Sociology of Tsinghua University, the wealthiest 20% in the country occupy 53% of the national wealth, while the poorest 20% own 3%. While the rich are able to afford goods, they are at the low end of the propensity for consumption. For the poor with a high propensity for consumption, they lack a means of payment. Also, sometimes new reform policies were introduced one after another in a short time frame, resulting in a rapid fluctuation of consumers’ expectations. On the one hand, effective demand and consumption is not sufficient, on the other, the bank’s savings increase rapidly.

Third, the imbalances exist in the industrial structure. China’s agriculture as component of GDP is 11% above the international level, and the tertiary industry is 32% below the international level. The high value tertiary industry, or service sector, has been developing at a very slow pace. Labor force in tertiary industry of developed countries consists of 62.8% of the total employment, while the ratio in China is only 28.6%. The development of tertiary industry not only affects the growth of the economy and prosperity, but also influences the improvement of the living conditions of everyone, and more importantly, affect the rate of unemployment. With the same input into different industries, the effects on job creation will be different. Entrepreneurs should do some studies on the tertiary sector. From the structure of foreign investment, the tertiary sector, especially high value tertiary sectors, has the highest growth rate of foreign investment.
Fourth, the problem with the first quarter economy is due to over-investment in the fixed assets. It has brought about two problems: A) The quantity and pace of money supply and the issuance of credit have not been in control; B) Shortages in the supply of coal, electricity, crude oil, and transportation. The fundamental problem is the excess of fixed assets investments. Currently, China’s economy cannot be summarized as “overheating”. Cooling and heating co-exist in the economy. Some aspects need to be controlled and some aspects need to be expanded. Currently, China’s macroeconomic problems need to be treated according to the specific situation, and should not be handled uniformly nor should the breaks be put on suddenly.

Translated from

Yao Jingyuan, Chief Officer of Economic Administration and Spokesperson of China’s Statistic Bureau.

Wen Jiabao Talks about Eight Crises Facing the Government

During an internal meeting of the Chinese State Council in late May, Wen Jiabao, the Premier, listed eight crises that the new government is facing. These eight crises are very different from the ones Jiang Zemin or Zhu Rongji (the former leaders) had listed.

The crisis of people losing trust in government

1. People have low evaluations of the image and work of the Government. Peoplelosing trust and support in government, to a certain extent, is the mostcritical crisis this government is facing. It directly affects the success ofthe [government’s] working principles and policies. Gaining people’s trust and support for the government cannot be done simply by empty words or propagandaslogans.

2. The government is far from meeting the standard of governing and administeringthe country by law. This is the foundation of political reform and systemreform.

The crises of legitimacy of the government

3. Resolve and eliminate the accumulated problems by law and regulation. Try notto leave them to the next government. This refers to the governmentorganization being too large. All previous streamlining movements weresuperficial, such as ministries and commissions being reduced but sectors beingincreased. As of this past March, not including police and traffic police, thenumber of government clerks reached 42.3 million, and retired clerks now total11.2 million. The clerks’ salaries, pensions and benefits, etc. comprise 45 ~60% of the local governments’ annual fiscal expenses.

4. The situation of corruption and bureaucracy.  It is normal to senseresentment and anger from the people when the government organizations andleaders have bad reputations. This is also an inevitable reflection fromsociety that the government lacks an effective monitoring and supervisingsystem to deal with corruption and bureaucracy within the government. This hasalready generated a crisis of legitimacy of the government.  

The Crisis of the Financial System and Social Security

5. The situation of the "messy, confused, fake and mixed" predicament inthe financial system is critical.  It has now been estimated that thereare 6 trillion yuan (~ $700 billion) of bad loans, 1.25 trillion yuan (~ $150billion) in enterprise triangular debt, and an annual currency printinginflation of 20%. So far, there is no set of good methods to resolve theseproblems. These are potential dangers that could easily ignite a financial andeconomic crisis.
6. The actual unemployment rate in urban areas is 12% (the official claim of theregistered unemployment rate is between 4.3% and 4.5%).  The socialsecurity system is ineffective. It is also insufficient in reducing the farmers’burden and raising farmers’ living standard.  Wen Jiabao, Song Ping, QiaoShi, Zhu Rongji, etc. all admitted at various times that a large number of bluecollar workers and farmers are still at the bottom level of the economy insociety. No matter what excuses can be found, this phenomenon is not areflection of the advantages of the socialist system.

WenJiabao said in the meeting that workers and farmers are the most reasonable andtolerant group. If the officials did not receive salaries for three months andtheir benefits were cancelled, would they not riot?

The crisis of the extreme income gap and public health care

7. The gap between the rich and the poor is extreme. Hu Jintao, Zeng Qinghong andZhu Rongji all admitted that a new capitalist class has already formed insociety. In fact, the Party and administrative leaders and their children arethe bureaucratic capitalist class and the most powerful force among thecapitalists. They control the state lifeline of the machinery of politics,economy, and military.

8.  The crises ofthe medical and education systems. The reform of the medical and educationsystems is not based on the country’s actual situation. It has gone from oneextreme to another. There are 50 million residents in urban areas who cannot goto hospitals because of financial difficulties. Five hundred million farmershave medical problems but lack medical treatment because of financialdifficulties. The nine-year free public education policy and laws havecollapsed. This has caused deep and long-lasting ramifications in society.