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The Volatile Chinese Stock Market: IPOs and Banking Reforms

In June, China ended a year-long government freeze on initial public offerings (IPOs). The government allowed the Bank of China and other financial institutions to issue stocks. Why? What are the short-term and long-term effects of this decision on the Chinese markets?

China’s stock market is still in its infancy, heavily influenced by government policies. Its market capitalization is only 3 trillion yuan (US$375 billion), which is about one-third of Hong Kong’s stock market, and 3 percent of the U.S. stock market. The Chinese stock market is out of proportion with the country’s economic development—it is too small relative to the economy. In 2005, the total stock value was only 16 percent of the GDP. By comparison, Hong Kong’s stock value is 600 percent of its GDP. Not only is the stock market small, but also bad risks account for a large portion of the companies listed. In addition, two-thirds of the stocks are not tradable. With both a high saving rate and scarce opportunities for financial investments, China abounds with strong stock speculation—in addition to a lack of investment knowledge and strategy. Consequently, a basic feature of the market is high volatility.

Although China has maintained high GDP growth in recent years, the performance of its A-share market has been disappointing. China’s A-shares entered a bear market in June 2001. Then, within four years, the Shanghai Stock Exchange index dropped from 2,200 to around 1,000. Afterward, for an entire year, China’s stock market did not see any IPOs. The market, however, saw some improvement.

Is it true that if there is no new stock for one year, the stock market will not drop? For lack of alternative investment opportunities, and because there are not many stocks to choose from, the stock market is pushed up by excessive demand. According to financial analysts, the main reason China suspended IPOs was the fact that the stock market had continued declining, the government feared that introducing new stocks would trigger massive selling of bad stocks to buy new ones, and that it would lead the already fragile market to a crash.

The immaturity of China’s stock market and the situation of the country’s financial institutions are directly correlated. China’s A-share market has only 15 years of history. Looking at the companies that offer stock, we see a very irrational structure. Take financial stocks, for example. Compared with developed countries, there are only a few financial stocks listed on China’s stock market. The financial content of the market is grossly disproportionate to its role in the national economy—the industry structure of the stock-offering companies is badly out of balance.

Financial stocks are very important to all the major stock markets in the world. Why are there so few financial institutions listed on the Chinese stock market? Isn’t it better if more financial institutions are seen on the market? The reason is that both the communist government and the banks know that, among all the industries, the financial industry is the least stable and the most dangerous. That’s why over these past years, not many financial companies have been added to the stock market—for fear that people would reject the stocks. Everyone knows that Chinese banks have too many bad debts and are high risk. Yet why is the Bank of China suddenly allowed to issue an IPO? This is due to several factors.{mospagebreak}

International experience tells us that as an economy develops and grows, financial institutions are the biggest winners. As China’s economy continues to grow, many investors view China’s banking industry as a profitable avenue. In the past two years, many foreign investors have purchased shares in China’s financial institutions. Why do they take the risk, knowing that Chinese banks are high risk and have had many bad debts? Because if they don’t, they may lose the opportunity to make big money; in the eyes of the investors, that scenario is also a risk. So when investors weigh the two risks, they are gambling. Which risk is higher? They wish to see this scenario: Economic development brings more profit to the Chinese banking industry, and bank management will improve, which will give banks new market and profit. Maybe the investors believe that Chinese people’s diligence and the current structure will somehow have a better chance for making money than bankruptcy. Of course, they also are clearly aware of their risks: If the bad debts are not resolved, the accumulative effect will trigger a financial crisis, in which case, they will lose all their money. According to Chinese official statistics, the bad debt rates in Chinese banks were down in the past two years. Although most foreign investors don’t trust the official statistics on bad debts, when they keep reading these numbers for a long time, they really would rather believe in them; the numbers make them feel better.

On the other hand, Chinese people’s saving rate is 40 to 50 percent. Chinese people have a total of 30 trillion yuan (US$3.75 trillion) saved in banks. To most people, interest rates on their deposits are too low, yet housing prices are beyond their reach. The return on stock investment is generally higher than the bank interest. This in part explains why in the first several months of 2006 when the global stock markets were doing poorly, the Chinese stock markets were buoyant. As a matter of fact, China’s stock markets gained about 40 percent in the first half of 2006, continuing a rebound from its eight-year low in mid 2005.

When the demand for stocks far exceeded the supply, the China Securities Regulatory Commission re-opened the market for IPOs. Obviously, whichever companies got selected for IPOs got the premium. After a year of pause, the Bank of China got the approval for listing on the stock market. The bonus it received was even bigger. This is a good time to list some financial institutions on the market, and investors may accept them. From another perspective, this decision could also add some excitement to the banking industry, and may even lead to further reforms. As far as the listing banks are concerned, they can get immediate cash and raise their capital, which naturally reduces their risks. In fact, selling bank stocks allows the government to transfer some risks to the investors—especially with new stock owners. The more stock the investors buy, the more money the bank has and the safer the bank becomes. On the other hand, some problematic banks may actually turn for the better as a result of foreign owners’ involvement in the bank’s management and restructuring. This somehow may resolve the big headache of the Chinese financial system. Why not give it a try?{mospagebreak}

Everyone knows that Chinese banks have many problems, and they should reform. Everyone also knows that it is difficult to initiate such financial reform, and the resistance is strong. Banking is vital for an economy. It has a far-reaching effect on the society; non-performing loans (NPLs) are a big issue already, and financial crisis could erupt any time. Since 1999, the Chinese communist government has repeatedly helped the four major banks write off their bad debts and has injected several hundred billion U.S. dollars into the banks. However, these measures did not fundamentally solve the problem. On the contrary, in the beginning of May 2006, Ernest & Young concluded in a report that the total amount of NPLs in China’s banking system is as high as US$900 billion. Although the report was eventually recalled under pressure, China could no longer hide its bad debt issue from the international community.

A recent speech by Premier Wen Jiabao confirmed the seriousness of China’s financial situation. Premier Wen said, "Massive financial corruption cases happen every day." Given this situation, everyone now agrees to bank reform. How can it be accomplished, then? Implementing reform in a bank is different from reforming a company. When it doesn’t work, we just close the company—but the collapse of a bank could trigger large-scale social unrest. Who dares to take the responsibility? In addition, there are so many bad loans. Taxpayers’ money cannot be used to fill the holes in the banks indefinitely. The people will not allow their money to be used like this, either. And it’s no use for officials to issue warnings like "no next time" and then take no action. Otherwise, banks learn quickly that they can count on the government to bail them out again, and they will most certainly get into the same situation next time.

It looks like maintaining status quo is not acceptable, so the strategy becomes: "Let’s do IPO!" Selling bank stocks can raise capital. Let the market be the judge and the driving force. Last year, two banks in China issued IPOs, and their stocks since day one have been on the rise. After its success in the Hong Kong market, the Bank of China issued A-shares in the Chinese stock market. Its stock prices surged on the IPO day.

However, how many IPOs can the market absorb now? Recently the China Securities Regulatory Commission was preparing for a new batch of IPOs. The information leaked out, and the market responded violently. On June 7, the Shanghai stock market index dropped 5.3 percent, which is the largest daily drop in the past four years. Subsequently, the Shanghai stock index plummeted another 4.8 percent on July 13 as a result of the news that the Industrial and Commercial Bank of China and the Datong-Qinhuangdao Railroad plan to issue IPOs on the Shanghai Stock Exchange. China’s stock market is small and volatile. Although Chinese people have huge savings reserves, with the country’s very fragile social welfare, medical care, insurance and pension plans, most Chinese cannot afford the risks of the volatile stock market.{mospagebreak}

In addition, before the end of this year, the stocks of 201 companies will come out of their IPO locked-in period, and 76 billion yuan (USD $9.5 billion) of non-tradable shares may now enter the secondary market. As a result, China’s stock markets will experience jitters in the second half of the year. Under such circumstances, companies that issue IPOs may not have the same luck as the Bank of China. Chances are that the popularity of new stocks won’t last long. As a matter of fact, while this article was being finished, news came that Air China cut its IPO size by 39 percent due to signs of weak interest in a domestic offering.

Dr. Tianlun Jian is a Senior Economist at Eaton Corporation. After he received his Ph.D. in Economics from Boston University, Dr. Jian joined Harvard University as a Research Associate and published research papers on China and India. Dr. Jian also worked in the People’s Bank of China and participated in the reforms on the RMB foreign exchange system and foreign investment policies

Falun Gong, Humanity’s Last Stand

History Unfolds

On July 20, 1999, in the wee hours, behind the curtain of the dark night, the Chinese armed police force, ushered along by China’s then-ruler Jiang Zemin, launched a nationwide blitz arrest of Falun Gong practitioners, jump-starting a violent oppression of 100 million innocent citizens.

No one at the time—neither the oppressed nor the oppressor—believed the persecution could last long. To Falun Gong practitioners, the persecution must have been the result of a misunderstanding. Less than three months earlier, on April 25, Premier Zhu Rongji had met with representatives of Falun Gong practitioners and assured them of their right to practice Falun Gong. As recently as June 14, a government spokesperson had stated that the government never prohibited Falun Gong practice, and that people had the right to practice. How could a government contradict itself so quickly?

More importantly, Falun Gong practitioners could not think of any justifiable reason for the persecution. Falun Gong only teaches people to follow the principle of "Truth-Benevolence-Forbearance" to improve their moral and mental qualities, and to practice five sets of meditative exercises to improve their physical well-being. The authorities were quite aware of Falun Gong’s positive impact on society; a February US News and World Report article quoted an official from the National Commission of Sports as crediting the practice with saving 100 billion yuan (US$12.5 billion) in medical expenses for the 100 million people practicing Falun Gong.[1] One third of the 60 million Chinese Communist Party (CCP) members and a large number of high-ranking government officials practiced Falun Gong. How could a government turn on its own supporters?

To the Chinese Communist Party, the persecution was meant to be a quick kill. Jiang himself, for example, had claimed: "I simply do not believe our [Chinese] Communist Party cannot conquer Falun Gong."

The regime had every reason to be self-assured. For several months, its intelligence agents had locked onto Falun Gong practitioners whom they thought to be "leaders," and its propaganda machinery had prepared potent fabrications to vilify Falun Gong and turn the public against it. In so many previous persecutions, these two steps alone were enough to break the backbone and spirit of any victim group.

The regime commands the world’s most powerful machinery of repression: the largest army, armed police force, public security police force, and detention center-labor camp system. This well-oiled machine has accumulated the most experience and skill in controlling people’s minds, dictating people’s social behavior, and annihilating nonconforming groups. In addition, the regime has achieved a feat no oppressors had ever accomplished before—enticing the world’s acquiescence toward repetitive human rights abuses through economic favors. There simply seemed no stopping it from doing what it wanted to do.{mospagebreak}

So overflowing was the regime’s arrogance that the Communist Party deviated from its usual practice of labeling its political persecutions "internal affairs" to divert international attention, and instead boldly trumpeted its new persecution abroad and even asked Interpol to apprehend and extradite the founder of Falun Gong. With such confidence, the Party gave itself three months to "completely solve the Falun Gong question." Some China experts and international observers thought the communist government needed just a week.

As history unfolds, what seemed a lopsided onslaught has turned out to be an epic struggle of peace vs. violence, truth vs. lies, and conscience vs. evil.

There is no doubt regarding the oppressor’s ferociousness. In the first few years of the persecution, the CCP was able to bring the weight of the entire society down onto Falun Gong practitioners. Every element of society, from government ministries down to neighborhoods, was turned against Falun Gong. Practitioners were forced to renounce their belief or be fired from their jobs, expelled from schools, stripped of business licenses, evicted from their homes, and deprived of retirement payments.

There is also no doubt of the regime’s brutality. Those who refused to yield to the political and social pressure were incarcerated, brainwashed, tortured, and killed. Millions upon millions of Falun Gong practitioners, from young children to pregnant women and the elderly, have been detained and abused; thousands have been tortured to death, while countless others have simply disappeared. Most shockingly, at least one clandestine concentration camp has extracted vital organs from thousands of Falun Gong practitioners. With the regime’s information blockade keeping the full picture hidden, the scope and severity of the atrocities are difficult to fathom.

Facing the extreme injustice, facing heinous torture and killing, Falun Gong practitioners have remained completely peaceful. They remain peaceful in the face of police beatings; they remain peaceful toward inmates whom police coerce into becoming torturers. They have exemplified Falun Gong’s teaching of "not hitting back when attacked, and not talking back when insulted." Only the righteous command the moral power of nonviolence. Such moral power is not displayed by just one or two, or a few, but by all Falun Gong practitioners. Their great tolerance and righteousness have touched countless people, including the torturers.{mospagebreak}

At the same time as the violent persecution, the communist regime also launched a far-reaching campaign of disinformation to demonize Falun Gong, to incite hatred, and to put pressure on Falun Gong practitioners. The CCP’s propaganda machine flooded the printing presses and airwaves with the basest lies and fabrications, claiming that Falun Gong preached doomsday and encouraged suicide, that the regime had treated Falun Gong practitioners "like a mother treats her daughters," and that it had won "decisive victories and successfully transformed 98 percent of Falun Gong practitioners." In early 2001, the regime even staged a self-immolation of five people on Tiananmen Square and, like Nero’s shift of blame for the Great Fire of Rome to Christians, blamed the immolation on Falun Gong. The potent propaganda poisoned many people into hating Falun Gong and participating in the persecution.

With great compassion toward the victims of the venomous lies, Falun Gong practitioners have persisted in what the Chinese language describes as "truth clarification"—informing people of the facts about Falun Gong and waking them up from a persecution that is completely based on lies. In the beginning, few people listened, and they even turned many practitioners in to the authorities. Gradually, people started to listen. As they learned about the heinous torture and saw through the CCP’s lies, they began to distance themselves from the persecution. The CCP can no longer mobilize society to assist in the persecution. More and more people have also started to protect Falun Gong practitioners and help them to spread the truth.

For the first time, the CCP has had to restrain its propaganda machine; to continue its smear campaign against Falun Gong would only convey the message that Falun Gong is still standing and Falun Gong practitioners are still going strong in China. For the first time in its long history of dictatorship, the CCP has had to take its persecution underground and stop claiming more "decisive victories."

The regime, however, cannot stop the tide from turning. The persecution of Falun Gong has thoroughly exposed the despotic nature of the CCP. At the same time, the courage of Falun Gong practitioners has awakened people’s conscience. Large numbers of people have renounced their CCP memberships and resigned from other CCP-affiliated organizations as a declaration to reclaim their conscience. By August 2006, more than 13 million people had renounced their allegiance to the CCP, and the number is rapidly growing.

This resistance to a violent persecution through truth clarification and awakening people’s consciences is unprecedented. The steely will Falun Gong practitioners have demonstrated and the tremendous sacrifices they have made are what the Chinese language describes as "startle the heaven and move the gods." When this page of history is turned, there will be no doubt that historians, writers, and scholars for generations to come will visit and revisit the epic story playing out today.{mospagebreak}

History Ignored

As the epic struggle has unfolded in China, the free world has largely stayed on the sidelines watching, or even looking the other way. No government has yet formally denounced such large-scale violations of human rights. On the contrary, in the last seven years, Western countries have coveted economic favors from the Chinese regime, and in return given tacit approval by awarding China the 2008 Olympics and WTO membership. The only times the Chinese regime has received real international pressure have been when economic conflicts were heightened and when a situation in China, such as the SARS epidemic, threatened the world.

Mainly because of these economic interests, Falun Gong has been an inconvenient, a misunderstood, or even a mistrusted victim group. Two common questions bear this out.

One is "Why didn’t we know about it?" That question was asked when Falun Gong practitioners around the world publicized how 18 female Falun Gong practitioners had been stripped and thrown into the cells of male criminals. That question was asked when Falun Gong practitioners around the world publicized horrifying pictures showing how seven hours of electric shocks had disfigured Ms. Gao Rongrong’s face. That question was asked when Falun Gong practitioners around the world publicized the systematic extraction of vital organs from living Falun Gong practitioners. There is no lack of information. For seven years, Falun Gong practitioners in China have taken great risks to collect and send abroad, on a daily basis, detailed information on the extensive and severe human rights violations that have been going on in China. Institutions that influence public opinion, including governments and media, have paid little attention to the atrocities, leaving the public largely uninformed.

Another frequently asked question is "Why does the Chinese government persecute Falun Gong?" To justify its persecution, the Chinese regime has spread many lies. It is therefore not surprising that, in the beginning, world governments and media were influenced by the CCP’s propaganda. What is surprising is that, after seven years, there is still no independent in-depth study of this serious issue. Several so-called China experts have further rationalized the regime’s persecution as a consequence of feeling threatened by the sudden appearance of Falun Gong’s large following. It is hard to think of another recent major human rights crisis in which the aggressor’s lies had such a lasting and pervasive influence. It is a combined result of the CCP’s lies and the lack of genuine concern for the victims.

At the same time, the governments of the free world have been reluctant to listen to Falun Gong practitioners’ side of the story. Some governments, including those of Germany and Canada, do not even believe the severity of the persecution and have forcibly returned Falun Gong practitioners back into the waiting hands of the Chinese regime. Some countries, including Germany, France, Singapore, Australia, Canada, Mexico, and Russia, have caved in to the Chinese regime’s pressure to curb Falun Gong practitioners’ protests during Chinese officials’ visits, and some have even arrested Falun Gong practitioners for staging such protests.{mospagebreak}

Because of the misunderstanding, or the lack of desire to understand, the free world remains unaware of the deep awakening of people’s consciences in China. The acquiescence, financial investment, and technologies from the West have in effect played the role of working against these changes and have helped bolster the regime and its repression. Some Western companies, such as Cisco and Yahoo, have directly assisted the regime in oppressing the Chinese people.

Because of the mistrust, when two witnesses, who are not Falun Gong practitioners, disclosed the well-organized organ extraction from live Falun Gong practitioners in a hospital in China, no government expressed any genuine concern. The U.S. State Department went as far as mischaracterizing the disclosure as "claims by the Falun Gong group" and declared "no evidence had been found" after Chinese officials organized two guided tours of the hospital.

The free world’s persistent silence toward such severe and extensive human rights violations is also unprecedented. When this page of history is turned, future generations will ponder how the democratic governments could cast aside the most fundamental values of the free world to seek economic favors from a despotic regime, and how the bottom line of humanity had slid so far that even the use of human organs as a commodity did not cause these governments to make a sound.
The epic struggle of peace vs. violence, truth vs. lies, and conscience vs. evil is still ongoing, and history is still being written. Those who are living the history now still have the opportunity to learn about the epic struggle and choose for themselves which side of history they want to be on.

The Chinese Tradition of Cultivation Practice

Falun Gong—also known as Falun Dafa, the Great Way of Law-Wheel Cultivation Practice—is an ancient form of cultivation practice.[2]

From its earliest establishment, Chinese culture has embraced the concept of the "Oneness of Heaven and Man." The way for man to achieve the Oneness, or his true self, is cultivation practice. Chinese literature is filled with legends of people achieving the status of deities, becoming enlightened, or obtaining the Dao through cultivation, and there have existed thousands of different schools of cultivation over the course of Chinese history. Cultivation practice, therefore, is a generic term for the practice of mind and body transcendence, with cultivation referring to the mental improvement and practice referring to the physical refinement.{mospagebreak}

Cultivation practice has left its imprint on almost every aspect of Chinese culture. The teachings of Lao Zi and Confucius, for example, were originally for guiding the cultivation of their respective disciples. A great number of historic figures who contributed to shaping Chinese history were practitioners of cultivation. In fact, cultivation of moral character was a prerequisite for students of any serious study, and "cultivate oneself, put family in order, govern a state, and pacify the world" had been a maxim for Chinese intellectuals for generations. As a result, the ethical values derived from teachings of cultivation have played an essential role in establishing and maintaining morality.

Cultivation has also long been recognized for its effects on physical health and supernormal abilities. The health benefits of Tai Chi and martial arts exercises, for example, are known worldwide. All the famous doctors and physicians throughout Chinese history were practitioners of cultivation and had developed supernormal abilities to detect and cure diseases. In fact, they were entirely responsible for establishing the theory and practice of Chinese medicine, such as the system of meridian points in acupuncture and Chinese herbal medicine that we know today.

Cultivation practice is similar in spirit to religions of other cultures. They all believe in the existence of higher realms, and they believe in the attainment of the higher realm by following and practicing certain spiritual teachings. Their role in maintaining society’s morality is also similar. Cultivation differs, however, from other religions in form: While other religions believe in achieving higher realms after life, most cultivation teachings aim to achieve consummation in this life.

The Spread of Falun Gong

Communist rule in the mainland brought an abrupt end to the rich tradition of cultivation in China. The communist Party’s atheist ideology and totalitarian power precluded any other ideas. Cultivation was branded as "superstition" and brutally persecuted. In the first two years of communist rule, approximately two million people were executed in the movement of "suppressing counter-revolutionary superstitious sects and secret societies." It was not until the late 1970s that some schools of cultivation practice reappeared in society, but they confined themselves to teaching physical fitness and healing diseases to avoid the risk of attracting the Party’s attention.

In 1992, Mr. Li Hongzhi began to give public lectures on Falun Gong. He explained that a full cultivation practice contains both the spiritual and physical aspects, and expounded that the key to cultivation is the improvement of one’s moral and mental quality. A practitioner should first of all be a good person with higher and higher moral standards. One should make an honest living and give up selfish and harmful thoughts. In case of conflict, one should consider others first, search within oneself to find one’s own shortcomings, never harm others for one’s own gain, and let go of attachments to fame, wealth, and lust. Through continuous improvement of one’s mental and moral quality, one becomes a better and nobler person, and eventually enlightens to and achieves a higher realm.{mospagebreak}

Following the Falun Gong principle of "Truth-Benevolence-Forbearance," practitioners of Falun Gong devote themselves to the cultivation of their inner selves, and regard the elevation of one’s heart and mind as fundamental. This, combined with five supplementary sets of gentle exercises of proven efficacy in health improvement, has enabled practitioners to achieve purposeful living, morality, total health, and inner peace.

Changing People’s Hearts Toward Goodness and Reviving Morality

At the time Falun Gong was introduced to the public, Chinese society was going through its worst destruction of morality and values. The Tiananmen Massacre in June 1989 not only destroyed the authorities’ claim to legitimacy and morality, it also devastated people’s most fundamental values. The ensuing political purge further suffocated all dissenting voices for social justice. To divert the volcanic social discontent and to dampen moral pressure from the general public, the regime turned to the lure of human greed and selfishness, letting loose a genie that no ruler in Chinese history had ever used before. With slogans such as "getting rich is glorious" and "let some people get rich first," the regime opened the floodgates for officials at all levels to appropriate public property, and a frenzy of material desire swept through China. This turned the nation’s morality upside down, replacing right and wrong with gain and loss. Morality slid down so severely that people refer to it as the "era of the entire people becoming corrupt" with no sense of remorse, and it is even fashionable to mock traditional values: "How much for a pound of conscience?" "What is morality worth?" This moral bankruptcy has caused severe social problems, such as an extreme disparity between the rich and the poor, widespread mafia-style crime, prostitution, drug use, and a high suicide rate. Never before in the history of China had such a destruction of humanity been seen.

Like a long-awaited call during troubled times, the refreshing moral teachings of Falun Gong awakened so many people from the moral destruction. "One should return to one’s original, true self; this is the real purpose of being human"—Mr. Li’s words revived people’s innate yearnings. They enlightened to a new sense of life, a life of cultivation. They experienced a peace from within. They let go of previous grudges without a feeling of loss. They gave up attachments to material gains and stopped worrying about being taken advantage of. Officials resisted corruption and rejected bribes. Businessmen shunned cheating and abided by honest practices. Gangsters, drug addicts, prostitutes, and thieves alike turned over a new leaf and led new lives. Countless people thanked Falun Gong for giving them a second life or saving their families.

While Falun Gong emphasizes individual cultivation, the high moral standards exemplified by Falun Gong practitioners have had a positive impact on society, and this has been well recognized by many people as well as by various levels of the Chinese authorities. For example, it is a standard procedure to shift and re-weigh grain that farmers turn in to the public procurement stations. In Hubei Province, however, this procedure was waived for grain turned in by Falun Gong practitioners. Many companies even established a preference for hiring Falun Gong practitioners, as Falun Gong had become synonymous with honesty and credibility.{mospagebreak}

The experiences of Falun Gong cultivation are so wondrous and real that by 1999, Falun Gong had become a global phenomenon of over 100 million practitioners across more than 50 countries.

The Escalating Hostility of CCP Dictators Toward Falun Gong

A few CCP ideologues, however, were affronted by the increasing popularity of Falun Gong. These atheist Party vanguards could not accept the fact that after more than 40 years of Marxist indoctrination, so many people—including the Communist Party members—would look elsewhere for moral and spiritual guidance. They did not want to admit their jealousy, so they tried various tactics to suppress Falun Gong.

They tried to plant secret agents and frame Falun Gong. In December 1994, a letter by "over 100 Falun Gong practitioners" was fabricated, accusing Mr. Li of falsifying his date of birth, amassing wealth, and evading taxes. It was used as the basis for the Ministry of Public Security’s order to ban Falun Gong. All the accusations were proven to be groundless, and the ban never materialized.

They tried to brand Falun Gong as "pseudo-science," and in 1996 banned Falun Gong books "for propagating pseudo-science."

They tried a smear campaign. In 1996 and 1998, state-controlled media nationwide ran numerous slanderous "stories," "reports," and articles against Falun Gong.

They tried harassment and intimidation. In 1997 and 1998, the Ministry of Public Security conducted nationwide investigations to "collect evidence of Falun Gong’s criminal activities"—accusing practitioners of criminal activities even before they found any evidence. In 1998, the same ministry instructed its police force in many cities to ban the Falun Gong practice, and arrest and fine Falun Gong practitioners for holding group practices on the charge of "participating in illegal gatherings."

These tactics were clear CCP-style political warning signals. They failed to deter Falun Gong practitioners, however, because the attacks and accusations were so groundless and incompatible with practitioners’ personal experiences of Falun Gong cultivation. The injustices also failed to provoke Falun Gong practitioners. Adhering to Mr. Li’s teaching of "Other people may treat us badly, but we do not treat others badly, nor do we treat people as enemies," Falun Gong practitioners quietly endured the bullying and time and again gave those prejudiced people opportunities to understand what cultivation is about and what kind of people practitioners are. Many practitioners also risked their careers or even their personal safety to write to the central leadership to testify from their own experiences that Falun Gong is beneficial to society, and not a threat.{mospagebreak}

At the same time, the number of people practicing Falun Gong continued to grow. In early 1999, the authorities estimated that 70 to 100 million people were practicing Falun Gong. A group of retired senior leaders also submitted a formal report to the Political Bureau of the Communist Party in support of Falun Gong. This further irritated the CCP dictators, particularly Party General Secretary Jiang Zemin, and the authorities heightened their allegations. On April 11, 1999, a magazine in the city of Tianjin published an article comparing Falun Gong to the "Boxer rebellion" that had "ruined the country." The CCP had previously eulogized the "Boxer rebellion" as a patriotic movement that saved China from imperialist exploitation. Apparently the regime would go to any length to find an excuse to incriminate Falun Gong.

Since that article was full of fabrications, many Falun Gong practitioners visited the editorial offices of the magazine to tell the editors their personal experiences of the Falun Gong practice, and asked the magazine to retract the erroneous article. On April 22 and 23, 1999, armed policemen violently assaulted Falun Gong practitioners in front of the magazine’s office and arbitrarily detained 45 of them. Oddly, the police urged Falun Gong practitioners at the scene to go to the central government in Beijing to address their grievance.

The April 25th Peaceful Appeal By Falun Gong Practitioners

Two days later, on April 25, 1999, over 10,000 Falun Gong practitioners gathered quietly in Beijing outside the State Council Appeal Office, located near the Chinese leadership compound, to request the release of the practitioners detained in Tianjin and the lifting of the ban on Falun Gong books.

The gathering was peaceful, orderly, and a demonstration of practitioners’ kindness. They stood three-deep in rows between the driveway and walkway so as not to block traffic; they advised curious pedestrians to move on so as not to create a scene; they picked up all the trash that cars and passers-by littered around. They even picked up the cigarette butts dropped by the police who were watching them. The police took advantage of their kindheartedness, however. Soon after the petition began, they told practitioners to follow them to see the central leadership. The police then divided the practitioners into two columns, one marching from south to north, the other from north to south. The two columns met at the gate of Zhongnanhai, the Chinese leadership compound, resulting in an encirclement of Zhongnanhai. This was later used to incriminate Falun Gong for "besieging the central government."

Upon learning of the gathering, Zhu Rongji, China’s premier, held two dialogues with representatives from the gathered practitioners and then ordered the release of those detained in Tianjin. Upon learning the news, the practitioners quietly dispersed.{mospagebreak}

Because of this gathering, Falun Gong began to receive international attention. The peaceful resolution of the April 25 petition was also highly regarded by international observers and media. Many viewed it as a precedent for solving social conflict through compromise, a milestone in China’s progress toward civil society.

The All-Out Persecution of Falun Gong

The peaceful resolution of the April 25 petition brought Jiang Zemin’s jealousy to a boil. According to reliable sources, upon hearing a report on the course of the April 25 petition, Jiang waved his fists and yelled: "Crush it! Crush it! Resolutely crush it!" Unable to conceal his rage any longer, he even spelled out his jealousy in the memo he wrote that night to the CCP leadership: "Can it be that the Marxism we communists have, the materialism and atheism that we believe in, cannot triumph over the stuff propagated by Falun Gong?" Laying the groundwork for an outright persecution, he lied about his previous resentment of Falun Gong and used the peaceful gathering as his excuse. In the same memo, he wrote: "Without a soul knowing, over 10,000 people converged in front of the Party’s and nation’s center of power, and the siege lasted for a whole day… We must take effective measures immediately to sternly prevent similar incidents from happening."

In his speech of June 7, 1999, to the full assembly of the Political Bureau of the Central Committee, Jiang clearly stated his reasons to persecute Falun Gong: "The appearance and spread of Falun Gong is a political contest of domestic and international hostile forces to fight with the Party and the government for a vantage point and to win the people’s favor."

Following Jiang’s speech, the Central Committee decided to crack down on Falun Gong.

On July 20, 1999, the regime launched its violent persecution of Falun Gong.
Just overnight, as if time had been turned back 30 years, the nation relived the horror of the Cultural Revolution. Tens of thousands of Falun Gong practitioners were arrested throughout China. State-run media bombarded the nation 24 hours a day with anti-Falun Gong propaganda, scenes of burning Falun Gong books, the arrest and sentencing of Falun Gong practitioners, and tearful "confessions" and "denunciations" from "transformed" Falun Gong practitioners. All government ministries and departments, all institutions, businesses, schools, organizations, work units, villages, and even neighborhoods were instructed to hold political study sessions to "study, comprehend, and implement" the regime’s policy on the "Falun Gong question." Everyone, whether Falun Gong practitioner or not, was required to "declare a clear-cut position and pass the test" to be "in unity with the Party."{mospagebreak}

To implement this all-out persecution of Falun Gong, the Party leadership formed the "610 Office" system (named for the date of its formation, June 10, 1999) to "handle the Falun Gong question." The 610 Office has absolute power over the existing Party hierarchy. It has the authority to directly issue orders to the military, security forces, police, the judiciary, and the propaganda ministry. It has the power to link the promotion of officials to their participation in and support of the persecution. Those who were passive or resistant were demoted or dismissed. Those who dared to support Falun Gong were themselves arrested. Through the 610 Office, the whole regime’s structure was mobilized to power the persecution. At the height of the persecution, as much as 25 percent of the nation’s resources was committed to the persecution of Falun Gong.

The objective of the persecution is to "completely eradicate Falun Gong"—to coerce each and every Falun Gong practitioner to renounce Falun Gong, to force all of them to change their belief. Throughout China, Falun Gong practitioners are forced to "have a correct understanding of Falun Gong, to draw a demarcation line with Falun Gong, and come back to the side of the Party." To demonstrate their "complete break from Falun Gong," practitioners are also forced to sign pledges renouncing Falun Gong.

Under such an atmosphere, few officials thought twice about turning against Falun Gong practitioners. To protect their position, or to seize the opportunity to achieve a higher position, officials throughout the country used all means to coerce Falun Gong practitioners, forcing them to choose between their belief and their employment, education, retirement pensions, property, and families. To exacerbate the pressure, some officials even used the employment, education, or pensions of family members to coerce practitioners into renouncing Falun Gong.

Torture and Killing

Those who refuse to give in to the pressure are sent to brainwashing centers, detention centers, labor camps, drug rehabilitation centers, mental hospitals, and jails, where they are subjected to unrelenting torture. These places are home to the darkest crimes in the world. The 610 Office instructs these places that, "No measure is too excessive against Falun Gong"; it pays them for every Falun Gong practitioner they "successfully transform," and it protects the torturers with total impunity.

Emboldened by the total impunity and driven by financial rewards, the police and guards who run these places care only about how to inflict the maximum amount of pain to force Falun Gong practitioners into renouncing their beliefs. The torture methods used are only limited by their decadent imaginations, and the amount of pain inflicted is limited only by the victims’ death.{mospagebreak}

Due to the Chinese regime’s blockage of information, we do not know how many practitioners have been tortured to death in police custody. From over 2,900 confirmed cases, however, we see an almost unimaginable picture of tragedy: Some died from their bodies being ripped apart by slowly pulling the limbs; some died after being locked in "water cages" and immersed in filthy water for months; some died from prolonged electric shocks on or in their genitals; some were frozen to death; some were burned alive. In extreme cases, an eight-month-old infant was killed with his mother, a 75-year-old grandmother was murdered, and a disabled man with a hunched back was killed when police forcibly "flattened out" his torso. The violations are so barbaric that a United Nations Special Rapporteur wrote in her 2004 annual report to the United Nations Human Rights Committee, "Reports describe harrowing scenes in which detainees, many of whom are followers of the Falun Gong movement, die as a result of severe ill-treatment, neglect or medical attention. The cruelty and brutality of these alleged acts of torture defy description."

There are those who find the torture and killing so barbaric that they express doubt as to the validity of Falun Gong practitioners’ reports of brutality; some object to Falun Gong practitioners’ exposing the atrocities to the public. What they do not know is that the aim of the torture is to brutalize the victims to the brink of death so as to force them to choose between a physical death and a mental demise—the giving up of their will, their fundamental values, and their conscience. It is a killing of one’s mind. The Chinese police have openly told Falun Gong practitioners: "We will make you beg for life while dying, and beg for death while living!" The only way out? To lie and say publicly that Falun Gong has done harm to them and to society, to say Truth-Benevolence-Forbearance is evil, and to thank and applaud the regime for saving them from Falun Gong. Tell lies to live, or tell the truth and die.

The Nature of the Persecution of Falun Gong

Some people have also thought that Falun Gong practitioners are too stubborn: Why not pretend to give in and practice Falun Gong secretly at home?

In fact, that is the very option that the authorities "offer" to Falun Gong practitioners. In the same way the pagan rulers 2,000 years ago offered the Christians a choice to conform before martyring them, the Chinese communist dictators want Falun Gong practitioners to "transform," to sign pledges to give up Falun Gong.

One Falun Gong practitioner wrote about her experiences in jail: "The guards ordered the convicts to force me to recite the ‘rules for a convict.’ I refused to do so, no matter how they beat me, because I am not a convict. They said I was a convict, the same as they were, or I would not be in jail. I told them, ‘No, I was jailed because I insisted on my conscience; I can get out easily by renouncing Falun Gong, but none of you can.’"{mospagebreak}

This simple account depicts the persecution at its core: reversing right and wrong, coercing the innocent to profess their "guilt." Why are Falun Gong practitioners so unyielding to the coercion? Why are they so uncompromising in insisting on their conscience? If right and wrong can be compromised, why have right and wrong? If good can cave in to evil, what will values and principles be based on? Conscience, the innate knowing of goodness, is the very essence of humanity. Everything else, even our "inalienable rights," can be forcibly taken away. The alteration of our conscience, no matter how small, must be consented to from within. Conscience, thus, defines human nature, and the right to conscience is a human being’s most fundamental right.

No crime, therefore, is worse than the crime against conscience. The Chinese regime’s persecution of Falun Gong not only violates Falun Gong practitioners’ right to conscience but is also an assault aimed at the destruction of human nature.

The Nature of the Chinese Communist Party’s Rule

The destruction of human nature is the very essence of communist rule in China.

The Chinese communist regime is the most vicious regime in history. Multiple studies and publications have indicated that at least 80 million lives have perished under its despotic rule. Some people doubt this number. In reality, it is only a conservative estimate. To illustrate the point, only a few of the Party’s major atrocities are listed below.

In the very first year of communist rule, a movement of "persecution of counter-revolutionaries" began. The slogan was "every village should hear gunshots." Ten million people were executed in that persecution. The movement of "suppressing counter-revolutionary superstitious sects and secret societies" then followed, and two million people were killed. In the "land reform" and the "industry and commerce reform," several million landowners and business owners lost their lives; some were executed and some committed suicide. In Shanghai, the communist mayor Chen Yi even mocked those business owners who jumped off buildings as "paratroopers" and heartlessly joked, "How many have landed today?"

Many now know about Stalin’s manmade famine in the Ukraine. The greatest manmade famine, however, happened in China between 1959 and 1961. A senior government official who was in charge of China’s agriculture reform in the 1980s told this author in person that his staff had conducted an internal investigation of the famine. A conservative estimate put the number of people who starved to death at 48 million, and a more reasonable estimate put that number at 60 million. In the year 2005, a former governor of Sichuan Province, in his memoirs, quoted official data: 12.5 million people starved to death in Sichuan Province—one of China’s two major grain production regions.{mospagebreak}

The Cultural Revolution of 1966-1976 threw the whole nation into hell. No official statistics of the death toll are available. In a Central Committee meeting in late 1978, then-CCP vice-chairman Ye Jianying said, "The Cultural Revolution killed 20 million people." Some have disputed the accuracy of that number, but the scale of the atrocity is clear. In Guangxi Province alone, in the summer of 1968, more than 100,000 "counter-revolutionaries" were cut open alive and their internal organs eaten as delicacies.

As shocking as these numbers are, it is far from enough to show the monstrosity of the CCP’s rule. We can also look at it from several additional angles. The first is that the CCP’s political persecutions have been so extensive that almost no family has been left untouched. All readers of this article can do a simple investigation of your own: Ask anyone from mainland China whom you know well whether he or she has a story of a family member or close friend who fell victim to one of the CCP’s political persecutions. Of all mainland Chinese that this author has come to know, not a single family was "persecution-free." The second is that the CCP’s persecutions have been so widespread that almost no social group has been left untouched. "The landlords, the well-off, the counter-revolutionaries, the corrupt, and the intellectuals" marked all groups that owned material or intellectual property; they were the early targets of the CCP persecutions. All the cultivation or religious groups that maintain their own spiritual beliefs are perpetual targets of persecution by the atheist CCP. Farmers and workers are supposed to be the "social base" of the CCP’s rule, but one only needs to look at the armies of farmers and workers who have lost their land and their employment to know their miseries. The Mongolians, the Tibetans, the Uighurs, and other minorities have suffered decades of genocide or culture-cide. Even the CCP’s own highest officials are not safe from persecution; many of them were jailed and killed during the Cultural Revolution. The third is how diabolic the means of persecution are. Lao Zi said, "If the people do not fear death, how will death be used to threaten them?" Death is what is most feared, right? The CCP’s persecution is a hell worse than death. You are not afraid of death? What about the deaths of your father, mother, husband, wife, sons, daughters, grandsons, granddaughters, and close friends? Why did so many people commit suicide during the Cultural Revolution? They did it to protect their families. They were more afraid of being forced to betray their loved ones than of losing their own lives!

One may wonder, "Why all these atrocities? What is this cruelty for?"

The purpose is to terrorize people into "actively" acting against their conscience and submitting only to the dictates of the CCP. Consistently throughout its 50 years of rule and persecution, the CCP dictators have openly announced to the nation that only 5 percent of the people are targeted, and that the other 95 percent are safe. This brings out the very worst of human nature—clinging to the 95 percent side at any cost, even at the expense of friends and relatives, and closing one’s eyes to the rights of the 5 percent. That 5 percent, of course, has been rotated so often that the whole nation has been repressed into submission. That is exactly the intended effect of the CCP’s persecutions: coercing people to act against their conscience and assist the CCP’s evildoings. The unfortunate part of these crimes against conscience is that they are self-perpetuating: the longer they continue, the more people are hardened to act against their conscience.{mospagebreak}

The Reason for and Price of the CCP’s "Stability"

Such an evil regime has long lost any claim to legitimacy and should have fallen long ago. The CCP itself admits that it "has led the nation and the people to tide over difficulty after difficulty and to pull through peril after peril." After the June 4th Massacre in 1989, there was a consensus that the regime had to change or fall. However, the regime did not fall; it changed, but only for the worse. As the nation’s problems become more serious, many people are convinced that it is only a matter of time before an incident will trigger a volcanic explosion that will bring down the regime. According to the CCP’s own statistics, in the past two years, there were over 150,000 violent incidents of protest. The spark that will trigger the explosion, however, has not yet come.

Few people have asked why the CCP can hold on. How is it that when society is so unstable, the CCP can maintain its rule?

At the most fundamental level, the destruction of human nature is the very reason for the CCP’s stability. The lower morality slides, the less people care about morality and justice. Issues that would have caused an uproar in the past now seem normal. As human nature dies, a bestial nature takes over. That is what has been happening through the whole history of CCP rule in China. One needs to look no further than the CCP’s view of "human" rights: "The greatest of human rights is the right to survive." It is pure bestial logic—anything goes as long as one lives. Unfortunately, such an argument has been widely accepted.

Some people argue that because China is so chaotic now, only the CCP has the power and structure to handle the chaos, and that the collapse of the regime will result in an even greater disaster for the nation. The CCP has amply exploited this last point and has repeatedly used "stability is the overriding priority" as the excuse for continuing its political persecutions, which in turn degrades the situation further. Some Western scholars and policymakers even believe this pretext and therefore tolerate the CCP’s human rights violations.

The fact is, the CCP’s political movements are the greatest disturbance to society and have caused the greatest disasters. Of the large number of the CCP’s major political movements and persecutions, very few were to quell a resistance. Most of them were unilaterally launched by the CCP, and most had only victim groups to annihilate, but no resistance to quell. Of the few persecutions that were in response to certain petitions or protests, such as the 1976 Tiananmen movement and the 1989 student movement, the CCP never took a conciliatory step but only escalated the situation into violent persecution. The severity of these persecutions also far exceeded what quelling resistance would require, and instead served to maximize the horror, break people’s will, and coerce them into submission.{mospagebreak}

The whole history of the CCP’s rule shows that the CCP thrives on social instability and chaos. The stability of the CCP’s rule is achieved through social instability and atrocities that destroy human nature and ruin morality. That is why, when the CCP worries about its rule or proclaims the "overriding priority of stability," a political persecution is nearing. That was the case for the persecution of Falun Gong, the 1989 Massacre, the Cultural Revolution, and for all the political persecutions in the history of the CCP. The fundamental reason is that, when the CCP’s evil nature is beyond what morality can tolerate, it is time to lower morality through the use of terror and coercion. As the CCP’s rule becomes more and more barbaric, morality is correspondingly destroyed further and further. The stability of the CCP’s rule is thus achieved at the highest cost—the destruction of human nature.

Enticement and Engagement

The CCP has not limited its attempt to destroy human nature to China only. While the CCP cannot coerce the world with terror as it does in China, it uses a different weapon.

At the same time that China was going through its worst destruction of morality and values after the Tiananmen Massacre in 1989, a contest between morality and self-interest also played out on the world stage. Unfortunately, self-interest trumped morality.

Many people talk about great investment opportunities in China now. The opportunities were incomparably better 17 years ago, when the Chinese regime would have given anything in exchange for a thread of international recognition after the Tiananmen Square Massacre. Why didn’t most Western countries jump on that golden opportunity right away? The sense of values and principles was still strong at that time. Many can probably still remember the public outrage when the media exposed the secret visit to China by then-U.S. National Security Advisor Brent Scowcroft right after the 1989 Massacre. Would we see the same outrage today? Most likely not. It is even doubtful whether the Tiananmen Massacre would cause the same outrage today as it did 17 years ago.{mospagebreak}

What has changed? Some argue that the Chinese regime has moved toward improving human rights in China. If that were the case, it would be easier to talk about human rights with the Chinese regime. The reality is just the opposite. For several years after the 1989 Tiananmen Square Massacre, when the U.S. Congress and the Administration debated whether to link human rights to trade with China, the Chinese regime at least listened and gave cosmetic gestures of releasing prisoners of conscience when Americans so demanded. Now, the tables have turned. The Chinese regime is in command—shut up about human rights or we will take our business elsewhere. This is not because the Chinese regime has become so overpowering. The Chinese regime readily makes concessions to the West on economic issues. It is an open secret that each time a top Chinese leader visits the United States, he carries a long "spending list." The Chinese media jokes about it as "dousing the anger" from the United States. Yet on human rights issues, the Chinese regime has become increasingly hardline. The fundamental reason is the decline of moral standards, the gradual replacement of the judgment of right and wrong by the calculation of loss and gain.

The engagement policy is a product of this decline in morality. An engagement policy can work. President Reagan clearly engaged the USSR, and induced major changes in the USSR, but his engagement was based on principles and executed with discipline. The engagement policy with the CCP, on the other hand, focuses only on economic interest. This is particularly so after President Clinton de-linked human rights from trade. Many have argued that trade with China will lead to economic freedom, which in the long run will spur the growth of political freedom. If our policymakers and administrators remain true to the intended objectives, they can be achieved. However, that is not the case. A Chinese economist, He Qinglian, has done many in-depth studies of the oligarchy and the lack of economic freedom in China, persuasively demonstrating that business engagement with China has not improved democracy, increased human rights, or generated a middle class in China. He’s research is suppressed in China, and she has been exiled to the United States. Many have also argued that investment in China will help the Chinese people. If the investors remain true to their stated intention, it could also be achieved. That, however, has also not been the case. Another Chinese economist, Prof. Li Zhining, has done many detailed studies on China’s economy and labor market, but his studies are also suppressed in China, and the authorities have blocked his website. Some key points of his studies are highlighted below.

According to Prof. Li, overstocked goods have been accumulating rapidly in China, from 1.33 trillion yuan (US$0.17 trillion) in 1996 to 4 trillion yuan (US$0.5 trillion) in 2003. The amount of overstocked goods in 2003 is equivalent to 41 percent of China’s GDP. In the West, if a similar ratio is above 2 percent, the economy will be considered in recession. In other words, supply in China already far surpasses demand. What huge market can we talk about, then? Indeed, this "huge market" is exporting over 20 percent of its GDP. The corresponding average number in the West is around 7 percent. Similarly, China’s commercial building vacancy rate is over 30 percent, four times the corresponding number in the United States. China’s problem of bad loans is notorious; China is short of energy supplies; China lags behind in technological development; so on and so on. In other words, China’s economy is not healthy, not properly developed. It is not the huge market that the CCP represents it to be.{mospagebreak}

There is, however, a huge labor market there. According to Prof. Li, while China’s GDP has been growing by 10 percent annually for the past 20-plus years, the ratio of salaries and wages to GDP has been decreasing, to the current 12 percent.[3] That figure does not even take inflation into consideration. A similar measurement in the United States is 75 percent. Consider that the U.S. economy is much bigger than China’s, while China’s labor force is much bigger than that in the United States; one can think how cheap China’s labor is. Many published articles have stated that China is a vast sweatshop.

Prof. Li focuses his studies on how government official corruption has been exploiting the cheap labor. "It is because the pay is so low that there is so much room for corruption to run rampant," he writes. The same can be applied to the West’s investment, and particularly to U.S. investment. Therefore, the real opportunity of investment in China is the opportunity to "legally" and "cleanly" take advantage of cheap labor—and isn’t exploiting cheap labor slavery?

Some argue, "If it weren’t for the West’s investment, those workers wouldn’t even earn the low salaries they get now." That is both presumptuous and morally wrong. The salaries in China are artificially suppressed at low levels by the very regime that is using this cheap labor to entice Western investments and at the same time entice Western acquiescence to its human rights abuses. If unions were allowed to form in China, would the workers’ pay be so low? If environmental groups were allowed to exist in China, would working conditions be so horrendous? It is the CCP that runs this modern slavery, but some Western investors are reaping the "profits" it generates.

If we see through the nature of the investment opportunity in China under the CCP, some paradoxical economic data will start to make sense. Why do U.S. businesses complain about the huge "trade deficit" with China but still go on importing goods? Because that "deficit" is not a real trade deficit; rather, it is a premium for outsourcing to China’s slavery. Why does China want to raise more foreign investments to increase its "internal need of expanding productivity" when China’s supply already greatly exceeds its need? It is simply to maintain the phantom of the "huge market." Why not increase the pay of the labor force and so increase the real internal need? That defeats the very purpose of slavery.

How is it possible, some may wonder, that the United States can allow itself to engage in slavery in China when, in the United States, Americans several generations ago fought one of the country’s bloodiest wars to abolish slavery? It is because moral standards have declined. If Abraham Lincoln had not been so dedicated to the founding principles of the United States, and had not demanded abolition—if he had instead carried on an engagement policy with the South, using the excuse that a better economy would lead to greater freedom for the slaves—the North could have shared some of the profits from slavery while keeping its hands clean; the North could even have defended its actions, claiming that it always had the intention of improving slaves’ rights in the South. That would be equivalent to today’s China policy. Many people in the United States, including policymakers, have argued that the engagement policy has failed; the proponents of the engagement policy are also frustrated by its ineffectiveness. Why doesn’t the policy work? Because it is morally wrong. Again, it comes down to human conscience. When values and principles have weakened, what was immoral before has become acceptable today.{mospagebreak}

Ignoring and Assisting Human Rights Violations

The self-serving engagement policy opened a floodgate for multinational corporations in China to operate in ways that are irresponsible, unethical, and illegal in their own countries. Ethan Gutmann’s Losing the New China details a whole array of accounts in this regard. These multinational companies have lowered themselves to the point of being a part of the corruption of morality in China.

Worse yet, some of them also help with or take part in the CCP’s human rights abuses. The examples of Cisco, Yahoo!, Microsoft, Google, and Motorola collaborating with the Chinese regime to limit Internet freedom are widely known. Volkswagen and Mary Kay even forced their Chinese employees to sign pledges not to participate in or support Falun Gong activities.

When questioned about their outrageous complicity in human rights abuses, their standard defense is "We must conform to China’s laws." It is impossible that the executives of these multinational companies do not know that the rights they help the CCP to violate are guaranteed by China’s constitution and by the Universal Declaration of Human Rights. It is impossible that they do not know that their actions are immoral and illegal according to higher laws, but they choose profit over their conscience and hide behind the CCP’s "laws."

With these multinational companies conforming to the corrupt practices in China and helping the CCP’s trampling on human rights, neither of the two strategic goals of the engagement policy with China—namely, the fostering of democracy in China and the transformation of China’s corruption-laden business conduct to meet international standards—has remotely materialized. Rather, it has turned into a downward moral spiral in which the multinational companies help the CCP to maintain its modern slavery and share the profits of that slavery.

If these multinational companies were to engage in similar conduct in their own countries, they would undoubtedly be prosecuted, and they would stand no chance of escaping. Even committing similar conduct in other countries would surely bring about severe consequences. Only when they commit this conduct in China are they left unscathed, because their own governments are also vying for economic favors from China while ignoring human rights violations. Earlier this year, the U.S. Congress held a hearing on Cisco, Yahoo!, Microsoft, and Google’s collaboration with the CCP to infringe on Internet freedom in China. These companies shrewdly asked for guidance regarding their conduct in China. They certainly know the nature of their conduct, but they got away easily because they know the U.S. government does not have an answer to their challenge.{mospagebreak}

While offering economic enticement, the Chinese regime slyly proposed a so-called bilateral human rights dialogue. The Western governments were only too happy to take the bait. It was a win-win solution for governments. The Chinese regime gained much-needed legitimacy, transforming from a human rights abuser to an equal partner at the human rights roundtable. The Chinese regime is also tacitly assured of reduced public condemnation from the free world, and can mask its deliberate violations as areas for improvement, and thus indefinitely drag out its deeds. For the Western governments, the closed-door dialogues help them to avoid public pressure and the associated moral burden. The "dialogue," however, is a lose-lose situation for China’s human rights, for human rights NGOs, and for the victims of CCP abuse. China’s human rights condition continues to deteriorate, and human rights NGOs are effectively denied channels through which to intervene, because the proceedings of these dialogues are not made public and therefore no accountability or benchmarks can be addressed.

After the Chinese regime pulled off the "dialogue" trick, several other regimes followed suit, and "human rights dialogue" became fashionable for a few years. Those dialogues with other regimes, however, were short-lived. Only the Chinese regime continues to enjoy the benefits of these dialogues, while Western governments are only going through the motions of dialogue with the Chinese regime. This fact alone should say enough about motives and about the effectiveness of such dialogues.

To justify the engagement policy and convenient human rights dialogues, many government officials selectively and willingly subscribe to the CCP’s make-believe news, such as village elections, the inclusion of human rights in the constitution, the drafting of more laws, and so on. They wishfully interpret these cosmetic changes and believe that the CCP has moved toward the rule of law, democracy, and respect for human rights. This façade persists even while the brutal persecution of Falun Gong goes on. There have been times when the free world has remained silent toward other oppressive regimes. The Chinese regime, however, is the only one to have enjoyed praise from the free world while escalating its abuses. Again, it shows that, when conscience becomes corrupt, what was immoral becomes justifiable, and what was condemnable becomes commendable.

Once the dikes of morality are broken, the flood of moral decline will find ways to run downhill. Worse than their multinational companies, some authorities in democratic countries collaborate with the Chinese regime to infringe on the rights of their own citizens. In Canberra, Australian Foreign Minister Alexander Downer has taken the trouble to sign a certificate every month for four years to restrict Falun Gong practitioners in Australia from staging a peaceful protest in front of the Chinese embassy. The mayor of Vancouver seeks a similar restriction to stifle Falun Gong practitioners’ protest at the Chinese consulate there. In Germany, France, Iceland, and a few other countries, there have been cases of local police forces being pressured into arbitrary and wrongful detention of Falun Gong practitioners who were merely exercising their basic rights of peaceful demonstration. What are human rights? What are freedoms of belief and expression? What are fundamental values and principles? What separates democracy from dictatorship? What is the bottom line? With the impact of economic enticement from the Chinese regime, what was once priceless is becoming worthless.{mospagebreak}

The decline in morality is egregiously evident in the silence of world governments and the media toward the shocking news of organ extraction from living Falun Gong practitioners in a clandestine concentration camp in a place called Sujiatun. Two witnesses first disclosed the news in early March 2006. One of the witnesses is the ex-wife of a neurosurgeon who had taken part in extracting corneas from living Falun Gong practitioners. It is difficult to think of the struggle she had to go through and the pressure she has had to bear for making this disclosure. She gave very detailed testimony, and stated that her motivation for making the disclosure is to save lives, because thousands of Falun Gong practitioners were still incarcerated in the underground complex behind a hospital and were in danger of being murdered for their organs. The shocking news did not get much attention from any government in the free world.

The U.S. State Department went as far as to issue a statement on April 14, just days before China’s ruler Hu Jintao’s visit to the United States, claiming that it "has found no evidence to support claims by the Falun Gong group that Falun Gong practitioners have been killed and their organs harvested in concentration camps." The U.S. State Department knew very well that the two witnesses are not Falun Gong practitioners, and even met with them; yet they mischaracterized the disclosure as "claims by the Falun Gong group" to downplay the allegation. The U.S. State Department drew its conclusion of "no evidence" from the report of its staff from the U.S. embassy and consulate in China after Chinese officials took them on two guided tours of the hospital. Then they urged China itself to probe the claim. The whole show, apparently intended to please the visiting Chinese ruler, would have been comical if the issue involved were not

Chinese Airline Captain Defects to Avoid Torture

At the Shanghai airport on August 8, 2006, Yuan Sheng, the co-captain of flight MU583/586, was about to take off for Los Angeles. What he did not know was that his life would change in the next 24 hours and that he might never see his wife and daughter again.

Yuang Sheng, 39, had been a pilot with the Shanghai-based China Eastern Airlines for 18 years. He had an impressive record of 12,400 hours of safe flying. Since 1995, he regularly flew the Shanghai-Los Angeles route. This time he was the co-captain responsible for the return flight.

The 300-plus passengers began boarding at around 2 p.m. As the return route co-captain, Yuan did not have much to do. He saw a young man in charge of ground safety and noticed he had the accent of someone from his hometown—Shandong Province—so he began chatting with him. He talked to him about the book the Nine Commentaries on the Communist Party, the withdrawals of the Chinese people from the Chinese Communist Party (CCP), and the persecution of Falun Gong in China. Yuan also suggested to him that he quit the CCP. They chatted for over half an hour before the young man left.

A moment later, the young man returned with four uniformed airport policemen. They then called two more local policemen to the site. First, they confiscated Yuan’s work ID and told him loudly, "You definitely can’t leave today! This issue concerns state security. It’s very serious!" They asked the crew to close the airplane door and leave without Yuan.

The passengers had already boarded and the airplane was ready to take off. The crew argued with the police and explained that it was too late to find someone to replace their co-captain.

The local police called in their supervisor, who took Yuan’s information and then said, "You will have to tell us all the details of this matter when you return from the United States." He returned the ID to Yuan and allowed him to board his airplane, as keeping an international flight from taking off was no small responsibility.

On the flight to Los Angeles, Yuan Sheng felt upset and dazed. Based on his knowledge of the CCP, he knew that real trouble awaited him when he returned to Shanghai. He thought a lot about what was happening in China.

He remembered how, at the end of 1997, he started practicing Falun Gong after a friend told him about the practice. He found his health improved, and he had more confidence. He remembered how, after the persecution started on July 20, 1999, when he flew back to Shanghai from the United States, Eastern Airlines made him go through forced brainwashing sessions because he practiced Falun Gong. His supervisors demanded that he write a guarantee letter to give up Falun Gong. If he refused, they would not have allowed him to continue being a pilot. He wrote the letter in order to keep his job, but he cried afterward. It was the only time in his adult life that he ever cried.{mospagebreak}

He remembered hearing of many cases of persecution of Falun Gong practitioners right in his own neighborhood. At the time of the Asia Pacific Economic Conference (APEC), the police secretly arrested many practitioners, including several living on Wuzhong Street near his home.

He also remembered how, in the building next to the Airline Office Building, the police arrested a Falun Dafa practitioner after a housekeeper found a copy of the Nine Commentaries on the Communist Party in an office. They didn’t have a warrant or follow any due process of law.

He knew from these experiences that the police took any incident related to the Nine Commentaries very seriously. The spread of the book and the withdrawals from the Communist Party scared Party leaders. He knew of people who had been sentenced to four-year prison terms just for possessing one copy of the Nine Commentaries.

After landing in Los Angeles, Yuan Sheng called his home. His 12-year-old daughter sounded happy on the phone. Yuan figured that the police had not yet gone there. They would wait for him at the Shanghai airport and arrest him once he passed through customs. Only then would they ransack his home. He was sure that he would not see his family again, even if he flew back to Shanghai.

He spoke to his wife, told her what happened, and explained to her why he could not come back. He asked her opinion. She said to him, crying, "Don’t speak any more! It’s not safe to talk on the phone; please make your own decision."

Flight MU586 was scheduled to arrive in Shanghai at around 6:30 p.m. on August 11, 2006, but its co-captain, Yuan Sheng, was not on board—he decided to apply for political asylum in the United States.

The defection of a Chinese airline captain has drawn attention to the Chinese people’s withdrawals from the CCP and the Chinese regime’s heavy-handed suppression, but not in China. For more than 20 months after the publication of the Nine Commentaries and the subsequent mass renunciations of the CCP, the Chinese regime has kept the facts hidden from the public. On August 11, a reporter from The Epoch Times called the Department of Propaganda and the Department of Security of China Eastern Airlines in Pudong to inquire about the incident. All responded, "We don’t know [anything about the situation]."

As The Epoch Times Commentator Zhang Tianliang points out, the Nine Commentaries has never been openly banned in China, but the Chinese police consider possessing or talking about this book to be an "issue concerning state security. It’s very serious!" After Yuan Sheng’s defection, China Eastern Airlines made a statement that carefully avoided any mention of the Nine Commentaries or the withdrawals from the CCP.

In the safety of the United States, however, Yuan Sheng is now free to talk openly and without fear about the Nine Commentaries and about the persecution. This couldn’t happen in China.

From the Editor

New Tang Dynasty, a Chinese-language TV station based in New York, recently hosted a one-hour live call-in program. Callers from both inside and outside of mainland China congratulated Mr. Yuan Sheng, a flight captain of China Eastern Airlines based in Shanghai, on his successful defection on August 9, 2006. Mr. Yuan is now applying for asylum in the United States.

Mr. Yuan’s story, appearing in this issue’s "In the News" section on page 6, is a modern version of escaping from one’s homeland to avoid religious persecution. Mr. Yuan is no criminal. The only offense he committed was that, while chatting casually with somebody who spoke his hometown dialect before the flight took off, he recommended a book called Nine Commentaries on the Communist Party, and advised that person to quit the Chinese Communist Party (CCP). The conversation also exposed Mr. Yuan’s identity as a member of Falun Gong, a spiritual practice that embodies traditional Buddhist and Daoist principles but has been banned by the CCP since July 1999. Unfortunately, that person reported Mr. Yuan to the police and turned his world upside down.

In China, the CCP regards Falun Gong as a most fearful enemy after its seven-year, ongoing persecution has failed to put the Falun Gong issue to rest. The CCP is even more nervous about the ongoing campaign of quitting the CCP. Those who get caught promoting the book and related information are given harsh sentences. One internal document revealed that simply owning a copy of the Nine Commentaries can spell a four-year jail term for a Falun Gong adherent. Fortunately, the airline and passengers raised an uproar and refused to let the police detain Mr. Yuan at the last minute on the basis of a conversation. The police let him get on the flight, but told him ominously, "We will handle you when you come back."

For Mr. Yuan, the callers’ congratulations could offer him scant comfort. In a matter of hours, he was cut off indefinitely from his job, home, wife, and daughter. Of course, the callers pointed out that if he were in China right now, he would still have none of those things and face jail and likely torture, to boot.

In the United States, Mr. Yuan can now say and practice whatever he believes—privately or in public. For millions of his fellow citizens, however, such freedom is still a pipe dream. Opportunities to escape China are few and far in between. For now, Mr. Yuan has a sense of purpose: take advantage of his newfound freedom to urge others to quit the CCP and call on all democratic governments to take action. To Mr. Yuan, that’s the only way he can help his fellow Chinese and have any chance of reuniting with his family one day.

Mainland Taiwan Affairs Office Has a Mission for Taiwan Media

In March and April this year, I wrote three essays for Taiwan’s New News Weekly at its invitation. When I was visiting Taiwan in July, a journalist friend from the Central News Agency told me that, because of my essays, the mainland’s Taiwan Affairs Office, a department under the State Council (of communist China), had harshly criticized the New News Weekly.

"Why do you handpick Jiao Guobiao when there are so many other writers in the mainland?" the Office demanded.

After I returned to Beijing, I asked the friend working for New News Weekly what had happened. He confirmed that what I had heard in Taiwan was true. "The Taiwan Affairs Office was even investigating who actually invited you to write the essays. So I was scared of asking you [to write for us] again," he said.

I used to have a good impression of the Taiwan Affairs Office, partially because a good friend of mine got a job at the Office after he received his Ph.D. degree. In my impression, it was an elite organization with no interest in mundane matters. I was surprised at how vulgar it had become. A simple matter as trivial as who wrote what article in a Taiwan magazine caused a stir.

The Degeneration of Taiwan’s Media

I still cannot figure out why the Taiwan Affairs Office dislikes me so much. I’m simply making a living writing these days. It looks as if the Central Propaganda Department has assumed the authority to disallow anyone in China from publishing anything I write, and the Taiwan Affairs Office has assumed the mission of preventing anyone from inviting me to write for any Taiwanese media. Under this bilateral attack across the Taiwan Strait, I could be starved to death.

This is hard to comprehend. Even if I die, the Taiwan Affairs Office would not make it to the list of beneficiaries, let alone inherit any penny from me. So why are they so anxious to see me bite the dust? Furthermore, I don’t have any enmity against the Taiwan Affairs Office.

Can it be that any given communist organization, wherever it is, no matter who’s running it, regards freedom of speech as its enemy?

During my visit in Taiwan, I attended a seminar titled "Why Taiwan’s Media Have Become so Degenerate," conducted by some Taiwanese journalism scholars. I had known little about Taiwan’s media, but I learned from the seminar that the degeneration has manifested in two aspects—smearing Taiwan’s democracy and embellishing the mainland’s autocracy.{mospagebreak}

One speaker pointed out that, according to Taiwan intelligence, at least 17 media have secretively received ill-gotten money from the Chinese authorities, who regard democracy and freedom as enemies.

Bowing to the Chinese Authorities

On the day I visited Mr. Wu Zhaoxie, key member of the Mainland Affairs Council (of Taiwan) and, in front of many Taiwanese media, I accused the Taiwanese journalists stationed in Beijing of being indifferent to the lives of the ordinary Chinese people as well as to democracy, freedom, and basic human rights there.

Since I denounced China’s Central Propaganda Department in 2004, journalists stationed in Beijing from the European nations, the United States, Australia, Japan, South Korea, and other democratic countries have all interviewed me to show their interest in and concerns about freedom of the press in China. However, I have yet to be interviewed by any journalists from Taiwan.

Later my friend in Taiwan told me that the real situation of Taiwan’s media is far more complicated. For example, China Times and United Daily News, two major newspapers in Taiwan, are both obedient and submissive to mainland China, although they do not necessarily agree with the mainland’s suppression of its press. The journalists at these two media have protested many times but ended up in trouble every time.

The Taiwan Affairs Office plays hardball with Taiwanese media. Unlike Western media, which are backed by their embassies in Beijing, Taiwanese media have to behave carefully. Otherwise their journalists could face deportation, and their stations could be forced to close.

Taiwan journalists are orphans in Beijing. They have no one to rely on but plenty to make them suffer.

I told my friend, "If they want to close my station and deport me, so be it. Take Apple Daily (of Hong Kong) for instance. Although they are still not allowed to set up a journalists’ station in Beijing, it does not prevent them from being in high demand. As long as you are determined, you can do well, sometime even better, in reporting mainland news without being stationed there."

My friend could only shake his head in helplessness.{mospagebreak}

Forsaking Work Ethics

During my 10 days’ visit in Taiwan, I sensed deeply that many people resent most of the media’s mainland news reporting. In order to establish journalists’ stations in Beijing, they have forsaken the ethics of journalism. The manipulator behind the scene is the Taiwan Affairs Office, whose initial responsibility was reunification across the Taiwan Strait.

In my opinion, the Taiwan Affairs Office should be held accountable for the current bilateral status because day in and day out, they’ve been doing nothing but driving friends over to the enemy’s side. They have polluted the entire media industry in Taiwan and disgusted 20 million people in Taiwan.

Jiao Guobiao was an associate professor of journalism at Beijing University. His article "Declaration of the Campaign against the Propaganda Department of Central Committee of the Communist Party" criticizes that the Propaganda Department is the largest and most powerful protective umbrella for corruptions in China. The article was popular among Chinese people but angered the authorities. He was later dismissed from his post by the university.

Translated by CHINASCOPE from Apply Daily

Observations on China’s Health Care System

The issue of reforming the health care system has always been a sensitive topic in China. On September 16, 2006, the Second Summit Forum for China’s Health Care Industry was held in China Europe International Business School (CEIBS) in Shanghai. The government officials who spoke at the forum remained cautious when dealing with the media.

They repeatedly stressed that reporters must not disclose their names or identities. As one of the officials explained, “I’m concerned about the possible problems it may cause.” Of even more interest, a few officials requested that their host delete their speeches from the forum’s stenographic records.

Contrary to his peers, Yin Dakui was the only speaker who dared to make his name public. The former deputy minister of the Ministry of Health is now the president of the Chinese Medical Association. His speech was titled” Develop a Fair and Highly Efficient Health and Medical Services System.”

Continue reading

Making It the Real People’s Magazine

While Common People magazine has long won the hearts of countless citizens in mainland China for its bold stand against social injustice and the Chinese communist government’s persecution of its own people, this same daring publication has offended the authorities. Not long after the November 2006 edition of Common People was published, the Chinese Internet police once again blocked its website.

One reporter from Common People revealed that this is the fourth time the website has been blocked. Speaking of the magazine and its chief editor, the reporter said, "As a reporter, I just have to do my job well—to write a good story. The fate and future of the magazine falls on the shoulders of Chief Editor Huang. In order to speak for justice and righteousness on behalf of the common people, he has been working under enormous pressure. He has so many troubles that he keeps to himself. He tells us very often that, as individuals, we each have to have morals, and as a media we have to have integrity. We have to produce news that is true, to report on the news behind the news, to put aside propaganda to do real news. Were we to be dismissed tomorrow, with such a leader, we would still have a sense of pride."

Following is the transcript of an interview with the chief editor of Common People magazine, Huang Liangtian, on November 4, 2006.

Q: I heard that the Common People website has once again been blocked?
A: Yes, we are already used to it. This is the fourth or fifth time.

Q: What do you think is the reason behind it?
A: I’m not sure of the exact reason this time. The Public Security Bureau told our Web server company that our magazine is too liberal.

Q: So has the magazine stopped publishing?
A: Not yet. They have not told us clearly to stop, because this magazine is still a government publication. In mainland China, all the publication numbers belong to the government. It’s the government who administers them all. We just want to make our government magazine more like a true magazine.

Q: What do you think makes it a true magazine?
A: Well, to speak the truth and not garbage or lies. This is the basic requirement of a magazine. A lot of the media in China are just propaganda tools. After I became the chief editor of Common People, I constantly tried to report the truth to our readers.{mospagebreak}

Q: When did you become involved with Common People? Were there any changes in the style and content of the magazine after you took over?
A: Common People used to be called The Chinese Countryside. It is a government publication by the Chinese Agricultural Bureau. It used to be for the purpose of cultivating the so-called "socialist new people," as the Party calls them [Note: This is a term of Chinese communist propaganda, which means making the people armed with the "socialist ideology" of communism.]. A few years ago, for some reason, it was renamed Common People for the purpose of promoting a socialist ideology among the people and propagandizing things such as socialism around the country.

Two years ago, the government arranged for me to become the chief editor of this publication. However, I am a scholar, so I decided to make this magazine a true news magazine. I want to report on things that people do not know about and to inform them of things they haven’t heard.

However, I never thought, even so, that there would be so many difficulties.

News should be open, and so should our publications. We should report on whatever our readers and the common people need. We should give them the information that they want to know.

As a media, we should not be political puppets. However, in mainland China, all the media are simply political toys. And this is determined by the party nature of Chinese Communist Party news.

Many of us cultured people or media workers have been fooled by the propaganda into thinking that we are also politicians. In fact, we are simply people with culture, and each cultured person should have his or her own independent character.

Q: In the atmosphere of political pressure in mainland China, how do you think you can be an independent person of culture?
A: One needs enormous courage to speak the truth.

Many media divide their readers into two categories: bad guys and idiots. The media seem only to attack the bad guys and educate the idiots. There is no true education or culture involved. There is only propagandizing and struggle.

In fact, these media are very ludicrous. The people are all in the know and the truth is already in their hearts. Every reader has a yardstick in his or her own heart. They each have a right to choose what they want.{mospagebreak}

Our goal is to try our best to create the things that readers need, to allow their agreement with us to come from inside their hearts. This is my guiding principle as the chief editor.

In reality, it is very simple and easy to say, but hard to do. Simply because all the other media are like that, we have thus become the odd one out.

Q: What kind of pressure does the regime put on you?
A: Well, they have all sorts of unwritten "commands" passed down through informal methods. Sometimes they’ll ask me to have a chat with them, sometimes they’ll ask a friend to pass the message, or sometimes they will have a meeting with me so I can listen to their instructions.

These are some of the things they might say, for example, "As a governmental publication, you should do this and that, and you’ll be fine. Otherwise, if you persistently decide to do this or that, things will ‘get messy.’ Why do you have to treat your readers as if they are smart people? Can’t you just treat them as if they are idiots? They are the masses, the common people. The goal of Common People is to educate the public. The purpose of educating them is so that they will become the next class of socialists, support the Communist Party, support socialism, and praise the Party and socialism."

This is what they say. However, I think that this is too easy and too hypocritical. I believe that it is not up to us, as a magazine, to say whether the Communist Party or socialism is good or not. Their actions decide this.

We don’t want to be brainwashing our readers. We hope to bring uncensored news to them, to offer a platform for common people to say what they want to say, and to express their hearts in accordance with the Chinese Constitution. Common People should tell what common people tell each other and spread such information among common people.

Although this is my guiding principle for the paper, it is not in conformance with the typical way that the Communist Party runs other publications.

Q: What is something that you have felt strongly over these two years?
A: My deepest feeling is that it is not easy to tell the truth, but that it is extremely interesting to do so.

We’ve never stopped the magazine—not once. Some issues were delayed; some officials requested that certain articles be removed. This is also the hardest part of my job and my greatest tribulation.{mospagebreak}

Some time in the future, I may be removed from my job, but when I look back, I can say without guilt that during my term as the chief editor, my fellow colleagues and I have never written a single lie or made an unfounded comment in this paper. I have not sold anything spurious to my readers. I have faced up to my own moral integrity, as well as the integrity that should belong to the profession. That is enough.

Q: I heard that many readers called to express their concern after the website was closed?
A: Yes, we received a lot of calls today. Most of our readers are cultured people with a sense of responsibility toward the nation, toward history, and toward the Chinese people; they are concerned with the current state and with the future of our nation.

Since I took over, I have never been concerned over the volume of our distribution. I focus mainly on the quality, so that readers have a sense that we have expressed what is in their hearts and used words that are meant to be said.

Moreover, we also report the truth of historical events uninfluenced by any political or party factors.

Q: Was there any restructuring of the workers when you took over?
A: Not at all. I did not bring a single person with me when I took over. These workers are all the original workers. However, the environment changes people. As long as we cultivate an environment where we dare to speak the truth, all of us will work according to this principle. United, we become a strong force, so we are able to do what we’re supposed to do.

The greatest problem with mainland media is that many media workers have desires to promote themselves— desire for money, power, position, fame, etc., or other fantasies beyond what is appropriate for our profession and for one’s conscience. Things are much easier once one is clear about all of these.

In fact, if everyone is given a more lax environment, we’re all the same. Every Chinese person who goes overseas is so energetic.

Everyone is talking about the ugly Chinese person nowadays. In our current issue, we have an article that specifically discusses this issue. What is the reason behind such ugliness? It is because our system is ugly.

From a certain perspective, we see that the Chinese people become very civilized once they go overseas. Japanese people are normally very polite. However, once they come to China, some of them become very rude; it is the same with Americans. Therefore, we cannot simply point our fingers at the Chinese people. We cannot say that there is something wrong with our race. It is a problem with the system. The Chinese people in Taiwan, Singapore, and elsewhere, are all very polite. They share the same heritage as us, so why are they different?{mospagebreak}

Perhaps it is because of our discussion on this issue that the website has been blocked.

Q: How did you manage to persevere for the last two years under such pressure?
A: A person becomes strong when he lets go of attachments and desires. Once a person is righteous within, the pressure is also reduced. If you stand straight, you’ll be able to bear the pressure. If a person is crooked within, only a small push will make him fall.

I feel very proud of my fellow colleagues. They have done a lot of things that I would never have thought of. We all have the courage to speak up for the truth.

Q: Will the new Xinhua News Agency’s regulations or the government’s regulations on sudden events have any effect on the magazine?[1] A: I don’t think so. The government has its own regulations and the news department has its own regulations. Nowadays, the media has become very advanced. Not everyone is blind. It is not a wise move to blindly regulate the news.

Q: Will you suffer additional pressure for accepting our interview?
A: I guess so, but it’s all right. I am responsible for every single sentence I say. I will still continue to do what I deem necessary. The Common People magazine will still serve its readers as usual.

As long as I am still the chief editor, I will do all that I can. I will try my best to see that the website is soon up and running. I have the confidence and the capability.

Q: Thank you very much for accepting our interview. We hope that Common People will be able to overcome this difficulty and to flourish.
A: Thank you very much for your interview. Please pass my message to all friends outside mainland China: I will not let them down!

Translated by CHINASCOPE from The Epoch Times.

Footnotes:
[1] On September 10, 2006, Xinhua, the Chinese Communist Party news agency, published a new set of government media restrictions, entitled "Measures on Administration of Release of Press Information in China by Foreign News Agencies." The new regulations require foreign news agencies to be examined and approved by Xinhua News Agency, and go through agencies authorized by Xinhua News Agency before publishing any news in China.

Chinese Foreign Exchange Reserve Surpasses One Trillion U.S. Dollars

Chinese authorities recently disclosed that China’s current foreign reserve has exceeded US$1 trillion in late October 2006. Not long ago, China had already replaced Japan as the country with the world’s largest foreign currency reserves. The news has once again shown a spotlight on China’s currency, with many of China’s trade partners believing that the yuan is seriously undervalued.

One trillion U.S. dollars is equivalent to one-fourth of the total market value of stocks listed on the Dow Jones Index—enough to buy Microsoft, Citibank, and Exxon Mobil combined, with the remaining enough for General Motors and Ford Motor Company. Although experts have suggested that the funds be appropriated to health, rural education, environmental protection, and other social security projects, Wu Xiaoling, the deputy governor of China’s Central Bank, recently made an explicit statement that the foreign currency reserve should not replenish the social security fund accounts. He reiterated that agencies that wished to use foreign currency reserves ought to pay an equivalent amount of Chinese currency in exchange.

While Chinese people may find it difficult to benefit from the huge reserves, they may have to suffer from the potential consequences. On September 12, 2006, the Bank for International Settlements (BIS) issued a warning to several emerging market economies, including China, that the huge reserves may present a dilemma, necessitating either raising their exchange rates or bearing the aggravated risk of inflation.

China’s foreign currency reserves come from exports and foreign investment. The Central Bank has been using the Chinese yuan to purchase U.S. dollars and other foreign currencies from enterprises and individuals. A recent article in the Wall Street Journal reported that, in order to maintain the unreasonably low Chinese RMB exchange rate, China’s Central Bank has to purchase about US$20 billion every month. In order to raise the money to buy dollars, the Central Bank either needs to issue more bonds or to put more cash into circulation. Infusing cash into the market will lead to inflation. On the other side, if the government distributes bonds, it will accumulate debt and the government will have to pay the dividend.

In the United States and China, many economic experts have already pointed out that the huge foreign currency reserve is not only a serious waste of resources but also a detriment to the interests of China. Chinese officials, who have thus far avoided facing the issue, have just begun to recognize this as a serious problem.

When Jiang Dingzi, vice chairman of the China Banking Regulatory Commission, was interviewed by the Study Times, the Communist Central Party School newspaper, he described China’s huge foreign currency reserves as one of the biggest economic problems. He added that China’s foreign exchange reserves are invested mostly in U.S. bonds. Although the liquidity of such assets is not a problem, the rate of return is not high. Because the value of the U.S. dollar has exhibited a long-term trend of decline, China is facing the risk that the U.S. bonds that China holds will depreciate.{mospagebreak}

With China’s rapid export growth, it is estimated that its foreign currency reserves will add another US$200 billion by early 2007. Mao Yushi, chief economist of Beijing Tianze Economic Research Center, a private economic research institute, said that, because Chinese officials are only now realizing that this is a serious problem now, it might already be too late. He added, If we had adjusted the exchange rate three years ago, when our foreign exchange reserves were only more than US$200 billion, we would not have today’s problems.

Economists worry that if China starts to sell U.S. dollars, it will cause the exchange rate of the dollar to plummet. As a result, the value of dollar-based Chinese investment will be greatly reduced. At the same time, the U.S. Central Bank will have to increase its interest rates. The U.S. economy will then stagnate or even enter a recession. The demand for imported products will drop dramatically, causing more damage to both China and the United States.

In today’s global economy, any move by either China or the United States will affect the entire world. Economists and politicians in both countries are painstakingly looking for ways out of this currency predicament.

Serene Lee is the hostess for NTDTV’s Economy Program.

China’s Policy Toward Foreign Investments Undergoes Dramatic Changes

Aseries of revisions to China’s foreign investment policy took place in October 2006. The most significant changes include: First, on October 8, 2006, the State Council passed a draft resolution merging the domestic corporate tax and foreign corporate tax systems. It is expected to become law—the Corporate Tax Law[1]—at next year’s "Two Conferences." Secondly, a number of the official research institutions reported that, in the future, as part of a long-term plan, various policies highly favorable to foreign investors would be discontinued.[2]

Such a directional change in government policy signals that the golden era of foreign investors acquiring large profits without paying taxes is coming to an end. Although in the past 20 years, only one-third of those investors actually realized their gold-mining dreams in China, the dream itself motivated them to keep pouring money into China.

China’s Economic Environment Has Experienced Tremendous Changes

As China’s policies on foreign investments have tightened up, the infusion of foreign investments into China has been shrinking. This is echoed by the recent official figure—the actual foreign investments in China dropped by 1.52 percent in the first nine months of 2006.[3] Such a drop is well within the expectations of the Chinese communist government. It is the result of the policy changes on foreign investment. The policy shift comes from changes in China’s domestic economic environment.

First of all, the thirst for foreign capital has decreased. By the end of September, China’s foreign currency reserves had jumped to US$987.9 billion, higher than any other country in the world, according to the latest data from China’s central bank.[4] In the past, China’s policy provided foreign investors with tax advantages over domestic corporations in order to stimulate more foreign investments in China. Since capital is no longer the bottleneck for China’s economic development, the foreign investment policies naturally changed to favor hi-tech investments.

Secondly, the problem of China’s limited resources is becoming increasingly severe. In particular, many resources, including energy, mineral resources, land, and low-cost labor, all lean toward the export-related industries. There are hardly any rules on environmental violations and labor rights. The boom in China’s exports has developed at a huge expense to the country’s resources, environmental damage, and energy consumption. On the other hand, the social benefits have not increased in proportion to the profit, despite all the development. Therefore, there is no significant increase in demand in the domestic market; "sustainable development" has become a pipe dream.

These two factors have determined that China must revise its foreign investment policies.{mospagebreak}

What Changes Have Been Made to the Foreign Investment Policies?

The current changes to the foreign investment policies are based on two criteria. One is to check if the foreign investment policy in the relevant areas will conflict with China’s economic interests. The second is to examine whether the current degree of openness will cause any economic security issues—although "economic security" is not a clearly defined topic in China. Despite the standard list of sectors established by the regime to exclude the involvement of foreign investors, some attempted takeovers by foreign investors in sectors and industries that do not fall in the prohibited list did not eventually go through because of "national economic security" concerns.

The recent revisions to the foreign investment policies fall into the following two major categories.

Consolidation of the Two Tax Systems

The so-called consolidation of two tax systems is to implement the same tax standards for both domestic and foreign corporations. In the past, due to the two different taxation systems for the two different types of entities, domestic corporations had to shoulder heavier tax burdens while foreign companies enjoyed lower tax rates. According to publicly available data in China, the actual tax rate that China’s domestic corporations paid averaged 25 percent while their foreign counterparts paid a tax rate of only 12 percent—a difference of 13 percent. The tax advantages used to be the main incentive for foreigners to invest in China. In the past three years, however, as the amount of foreign investment has surged, a viewpoint unfavorable to foreign investments has gradually come to dominate mainstream thought. Such a viewpoint holds that the foreign investments in China have reached the saturation point, and China’s domestic enterprises are in a disadvantageous position due to the heavy corporate taxes. Thus the voices calling for the consolidation of the two tax systems became ever louder. In the end, the State Administration of Taxation, the Ministry of Finance, and the National Development and Reform Commission, all of whom are proponents of a single tax system for both, won the battle within the circle of decision makers, leading to the present adjustments and changes in China’s foreign investment policies. It appears that the motion of the "Corporate Tax Consolidation" will likely be passed at the People’s Congress in March 2007, and it will be implemented in 2008 at the latest.[5]

The Ministry of Finance has pre-announced the consolidated tax rate to be 25 percent. The Research Institute of Finance under the Ministry has finished an evaluation of the impact of the merged tax rate on fiscal revenues, based on a range of 25-28 percent. To please the local governments, the central government promised a transitional period of one to two years, with a larger degree of freedom for regions in the West.{mospagebreak}

The tax consolidation will have a significant impact on foreign investors, who enjoy many tax advantages in China, including the "Two Waivers and Three Halves." (Presently, foreign corporations enjoy tax benefits for five years, starting from the first year of making a profit. The first two years are free of tax. In the following three years, they pay half of the tax.) Local governments usually take the approach of taxing them first and giving them a refund later. Many foreign corporations, especially those from Hong Kong and Taiwan, have been relying on the tax advantages and export tax reimbursements as their main vehicle for profits. Once the new tax system is in place, many of these companies will likely pull their investments out of China. For multinational corporations, however, the situation could be different. Since China is merely the production base or the host country for their subsidiaries, the multinational corporations can sell their China-produced products to the parent companies and therefore use the internal price to transfer the profits to countries with lower tax rates. As a result, they can avoid the potential disadvantages caused by the new tax policies. There are also multinational corporations whose markets are in China. For them, the only choice is to hold on to the business until they no longer make a profit.

The argument that domestic corporations are the biggest beneficiaries of the "corporate tax consolidation" is not true either, as they will pay the same tax rate as before and will not enjoy lower taxes. The benefits to them, if any, are indirect at best. For example, compared to the same products made by the foreign corporations in China, the products made by the domestic corporations are usually of lower quality, albeit with comparable prices. However, in the past, the foreigner companies enjoyed lower tax rates; thus they could set lower prices to expand their market share. Now, with the consolidated tax rates, the domestically made products can use a lower pricing approach to take the market shares from their foreign competitors.

It is the Chinese regime that will benefit the most, as it will be able to collect significantly more taxes as a result of the new policy.

Policies on Takeovers by Foreign Investors

Another major policy change concerns the takeovers by foreign investors. In the last two years, the investment strategy of the Ministry of Commerce has been to encourage foreign investors to acquire Chinese firms. Take the 2004 data as an example. In 2004, the foreign investments in the form of acquisitions consisted of 10 percent of the overall foreign direct investments (FDI). In the recent couple of years, the pace of foreign takeovers has been accelerating. The most noticeable include the takeover of Xugong Construction Machinery by the Carlyle Group of the United States, and the purchases of Sichuan Shuangma Cement Co. Ltd by the Lafarge Group, Shenzhen Development Bank Co. by the New-bridge Capital Group of the United States, Qingdao Beer by Anheuser-Busch, and the Lanwu Steel Corporation by Arcelor. Among the acquisition attempts, some succeeded and some failed. The main reason for the failures, according to the Chinese media, was the concern for "China’s national economic security."[6] After three years of continuous media exposure, the list of sectors and companies that may affect the national economic security has greatly expanded.{mospagebreak}

With the alleviation of the thirst for capital and the ever-rising nationalism, the door opening for foreign mergers and acquisitions has become even narrower. "Provisions on the Takeover of Domestic Enterprises by Foreign Investors," announced on August 8, 2006, and effective on September 8, is the indicative official document on the policy changes for foreign takeovers. In addition, there are a few other noticeable trends, including:

1. The State Council is discussing the formation of an inter-ministry commission similar to the foreign investment investigation committees in other countries. Led by the National Development and Reform Commission and involving the Ministry of Commerce and the Ministry of Finance, this new organization will collaboratively investigate all of the major foreign takeovers in the machinery and manufacturing industries.

2. Restrictions on takeovers or stock ownership by foreign investors will be placed in the seven key manufacturing sectors, including nuclear power plant equipment, power plant equipment, electric power transmission and distribution equipment, shipbuilding, gears, petrochemical equipment, and the steel industry. Twenty to 40 key enterprises have reportedly been added to the list that is under the State Council’s direct protection.[7] The criteria for the status of "key" enterprises are based on the market shares, asset amounts, production scales, and revenues of the corporations.

While the Ministry of Commerce has long been a proponent of providing favorable terms to foreign investors, it made a sharp turn this year by issuing the "Report on the Control of China’s Industries by Foreign Investors," and by reexamining the effectiveness of attracting foreign investments to China over the past few years. Full of national economic security concerns, the report has the tone that foreign investors have already taken control of China’s industrial sectors.

As far as how to properly decide on a policy for foreign takeovers, China’s press widely believes that two red lines must be drawn. One is to ensure that foreign investors do not disturb China’s economic order. The other is to check on whether the foreign investors have threatened the security of the industries. Any foreign acquisition within these two red lines will likely be the target of protectionism, while the foreign investments that are beneficial to the transformation of the industrial structure or means of economic growth will be encouraged.

Who Is Influencing the Foreign Takeover Policies?

Before asking the question, one may first ask who is actually most concerned about industrial security.{mospagebreak}

Widely quoted as the supporting evidence that China’s industrial security is being compromised, a report distributed by the Research and Development Center of the State Council indicates that in each of the industries open to foreign investors, foreign investors almost exclusively control the top five enterprises. In particular, foreign investors own the majority rights of asset control in 21 out of 25 of China’s industries; they control the majority of the shares of the largest five elevator manufacturers, which produce 80 percent of China’s market shares. In the home appliances industry, 11 out of 18 national-level enterprises are joint ventures with foreign investors, while in the cosmetic industry, foreign investors control 150 Chinese companies. In addition, 20 percent of the medical industry is under foreign investors’ control, and 90 percent of the sales in the auto industry come from foreign brands.[8]

The aforementioned industries were not previously on the list of strategic industries for national economic security. Nor do Beijing authorities believe they are related to economic security. It is no exaggeration that the fact that these industries are now related to national economic security is the result of the widespread media coverage in the past two years. Then who is concerned about the economic security of these companies?

There are only two groups of people who have a vested interest in these industries: the domestic competitors and the consumers. From the perspective of protecting consumer rights, Chinese consumers get much better quality from the merchandise and services from foreign companies in China. Moreover, the Chinese consumers are forced to tolerate the price monopolies and the inferior products and services in the industries that are not threatened by foreign investors’ control or subject to economic security. These industries include telecommunications, oil and energy industries, and the financial systems. The extent that the public interest is harmed by these state-owned monopolies is demonstrated in the following incident. On October 4, 2006, during the 16th Party Congress this year, to crack down on the overly powerful ministries and government departments, the central authorities published an article in the name of the Xinhua News Agency—"Take Measures to Suppress and Prevent the ‘Special Interest Groups’ from Growing"—publicly acknowledging that the state-owned monopolies infringe upon the public’s interest and damage "social harmony."

It is fair to conclude that the media coverage linking these non-crucial industries with the national economic security must come from the domestic companies that compete with their foreign counterparts doing business in China. The major players in these industries are all state-owned enterprises, not the domestic private companies.{mospagebreak}

We should not overlook the power of these "special interest groups" in influencing state policies and legislation. To maintain their monopoly positions, these groups have been utilizing various means, including hiring scholars to appeal for them in the name of protecting the national industries. The outcome is the directional adjustments of the foreign investment policies. As a matter of the fact, it is more appropriate to call in these special interest groups to protect their monopoly interests than to protect national economic security. If these examples are still insufficient, the new regulations China is currently pushing forward to restrict the expansion of the large international chain stores in China, including Wal-Mart Stores, and the Carrefour Group, are surely unrelated to national economic security.

The Chinese companies are cleverer now because they know how to protect their own interests by waving the nationalism flag. Many industrial associations are involved in the foreign takeover debates. For example, the Bearing Industry Association of China publicly expressed its opposition to the preliminary acquisition agreement between the Schaeffler Group of Germany and the Luoyang Bearing Group. The China Cement Association is also demanding that the central authroities investigate the M&A activities of foreign investors in the domestic cement industry.

Should the domestic companies demand the protection of their industries in order to gain more time to renovate and improve the quality of their merchandise and services, their actions would not deserve criticism. On the other hand, if the purpose of their demand is to protect their monopoly interests by compromising the interests of consumers, the protectionism under the disguise of the nationalism flag needs to be questioned.

Blocking Chinese Firms from Being "Fake" Foreign Investors

Another indicative change of the foreign investment policies is that they block many Chinese firms from enjoying favorable terms by disguising themselves as "foreign investors."

Among the foreign investments in China, one-third of them are actually from native Chinese who have transferred their assets abroad and then infused them back to China in the name of foreign companies. According to a conclusive study by the Chinese government, there are three forms of "fake" foreign investments. The first scenario is that the Chinese companies in Hong Kong, Macau, or other countries, out of their strategic needs, come back to China to form foreign investment companies. The second scenario is that to raise capital, the domestic corporations register some shell corporations overseas, then return to China to acquire their former domestic corporations, and finally bring them to IPO. The last form is that the formerly domestic corporations register some shell companies with offshore financial centers and then become foreign corporations in China.{mospagebreak}

It is estimated that the third form of "fake" foreign investments is very common in China. As of today, not only Hong Kong, with its single tax system, remains the best place for China’s domestic companies to register their shell companies; but also the Virgin Islands, the Cayman Islands, and the Samoa Islands have become the second, seventh, and ninth most popular regions for Chinese companies to register their offshore entities. With regard to the ratio of "fake" foreign investments in China to total foreign direct investment (FDI), the World Bank estimated that in 1992, it was as high as 25 percent. Some experts say that today that number is over 33 percent [9]

"Provisions on the Takeover of Domestic Enterprises by Foreign Investors" presented by the Chinese authorities in August introduced the regulations on "actual control." Provisions 11 and 15 require the applicants to disclose to the investigation authority their administrative relationship and their actual holders. Under these rules, the takeovers actually controlled by domestic corporations must be subject to approval by the Ministry of Commerce. Provision 9 provides that the acquisitions of domestic companies by overseas corporations that are actually controlled by domestic entities will not, in principle, enjoy advantageous treatment. In addition, provision 59 provides that when the natural stockholders of domestic corporations change their nationalities, the nature of the corporations they own cannot be changed (to a foreign investors’ venture).[10]

These provisions make it improbable for "fake" foreign investments to profit from their outflanking tactics. Nevertheless, such a change indeed conforms to the Chinese government’s political principle of consistently treating overseas Chinese as citizens of China.

Ms. He Qinglian is a renowned economist from China.

Translated by CHINASCOPE from Finance and Culture Weekly of Taiwan News, November 8, 2006, Issue 263.

Footnotes:
[1] Accounting Times, October 16, 2006, "Liangshui Hebing Maichu Shizhixing Bufa, (A Substantial Step Taken on Consolidation of the Two Tax Systems)" vol 90 http://www.atimes.com.cn
[2] Xinhua News Agency, October 20, 2006, "Weilai Zhongguo De Waizizhence Jiang Zubu Xiangzhongxingwaizi Zhuanbian, (China’s Future Foreign Investment Policy Will Gradually Change to a Neutral Policy)"
[3] Same as above.
[4] Website of People’s Daily, November 8, 2006, "Waihuichubei Tupo Yiwanyi Meiyuan, Ju’e Waihui Ruhe Shiyong, (Foreign Currency Reserves Exceed US$1.0 trillion; How to Make Use of Foreign Currency Reserves)" http://finance.people.com.cn/GB/1045/5011992.html
[5] Same as [1].
[6] Xin Caijing (New Finance magazine), January 5, 2006, "2005 Niandu ‘Zhongguo Shida Binggou Shijian’ Dianping, (Comments on the 2005 ‘Top Ten M&A’s in China’)" by Li Bing
[7] Sichuan Jingji Xinxiwang (Sichuan Economics Information Network), June 28, 2006, "Liubuwei Yu Lianxi Bufang, Waizibinggou Congyan Shencha, (Six Ministries and Commissions Work Together to Seriously Investigate M&A’s by Foreign Investors)" http://www.sc.cei.gov.cn
[8] Global M&A Research Center, China’s Map of Industries, 2004-2005, April, 2005, published by People’s Post & Telecom Press
[9] 21st Shiji Jingji Baodao (21st Century Economic Report), June 19, 2006, "Waizi Shuishou Loudong, (Loopholes of Taxation on Foreign Investment)"
[10] Website of People’s Daily, August 10, 2006, "Guanyu Waiguo Touzizhe Binggou Jingneiqiye De Guiding, (About Regulations on M&A’s of Domestic Enterprises by Foreign Investors)" www.finance.people.com.cn/GB/1037/4685010.html