November 3rd 2001

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Articles from this issue:

Cover Story: Afghanistan - Why the war on terrorism will be long and risky

Editorial: Why the ALP could win by default

TESTIMONIAL: A policy agenda for Australia's future prosperity

Election 2001: When will the parties support a new bank?

Defence: US Navy commissions Australian high speed catamaran

Canberra Observed: Nationals looking down the barrel

Straws in the Wind: Varieties of evil / Russian fears / My enemy's enemy is my friend

Law: Family Court redefines man

Government spokesmen confirm WTO threats

Media: Moral equivalence / Will they be invited back?

Letter: Settlement deaths

Letter: Beazley defended

Letter: Defence solution

Comment: The evil face of terrorism

Drugs: The case against medical cannabis

Obituary: Vale Phyllis Boyd

China: Can the Chinese Communist Party survive the market?

Books: 'John Maynard Keynes: Fighting for Britain 1937-46' by Robert Skidelsky

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China: Can the Chinese Communist Party survive the market?

by Sharif Shuja

News Weekly, November 3, 2001

The conventional view that most outsiders hold on China now is that it is a Great Power and is contending for status as a superpower rival to the US. China has been enjoying rapid economic growth ever since it embarked upon its reform program initiated by Deng Xiaoping more than 20 years ago.

China's current leaders have continued these policies. They remain committed to reform; indeed they recognise that reform is necessary for long-term growth and prosperity. Like Deng, they have learned that a command economy is inefficient and unresponsive and that an inward-looking China, cut off from the outside world, cannot progress.

China's rapid economic growth has generated a widespread view that it would be the economic superpower of this new millennium. China's economic reform process seeks to develop an internationally integrated market economy without substantially restructuring its political system.

The prime objective of the reform process has been rapid economic growth through a variety of means in such sectors as foreign investment, rapid urban and rural industrialisation, the promotion of service industries, the development of a private enterprise sector, increased managerial autonomy for the state and collectively-owned sectors of industry, and expanded foreign trade.

The reality is that, however large it may have been, China's economy in early 2001 is not a national economy and bears no resemblance to Western economies structurally.

There are two Chinas: a maritime China, caught up in the economic growth of modern times and looking beyond her frontiers; and a continental China, agrarian, bureaucratic, conservative, and unaware of the economic advantages of international capitalism. It is this second China that is consistently controlling political power.

The economic growth now has been heavily concentrated in maritime China, and the vast hinterland remains very unevenly integrated into a national economy. And, given its size and rate of growth, an unreformed China may greatly distort the free-market trading systems.

China now faces serious challenges and a number of critical problems. The most important challenge for Beijing is how to adopt economic policies which will enable it to develop to its full potential, but ensure the hegemony of the Chinese Communist Party, i.e., the capacity of the Party to retain political centralism with economic decentralism.

Other challenges and problems include: the growing, economic dichotomy between the coastal provinces and the rural ones and its implications for internal cohesion; unemployment; an ageing population; capital inflows; pollution; the tensions between the emerging entrepreneurial economy; and the vast parts of China still under state control and the future of the Party. There is a deep-seated fear that sooner or later, one or more of these issues is going to result in political unrest.

The ageing population structure is an important concern for China. One study estimates the ratio of the elderly population dependent on working adults or the government will rise from 10 per cent in 1990 to 22 per cent in 2025. Already nearly 10 per cent of the 1,240 million Chinese are aged 60 or over. By mid-century, birth and death rates will be similar, and the population will be stabilised at 1,600 million, of whom no fewer than a quarter will be aged over 40. This ageing phenomenon is occurring in many countries, but most have had a stronger economic base than China and a better developed welfare system.

The plight of the more than 300,000 state-owned enterprises (SOEs) is a serious burden on China's economy. These SOEs, which employ more than 100 million workers, are operating at a loss of about one per cent of GDP each year. Many industrial workers receive only partial payment. The problem of underemployment and bankruptcy in state-owned enterprises is critical, and needs reform. But the SOE reform is just one aspect of an escalating unemployment problem.

The one million-plus soldiers and officers in the reserve forces of China's military are primarily in SOEs of one form or another. The closure of these SOEs in a drive for national economic efficiency would create more unemployment and social unrest.

In rural areas, people are being made surplus by more efficient farming methods and other changes, with official estimates suggesting that the army of jobless will soon reach 120 to 140 million. Questions are also arising about the future of the 23 million town and village enterprises which employ around 135 million people, and have been driving local economies in some parts of the country since the mid-1980s. Now, however, they are being squeezed because of rising costs and greater competition from foreign-invested firms.

Unemployment in urban China is also rising with some estimates suggesting that the real rate of unemployment there has already reached around 10 to 12 per cent. Another potentially volatile group is China's "floating population" of underemployed or unemployed rural labour. Mainly male, and numbering about 100-120 million, they migrate into cities and work on construction projects. They return to the countryside from time to time, or else send funds back to their families. The potential for labour unrest in China is high, and may be one of the most volatile problems to confront the Chinese leadership and the People's Liberation Army.

Pollution problems are mounting. Raw sewage is being dumped untreated into rivers, much of the rain falling in some areas - such as Guangdong Province - is acidic, and vehicle emissions are rising in cities like Beijing, Shanghai and Guangzhou. Many foreign enterprises are heavy polluters as are village enterprises, which use rivers as drains for untreated toxic wastes. The last couple of years have seen a crack-down on polluting enterprises, but every closure means fewer jobs.


The central government is becoming increasingly concerned about the likely disruption to political and social stability if the inland areas continue to believe that they are not getting a fair share of the benefits of rapid economic growth.

The current Five-Year Plan gives priority to inland development, and the top leadership constantly reiterates the importance of rectifying the imbalance by stepping up resource development and infrastructure projects, improving the investment climate and directing more funds there and creating employment opportunities.

China also faces the potential of a financial crisis of serious magnitude. The centrally controlled banks of China and the Government have been heavily subsidising SOEs with loans to prevent their collapse. Up to 90 per cent of all loans granted to enterprises by state banks went to SOEs, but these SOEs produce less than 40 per cent of China's industrial output.

The recent Asian currency crisis is also a matter of serious concern. It is not yet clear how instability in the rest of Asia's currencies and stock markets will affect China, but this is every reason for China to be concerned. China insists that the peg of the Hong Kong dollar to the US dollar will be kept for the moment, but if it were to fail, then there would be serious repercussions on the Chinese economy.

China has been able, so far, to survive the regional financial turmoil - attributable mainly to the closed nature of its financial sector. China was wary, however, as early as 1994-95 when the Mexican economy was in financial crisis. China's financial research personnel warned the central government that the economy was still too weak for China to engage with international rivals, and that it was not yet ready to allow outsiders to compete openly in the domestic market. This caution has subsequently been proven correct.

The stability of the Chinese currency, Renminbi, is a matter for serious concern in the region. There has been restless speculation over whether the Renminbi should devalue and, if so, when and by how much.

So far, the Chinese Government has emphasised the stability of its currency. Access to the vast American market has been a major factor in helping China build its very large foreign currency reserves, and that in turn has been a main factor in enabling it so far to resist pressure to devalue the yuan, a very important point for every nation involved in the Asian economic crisis.

Aside from divisive regional hostility, there has been a massive influx of workers into the coastal regions from the poorer interior.

The result has been a wide variety of social problems in the cities, including rising crime, drug trafficking and prostitution and huge pressure on an already stretched infrastructure.

Rapid economic growth has also contributed to weakening central government control over the regions. Guangdong, for example, is the fastest-growing provincial economy in China. The wealth generated by this growth has bred a new regional élite anxious to escape the fetters of central government policy control.

Whilst the Party has attempted to control this new élite (some regional governors have been criticised and dismissed for ignoring Beijing's dictates), the trend toward greater regional autonomy has continued, fuelled by economic developments. Guangdong province is perhaps the best example of this phenomenon. It is now largely self-financing, receiving little cash from central government and, in return, paying little in taxes.

Despite impressive economic growth, dissatisfaction with the Party is increasing; and in the long term, Chinese Communist Party (CCP) control over the PLA might gradually erode. On the economic side, the CCP is caught on the horns of a dilemma. Rapid economic reform has brought many dangerous side-effects including rampant inflation, corruption and growing economic differentials. It has also failed to bring the government solvency.

The CCP shows no sign of giving up its monopoly of power, or of solving its approaching problems. Reform involves drastic opening to the outside world. It is inevitable that the values of the rich and industrialised countries of the West will gather influence in China.

Controls on this influence are inevitably going to create resentments among the educated young, the skilled people who are going to make up the very personnel who implement modernisation.

The Government wants them on side, not resenting everything it does. Indoctrination of the youth has worked in the past, but the fact that the student movement and Tiananmen massacre occurred proves that it was not working from the mid-1980s on.

Today, the decisive power is still in the hands of the government, but we can anticipate China will be transformed within two decades. Chinese society itself is swiftly changing, no matter what the government does.

No political authority can halt this process. The critical question is how the change will happen.

  • Sharif Shuja

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