SURVEY: CHINA

Coming out
Mar 23rd 2006
From The Economist print edition

China hopes to use the 2008 Olympics in Beijing to mark its emergence on the world stage. But, says James Miles, it still has plenty of things to fix at home

“CHINA is a second-rank middle power that has mastered the art of diplomatic theatre: it has us willingly suspending our disbelief in its strength.” So argued the late Gerald Segal, a British scholar, in 1999 as the country reeled from the Asian financial crisis and fumed impotently as NATO attacked Serbia. China was then merely “a theoretical power”, and seriously overrated in terms of international trade and investment. Mr Segal made a powerful case that China mattered far less than many believed. Today it is hard to dispute that China matters far more than it did seven years ago.

Yet there is no other important country whose likely trajectory over the next 20 years is more uncertain than China's. Possibilities include:

•An economy that continues to boom as the political system gradually becomes more liberal and China becomes an increasingly positive force in the world;

•A fast-growing economy, a surge of vengeful nationalism and an attempt by China to displace American power in Asia, regain Taiwan and challenge Japan;

•A country in disarray, engulfed by social and political crises as its economy slumps.

All are plausible. Much will depend on choices made by China itself and by other powers, especially America.

That China does matter is evident from its impact on the global economy. Since 2000, China's contribution to global GDP growth (in purchasing-power-parity terms) has been bigger than America's, and more than half as big again as the combined contribution of India, Brazil and Russia, the three next-largest emerging economies. China's massive build-up of American Treasury bonds affects American interest rates and thus Americans' willingness to spend. Its low-priced manufactures give western consumers more buying power. Its thirst for energy has helped push oil prices to record highs. Its entry to the World Trade Organisation in 2001 has speeded up the opening of the world's biggest market. Whereas a few years ago it might not have mattered much to the West if China's growth had faltered, today it would be a very different story.

China's growth and increasing confidence is also beginning to affect the way it behaves on the world stage. If only tentatively so far, it is beginning to act like a big power. A country that once preferred to stay clear of multilateral diplomacy is now at the centre of multilateral efforts to persuade North Korea to abandon its nuclear-weapons programmes. It has formed a club of central Asian powers to deal with security threats. Its secretive armed forces are reaching out to other countries by staging joint manoeuvres (though not yet with the Americans or the Japanese). And China's burgeoning demand for oil and other commodities has made it cosy up to countries whose unsavoury behaviour matters to the West, such as Iran.

Over the next few years China's Communist Party leaders will face a series of challenges. Abroad, perceptions of China will change as the country's surging economy affects the lives of people around the world. In places that are important to China, from Tokyo to Taipei to Washington, DC, there will be changes in political leadership. At home, rapid growth will bring social and economic turbulence. And next year there will be an important quinquennial party conclave, followed by the Olympic Games in Beijing in 2008.

The world is expecting more of China, and so are its own people. This will become increasingly clear in the build-up to the Olympics. For China, these will be about far more than sport. They will be much the biggest international event ever staged on its soil: a coming-out party of huge symbolic importance. They will mark China's full rehabilitation in Western eyes after the bloody suppression of the Tiananmen Square protests in 1989. They will also be a chance to show off what the chief day-to-day organiser of the Beijing Olympics, Liu Jingmin, calls “an industrial revolution on a much bigger scale than Europe's”. Ambitiously, in a country that has one of the world's smoggiest capitals, Mr Liu says he wants a “green revolution” too.

A property-owning non-democracy
Accompanying China's industrial transformation has been another revolution of profound significance. Since the late 1990s, urban China has privatised housing, a commodity once exclusively in the hands of the state. A property-owning middle class is not only fuelling a surge of consumption but also developing a keen desire to protect its property. Few see much benefit in trying to overthrow the party: that, they fear, could cause chaos and an even bigger threat to wealth. But many want better governance and a legal system that protects them. And all but the very richest complain bitterly about a government that, despite strong and growing revenues, has presided over the collapse of affordable health care and education.

Farmers want change too. The past few years have seen an upsurge of peasant protests, many of them about the rapid encroachment of cities into rural land. As this survey will argue, China needs another ownership revolution, this time in the countryside. One of the most damaging and socially divisive legacies of Maoist economics is the control of rural land by village “collectives”. The rights of farmers in these collectives are ill- defined. In practice, rural governments regard the land as theirs and use it to fill their coffers. Many millions of farmers have been pushed off their fields with little if any compensation, and anger is growing.

President Hu Jintao, who in 2004 assumed full authority in the communist country's first ever peaceful handover of power, has set his sights high. Abroad, he wants to convince the world that China's rise poses no threat to other countries. At home, he hopes to create a “harmonious society”. This means one less obviously riven by huge disparities in wealth and access to services such as schools and hospitals, and one less troubled by protests.

The party conclave late next year, known as the 17th Congress, will be the first such gathering with Mr Hu in undisputed command (insofar as anyone can tell in China's opaque political system). It will be an important opportunity for him to indicate how a still unreformed and dictatorial party can give the public a greater say in addressing these growing social problems. And it will be a chance, less than a year before the Olympics, to show the world that against the background of China's remarkable economic change, the party is changing too.

Political reform matters. Without it, it is hard to imagine how China could make the kind of stable transition to democracy that Taiwan has achieved; and an unstable China is more likely to pose a threat to the outside world. The past few years have seen signs that the party wants to use nationalist sentiment to bolster its legitimacy. The dangers of this approach became evident in 1999, with an explosion of anger across urban China about the accidental bombing of China's embassy in Belgrade by American warplanes. Last year similar outrage was directed at the Japanese, with sometimes violent protests in several cities triggered by territorial disputes and Japan's wartime history. Such unrest worries other countries, and it worries China's Communist Party too, even though it plays a large part in fuelling it.

The Bush administration is trying to cajole China away from seeing the global balance of power in zero-sum terms and persuade it instead that a rising China and a strong America could not only coexist but thrive together. In September last year, Robert Zoellick, America's deputy secretary of state, said he hoped that China would be a “responsible stakeholder” in the world community. That has now become one of America's favourite terms in its discourse with China. It means that America wants China, a veto-wielding member of the United Nations Security Council, to look beyond its narrow self-interest in its international dealings. China's handling of the nuclear crisis in Iran will be an important test. Reassuringly, at least in its relations with America, China for now seems to be guided more by pragmatism than by competition. And just as reassuringly, America is encouraging it in this.

Barring a sharp slowdown in the global economy or some huge crisis at home, China is likely to maintain strong growth for the remainder of this decade. This gives its leaders more leeway to sort out its banking system, deal with the land-ownership problem, fix health care and education (which will involve big changes in the country's fiscal system) and set up a credible social-security safety net. If it fails to do so in the next few years, it will store up potential crises for the decade beyond, when China's working-age population will begin to decline and a rapidly ageing society will loom closer.

Beware of Latin Americanisation
Efforts to tackle such issues are motivated by fear of unrest. Officials are well aware of China's vulnerability to the sort of sudden political crisis that caused the collapse of communist governments in Russia and eastern Europe less than two decades ago. In the official media, a fashionable new topic is the potential “Latin Americanisation” of China: the possibility that growing income inequalities and an ill-regulated rush to privatise could precipitate economic and political upheaval. Just as the implosion of communist regimes elsewhere encouraged the late Deng Xiaoping to launch wealth-generating market reforms in the early 1990s, fears of instability caused by today's inequalities at home are prompting the government to try to find ways to help the marginalised.

This survey will argue that such fears are sometimes exaggerated by a party that until 15 years ago controlled almost every aspect of its citizens' lives. The party is finding it hard to adjust to what many developing countries would regard as normal teething troubles. China's rapid economic growth endows it with a critical mass of people who expect their lives, or at least those of their children, to get much better in material terms than seemed possible until quite recently. Reports of protests here and there have become part of the background noise of urban life.

But rapid economic growth cannot be expected to last forever, and the party is acutely aware that, apart from its ability to deliver wealth to some, it lacks a strong legitimising force. Conscious of the country's volatile history, it is especially alarmed by the growing unrest among a rural population (still the majority) that has benefited far less from China's economic rise than have many urban residents. It was after all, a peasant rebellion that helped the communists to power. And although it is safe to rule out another such revolution, rural discontent is nevertheless a big political challenge for Mr Hu.

Fat of the land
Mar 23rd 2006
From The Economist print edition

But only for a select few

IN PINGGU district, a mountainous and largely rural area in north-eastern Beijing, local officials are keen to show off how they are implementing one of the Communist Party's latest directives. It is, like all party initiatives, encapsulated in a slogan: “Promote the construction of a new socialist countryside.” The idea is to narrow the widening gap between rural and urban China, defuse unrest and turn the country's 800m rural residents into economy-boosting consumers.

In Bolitai Village, perched on a slope beneath the scenic ruins of the Great Wall, building a “new socialist countryside” has meant bulldozing peasants' decrepit houses and replacing them with cheery-looking two-storey villas with solar heating panels on the roofs and broadband internet access. Pinggu's plan is to enrich remote village communities by turning them into weekend hideaways for a new middle class in Beijing that now has cars and thus the means to roam. The government provides grants and arranges low-interest loans for construction, and encourages lots of official delegations to visit.

The revamped Bolitai looks garishly new, and insofar as it involves an entire community falling in with a government-inspired project (barring one old man who has refused to rebuild his house), it has the feel of Chinese socialism. Pinggu officials boast that their “new socialist countryside” campaign got started before the idea became party policy last October. The party plans to boost spending on rural infrastructure including roads, schools and hospitals, abolish all school fees by the end of next year and step up efforts to provide peasants with health insurance. But none of this will tackle the root of China's rural problems: the ownership of land.

Reports of large-scale and sometimes violent rural protests have become ever more frequent in recent months. In June 2005, government-hired goons in Hebei Province killed six peasants in a battle to enforce a claim on a piece of farmland by a state-owned power plant. The following month, hundreds of villagers in Taishi in Guangdong province launched a campaign to oust their village head whom they accused of misappropriating money from land sales, leading to violent clashes. In December, police shot dead as many as 20 villagers in Dongzhou in Guangdong province in another fight over land claimed by a power plant. In another Guangdong village, Panlong, a girl was killed in January when police clashed with farmers.

At a party meeting in December, China's prime minister, Wen Jiabao, reflecting the leadership's growing anxiety over such unrest, issued a warning against making “historic errors” over rural land. The protests suggest that the party's strategies for taming rural unrest have failed. In the 1990s, one answer was thought to be village democracy. Residents were allowed to elect their leaders by secret ballot. But in many villages the experiment dissolved into power struggles between elected chiefs and the party's own unelected representatives. The party made it clear that the party secretaries were to remain in overall command, and the peasants' enthusiasm dwindled.

Another strategy has been to boost rural incomes. In 2000 the party began to abolish a wide range of fees levied on farmers by local governments. In 2004 it offered farmers direct subsidies for growing grain. From this year, it has abolished an ancient tax levied on peasants according to the amount of land they hold. Real rural incomes in 2004 grew by 6.8%, the highest annual rate since 1996, and in 2005 by 6.2%. But urban incomes last year rose by 9.6% and, especially on the periphery of urban areas where land is being seized fastest, there is still much anger and resentment in the villages. Estimates vary, but most agree that tens of millions have lost some or all of their land since the early 1990s, often without compensation.

Not for keeps
The problem goes back to Mao Zedong. One of the first things he did on taking power in 1949 was to seize land from landowners (killing thousands of them in the process) and redistribute it to peasants. In the 1950s he took the land away from them again and put it under the “collective” ownership of communes. The communes were dismantled in the early 1980s, a few years after Mao's death. Peasants were allocated plots of land to farm as they wished, but ownership remained “collective”. Since the 1990s, leases of 30 years (but in practice often less) have been granted on these tiny plots, but peasants have not been able to use the land as collateral for loans or to sell it. They can rent it out, but this often involves paying a fee to the village administration.

So whereas trade in land and property has become an important engine of growth in urban China (where residential leases run for 70 years and others for 40 or 50), farmers have been cut out of this boom. Li Changping, a former township party chief who has become a prominent critic of the government's rural policy, says that by limiting leases to 30 years the state is in effect asserting its control of the land over the village collective. This reinforces local governments' belief that land is theirs to grab.

China's rural-land problem is exacerbated by a dysfunctional system of fiscal transfers that leaves many local governments unable to pay for basic services such as health care and education. China is among the most decentralised countries in the world as far as paying for local services is concerned (“the central government invites the guests, the local government pays the bill,” goes a popular saying). A half-baked attempt at reform in 1994 has favoured wealthier regions.

Imaginechina
Abolishing rural taxes without putting in place an alternative way of funding public services has simply made the problem worse. Land has become an even more vital resource for local governments, which either hand it over for little or nothing to attract industry or sell it at high prices to property developers. They also use requisitioned land as collateral for bank loans, adding to the potential woes of a banking system in which risk is poorly understood. Total debts of township and village governments alone may amount to well over 1 trillion yuan ($125 billion), or more than 5% of GDP.

When land is seized, peasants are compensated for its agricultural value, which according to some Chinese scholars averages about one-tenth of its market value. Village administrations take a cut, so the amount received by the peasants is often far less. By contrast, in the cities the privatisation of housing since the late 1990s has created a middle class that is using its property as collateral to borrow. Trading property has become a big source of urban wealth. Of China's 50 richest people, about half owe their fortunes in large part to property deals, according to Rupert Hoogewerf, the author of China's first rich list.

Scattered and ill-organised rural protests are unlikely to turn into a serious threat to the party. China's political future depends largely on stability in the cities. Mao's armies of landless and disgruntled peasants would be hard to recreate in today's more effectively controlled China. But the protests are a serious embarrassment to the current leadership, and they are likely to get worse as the cities expand relentlessly.

Some Chinese scholars suggest curbing the powers of rural governments to appropriate land, and giving individual peasants the right to trade it, mortgage it or keep it indefinitely. Secure rights would encourage farmers to invest more. This would help make land more productive. Giving farmers the right to negotiate the sale of their land to developers directly would greatly improve their chances of realising the market value of their holdings. And restricting land seizures could help push up the price of land on the periphery of urban areas and encourage a more rational use of existing urban land. Such measures could also help ease the government's worries about the loss of food security arising from the rapid encroachment on rural land.

There is huge resistance to change. One reason is that allowing the “marketisation” of rural land would be seen as a direct assault on party ideology. But to a party that cares more about its survival than it does about communist principles, a more important consideration is the risk of instability. It fears that creating a free market in rural land would prompt peasants to sell their holdings to pay their debts, sending an avalanche of landless farmers to cities that have no social-security infrastructure to deal with them.

The party's fears are overblown. Given the parlous state of urban China's social-security system, peasants would continue to regard land as a vital safety net, to be relinquished only in extreme circumstances. True, the system that kept rural and urban China rigidly separated is gradually being dismantled to allow cheap rural labour into the urban workforce; but migrants from the countryside generally get the most menial jobs, miss out on subsidised health care and are often denied access to oversubscribed urban schools. And if they cannot find a job, they will find the cities prohibitively expensive.

Reform by stealth
To make rural land reform work, fiscal transfers from the centre to the provinces would also have to be made fairer, and that too would require considerable political will because richer provinces would be reluctant to lose their advantages. However, the government is inching in the right direction. In 1998 it ordered written land-use contracts to be issued to peasants (though this rule is widely ignored). A law introduced in 2003 restricted the right of collectives to reassign land within villages and provided a legal basis for transfers of land between peasants for farming.

Reform by stealth has been a hallmark of much of China's economic transformation in the past quarter-century. The leasing of land to households in the early 1980s began as a grassroots initiative that gradually gained official support and was already being widely practised by the time it was given the party's formal approval. Late last year in Guangdong province, one of China's most affluent regions (and also the scene of some of the most violent peasant protests reported recently), the authorities began allowing villages to trade land that had already been converted to industrial use. This step was hailed by one state-controlled newspaper as the start of a “new land revolution”.

But the “new socialist countryside” now being championed by China's leaders is unlikely to bring a sweeping change in the way rural land is organised. Chinese officials have been inspired by South Korea's “new village movement” launched in the 1970s, when that country was similarly worried about rapid urbanisation and the wealth gap between urban and rural areas. South Korea's government spent heavily on rural infrastructure and on providing farmers with building materials. But the Chinese have made little mention of South Korea's earlier land reform in 1949 which gave secure marketable rights to former tenants, and which proved to be a key factor in South Korea's successful transition from agricultural economy to industrial powerhouse. Still less have they dwelt on Taiwan's similar and highly acclaimed land reform of the early 1950s.

Incremental steps over the next few years towards the creation of a rural land market and a reduction in local governments' share of health-care and education costs would give farmers a far better chance to prosper, whether on their land or in the cities. That would be good news for China's economy, which badly needs a new engine of consumer-led growth.