What Does China Think?

CHAPTER ONE

Yellow River Capitalism

In the 1980s, we were all reformists. We criticized old-style Maoist goals and practices. We looked at our circumstances through the ideas of the West. What we got was naïve and abstract because we didn’t really know what would happen to China once the market took off. We didn’t know that the market would create rich and poor: we thought it would benefit everyone. And for a few years it did.

Gan Yang

It was the Cuban cigars that first caught my eye. Half a dozen boxes of Cohiba, Romeo y Julieta and Montecristo piled high on Zhang Weiying’s desk in a haphazard monument to the economic opportunities of today’s China. These almost Freudian status symbols – worth several times a Chinese peasant’s annual income – are like pocket-sized pyramids, toiled over by workers for the rich to flaunt. Like the 300 skyscrapers of Shanghai or Beijing’s new Olympic Stadium they testify to the nature of an economy where labour has become a commodity, and money is spent almost as quickly as it is earned.

But for Zhang Weiying they are also pocket-sized fragments of freedom; products of a parallel universe – a republic of the West – that has been built alongside the Communist state in China; one whose dynamism he hopes will gradually eclipse and replace the last vestiges of Maoism. Like other economic liberals – or members of the ‘New Right’ as their opponents call them – he thinks that the planned economy is the foundation of political despotism; that China’s freedom will not come until the public sector is dismantled and sold off, and the state has shrivelled into a residual body designed primarily to protect property rights. Only then, according to the ‘New Right’, will a propertied class – a new civil society – be able to lay the foundations for democratic politics. The cigars, therefore, do not just show that getting rich is glorious, as symbols of private wealth they are milestones on the road to freedom.

Behind Zhang Weiying’s desk a glass-fronted display case glistened with the trophies and baubles of a distinguished career: books he has written and edited, pictures of him with Nobel laureates and statesmen, degrees from leading universities, and an award for ‘The Man of the Year in Chinese Economy’ from Chinese Central Television (CCTV) in 2002. They all reinforce the point that Professor Zhang Weiying has made it; that he is one of the most famous economists in China. But life today is getting tougher for economists like Zhang Weiying. After thirty years of ruling the roost with imported ideas from the West, they can feel China turning against them. Opinion polls show that they are the least popular group in China – on a par with traffic wardens and used-car salesmen in the UK. Public anger is growing over the costs of reform, with protests by laid-off workers coming together with concern over illegal demolitions, corruption and unpaid wages and pensions. As a result, the ideas of the market are being challenged by a ‘New Left’ which advocates a gentler form of capitalism. A battle of ideas is raging which pits the state against the market; coasts against inland provinces; towns against the countryside; the rich against the poor.

The dictatorship of the economists

Success is all about timing, and Zhang Weiying’s was perfect. He graduated with a degree in economics in 1982 – just as Deng Xiaoping’s opening and reform process was gathering momentum. It is hard for Westerners, used to life in a fissiparous open society, to understand a purposeful state like Deng’s China. Zhang Weiying frequently uses the word ‘missionary’ to describe the determination with which China pursued economic growth. In a similar way, Franz Kafka, the pre-eminent chronicler of life in the closed society, conjures up the singleness of purpose of the Chinese authorities in a different period in his essay on the Great Wall of China: ‘Fifty years before the building was begun, throughout the whole area of China that was to be walled around, architecture, and masonry in particular, had been declared the most important branch of knowledge, all others being recognized only in so far as they had some connection with it.’ When Zhang Weiying graduated in 1982, there was a new wall to build: China’s market economy. The Communist Party had declared that economic growth was ‘the central task’, and suddenly everyone wanted to be an economist. ‘Economics,’ as Wang Hui puts it, ‘acquired the force of an ethics.’ As the economy grew, so did the influence and wealth of the economists. They populated government taskforces, wrote plans for privatization and filled the boards of the newly privatized companies (131 of 274 independent directors in today’s listed enterprises are academic economists). They became the new high priests of China whose arguments increasingly trumped those of Maoist refuseniks (who were derisively known as fanshipai or ‘whateverists’ because they supported whatever policy decisions Chairman Mao made).

Deng Xiaoping’s ‘dictatorship of the economists’, as disgruntled political scientists, philosophers and sociologists called it, produced startling results. An average of 9 per cent growth over three decades made China the world’s third biggest economy by 2007. Three hundred million people rose from absolute poverty, while 200 million left their farms to work in industry. One hundred million joined the so-called middle class and 500,000 became millionaires. And a new generation of Chinese companies such as the computer giant Lenovo that bought IBM and the Nanjing car company that bought MG Rover entered the global corporate league.

Like Zhang Weiying’s own success, China’s economic miracle owed much to its timing. Unlike his Russian and Latin American counterparts who rapidly implemented measures to liberalize and privatize their economies – known as ‘economic shock therapy’ – the Chinese leader Deng Xiaoping did not have a mandate for radical reform. Many leading Communist Party officials such as Chen Yun, Li Xiannian and Deng Liqun were against market reforms. They continued to believe that China’s problems could be fixed by modernizing the planned economy and making it ‘more scientific’, like its Soviet counterpart. Deng Xiaoping and his allies were, therefore, unable to set a blueprint or timetable for China’s economic transformation. Instead, they opted famously to ‘grope for stones to cross the river’ – implementing incremental changes, one step at a time, without ever talking about the final destination. To his country’s lasting benefit, Deng Xiaoping heeded Bertolt Brecht’s advice that when there are obstacles, the shortest distance between two points can be a crooked line.

The village of zebras

Zhang Weiying has a favourite allegory to explain China’s reforms. He tells a story about a village whose residents rely on horses to carry out all their chores. The village elders, who had tirelessly argued that their horses were better than the zebras used in a neighbouring village, would harangue anyone who questioned their claim. Over time, however, the elders realized that the neighbouring zebras were, in fact, superior to the idle and greedy horses which they had so actively promoted. So, after years of hailing the virtues of the horse, they decided to embrace the zebra. The only obstacle was converting the villagers who had been brainwashed over decades into worshipping the horse. The elders developed an ingenious plan. Every night, while the villagers slept, they painted black stripes on a few horses. When the villagers awoke – shocked at the presence of evil beasts in their midst – the leaders reassured them that the animals were not really zebras, just the same old horses adorned with a few harmless stripes. The villagers gradually became accustomed to the presence of the strangely decorated animals in their midst. After a long interval the village leaders began to replace the painted horses with real zebras. These prodigious animals transformed the village’s fortunes, increasing productivity and creating wealth all around. Only many years later – long after all the horses had been replaced with zebras and the village had benefited from many years of prosperity – did the elders summon the citizenry to proclaim that their community was a village of zebras, and that zebras were good and horses bad.

Zhang Weiying’s allegory is an explanation of his most famous idea, the theory of ‘dual-track pricing’ which he first put forward in 1984. He argued that ‘dual-track pricing’ would allow the government to move from an economy where prices were set by government officials to one where they were set by the market, without having to publicly abandon its commitment to socialism or run into the opposition of local governments with a vested interest in central planning. Under Zhang Weiying’s approach some goods and services continued to be sold at state controlled prices while others were sold at market prices. Over time, the proportion of goods sold at market prices was steadily increased until by the early 1990s almost all products were sold at market prices. The ‘dual-track’ approach embodies the combination of pragmatism and incrementalism that has allowed China’s reformers to work around obstacles rather than confronting them head on. Rather than closing down the old central planning system, they first created an alternative reality alongside it. And when things went well, they reformed the old system to give it the best features of the new reforms.

Pearl River Capitalism: from permanent revolution to permanent innovation

Zhang Weiying was not the only person to call for ‘dual-track pricing’, but he was the first to do it publicly. He was soon given a plum job working for the Commission for State Institutional Reform which he held down from 1984 until 1990. Zhang Weiying was part of a group of young officials who found ways of making market ideas palatable to the older Communist elite. Their goal was to paint as many zebras as possible – to create a parallel market in the shell of socialist China.

China’s economic reforms had begun in the countryside with the dissolution of the ‘people’s communes’ and the end of collective farms in 1979. For over two decades before then, life in the countryside had been organized around collective ‘work units’ which lived together, worked together and ate together. The work unit was meant to replace the family as the primary unit of economic activity and social life. With the ‘opening and reform era’, these collective farms were closed down and replaced with smallholdings that were controlled by individual families who could decide what they wanted to grow, and more importantly kept the profits generated by their labour. This led to a huge surge in agricultural productivity which freed thousands of labourers from the fields. These workers were soon employed by a new crop of privately run factories – known as ‘Town and Village Enterprises’ – which sprang up all over the countryside. The wealth generated by China’s rural revolution allowed the local governments to benefit from the revenue generated by private industry. But these primitive trysts with the market were not what excited Zhang Weiying and his colleagues. This was just the beginning.

In their quest for a new China they looked beyond the landlocked rural plains where economic reform had begun to the outward-facing coastal provinces of the east. At the beginning of the 1980s, Shenzhen was an unremarkable fishing village, providing a meagre living for its few thousand inhabitants. Over the next three decades it has become an emblem of the Chinese capitalism that Zhang Weiying and his colleagues were building. Because of its proximity to Hong Kong, Deng Xiaoping chose Shenzhen as the first ‘Special Economic Zone’, offering its leaders tax-breaks, freedom from government regulation and a licence to pioneer new market ideas. The architects of reform in Shenzhen were not interested in replicating the low-tech industrial revolution that had taken place in the countryside at the beginning of the era of ‘opening and reform’. They wanted to build high-tech, capital intensive plants that could mass-produce the sort of high-value-added goods that could compete directly with the West. In order to get their hands on the technology and capital to turn their dreams into reality, the authorities set about attracting investment from abroad. Shenzhen alone succeeded in pulling in over $30 billion of foreign money to build factories and roads and develop its ports. The secret of Shenzhen’s success was its reliance on exports, rather than domestic consumption to fuel its growth. The decision to open the ‘Special Economic Zones’ up to the outside world provided a booster for the development of a non-state sector because foreign companies would set up joint ventures and shareholding companies. As a result, by 1992 half of China’s industrial output was generated by the non-state sector.

This pattern of building zones of radical experimentation to gradually produce more valuable goods and services was the key to China’s success. It was very capital intensive, and needed to be financed by drawing on the country’s massive savings and the revenues from exports rather than domestic consumption. It was based on the commodification of labour, as the coastal regions could suck in endless numbers of workers from the countryside in order to depress urban salaries. And it was laissez-faire – allowing wealth to trickle down from the rich to the poor organically rather than consciously redistributing it. Deng Xiaoping pointedly declared that ‘some must get rich first’, arguing that the different regions should ‘eat in separate kitchens’ rather than putting their resources into a ‘common pot’. As a result, the reformers of the eastern provinces were allowed to cut free from the impoverished inland areas and steam ahead.

The take-off of the coastal regions seemed to back up the claims of generations of Chinese reformers that their country had been held back by the conservatism of its inland provinces, which prevented China from competing with maritime civilizations such as Britain, France, Japan and the USA which had embraced the market, trade and innovation. The reforms of the 1980s unleashed a process of social change that went far beyond economics. The Chinese called it a ‘cultural fever’. It reached a cresc-endo in June 1988 with the showing of a six-part documentary called River Elegy in prime-time on the main state television channel. The series used the story of the Yellow River – often referred to as ‘mother river’ because it is considered to be the cradle of Chinese civilization – to launch a full-frontal attack on China’s traditions.

Rather than accepting the romantic ideal of the Yellow River as the embodiment of Chinese greatness, the series presented it – with its countless victims from flooding and drought – as an enemy of the Chinese people; the ultimate symbol of their irrational, erratic and earth-oriented character. Each episode targeted a Chinese tradition that was holding the country back. For example, the Great Wall was treated as a symbol of meaningless isolation, while the Ming dynasty was attacked for its ban on maritime activity. The pungent style of the narrator drove this point home in the very first episode: ‘There is a blind spot in our national psyche: it is a vague belief that all of the shame of the past century is the result of a break in our glorious history. Ever since 1840, there have been people who have used the splendours and greatness of the past to conceal the feebleness and backwardness of our present state … Yet the fact remains, our civilization is moribund.’ The narrators pleaded with China to break the bonds of traditional society that had prevented the country’s modernization. China, they argued, must now turn away from the countryside, focusing not on the Yellow River, but rather on the blue world of the ocean and the world beyond. The final images of the series show the Yellow River dissolving into the powerful sea which symbolizes the might of the Western world which has embraced modernity. In China’s universities and colleges, students spontaneously discussed and debated the issues raised in each episode of River Elegy. Five million copies of the script were sold as it became an instant best-seller. The reformist prime minister Zhao Ziyang arranged for the series to be re-aired on the main TV channel, Chinese Central Television.

Less than a year after the series was aired, the cultural fever took a decidedly political turn in the Tiananmen Square demonstrations of 1989. What began as a memorial march for the former Communist Party Secretary General Hu Yaobang on 15 April soon turned into a catch-all protest for political reform, workers’ rights and an end to official corruption. This incredible display of people power that dominated the streets of Beijing for six weeks gave the world a glimpse of a democratic China until it was abruptly wiped out by soldiers and tanks on 4 June 1989. The crackdown was more than a human tragedy; it became a defining moment in China’s political and economic development.

The two stories of Tiananmen

One of the students who was glued to the television during episodes of River Elegy was Wang Hui. He had been working on a PhD in Chinese literature when he joined the student demonstrations of 1989. Like most young intellectuals Wang Hui was a supporter of Deng Xiaoping’s ‘Open Door’ policies and a believer in the potential of the market. But when Wang Hui left the demonstrations for the last time he embarked on an intellectual journey that would change his world-view: ‘In the early morning of 4 June 1989, as I departed from Tiananmen Square in the company of the last group of my classmates, I felt nothing but anger and despair.’ As the government rounded up and punished the organizers of the protest, Wang Hui took off to the mountains and spent two years in hiding, getting to know peasants and workers whose experiences made him doubt the justice of unregulated free markets, and convinced him that the state must play a role in preventing inequality.

Until 1989, reformist intellectuals had been united in a journey to the West, regarding political and economic liberalism as a seamless whole, one that would benefit all Chinese people. Their enemies were the ‘conservatives’ who supported the Maoist status quo. After the bloodshed the reformers split into two camps: a ‘New Right’, led by thinkers like Zhang Weiying, who see free markets as the most important goal and are willing to make an accommodation with political authoritarianism; and a ‘New Left’, about whom we will hear more later, led by scholars such as Wang Hui, who emphasize equality and political democracy at the expense of total market freedom.

These tensions had been inherent in the demonstrations themselves. In the West, we saw Tiananmen as a confrontation between a brutal, unreformed communist state and a group of students longing to be part of the capitalist world of liberal democracy. But, in an important essay on the meaning of 1989 (which he wrote retrospectively from exile in 1997), Wang Hui takes the spotlight off the intellectuals and students and puts it on a wider group of workers who came to the square with more concrete social and economic demands. Their involvement in the protests had been triggered by mounting discontent about the radical market reforms of 1988 which had set off rocketing inflation and inequality. These workers had no interest in being part of the West. In fact, what they wanted was price stability, social security and an end to corruption and speculation. Wang Hui sees their concerns as part of the global resistance to neoliberalism, comparing Tiananmen to the anti-globalization riots that erupted in Seattle and Genoa.

According to Wang Hui, there were two different agendas in the square: one group wanted social welfare and protection from the market; the other wanted democracy and protection from the leviathan Communist state. If the protesters had faced in two directions, so did the repression that followed it. According to Wang Hui, the crackdown not only silenced calls for democracy, it also ended public debate about inequality. Once the tanks had done their work, the process of marketization speeded up. The price reforms that had been called to a halt in the second half of 1988 were implemented in September 1989. After Deng Xiaoping reasserted himself over the conservatives in 1992 – using his famous ‘Southern tour’ of the coastal cities of Guangzhou and Shenzhen to restate the case for reform – many more changes followed. The corruption, the smuggling, the unfair distribution of assets, the influence of interest groups on public policy, the overdevelopment of real estate, the problems with the social welfare system and environmental concerns, which the protesters had complained about, got steadily worse.

However, the threat of further repression meant society’s discontent was muted. As Wang Hui says: ‘Just as people have forgotten the sound of social fragmentation echoing behind the excitement at Tiananmen, neither can people remember that the market era referred to today as “neoliberalism” is hiding behind the political spectres of those on the square and has only in this way secured an exemption from social protest against it.’ What he means is that the stodgy, bureaucratic face of the traditional Communist Party has masked the most extensive and ambitious process of marketization and privatization the world has ever seen. By referring to the market revolution as ‘socialism with Chinese characteristics’, the authorities were able to use quotes from Marx and Mao to repackage the ideas of Milton Friedman and Friedrich Hayek. For Wang Hui, the tanks that pulverized the hopeful intellectual flourishing of the 1980s were working on behalf of market fundamentalism rather than Maoism. Contrary to the view of the repression as a reassertion of Maoist ideology, the authoritarianism was acting to silence workers’ anxieties about inequality. This is Wang Hui’s version of the zebra story.