The Hindu
Saturday, October 10, 1998 
SECTION: Opinion



China's Russian fate? 

Date: 10-10-1998 :: Pg: 12 :: Col: c 

By Gerald Segal 

WHEN I asked Chinese officials why they lifted their five-year ban on my visiting their country, they said, ``China had changed''. Indeed it has, but there has been far less change in the way the country is understood. 

China is like any other country where an old system is dying and a new one has not yet taken hold. But it is worrying that while being banned from Brezhnev's Soviet Union or the East Asian countries when they had more autocratic regimes was seen as a sign that you were doing your job properly, being banned from China continues to be seen as reason to treat you as beyond the pale rather than as a reason to criticise the dying regime in Beijing. The Chinese authorities imposed their ban because I wrote an article that urged Western support for Mr. Chris Patten's reforms in Hong Kong because they held out the prospect of helping reform all of China. Up until a week before the ban was lifted, the advice I received from Western officials and China-watchers was to soften my line or even stay silent for a few years. Some Chinese officials said nothing short of a public ``self-criticism'' would get me a visa. This misguided advice was symptomatic of the misperceptions derived from treating China as sui generis. China, much more than India, has held a fascination for Westerners. Western democrats, who praised China's firm reforms while deriding India's chaotically democratic route to reform, have always managed to get away with their contradictions. Western business leaders who made their profits from the success of open political systems make strange apologists for the Chinese authoritarians: no more notably in the form of media tycoons who are happy enough to make money from broadcasting to India but seem content to lose money in broadcasting in China under strictpolitical control. 

In truth, the major problem with Western attitudes towards China is a lack of understanding that it is really a puny power with vast problems. Some difficulties bear uncanny resemblances to Japanese predicaments, but the most worrying similarities are to Russia. China, like Japan, has a bubble economy compounded by a weak political leadership. Upon my return to Shanghai after five years, Chinese officials proudly pointed to miles of shiny new buildings with plans being laid for the world's largest office tower. No mention was made of the fact that 70 per cent of the new buildings were empty and the skyline was littered with abandoned building sites. Money is pumped into this system at a time when bad bank loans stand at 40 per cent of the GDP. Chinese entrepreneurs know - even while officials try to persuade foreigners otherwise - that money is better invested outside China. Hence the fact that more money fled China than entered since 1992, and in 1998 the outflow of hot money is nearly twice the rate of inflow. When comparisons are drawn between the success of China and the failure of India to attract foreign investment, mention is never made of the vast capital flight from China. Given this trend, and the mammoth waste of money in useless construction in China, the differential in Chinese and Indian growth rates should seem less real or important. 

To be fair to the Chinese leadership, it understands these problems and knows what it must do. The Prime Minister, Mr. Zhu Rongji's reform plans announced earlier this year, and now shelved, are testimony to the vastness of the challenge and the weakness of leadership. Much like Japan, China knows what it must do, but fears the consequences of doing so. Precisely because so many states in Pacific-Asia are in such deep economic trouble, China is now wondering if it learnt the correct lesson in opening up to the outside world. The likes of Mr. Zhu Rongji know that they are caught between a rock and a hard place and that standing still is not a viable option. But for the more cautious bureaucrats around him, standing still seems to have some attractions. 

And yet the picture is really even worse: China's most disturbing analogy is to Russia. A Chinese economist, Ms. He Qinglian, has published in her country a daring analysis of why its reforms are merely ``the marketisation of power''. Like the dominance of Russian ``oligarchs'', power in China is concentrated in the hands of a tiny elite of ``red princes and princesses'' and well- connected officials. Income inequality has grown rapidly and since 1994 has been higher than in the U.S. The 70 per cent of the Chinese population that lives in the countryside is even seeing a real (not just relative) decrease in wealth in recent years. Under these circumstances, China, like Russia, suffers what Ms. He calls a ``collapse of ethics''. The problems in the rural areas are perhaps the most acute for it is here that there was a revolution in rising expectation that has now been deflated. It is just such a descent that in other places and at other times has provided for revolutionary conditions. The analogy to Russia also includes the failure to collect taxes, regional power-brokers thumbing their noses at the Central authorities and, most disturbingly, a growing capital flight. Much as in East Asia in 1997 when the locals demonstrated their lack of faith by exporting capital, the prudent foreigners are bound to follow suit. In Russia, as in China, despite the massive outpouring of money by the local elite, these same people are cheeky enough to call for the Westerners to pour money into their country. What is most remarkable about this state of affairs is that the Westerners continue to invest where the locals dare not. At some point, as happened in the rest of Pacific-Asia, bankers and hedge fund managers learn lessons from local entrepreneurs and other members of the elite. 

The most obvious parallel with Russia is in the failure to reform rusting state-owned enterprises (SOEs). Chinese officials know they cannot deal with their bankrupt banking system unless they stop providing drip-feed loans to long-dead SOEs. Some four per cent of China's supposed seven per cent annual GDP growth is the unsaleable product of the SOEs. Unusable, rusting SOE products are equivalent to 18 per cent of the total GDP. Amazingly, bank lending increased by 24 per cent in the first half of 1998, but in a rapidly deflating economy the Government fears that closing SOEs will cause mass unemployment and social unrest. In the absence of a welfare system - the Chinese used to say they did not need welfare because they had Asian family values - there seems to be no choice but to sustain the SOEs as a proto-social welfare net. Nevertheless, unemployment is at 10 per cent and rising. 

Of course, there are also important differences with Russia. China's political system remains far less pluralist; there is no equivalent to an independent Duma or a freeish press. China's currency has a fixed exchange rate and convertibility is constrained, thereby limiting the ability of international markets to impose ``market discipline''. The Russian economy depends far more on the export of natural resources while China has been successful in developing a light industrial export sector. China has also benefited from large flows of capital from the ethnic Chinese - it is the developing world's largest importer of capital, 70 per cent of which is from the ethnic Chinese. 

An optimist about China will claim that Taiwan is the future, where a once-Leninist ruling party transformed itself and the surrounding political system into effective pluralism. In Taiwan, the process took place when sufficient economic prosperity led to the creation of a middle class which wanted greater control over its political future. But even before that social dynamic of reform took hold, Taiwan had more a transparent and accountable economy with far less stress on large and state-owned industry. Taiwan may have shared some elements of Leninism with China, but it had a great advantage in not having a Marxist baggage to dump. But as Mr. Chris Patten astutely notes in his recent book, East and West, a more likely future for China is a version of Indonesia. Crony capitalism, politically powerful armed forces, regional tensions, income inequality, and some encouraging signs of the emergence of a civil society are all present in modern China. No wonder that China turned off the CNN's satellite feed when student demonstrators on the streets of Jakarta toppled President Suharto. 

In the final analysis, China's problems can be usefully understood with all these comparisons in mind. But the ultimate clarity about its fate will not be achieved until we understand that China has not truly broken with its past. It is burdened by its failure both to understand that it cannot defeat or even re- make the Western system that dominates the world and to reject the Leninist solution. As it runs up to the 50th anniversary of its communist revolution, it becomes all the more alarming that China, unlike Russia, has not admitted that its communist revolution was a huge mistake. 

(The writer is the Director of Studies, International Institute for Strategic Studies, London).