After 30 years of reform, economic perils on China's path
By Jim Yardley The New York Times
Saturday, December 20, 2008
The ruling Communist Party threw itself a big party on Thursday. The country's leadership marked the 30th anniversary of the reform era that transformed China into a global economic power and, in doing so, changed the world.
At a triumphant ceremony at the Great Hall of the People in Beijing, President Hu Jintao invoked Deng Xiaoping, who consolidated power in 1978 and began "reform and opening." Hu emphasized the party's unwavering focus on economic development. "Only development makes sense," said Hu, quoting Deng.
But beyond the oratory, Hu and other Chinese leaders are now facing a new era in which Deng's export-led economic model, as well as his iron-fisted political control, face unprecedented challenges. Global demand for Chinese goods has slumped, unrest is on the rise in the industrial heartland, and China is scrambling for a new formula to preserve stability and ensure growth.
The downturn is so swift — exports fell last month for the first time in seven years — that Beijing is being forced to abruptly shift priorities. Until recently, Hu had been trying to curb excesses like rampant pollution and income inequality that posed environmental and social challenges to long-term development. Now, those priorities seem eclipsed.
Instead, leaders are restoring tax breaks for exporters and pushing down the value of China's currency to encourage exports. At the same time, they are casting about for ways to spur domestic demand and wean China's economy off its dependence on foreign markets swept up in the global financial crisis.
Politically, Chinese reformers had hoped the symbolic weight of the anniversary and the nation's post-Olympic glow might propel some measure of political reform to address official corruption and help defuse rising social tensions.
But as Beijing worries about strikes and mass layoffs even in some of its most prosperous areas, official tolerance of political dissent has seemingly narrowed. This month, a prominent dissident was detained after authoring an open letter calling for greater democracy. An editor at one of the country's leading newspapers was reassigned after publishing articles deemed too politically provocative. "We must draw on the benefits of humankind's political civilization," Hu said in his Thursday speech, according to Reuters. "But we will never copy the model of the Western political system."
If any place symbolizes China's reform era, it is Shenzhen, a city conceived from Deng's imagination — and one now at the cross hairs of the economic downturn. Thursday's celebration was timed to a 1978 political meeting, the Third Plenum, which anointed Deng as China's leader and introduced "reform and opening." Two years later, Deng pointed at a sleepy fishing village in coastal southern China, near Hong Kong, and ordained it the country's first "special economic zone" to experiment with foreign investment and export manufacturing. Today, Shenzhen is a city of more than 10 million people ringed by thousands of factories.
A factory district just outside Shenzhen, Fuqiao Industrial Park, is a snapshot of the economic troubles rippling through the region. Several small factories in the park have closed in recent months. At Wang Jinda Industries, the lettering had been scraped off the entrance after the owner closed last week. Two customers had arrived for a shipment of goods only to find an empty factory.
Meanwhile, some factories that remained open were struggling. Workers at a large printing factory said owners had stopped recruiting new workers in September while many others had quit. Several workers said wages had dropped significantly as owners were reducing the length of shifts. A few workers accused owners of deliberately trying to drive down wages to force workers to quit. "Everybody is worried," said Lin Baozeng, 26, a cashier at a canteen inside the industrial park. Her daily lunch crowd has dwindled to about 100 migrant workers from 500.
"If the economy is bad," Lin added as her 3-year-old daughter played nearby, "how can I afford to raise my child?"
As yet, gauging the scale of factory closures remains difficult in Shenzhen and surrounding Guangdong Province, the country's main export engine. Guangdong was already making a concerted effort to move up the manufacturing value chain at a time when rising labor costs and greater government regulations were making some smaller, cheaper exporters unprofitable. But the recent export slowdown is having an unanticipated impact. More than 7,000 small and medium-sized factories have closed in recent months. Shenzhen's mayor said 50,000 people in the city alone had lost their jobs in the last few months.
And there are mounting signs that the problems could be far broader. Over all, China's economy will continue to expand next year, but some economists say the rate of growth could fall as low as 5 or 6 percent, far slower than the double-digit pace of the preceding several years.
State media have reported that 4.85 million migrant workers have returned to the countryside early before next month's annual Lunar New Year holiday. Some inland provinces have already announced subsidies for unemployed returnees. On Thursday, the country's official news agency, Xinhua, reported that 6.5 million migrant workers may be jobless next year.
Beijing has recently restored some export subsidies that had been repealed as part of earlier efforts to rebalance the economy toward domestic demand. Huang Yasheng, a management professor at the Massachusetts Institute of Technology, said such subsidies made short-term political sense, given the huge numbers of jobs provided by factories, but did not address China's long-term economic challenges. "I see the export supports as a crisis measure," Huang said. "They really have no other way to maintain employment."
Huang said the government's focus on exports and expanding the role of state-owned corporations since the 1990s had meant too little of the country's wealth had trickled down to ordinary people. He said household incomes had lagged well behind overall growth, meaning that hundreds of millions of ordinary people still had relatively little spending money — a major problem when the government is trying to rapidly increase domestic consumption. "It's a huge challenge," said Huang, author of the recent book "Capitalism with Chinese Characteristics" (Cambridge, 2008).
China's immediate answer is a stimulus program focused on infrastructure like railways and ports. State-owned banks are being ordered to make credit easily available, and business taxes on real estate sales were waived this week. Such steps may be crucial to buttressing the Chinese economy and preventing a deeper global recession. Yet some Chinese officials are wary of the potential impact of another phase of state-led industrial development.
The government stimulus program enacted in response to the 1997-98 Asian financial crisis enabled China to avoid the recessions suffered by neighboring nations. Yet it also propelled enormous investment in heavy industry that is a major reason China is now the world's largest emitter of greenhouse gases.
In an opinion piece in the online edition of People's Daily, Pan Yue, the outspoken vice minister of the Ministry of Environment, blamed Western excess for the global crisis and warned that China risked ruin if it blindly pursued Western industrial models.
"China's reform and opening has achieved in 30 years the economic gains of more than 100 years in the West — yet more than 100 years of environmental pollution in the West have materialized in 30 years in China," Pan wrote. "The present global economic crisis shows that if China continues down the old road of Western industrial civilization, it will only come to a dead end."
China is a far more open and dynamic place than the country Deng first unleashed three decades ago. Much of that change has come from ordinary people pushing for more space in society, just as much of China's economic success has come from the entrepreneurial energy and hard work of its work force. Yet Communist Party leaders have been careful to hoard political power: independent unions and political opposition remain illegal.
Earlier this year, Shenzhen's leaders seemed eager to position the city as a pioneer of political reform. Shenzhen officials published a reform plan that advocated some local elections and greater leeway for local legislatures and courts to make decisions. But those plans, later tempered by provincial leaders, now seem derailed as officials are focused on maintaining social stability.
Some influential Chinese say more should be done. Yu Keping, a scholar at a leading Communist Party research institute who has advised top leaders, published essays this week in leading Chinese newspapers about the need for greater democratization to combat corruption.
In an interview with The New York Times, Yu called for "breakthrough reform." But he also said that change must come incrementally, given the need for social stability, with an initial emphasis on better governance and rule of law. "We need to promote democratization in China," Yu said. "On the other hand, we need to promote social stability. If we had an election right now, we might end up like Thailand."
In fact, the limited momentum toward modest political change could well be sidelined by economic problems, some experts say. "A real huge question is how the economic downturn is going to affect any sort of political reform," said Joseph Fewsmith, a Boston University professor who studies Chinese politics. He said officials may deliberately slow implementation of a new rural land reform law approved this fall to grant farmers the ability to transfer their land rights.
"People worried about social stability are going to proceed very, very slowly," Fewsmith said.
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