China's affluence trap

We used to think that as China became wealthier, it would become more like the west. Yet the country is being transformed by internal disputes between its new right and left, with unpredictable consequences for the world

An anti-Japan protester runs down the street followed by riot police
An anti-Japan protester runs down the street followed by riot police during a protest last year. Photograph: Getty Images

On 26 August 2012, 36 people were killed when a methanol tanker crashed into a bus in the city of Yan’an, northern China. As so often happens in the country, farce came hot on the heels of tragedy. Soon after the accident, a photograph appeared online of Yang Dacai, a local official in charge of work safety, smirking at the scene of the crash, prompting a dam-burst of internet anger.

The focus of netizens’ comments soon moved from Yang’s composure to the value of his watch and bloggers managed to unearth pictures of him wearing 11 different luxury watches worth many times his official salary. A few weeks later, the Chinese media reported that he had been sacked after an investigation into corruption.

This is just one of countless scandals that flare up every year in China. It illustrates why many Chinese intellectuals think that the country is on the cusp of a new era in its development. The focus on Yang’s expensive watches shows that it is the ill-gotten wealth of the Chinese superclass, rather than the poverty of the masses, that is causing the most tension.

That there was a crackdown on the official rather than the bloggers who exposed him shows that China’s usual approach to stability is being revisited in the age of social media.

That the misdeeds of a relatively junior local official are being reported in the international media also shows that China has hit the global prime time.

Last year began with a series of powerful signals of change. In February, the World Bank and the Chinese Development Research Centre released a report on the country in 2030, calling for a wave of market reforms; in March, a village in Guangdong was allowed to hold an election, having ousted officials suspected of selling off communal land at artificially low prices; later that month, the “princeling” Bo Xilai was dismissed from his Chongqing power base with a warning against returning to the Cultural Revolution.

A cacophonous debate has erupted among China’s intellectuals about the future of the country – pitting China’s neoliberal economists against egalitarian political scientists, neoconservatives against neo-Marxists and globalists against ultra-nationalists.

The Chinese like to think of history as progressing in 30-year cycles. They think of China 1.0 as the years of Mao Zedong, which lasted from 1949 to 1976, when China had a planned economy, a Leninist political system and a foreign policy of spreading global revolution. China 2.0 was the China that began with Deng Xiaoping in 1978 and spanned a generation until the financial crisis of 2008. Deng’s economic policy – launched under the label of “socialism with Chinese characteristics” – was defined by export-led growth backed up by “financial repression”. Deng’s political agenda was epitomised by the quest for stability and elite consensus after the Tiananmen Square Massacre in 1989. His foreign policy outlook was about creating a peaceful environment for China’s development by quietly amassing power and keeping a low profile.

Since the global financial meltdown in 2008, China’s intellectuals have diagnosed a crisis of success. Each of the three goals of Deng’s era – affluence, stability and power – is seen as the source of new problems. Incredible as it might seem, some intellectuals have started to talk of the era of Hu Jintao and Wen Jiabao, which delivered 10 per cent annual growth on average, as a “lost decade”, because muchneeded reforms were not made. China 3.0 will be defined by a search for solutions to these three crises.

Many Chinese intellectuals predict that insuperable pressures from society will produce changes as significant as the onset of communism in 1949 or the embrace of the market in 1978. However, unlike during those earlier periods, today’s reformers do not have international models to guide them. It is not just the Beijing consensus that is broken; the models of the west are also discredited. The intellectuals of China 3.0 find themselves in uncharted territory.

Sleepless nights

For most of the past 30 years, China’s leaders have been kept awake at night by worries about their country’s poverty and the problems of a socialist economy. Today, it is China’s affluence and the problems of the market that are causing sleepless nights.

In 1979, Deng Xiaoping pledged to build a “xiaokang [moderately well-off] society”, in which citizens would be comfortable enough to lift their eyes above the daily struggles of subsistence. For more than a decade, Chinese people have been living a version of this once-utopian concept.

However, since the financial crisis, the two sources of the country’s breakneck growth – exports and domestic investment – have been under pressure. Because the government is afraid of taking money away from the newly enriched bourgeoisie, it has struggled to boost the economy by persuading Chinese citizens to spend more of their income. China’s affluence is turning into a trap.

The west’s demand for exports has fallen off a cliff and Beijing is struggling to adapt. The supply of cheap exports from China was made possible by a deep well of migrant lab - our guaranteed by the hukou system, which ties the social rights of peasants to their birthplace and puts them at a disadvantage in the cities to which they migrate for work. The result is that a city such as Guangzhou (formerly known as Canton), the largest in Guang - dong Province, has become like Saudi Arabia: it has a GDP per capita on a par with a middleincome country but academics estimate that only three million of the 15 million people who work there every day are officially registered inhabitants. The rest have no rights to housing, education or health care and live on subsistence wages. In Saudi Arabia, the cheap migrant labourers are attracted by the oil wealth of the state, but in Guangdong the labourers are the source as well as the byproduct of the wealth. Reform of these conditions is painfully slow.

The absence of protection for most workers helps strengthen the other leg on which China’s growth stands: cheap capital for investment in domestic infrastructure. Without state-backed pensions, health care or education, citizens save almost half their income as a hedge against personal misfortune. Yet the state-owned banks give them an artificially low interest rate. This makes vast amounts of capital available to crony capitalists at cheap rates for speculative investment, which has swelled the GDP and left the Chinese landscape strewn with white elephants such as palatial municipal buildings, factories that stand still and empty hotels.

On one side of the debate about how to escape from the affluence trap are economists such as Zhang Weiying who form the core of the pro-market new right. They pioneered the gradualist reforms of the 1980s and 1990s and now want the state to finish the job and privatise the rest of the economy.

Zhang, a brilliant man who trained at Oxford in the early 1990s and became a devotee of Thatcherite economics, returned to Beijing in 1994 with a mission to help his country move from Mao to Milton Friedman. Today, he argues that the solution is to restart the interrupted privatisation of the state sector; to liberalise the financial system, particularly by giving the private sector equal rights to do finance; and to privatise the land and end collective ownership.

In an inversion of the French anarchist Pierre-Joseph Proudhon’s saying about property, Zhang presents public rather than private ownership as theft. His ideas have champions within the Chinese system. Last year, China 2030, a 448-page report by the World Bank and the Development Research Centre of the State Council, called for a “fundamental shift” towards marketisation in the country’s development model.

On the other side of the debate are new-left thinkers such as Wang Shaoguang, who have been calling for a different model of development since the 1990s. Wang has rediscovered J K Galbraith’s classic work on the “affluent society” and is adapting his critique of mid- 20th-century America’s spiralling inequality and ravaging consumption to China. Wang claims that Galbraith would have no difficulty recognising the symptoms of his affluent society in today’s China. He argues that China’s leadership has spent a generation obsessively focusing on economic growth at the expense of all else.

Inequality has run rampant as socialist China has destroyed the “iron rice bowl” of social protection. China has gone from being one of the most equal countries in the world to a nation with a bigger gap between rich and poor than the US. A surge of conspicuous private consumption and vanity projects has come at the expense of investment in public goods such as pensions, affordable health care and public education.

The new left argues that China’s thirst for growth and affluence has created a bubble economy, trapping millions in poverty, and that the solution lies in planning, rather than privatising. Since the early 1990s, those on the left have been setting out ideas that have challenged the orthodoxy of neoliberal economics and have called for a return of the state. This grouping is “new” because, unlike the Maoist refuseniks, it embraces the market as part of a mixed economy. And it is left-wing because it worries about inequality.

Another Tiananmen

At the top of the new left’s list for reforming China’s economic development model are boosting wages, ending artificial subsidies for exports, providing access to social services, refining the hukou system and ending the “financial repression” of interest rates. Its exponents talk about low-price health care, socialised capital, reforming property rights to give workers a say over the companies they work for, and green development.

The problem for the approaches of both the left and the right – stimulating demand on the one hand and supply-side reforms on the other – is that they run into the vested interests that have grown during the dizzying two decades in which crony capitalism has taken off. How to break that is increasingly a question that impinges on politics.

For the first time in two decades, there is an urgent discussion about political reform. A surprising number of intellectuals talk privately about the threat of revolution or, at the very least, much more dramatic scenarios of democratic transition. Minxin Pei, a USbased Chinese academic, has written what many of his fellow thinkers believe but cannot write: that the conditions for “another Tiananmen” are there. The sociologist Sun Liping has argued that China’s obsession with stability is becoming self-defeating: “The ultimate outcome of the massive stability preservation project is, in fact, the inten - sification of social tensions.” He is one of China’s most distinguished scholars, but his words have added significance because he was also PhD supervisor to Xi Jinping, the future president of China.

Other intellectuals wonder how the new leaders will gain enough legitimacy to take on vested interests – and, more challengingly, how they will maintain this legitimacy at a time when growth is slowing. The big debate is between thinkers who believe in institutional and those who believe in political sources of legitimacy.

One group of Chinese intellectuals thinks that the way out of the stability trap is to find ways of institutionalising Chinese politics. The new right, which does not believe in removing the roots of inequality, wants to use politics to make it more legitimate. It is conscious that China is becoming more complex and more restive, with an epidemic of riots spreading across the country. In the mid-1990s, people were shocked when the Chinese ministry of public security reported that there were almost 9,000 “mass incidents” a year (defined as violent demonstrations). Since then, the number of riots has grown at an even faster rate than the Chinese economy: state-backed studies estimate that the number rose to 180,000 in 2010. There is now more than one major riot every two minutes. How can the government channel this anger so that it does not threaten to overturn the system?

The place where these issues have come to the fore the most is Guangdong, which has become a model of flexible authoritarianism that gives greater voice to citizens on the internet and allows civil society and non-governmental organisations to raise their concerns. In the village of Wukan in Guangdong in March 2012, a battle between peasants whose land had been confiscated and corrupt local authorities was resolved with an election. The dispute captured the national attention and became an important example of the potential of a “Guangdong model”. Before Wukan, elections had more or less disappeared from the menu of systemic reforms. Guangdong’s then Communist Party chief, Wang Yang, described it as an experiment for dealing with social unrest.

Many of the country’s intellectuals came of age during the Cultural Revolution and worry that mass democracy can rapidly become “mob rule”. They have been influenced by the collapse of faith in elections in developed democracies that are beset by falling turnouts, the rise of populism and a crisis in the idea of representation. Thus, although they want a more institutionalised Chinese system – with term limits, public consultation and the rule of law – they do not see multiparty elections as a panacea. They argue that although the west maintains elections as a central part of the political process, it has supplemented them with new types of deliberation such as referendums, public hearings, opinion surveys and “citizens’ juries”.

China, according to these new political thinkers, will do things the other way around: it will use elections at the margins (perhaps up to village level) but make public consultations, expert meetings and surveys a central part of decision-making.

Another group of Chinese thinkers, however, believes that such institutional innovations are counterproductive. These intellectuals argue that the innovations risk causing a crisis of Chinese legitimacy by creating an overly bureaucratised and cautious leadership that is incapable of making the necessary bold choices. They argue that because of the flaws in the political system, such as nepotism and corruption, it will be impossible to find an institutional fix for China’s problems. Only the charismatic power of a leader, they claim, combined with the political organisation of the party, could cut through.

This fear of bureaucratisation is best captured by the neoconservative thinker Pan Wei, who argues that although the bureaucratic state is able to make big decisions, it is the trivial things that lead to social unrest and the fall of political systems. He argues that the natural communities that had existed for thousands of years in China have gradually been destroyed, first by Maoism and then by the market.

Pan lays out a Chinese variant of communitarianism to re-create them. He interprets the unrest in Wukan as having been driven by a lack of respect for the original, local clan communities, which the election of a new leader only amplifies. He views the development of civil society organisations in a township called Wuxi, in Sichuan Province, as an example of a new version of Mao’s “mass line” which puts emphasis on “participation” instead of “coverage”.

In this respect, Pan shares with some newleft thinkers the view that the institutions of the state are so corrupt and complicit in the existing order that they will be incapable of delivering social justice or correcting the “original sin” that has led to the emergence of a super-rich class alongside the pauperised masses. They are less interested in restricting the power of the executive than they are in empowering the masses and see a populist democracy as the solution.

It is within this context of the debate between political and institutional sources of legitimacy that we should also view the effect of the internet on China. It has been an article of faith among many western observers that the inevitable consequence of the internet has been to open up societies and defeat autocratic regimes, bringing liberal democracy in its wake. However, the Chinese state has changed the internet as much as it has been changed by the internet.

After a train crash in Wenzhou, Zhejiang, in July 2011, the government allowed ten million critical messages about the national railway minister to be aired on social media over five days. Later, between February and April last year, people were able to have a relatively free internet debate about the Chongqing party head Bo Xilai. There is speculation that the Communist Party encouraged the lurid rumours about Bo and his wife, Gu Kailai, to sap the legitimacy of a very popular leader to the point where he could be purged.

It is possible that social media could be used to lengthen the life of the one-party state by giving citizens an outlet for discontent, while allowing the leadership to understand public opinion (and, if necessary, prevent political mobilisation). This could be a practical solution to the stability trap, so long as it does not prevent the reforms that will be necessary for China to continue growing as an economic and political power.

For a generation, China’s foreign policy was guided by Deng Xiaoping’s injunction “Tao guang yang hui”, which literally means: “Hide its brightness and nourish obscurity.” Deng meant that China, as a poor and weak country, should keep a low profile, avoid conflicts and concentrate on economic development. In place of the foreign policy of China 1.0 – focused on ensuring the security of the revolutionary state and promoting revolution elsewhere – Deng accepted a USdominated international order and tried to free-ride on the markets that the west guaranteed and policed.

Since the global financial crisis, the Deng approach has been under increasing attack. It is hard to keep a low profile when your country has the second-biggest economy in the world, your military spending is growing at double-digit rates and you have a physical presence on every continent. On one side of the debate are China’s globalists, who want to accommodate western power. They argue that precisely because China is more powerful, “modesty” and “prudence” are now even more important. On the other side are those who argue that China must pursue a more assertive foreign policy, in which it helps to define the rules of foreign policy rather than follow diktats crafted in Washington and elsewhere. This applies to the question of global governance but even more to China’s neighbourhood, where issues around the South China Sea, the East China Sea and Japan loom increasingly large.

One of the leading globalists is a Beijing University professor called Wang Yizhou, who has translated many liberal internationalist texts into Chinese. In a much-discussed recent book, Creative Involvement, he argues that China has to protect the interests and safety of its citizens around the world. If you add the 50 million Chinese citizens living abroad to the 80 million people in long-settled diasporan Chinese communities, you get 130 million people. If they were in a single country, it would be the tenth-biggest in the world, with a population larger than Japan’s.

The world took notice only when China airlifted 38,000 citizens out of Libya, but there are millions more Chinese working in countries as unstable as Sudan, Afghanistan, Iran and Angola. Where military planners used to talk about Taiwan to make the case for extra resources, they now talk about the need to acquire a blue-water navy to protect Chinese investments.

The paradox is that, as China becomes ever stronger, the governing power of its state seems to be getting weaker. The foreign ministry – historically the most cautious of the bureaucracies – is outranked by many com - panies and domestic departments; provincial governments and the big state-owned enterprises are more interested in advancing their profits than in reassuring the world; and the People’s Liberation Army is increasingly restless. Furthermore, there is now so much contact with the rest of the world that the senior leadership usually engages with issues only once they become a crisis – with the exception of the relationship with the United States.

The recent demonstrations in China against Japan and the outpourings of anger on the internet about the conflict between the two nations in the South China Sea and the East China Sea suggest that many Chinese expect their leaders to translate their growing economic clout into tougher policies.

The debates about China 3.0 are of huge importance for the world. It is not just that one-fifth of humanity lives within the country’s borders. It is also clear that the other four-fifths of the world’s population will increasingly be influenced by China’s actions. Chinese economists predict that, in 20 years, Beijing will have an economy more than twice the size of America’s. They think that it will be the world’s biggest domestic market and the biggest global source of foreign investment, buying up western companies, brands and assets with its savings.

Yet although China’s footprint will become ever more important for the world, the drivers of its internal debates will be increasingly domestic. In the past, Europeans assumed that as China became wealthier and more developed, it would inevitably become more like us. This led to a lack of curiosity about the country’s internal debates and an attempt to divide its thinkers and officials into “reformers” who embrace western ideas and “conservatives” who want to return to the Maoist past. Europeans now need to change their mental map to deal with a China whose internal structure and structural relationship with the rest of the world have been turned on their head.

Mark Leonard is the director of the European Council on Foreign Relations and the editor of “China 3.0” (download it for free at: www.ecfr.eu)

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