Watch Out for China

By Bruce W. Nelan

It was called the Middle Kingdom, a self-absorbed and xenophobic empire. Its massive indifference to the outside world remained in place for millenniums, through dynasties and revolutions. Until, suddenly, the communists in Beijing cast aside their Marxist zeal and set their country on the road to capitalism. Only 15 years later, China -- with a fifth of the globe's population -- is a candidate superpower, more involved in international life than ever before in its history. The impact of its emergence is so profound that scholars are predicting relations between China and the U.S. will shape the world in the 21st century.

For that reason, Bill Clinton and his advisers regarded his talks with Chinese President Jiang Zemin in Seattle last week as the most important of the summit with 15 Asian and Pacific leaders. Their hour-plus session was the highest-level contact between the U.S. and China since the massacre of pro- democracy demonstrators in Beijing in 1989. Though it was essentially a getting-to-know-you meeting and made no progress on bilateral issues, Clinton said afterward that he and Jiang "agreed on the need to work on improving our relationship."

Like Presidents before him, Clinton has learned that China is just too big to bully and too important to ignore. With relations getting worse almost from the time he took office, Clinton had to face the real possibility that if Congress refuses to renew China's most-favored-nation tariff status next June, it could lead to a serious, even dangerous, breach with the world's next superpower.

There are compelling reasons for the U.S. to pay attention to China. While the country ran an $18.3 billion trade surplus with the U.S. in 1992, in the process it bought $7.5 billion in U.S. exports, which meant jobs for thousands of Americans. To curb the proliferation of nuclear weapons and missiles, Washington has to entice Beijing into new and better-enforced arms control agreements. China's cooperation will also be essential if any international action -- diplomatic or military -- is taken to halt North Korea's push to develop nuclear weapons. The Clinton Administration hopes that what it calls "enhanced engagement" with Beijing will enable them to talk through such contentious issues without endangering the entire relationship.

China's leap forward is still hampered by its rigid politics -- and the prospect that the system could soon change dramatically. The man who was not there in Seattle but who figuratively sat in on all the meetings was Deng Xiaoping, China's senior leader and chief reformer. Deng, now 89 and very frail, is China's last emperor -- the tail end of the charismatic generation of military and political leaders who held power alone, and he is not likely to rule China much longer.

As Deng slips away -- "going to meet Marx," he jests -- the key question is whether his economic reforms will remain in place or be overturned by elderly hard-liners who survive him. Can the Communist Party, with waning legitimacy and faith, provide the stability to keep the vast country on track and under control? Can China, like neighboring Singapore or South Korea, strike a lasting balance between authoritarian politics and free-for-all capitalism?

So convincingly has he left his stamp on the country that many Chinese will find it difficult to envision a China without Deng. After the ruinous years of the Cultural Revolution and the death of Mao Zedong, Deng consolidated his power. In 1978 he dropped Marxist orthodoxy to begin economic reforms he hoped would make China "a modern, powerful socialist country." He and his disciples insist they are creating a "socialist market economy," an oxymoron they interpret officially as "socialism with Chinese characteristics." While they cling to such slogans to bolster their positions, in practice they are producing capitalism with Chinese characteristics.

Though the formerly totalitarian government is now simply authoritarian, the leaders make no pretense of easing the hard hand of the police state to permit any political diversity or plurality, let alone real democracy. Dissidents are still arrested and thrown into prison. Even so, the high-energy drive for economic diversity and the freedom that offers to talented people have helped open the society -- so long as individuals do not challenge the state. "There is more openness in China now," says a senior Western diplomat in Beijing, "than at any time in the past, and far more than under Gorbachev in Russia."

The effects of Deng's economic revolution are astounding. In Mao's time, leveling was the rule, and everyone aimed at a drab, fanatical egalitarianism. The nation dressed in rumpled blue tunics that made it difficult to tell men from women, and waxed so proletarian that even army officers removed their badges of rank. Today the society is brazenly materialistic, roaring through cycles of boom and bust that have made millions rich. The free-for-all has also left hundreds of millions in the dust but still eager to get theirs. "People are thinking only about money," says a Chinese professor of philosophy in Beijing. "We are only interested in seizing the opportunity brought by this economic change," agrees 23-year-old photographer Nie Zheng.

In the 15 years since Deng abolished the agricultural communes and opened the door to cooperative business and private enterprise, China's economy has mushroomed, growing an average of 9% a year, doubling the size of the economy every 10 years. In 1992 gross domestic product increased 12.8%, and this year it is growing at 13% despite a series of austerity measures. Though per capita income is only about $380, by some calculations of purchasing power China has the third largest economy in the world (after the U.S. and Japan) and could become No. 1 in two decades.

Some provinces are even more gung-ho for growth than the bosses in Beijing. Hainan in the far south plans to build itself into another Hong Kong. Guangdong and Shandong hope to catch up with such Asian powerhouses as South Korea and Singapore by 2015. The special economic zone of Shenzhen is two hours' drive from the southern city of Guangzhou, where bustling construction sites and rows of town houses, factories and shopping centers line the road through the Pearl River delta. In Shanghai, China's New York City, shop windows are crammed with chic imports, electronic pagers and fancy cuts of meat.

Nearby in the Pudong economic zone, which was swampy farmland only two years ago, modern highways, bridges and office buildings are taking shape. Shanghai will soon emerge as "the national and international financial center," boasts Huang Ju, the city's mayor. It will be "the dragon's head that will pull the body of the Yangtse River valley," home to a third of China's 1.2 billion people, into a new age of prosperity.

Individual lives are similarly transformed. More than a million Chinese have become dakuan, or dollar millionaires, and as much as 5% of the population is affluent by Chinese standards. In 1978 Li Xiaohua was a cook in a Beijing restaurant. Today he is a business tycoon who wears a diamond-studded Rolex watch and owns two Mercedes-Benz and a red Ferrari. Ten years ago, Chen Xiaohan was a steelworker in a mill near Beijing. Now he manages a state-owned import-export company and drives around in a Cadillac with a mobile phone. Wang Guoqing quit his job at the Bank of China in Xian three years ago and is now a multimillionaire retailer, restaurateur and real estate developer who wears Pierre Cardin suits, Italian shoes and a $2,000 Swiss watch.

Deng says, "To get rich is glorious." That is undoubtedly true for people like Li and Wang, but for the vast Chinese nation getting rich is a mixed blessing. The rigid discipline of the party and its apparatus is slipping, and crime is on the increase. Corruption -- payoffs and connections -- is the rule at every level. Wealth is growing unevenly: very fast in the special zones, in big cities and along the seaboard, but slowly in the great agricultural interior. Both rural and urban incomes have increased significantly in the past 15 years, but farmers still average less than half of the city worker's wages. Agriculture Minister Liu Jiang warns, "The profitability of farming is declining, and farmers are losing their motivation."

While perhaps 200 million coastal dwellers are now prosperous, and tens of millions of township and village enterprises are thriving, 90 million hamlet dwellers in the interior are still stuck in subsistence farming and near feudal conditions. "Beijing has no extra money to spend on us," says an official in northern Shanxi province. "We were told we would be helped after the reforms took off in the south." Much of the north is still waiting. A businessman from Gansu province, where a quarter of the population is illiterate, complains, "We will always be 10 years behind Shenzhen." At least 100 million peasants have left the land to search for quick riches and are floating rootlessly from job to job in the cities, increasing the crime rate and the profits of resurgent drug rings.

As party control slacked off and the drive to make money was legitimized, provincial and city officials went into business for themselves, creating their own special-enterprise zones to attract outside investment. The money and loans to finance these schemes usually came from local branches of the state bank; many of the banks used all their money for such investments and ended up having to pay farmers for their harvest in promissory notes of doubtful value. The leaders in Beijing called these unregulated investment programs "warlord economies" and set out to control them.

Like Russia, China is trying to create a market-based economy out of one that had been planned and commanded from the center for decades. It is running into some of the same problems Boris Yeltsin and his reformers have encountered, including a shortage of capitalist institutions and a surplus of recalcitrant bureaucrats. In principle, the way to privatize a socialist economy is to get the government out. In practice, the market cannot function well if large parts of the economy are controlled by the state. And in China the banking system still functions in response to political rather than economic rules.

Because leaders have not institutionalized capitalist tools like interest rates and money supply to control growth and inflation, the country repeatedly goes through periods of fast growth followed by frantic clamps on credit to slow down inflation. Through most of this year inflation has been in the double digits, and above 20% in the cities. In June, Beijing ordered a freeze on new bank credit and called in $17 billion in loans. Howls of protest erupted from regional officials and bosses of the big state corporations -- two-thirds of which are unprofitable -- that had to cut back production because they ran out of credit. So the austerity program is being eased even though urban inflation is still over 17%.

This lesson jolted the central leaders into the realization that Beijing's ability to control the country is far more limited than it was a few years ago. Those who take over from Deng, whether in the next weeks or months, will face two immediate challenges. They will have to make sure his reforms and the growth they bring survive, and they will need to hold the country together while the economic revolution is completed.

Two weeks ago, a Communist Party Central Committee plenum adopted a 25-page, 50-point reform outline they called "a program of action to restructure the economy." The plan focuses on two central problems: the hugely inefficient state-held factories and the chaotic fiscal and monetary systems. The state owns and operates more than 50% of China's industry and dominates machinery production, transportation, energy and finance. The party plan calls for turning some enterprises into stock corporations and allowing competition to drive some out of business. Resistance from managers and local officials will be furious, because shutting down the giant corporations will bring large- scale unemployment and possibly civil unrest.

The second part of the program lays out the need to reform both the tax system, which now shortchanges Beijing and weakens its hand with the ( provinces, and the central-banking operation, which is essentially unregulated. "China suffers not from too much central control but too little," says Richard Margolis, corporate finance director of Smith New Court Ltd. in Hong Kong.

Though the party document calls itself the definitive reform plan for the 1990s, analysts in Beijing have doubts about how definitive it is. One Western diplomat detects a continuing struggle between those who make growth their top priority and those who want it to slow down. "I think," he says, "there are party elders lurking in the background who are not 100% disciples of Deng's economics." Because the reforms the country is pushing through are so "far- reaching in their implications," he wonders if Deng's heirs may be "playing too close to the edge."

The men who will have to implement this plan will lack the personal authority Deng has exercised for so long, and could be forced into a collective leadership, which is communist jargon for rule by committee, or even a wrenching power struggle. President Jiang, 67, is Deng's choice as successor, and he already heads the party as well as the government. But many experts do not expect him to hold on to his position. Hard-line Premier Li Peng, 65, is still a contender, but he has been ill, and was out of sight for several weeks last summer. If Jiang self-destructs, the leading role could go to either Vice Premier Zhu Rongji, 65, the economic policy chief who is a committed and pragmatic reformer, or National People's Congress chairman Qiao Shi, 68, a former overseer of the intelligence and security services who is known as a fence straddler but leans toward reform.

Even if succession were assured, there are many other uncertainties. No former communist state has subsequently managed a full emergence into a market economy. Certainly none has made the journey while under a government that still calls itself communist. Chinese officials sometimes say, without irony, that their ambition is to achieve the authoritarian and wealthy status of tiny Singapore. China's history of strongman rule goes back 3,800 years. So, with a Communist Party drained of Marxist ideology, perhaps it no longer matters what the rulers call themselves. Their subjects are united behind the central plank of their political platform: the glory is in getting rich.

With reporting by David Aikman/Washington, Sandra Burton/Hong Kong and Jaime A. FlorCruz and Mia Turner/Beijing