Capitalism with Chinese Characteristics

"Yes, his would be a heterodox view, in part because he’s not a classically trained economist; he’s a political economist. But the fact that he’s a contrarian is quite helpful because he offers a valuable corrective to some of the conventional narrative on the China story. Also, I have to say, as far as economic books go, this is one of the livelier offerings. I put it on the list with confidence that it’s not going to be a gruelling experience, because it’s actually a pretty good read. And that’s because he tells a story. His story begins with these farmers who decided on their own, secretly in 1978, that they were going to end the collective farming arrangement, divide up their farmland and start to farm it individually. That became a hugely important model, because it was replicated across the country. What Yasheng Huang is arguing throughout his book is that China’s great strength has been its own entrepreneurial culture, and that the country has been at its best when it has allowed that entrepreneurial culture to thrive. And that it has actually stumbled when it tries to move in and the state tries to regulate the economy inappropriately or tries to promote state interests. What he’s doing is arguing against the image of ‘market authoritarianism’ or ‘state capitalism’, which is in fashion these days. It’s become very fashionable to talk about the idea that China has rewritten the rules on private entrepreneurship, or on the power of the market. Yasheng Huang is saying, ‘As a matter of fact, no. China’s economic story is in some ways very conventional and we should remember that because it means people do best and the country does best, it grows fastest and their lives improve fastest, when you give them the opportunity to really pursue their own entrepreneurial instincts.’ That’s what’s kind of interesting about Huang. He is hugely impressed with China’s growth and its ability not to get swept up in the financial crisis. But the difference is how he explains that growth and that success. He’s not just a naysayer – there are these books out there that are basically just predicting the fall of the Chinese regime and are essentially political documents. That’s not what he’s doing at all. He’s making an economic argument that still votes for the power of China’s success but does so for a different explanation, and that’s what’s provocative about it. The valuable voice that he brings is a couple of things. First, that the weakness in the Chinese economy is the effort on the part of the state to meddle with it, or benefit from it, beyond what is economically rational. As an example, he has the statistics that show that the average person’s life improved much faster – as told by the growth in rural household income – in the 1980s than it did in the 1990s. He has another book coming out now that shows that the growth in rural household income has really stagnated and slowed down substantially, which means that the average person is feeling poorer. That is a very dangerous fact, if you’re the Chinese government. You want your average citizen to feel richer every year than the year before – because that is the fundamental basis for your political future. The other thing he’s got is this great line: he’s collected all of these old issues of Business Week and the WSJ from the 1970s that were raving about the Brazilian economic model and how Brazil had redefined the way capitalism would work. You can let that speak for itself. What he’s saying is that these economic stories are not faits accomplis . There are moments of good management and moments of bad management, and it’s up to us to identify the moments when China has been at its best and try to take the lessons from that. I am hugely biased because I studied in Beijing, I live in Beijing and I happen to think that Beijing is where the action is. And there are a lot of people who would agree with me. But that’s a kind of Yankees/Red Sox declaration. I go to Shanghai all the time but Shanghai has never stirred the soul the way Beijing has. Beijing is this strange combination of being both the artistic and creative capital and the centre of a one-party regime. That’s a weird and incandescently productive combination. So Beijing is a must-go-to. I suppose you need to go to Shanghai because it’s cosmopolitan and it will show you something, but I think Beijing is unique. Get the weekly Five Books newsletter It’s also vital to get outside the huge cities, and everybody will tell you that. One off-the-wall suggestion would be to go to Xining, which is the capital of Qinghai province. Xining itself is an unlovely place. It’s not a place you need to spend much time, but it’s very accessible from Beijing. You can fly there in a couple of hours. It’s a really dramatic intersection between Tibetan culture and Han Chinese culture and Hui Muslim culture, and Uighur culture. If you go to the train station or bus station in the centre of town and just stand there for half an hour and look around you, you’ll get a much more realistic image of China’s incredible diversity and complexity than you will in Beijing, even in the hutongs. So I say go to Xining, and from there you can actually get out to some ethnic diversity within an hour or two’s drive, and you’ll start to see something interesting. Yes, Qinghai has some very beautiful stretches. It has all the drama and scale of the lowlands of Tibet, but it’s a little bit more accessible and in fact more diverse. They are beautiful but I would actually put Suzhou on the list for a different reason. Suzhou has lovely canals and it’s rightly proud of that, but what’s most interesting to me about Suzhou these days is that there’s now a high-speed train that can take you there from downtown Shanghai in about 20 minutes. It’s fascinating because it completely transforms the geography of central China. Suzhou is now, more or less, a bedroom community of Shanghai. I actually do recommend Suzhou, but don’t go in the summertime, it’s too hot. The other thing you could do is go to Yunnan province. It has incredible diversity and all of the challenges that you see elsewhere in China – for example, that’s where they’re dealing with HIV. Yunnan has what people call Shangri-La and it does have this amazing diversity. But some of the places that are most immediately available in the guidebook – like Dali and Zhongdian – they are part of what I think of as the ‘Shangri-La industrial complex’. They’re not short on foreigners, and may leave some people feeling that they didn’t get far enough off the grid. But as in the case of Yangshuo, which is down near Guilin, you are best off hunting for guesthouses or satellite villages that are outside those main tourist destinations. They have the advantage of being accessible – because of transport links into Dali, Yangshuo and the like – but still having the remoteness that you’re seeking. The key thing is getting outside downtown Yangshuo, because there are too many backpacker hostels where you can eat banana pancakes and read your e-mail. If you go outside the city, not that far, there are a couple of guesthouses that are out in the hills that are easy enough to find. It shows you a side of China that is improving steadily, and people are not as sick as they once were and it’s not as poor as it once was, but it’s not given up its visible Chinese identity. Yes the Renminbi 20 yuan note has the karst hills of Guilin – and there’s nothing more Chinese than a 20 yuan note…"

"I think Yasheng goes a little too far with some of his claims. But the broad outline is correct. There was a period of healthy organic growth in the 80s, driven by the de facto private sector. Many township and village enterprises were collectives or owned by the local government. But in reality they were private enterprises. This changed in the mid-90s, especially with the adoption of the ‘grasping the large and letting the small go’ policy that circumvented the special interests in the state sector. When Deng Xiaoping was alive, his executive vice premier, Zhu Rongji, wanted to bankrupt or merge many of the smaller state-owned enterprises into larger ones. It was a political tactic to further reform. And it worked. The problem was that it created these giant, state-owned enterprises. Recent statistics reveal the state sector made a profit of 2 trillion renminbi last year, of which the 122 largest SOEs made 1.35 trillion. They have combined assets of over 10 trillion dollars and have become an enormously resourceful and powerful interest group. Their CEOs have numerous ties with top political leaders and sit on the party’s central committee. Most bank loans, issued bonds and stock-listing proceeds in the system go to these conglomerates. There’s still a private sector but it has been squeezed tremendously, especially in the last two years. Yasheng does a great job of explaining the genealogy of this process. He shows us the evidence on a national basis and in terms of Shanghai. People think of Shanghai as this dynamic, market-oriented city that symbolises the future of China. But Yasheng points out – and I know this because I’ve done fieldwork in the city – that the largest enterprises in Shanghai are state-owned. From energy, steel and car manufacturing to taxi firms and newspaper stands, the state dominates. Yasheng says it’s a bad thing because the state doesn’t allocate capital efficiently. It’s not their money, after all. That’s what you see in China: a lot of wasted money. Travellers are impressed with the infrastructure – stadiums, airports, opera houses – but it’s not used very much. The Bird’s Nest – the Olympic stadium in Beijing – cost hundreds of millions of dollars but I don’t think anyone uses it. There are many other examples like that across China. But I do think Yasheng’s book is possibly a little harsh. The reason for such a concentration of financial resources is that the leadership became increasingly concerned about the possibility of a major economic shock. The policy stemmed from insecurity, especially after the death of Deng in 1997, which coincided with the Asian financial crisis. They wanted to ensure there was a large foreign-exchange reserve and plenty of centrally-controlled resources. They tried to suppress the amount of explicit government debt. Instead of using budgetary allocation to finance local infrastructure, the central government instructed local governments to form companies and borrow money from the banks, thus hiding the deficits. They got the results they wanted: relative financial stability and fast growth, fuelled by high investment rates and low government deficits. Since 1997, we’ve had a decade and a half of stability and growth. That’s quite something. Still, I agree with Yasheng that this situation will become increasingly untenable in the future. There has been so much waste, a lot of it financed by debt in the financial system instead of government debt. This means that either these wasteful projects will have to generate cash flow to pay back the banks or the banks will become insolvent. The Chinese government is grappling with this major issue."