E-Notes

China in 2002: A Tale of Two Transitions

by June Teufel Dreyer

April 25, 2002

June Teufel Dreyer is Professor and Chair of the Department of Political Science at the University of Miami, Florida. She is a member of the U.S.-China Security Review Commission and a senior fellow of the Foreign Policy Research Institute. This essay draws on a presentation to an FPRI symposium, held on March 25, 2002, on the China-Taiwan issue. Also see “Why Taiwan’s Political Paralysis Persists,” by Shelley Rigger.

Like most countries of the world, the People’s Republic of China (PRC) faces a large number of daunting problems. In China’s case, these can be subsumed under two major categories of transition— domestically, to a new generation of leaders, and, internationally, to significant changes in geopolitical alignments.

With regard to the first, many of the developments of the current year revolve around the run-up to the 16th Congress of the Chinese Communist Party (CCP), scheduled for fall 2002. The majority of the present leadership has reached mandatory retirement age and, assuming that regulations are obeyed, will be ineligible for re-election. The transition from what is known as the third generation leadership to the fourth is fraught with uncertainties: although the third generation has been criticized for its lack of charisma and leadership qualities, those considered most likely to inherit their jobs seem even less endowed with personality and vision. Many Chinese express doubt that they will be able to cope with the multiple challenges ahead.

Zhu Rongji’s Domestic Balance Sheet

Meanwhile, in common with retiring leaders elsewhere, members of the third generation have evinced concern with how they will be regarded by future historians. This was seen most clearly in the speech given by retiring Premier Zhu Rongji at the National People’s Congress, China’s parliament, in mid-March. Zhu is enormously popular in the West, where he is seen as a blunt spokesman who says what he thinks in as few words as possible, someone who cares more about doing what he thinks needs to be done than about his approval ratings, and as personally incorruptible in a system where corruption is pervasive. In China, where it seems that nearly everybody blames Zhu for something, he is much less popular. This probably accounts for the somewhat defensive tone of his speech.

Zhu was at pains to remind people of what he had done for them. He had, he stated, “basically fulfilled” his objectives, which he listed as

Although the premier, a modest man by nature, did not claim credit for it, he is believed to have been instrumental in securing the 2008 Olympic summer games for Beijing. The award has been a long sought-after goal, regarded as adding to the prestige not only of the capital city, but of all China.

Zhu said that he knew he had been nicknamed “the deficit premier,” but that he felt he must decline the honor: had he not pumped large amounts of state funds into the PRC’s economy, it might have collapsed.

The premier’s domestic critics were not impressed. Many of them are willing to give him at least some credit for trying, but do not concede that there have been significant accomplishments. If the reform of the state-owned enterprises was such a success, they say, then why, beginning on March 1st, little over a week before Zhu made his speech, did a series of large strikes and demonstrations break out in several parts of China by workers who had been laid off in the re-structuring process? The workers had a number of grievances, chief among them that they had not received the severance settlements they had been promised, that there had been massive corruption in the sell-off of plants’ assets, and that medical coverage had disappeared.

As for streamlining government, local governments, at least, were larger than before. The need to meet their burgeoning payrolls had contributed to a proliferation of new and higher taxes. Farmers' incomes had stagnated, with policies instituted by Zhu held responsible for declining grain prices. The premier acknowledged in his speech that trying to deal with the deterioration of farmers’ incomes had been his “biggest headache.” The deterioration of rural living standards affected more than just farmers: in many areas, there was no money to pay teachers, either. And, in order to escape impoverishment in the countryside, tens of millions of people—no one knows how many but estimates range from 80 to 125 million— have immigrated to cities in search ofwork. This floating population, as it is known, has helped urban areas by its willingness to undertake so-called “3-D”— dirty, difficult, and dangerous— jobs shunned by long-term residents. But it is also blamed for rising crime rates, the spread of various contagious diseases, and evasion of family planning regulations.

With regard to the banking system, the four largest banks in China continue to hold well over ninety percent of the country’s deposits. They also continue to have dangerously high levels of non-performing loans. Due to a lack of transparency in disclosure and the fact that the PRC does not use internationally accepted accounting standards, there is considerable disagreement about the size of these non-performing loans, although most analysts believe that they are in excess of the danger limit set by the Bank of International Settlements in Basel. Asset management companies have been formed to deal with these bad loans, but undercapitalization of the AMCs and corruption in the system have resulted in a debt recovery ratio that was initially under thirty percent and is moreover declining, since theAMCs disposed of the best assets first. A run on the banks could prove disastrous.

Even WTO entry may seem like a bad idea to many Chinese, at least in the short-run. This is particularly true in the agricultural sector, and in the rust-belt of the PRC’s northeast that has been the epicenter of recent strikes. As a condition of WTO membership, subsidies and protective tariffs must be removed. Chinese agriculture is inefficient to the extent that, for example, soybeans grown in the United States can be sold in China for far lower prices than they can be produced at in the PRC, even after transportation and storage costs are added on. Assuming that the fourth generation intends to honor the conditions of WTO membership, there will be a major adverse impact on the already-depressed agricultural sector. And labor unrest is likely to increase as well.

With regard to the Olympics, in the process of soliciting votes from members of the International Olympic Committee, Beijing promised major improvements to the area’s infrastructure, and to clean up its polluted environment. The first will siphon scarce funds away from the Invest in the West campaign, which was designed to ease growing income disparities between east and west China. Party and government hope that easing these disparities will lessen regional and ethnic tensions, since most of the PRC’s ethnic minorities live in the western part of the country. Efforts to clean up the environment come athwart the increasing desertification of the country. As if to underscore thedifficulty of the undertaking, an enormous sandstorm buried the capital, and most of the rest of north China, in a haze of choking dust just days after the National People’s Congress ended. The yellowish particles appeared orange in the sunlight, bathing the capital in an eerie Hallowe'enish glow for several days. Residents complain that the storms are larger and more frequent each year, and environmentalists agree. A major factor is the uncontrolled clearance of forests and grasslands to create more arable land to support a population that continues to grow despite family planning regulations.

China’s Foreign Relations in Transition

Internationally, the situation is scarcely better. Japan, whose already existing concerns about its much larger neighbor’s growing strength were reinforced by Beijing’s aggressive actions in the Taiwan Strait during 1995-96, has been giving new, expanded powers to its Self Defense Forces, and is talking about participating in a joint missile defense program with the United States. The PRC leadership worries that this will result in a revival of the Japanese militarism that led to an invasion of China in the 1930s. Taiwan, considered a wayward province by Beijing, continues to advance toward establishing an international persona consonant with its de facto independence. India has become a declared nuclear power and, concerned with ever-larger Chinese military budgets and the PRC’s more aggressive regional stance, has been improving its own military and reaching out to new allies.

Ongoing fears of encirclement by less than friendly powers were reinforced by U.S. reaction to the events of September 11, 2001. China hinted to the United States that, in return for its cooperation in the war against Osama bin Laden and his supporters, it wanted understanding of its position on its own domestic dissidents, some of whom are Muslim separatists— although not necessarily terrorists— and a softening of American support for Taiwan. Washington declined, realizing that, since the PRC knew that it was in Beijing’s own interests to cooperate in dismantling terrorist camps in Afghanistan, no concessions were needed. American efforts against terrorism have included the establishment of bases in several Central Asian states abutting Afghanistan; the Chinese leadership worries these may stretch into a long-term presence that will overshadow the PRC’s own stature there. Beijing’s uneasiness was compounded when the Bush administration announced that the war against terrorists would be expanded to other countries that supported their activities, with the Philippines, Yemen, Indonesia, and Iraq considered likely candidates.

Perceptions that the post-September 11 campaign against terrorism was little more than an excuse for imposing American hegemonism world-wide were exacerbated by a classified Department of Defense document leaked to the Los Angeles Times, also in March. A policy review that contained contingency planning for nuclear strikes, the report named seven countries, including China, as possible targets. An additional irritant was the visit of Taiwan’s defense minister, Tang Yiao-ming, to a conference in Florida where he met with Deputy Secretary of Defense Paul Wolfowitz. As far as is publicly known, this constituted the highest-level defense contact between the U.S. and Taiwan since Washington broke formal relations with Taipei in 1979. Last year, shortly after assuming office, President George W. Bush stated that he would do “whatever it took” to help the island repel an invasion by the mainland.

Mixed Prospects

Those who are optimistic that the PRC’s new leadership can successfully bridge these transitions point to the steady growth of the economy. Other have disputed by how much it is actually growing, given several years of decline in such indicators as energy consumption and Premier Zhu’s own words about pumping in government funds to avert economic collapse. That said, it is clear that more Chinese have more possessions — stylish clothing, electric fans, color televisions, scooters, and cars, most visibly— than ever before. Nonetheless, while the “haves” have more, those who have less continue to fall behind. Even the government’s statistics, which tend to err on the side of optimism, confirm a worsening of the Gini coefficient. And the poor are largely hidden from visitors’ eyes. Rising expectations create their own pitfalls, as citizens question what party and government have done for them lately. In the foreign policy area, the new leaders must fashion a strategy that resists perceived American attempts at hegemonism, draws Taiwan closer to the mainland’s embrace, and allays the fears of those countries who now seem to be forming a coalition against it. Whether the fourth generation is up to the tasks ahead remains to be seen.

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