New China. New crisis

Sunday January 7, 2007
The Observer

For more than 2,000 years, China's conceit was that it was the celestial kingdom, the country whose standing was endowed by heaven itself and whose emperors tried to reproduce heavenly harmony on Earth. All China basked in the reflected glow; foreigners were barbarians beyond the gilded pale who should not be allowed even to learn the art of speaking and writing Chinese.

When I first visited China in the autumn of 2003, such articles of Confucian faith seemed very far away, submerged by the lost wars and the 26 humiliating treaties of the 19th century, subsequent communist revolution and now the economic growth to which Beijing's motorway rings and Shanghai's skyline are tribute. This was a new China that had plainly left behind obeisance to the canons of Confucianism and the later cruelties of Mao. More than three years and a book later, I am less convinced.

All societies are linked to their past by umbilical cords - some apparent, some hidden. China is no different. Imperial Confucian China and communist China alike depended - and depend - upon the notion of a vastly powerful, infallible centre: either because it was interpreting the will of heaven or, now, of the proletariat. In neither system have human rights, constitutional checks and balances or even forms of democracy figured very much. As a result, China has poor foundations on which to build the subtle network of institutions of accountability necessary to manage the complexities of a modern economy and society. Sooner or later, it is a failing that will have to be addressed.

China is both very confident about its recent success and very insecure about its past, a potent mix that breeds a deep-seated xenophobia and shallow arrogance. China's economy in 2007 will be nearly nine times larger than it was in 1978 when Deng Xiaoping won the power struggle with the Maoists and began his extraordinarily sinuous, gradualist but successful programme of market-based economic reforms, groping for stones to cross the river, as he called it. China is now the fourth largest economy in the world - after the United States, Japan, and Germany - and is set to become the second largest within a decade. More than 150 million workers have moved to China's booming cities and 400 million people have been removed from poverty. It is a head-spinning achievement.

China is the new factor in global politics and economics, and its rulers and people know it. It now has more than $1 trillion of foreign exchange reserves, the world's largest. It is the single most important financier of the United States' enormous trade deficit. It is the world's second largest importer of oil. Before 2010, it will be the world's largest exporter of goods. It is, comfortably, the world's second largest military power. Last year, the Pentagon's four-yearly defence review stated that China is the power most likely to 'field disruptive military technologies that could over time offset traditional US military advantages'. A new great power is in the making, but one whose pursuit of its self-interest takes the amorality of power to a new plane. It is not just the Chinese who should be concerned about its institutional and moral failings; all of us should be.

In China, you can almost smell the new self-confidence: it is in the skyscrapers built in months; it is in the brash and unashamed willingness to rip off and copy Western brands; it is in the well-groomed and inscrutable demeanour of the rich entrepreneurs, self-confident officials and assured academics.

I sat in a Beijing bar just over a year ago with a typical member of China's new class of rich businessmen who double up as members of the party, a combination of commercial and political power that China knew well as the old Confucian mandarinate, now strangely reproducing itself in a new guise after Mao tried to eliminate it forever in the Cultural Revolution.

In surprisingly fluent English and with his Mercedes waiting outside, he praised China's communist regime and its curious mix of capitalism and communism with all the enthusiasm of a Tory businessmen praising Thatcher. Chinese corruption? Think of Enron and party-funding scandals in London, he declaimed. Double standards between communist rhetoric and practice? What about the US and Britain's invasion of Iraq, and Guantanamo Bay? What I failed to realise, he insisted, betraying both assurance and insecurity, is that China will not surrender again the natural rank that it should never have lost. Western values, institutions and attitudes were being revealed for being straw men, blown away by resurgent China and the pragmatism of its communist leaders.

Yet Western values and institutions are not being blown away. The country has made progress to the extent that communism has given up ground and moved towards Western practices, but there are limits to how far the reformers can go without giving up the basis for the party's political control. Conservatives insist that much further and the capacity to control the country will become irretrievably damaged; that the limit, for example, is being reached in giving both trade unions more autonomy and shareholders more rights. It is the most urgent political debate in China.

The tension between reform and conservatism is all around. For example, the party's commitment now is no longer to building a planned communist economy but a 'socialist market' economy. The 26,000 communes in rural China, which were once the vanguard of communism, were swept away by the peasants themselves in just three years between 1979 and 1982, the largest bottom-up act of decollectivisation the world has ever witnessed. Hundreds of millions of peasants are, via long leases, again farming plots held by their ancestors for millenniums. China's state-owned enterprises no longer provide life-long employment and welfare for their workers as centrepieces of a new communist order; they are autonomous companies largely free to set prices as they choose in an open economy and progressively shedding their social obligations.

Equally amazing, China's communists have declared that the class war is over. The party now claims to represent not just the worker and peasant masses but entrepreneurs and business leaders, whom it welcomes into its ranks. The party refers to this metamorphosis as the 'three represents': meaning that the party today represents 'advanced productive forces' (capitalists); 'the overwhelming majority' of the Chinese (not just workers and peasants); and 'the orientation ... of China's advanced culture' (religious, political and philosophical traditions other than communism).

Party representatives say that the country is no longer pledged to fight capitalism to the death internationally, but, instead, wants to rise peacefully. China has joined the World Trade Organisation and is a judicious member of the United Nations Security Council, using its veto largely in matters that immediately concern it, such as Taiwan.

But for all that, it remains communist. The maxims of Marxist-Leninst-Maoist thought have to stand, however much the party tries to stretch the boundaries, because they are the basis for one-party rule. Yet the system so spawned is reaching its limits. For example, China's state-owned and directed banks cannot carry on channelling hundreds of billions of pounds of peasant savings into the financing of a frenzy of infrastructure and heavy industrial investment. The borrowers habitually pay interest only fitfully, and rarely repay the debt, even as the debt mountain explodes. The financial system is vulnerable to any economic setback.

Equally, China is reaching the limits of the capacity to increase its exports, which, in 2007, will surpass $1 trillion, by 25 per cent a year. At this rate of growth, they will reach $5 trillion by 2020 or sooner, representing more than half of today's world trade. Is that likely? Are there ships and ports on sufficient scale to move such volumes - and will Western markets stay uncomplainingly open? Every year, it is also acquiring $200bn of foreign exchange reserves as it rigs its currency to keep its exports competitive. Can even China insulate its domestic financial system from such fantastic growth in its reserves and stop inflation rising? Already, there are ominous signs that inflationary pressures are increasing.

These ills have communist roots. It is the lack of independent scrutiny and accountability that lie behind the massive waste of investment and China's destruction of its environment alike. The pace of desertification has doubled over 20 years, in a country where 25 per cent of the land area is already desert. Air pollution kills 400,000 people a year prematurely. A hacking cough in the Beijing smog or the stench when the wind comes from the north in Shanghai are reminders of just how far China still has to go.

Energy is wasted on an epic scale. But the worst problem is water. One-fifth of China's 660 cities face extreme water shortages and as many as 90 per cent have problems of water pollution; 500 million rural Chinese still do not have access to safe drinking water. Illegal and rampant polluting, a severe shortage of sewage treatment facilities, and chemical pollutants together continue to degrade China's waterways. In autumn 2005, two major cities - Harbin and Guangzhou - had their water supplies cut off for days because their river sources had suffered acute chemical spills from state-owned factories.



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