Wednesday, April 18, 2012

China’s Economic Reform Requires Political Reform

By Jian Tianlun

China’s economic reforms have reached a critical point, and the economy designed to support the Communist Party’s rule now calls that rule into question.

When Deng Xiaoping proposed economic reforms in 1978, the Chinese Communist Party (CCP) found maintaining its rule difficult. The Chinese economy was about to collapse, and people’s daily living had become a problem.

The economic reforms were meant to preserve the rule of the CCP by turning the economic situation around. The reforms that took place afterward—the dual-price system, joint-stock ownership, special economic zones, stock listings, privatization of real estate, and so on—were all based on Deng’s strategy of “letting some people get rich first.”

The result of economic reform has been a rich state and a rich Communist Party with poor citizens.

 Of course, the “some people” who got rich were the leaders of the CCP and their children.

Getting Rich

China’s high growth over the last 30 years has relied heavily on manufacturing for export, investment, and real estate.

In order to encourage exports and open up the international market, China artificially undervalued the RMB’s exchange rates. As a result, a product that did not make money in the domestic market would, once exported to foreign countries, attain profit margins of 30 percent, 50 percent, or even more, after foreign exchange earnings were converted into yuan.

Since the 1980s, the foreign-export sector became most sought-after, and the children and grandchildren of Communist Party officials have made big money in it.

In the 1980s, China’s central government allowed some producers to sell products at two different prices: a state-set price, for centrally rationed supplies, and a higher, free-market price. Under such a dual-price system, many officials who controlled goods at the state-set prices sold them at the much higher market prices, making a fortune. Corruption has been out of control ever since.

Later on, to set up joint-ventures, China exchanged land and factories for foreign investment and technology. The land and factories are state assets and belong to the people. However, the profits generated from such joint ventures did not go to the people. The profits went into pockets of the Party officials and factory directors.

The reform of state-owned enterprises has resulted in a small number of officials and investors owning the state assets, while a large number of workers have been laid off, losing their benefits and retirement funds.

Presidents and general managers of the big state-owned enterprises are all appointed by the central government. Some of these enterprises, through selling the company’s state-owned assets and listing the enterprises on the stock market, have generated large amounts of cash. The Party officials and factory directors are the ones who have benefited.

Then came the “housing reforms” in the late1990s. In effect, the practice has been to sell state-controlled land. When the land is sold, more investment comes in, the land price goes up, and GDP growth accelerates.

Higher growth is then taken as evidence of good administrative performance, providing better chances of promotion for these officials. At the same time, by colluding with real estate developers, the officials selling the land share in the profits of development.

Prior to the Tiananmen Square massacre in 1989, the CCP openly proclaimed the imperative of “upholding the leadership of the CCP.” After the massacre, the CCP began talking instead about “maintaining social stability.” The CCP softened its tone, but the meaning remained the same: The first priority was to maintain the Party’s rule. Economic reform was simply a means to that end.

Economic Reforms Are Failing

But the Chinese economy can no longer be counted on to maintain social stability.

The export sector is slowing down. Since the global financial crisis, economic growth has significantly slowed worldwide. The Eurozone, China’s largest export market, is experiencing a serious debt crisis, which has greatly affected China’s exports. The slowdown in other regions has also decreased the demand for Chinese exports.

The exchange rate does not provide as big a boost as it formerly did. As China’s trading partners have been denouncing more loudly how China’s long-undervalued exchange rates have disrupted world trade, the regime has revalued the exchange rates in recent years. Consequently, China’s exporters are now facing higher costs, as they get less of a subsidy through the exchange rate.

The supply of cheap, domestic labor is decreasing. Wages have risen, pushing up labor costs for exporters as well. This reduces the exporters’ profit margins and weakens the competitiveness of Chinese products in international markets.

High rates of investment helped China turn itself into the world’s factory. But growth through high investment is not sustainable.

Many manufacturing industries, such as automobiles and steel, are facing overcapacity. Yet revenues for these industries come mainly from exports. As local wages rise and the yuan revalues, export costs are going up at the same time that global demand is declining. The prospects for high profits are dwindling. In recent years, some foreign companies have started withdrawing investments from China.

In the stock market, the Shanghai Composite Index dropped 20.5 percent from last April to March 28. During the same period, the U.S. Standard & Poor’s index rose 11.9 percent.

China’s economy is no longer the same as it was 10 years ago.

Since last August and September, many stock markets have started to recover, but the Chinese stock market has diverged from the global stock markets, trending downward. This means that investors both inside and outside of China are not optimistic about the Chinese economy.

The real estate market in mainland China took a turn last October and in general has been trending downward. The sales volume and housing prices have been declining throughout the country.

Various economic indicators are painting the same picture. China’s economy is no longer the same as it was 10 years ago, and the environment for high growth does not seem to exist anymore. It is also impossible to continue in this way.

The economy can no longer grow by high investment, exports propped up by an undervalued currency, and an ever-expanding real estate bubble. But without high economic growth, many social problems will emerge.

China’s 30 years of economic reforms have widened income inequality in the country. There is a stark contrast between the officials and those connected to them who suddenly got rich by taking advantage of the economic reform policies and the landless farmers and laid-off workers.

The recent Wang Lijun-Bo Xilai scandal has put these economic truths in a new light. When former Chongqing police chief Wang Lijun fled for his life to the U.S. Consulate in Chengdu on Feb. 6, he ripped open the CCP’s facade for the Chinese public to see the truth about the Party.

The Party may want to pose as the public’s benefactor that maintains stability, but behind that public-spirited pose, the Party leaders are locked in a desperate struggle for power. The faltering economic growth and the clear recognition of what the Party is have combined to knock out the last props maintaining the CCP’s legitimacy. If it does not change, the public will force it to.

Let Everyone Get Rich

The basis of China’s economy must change, and that will require changing the basis of its politics. The principle of the economy must change from “let some people get rich first” to “let everyone get rich.”

The economic reforms, up to now, have been designed to maintain the rule of the CCP and enrich CCP officials. The result has been a rich state and a rich Party with poor citizens. The economic reforms should be designed, instead, to bring benefits to the general public.

Bringing about this change requires changing how officials are evaluated, which requires political reform. Let the general public evaluate and elect government officials.

This political reform will require an independent judicial system. And a new administrative system is needed so that political power cannot be used to obtain profits. Right now, the capitalization of power is a very serious issue in China.

If the CCP does not end its single-party rule, then no political reform is possible. After more than six decades of the CCP regime, the Chinese people no longer believe that the CCP can transform itself. Only by following the public will and abandoning the CCP can China move forward. The economic reality has made this clear.

Note:  This article was first published on the Epoch Times on April 17, 2012.