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CHAPTER 9
THE ECONOMIC, SOCIAL, AND POLITICAL SITUATION IN CHINA
By the mid-1990s, China had accomplished unprecedented achievements in
economic development. The Chinese economy expanded more than fourfold between
1978 and 1995. In that period, Chinese GDP per capita grew at the blistering rate of 8
percent a year and 200 million Chinese were lifted out of absolute poverty. 1 Despite the
fact that China’s inflation (measured by the retail price index) rose to a 21.7 percent
record high in 1994 due to double-digit growth rates during 1992-94, by the end of 1996
inflation was brought down to 6.1 percent, with only a small reduction in economic
growth, which was still 9.7 percent for 1996. In economic parlance, the Chinese economy
achieved a “soft landing.”
Nonetheless, a 1997 World Bank report pointed out that China’s rapid growth and
structural changes, while resolving many problems, created new challenges: periods of
macroeconomic instability stemming from partially completed reforms, increased
unemployment, and income insecurity; mounting environmental pressures, especially in
urban areas; rising costs of food self-sufficiency; growing inequality and relatively high
poverty levels, particular in remote areas; and a prickly occasionally hostile world
environment. In addition, the report highlighted that the risks the Chinese economy faces
in the future are complex, immediate, and fundamental. What is more, several risks are
1
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 1-2.
294
interrelated and could derail the economy. First is the link between banks and state
enterprises. Second is the nexus between state enterprise reforms, labor markets, and
equality. Third, delayed enterprise reforms could slow growth and hamper efforts to clean
up the environment. Fourth is the government’s fiscal position and the system of
intergovernmental transfers.2
Nicholas Lardy warned that the current stage of reform is in many ways more
difficult than earlier stages of reform. Economically it is more complex since it requires
closely coordinated reforms of state enterprises, the financial system, and tax
administration. Politically it is extremely challenging because future reforms would lead
to a staggering unemployment rate and reduce the real incomes of a significant portion of
the population, at least on a transitory basis.3
China’s economic development has benefited greatly by integrating itself into the
world economy as discussed in the Chapter 8, while the world economy in turn influences
Chinese economic development and reforms. In 1997-99, the AFC not only negatively
influenced China’s economy but also sent a warning to China’s leaders concerning the
country’s financial situation. Furthermore, although China’s entry into the WTO4 will
contribute to long-term efficiency and economic growth, China will first have to pay
substantial, short-term transitional costs. The AFC is a catalyst for China to accelerate its
domestic reforms and the WTO is the convergence point where China’s domestic agenda
and external reforms meet. Beijing must take into consideration both international
economic constraints and opportunities when designing its domestic economic agenda.
2
3
4
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 2, 99.
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), p. 221.
China formally became a member of the WTO on December 12, 2001.
295
In addition to the above challenges, the Chinese government faces a serious threat of
rampant official corruption and inflation (macro-economic instability), which were two
major issues fueling widespread social discontent and the demonstrations of 1989. In light
of the fall of Suharto’s Indonesian regime in 1998, Pei Minxin warned that growth-based
legitimacy is very unreliable since the Indonesian economy maintained one of the highest
rates of growth in the world in the post-World War II period. He argues that due to
Suharto’s family engaging in corruption activities, the shakiness of his support became
clear only when, barely eight months into Indonesia’s worst economic crisis in three
decades, angry citizens and the country’s armed forces – supposedly the mainstay of the
Suharto regime – forced the leader out of office. He argues that “a leadership split, an
economic crisis, or an external setback should set off a chain reaction leading to a
Suharto-type collapse in China.”5
The prospect of the Chinese economy overcoming these challenges is not optimistic.
Pei Minxin warns that the Chinese government’s ability to overcome these short-term
difficulties is not assured because of the inherent weaknesses of the current Chinese
political system and accumulated social and political stresses in Chinese society. 6 In early
2001, Kenneth Lieberthal also warned: “Current challenges may overwhelm the
capacities of the Chinese system and produce fundamental instability. This possibility
looms especially large over the next four years.”7 The following sections will further
examine the interlocking economic, social, environmental, and political challenges China
faced in the late-1990s.
5
6
7
Minxin Pei, “Asia’s Political Lessons,” China Business Review, September-October 1999, p. 10. Minxin
Pei, “Will China Become Another Indonesia?,” Foreign Policy, Fall 1999, p. 108.
Minxin Pei, “Future Shock: The WTO and Political Change in China,” Carnegie Endowment for
International Peace Policy Brief, vol. 1, no. 3 (February 2001), p. 1.
Kenneth Lieberthal, U.S. Policy Toward China, Brookings Institution Policy Brief #72 (March 2001),
http://www.brookings.edu/comm/policybriefs/pb072/pb072.htm, accessed March 5, 2001, p. 2-4 of 8.
296
I. The Fiscal Constraint of the Chinese Government
Over the past two decades, the resources available to the Chinese state to tackle the
staggering challenges ahead have been declining in terms of both the share of state budget
and the share of disposable revenue8 for the central government compared to its GDP.
State fiscal revenues declined from 28.4 percent of GDP in 1979 to 10.7 percent in 1995,
and then rose slightly to 14 percent in 1999. State expenditures declined from 31.8
percent of GDP in 1979 to 11.7 percent of GDP in 1995 and then up to 16.1 percent in
1999, well below the developing country average of 32 percent. 9 In particular, the share
of resources controlled by the Chinese central government in terms of GDP has been
declining rapidly. Despite the shares of collected revenue of the Chinese central
government maintained at around 5-7 percent of GDP in the 1980s and 1990s, the share
of its expenditure to GDP declined sharply, from 16.2 percent in 1979 to 3.2 percent in
1996, then up slightly to 5.1 percent in 1999. (See Table 9.1.)10
Table 9.1. China’s Fiscal Position, 1979-99
Period
State Revenue (RMB billion)
Share of GDP (%)
State Expenditure (RMB billion)
1979
114.6
28.4
128.2
1988
235.7
15.8
249.1
8
1994
521.8
11.2
579.3
1995
624.2
10.7
682.4
1996
740.8
10.9
793.8
1997 1998 1999
865.1 987.6 1144.4
11.6
12.4
14.0
923.4 1079.8 1318.8
Disposable revenue is the sum of centrally-collected revenue and remittances from the provinces, through
revenue sharing, minus regime subsidies and tax return from the central government to local
governments. See further discussion in Chapter 10.
9
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 24-25.
10
Before state-owned enterprise (SOE) reforms, SOE investment was accounted as the expenditure of the
central government. Now, the central government is no longer responsible for that investment. Therefore,
in addition to other reasons, this change also contributes to the reduction of overall expenditure of the
central government.
297
Share of GDP (%)
Collected revenue by the central
government (RMB billion)
Share of GDP (%)
Expenditure of the central government
(RMB billion)
Share of GDP (%)
31.8
23.1
16.7
77.5
12.4
290.7
11.7
325.7
11.7
366.1
12.4
422.7
13.6
489.2
16.1
584.9
5.7
65.5
5.2
84.5
6.2
175.4
5.6
199.5
5.4
215.1
5.7
253.3
6.2
312.6
7.1
415.2
16.2
5.7
3.8
3.4
3.2
3.4
3.9
5.1
Note:
1.
The state revenue refers to revenue actually collected by the central and local governments.
2.
Revenue in this table does not include revenue from domestic and foreign borrowings, and expenditure
does not include the payment of the principal and interest of domestic and foreign debts and the
expenditure for capital construction using foreign loans.
Source:
National Bureau of Statistics (PRC), China Statistical Yearbook, no. 19 (2000) (Beijing: China Statistics
Press, 2000), pp. 256, 267, 268.
This situation has greatly limited Beijing’s ability to respond to the inevitable need
to spend more on economic development, social reforms, and environmental protection.
According to the 1997 World Bank report, the overall annual expenditure shortfall in the
high-priority areas, such as spending on health, education, poverty alleviation, pensions,
infrastructure, and environment protection, has been estimated at 4.6 percent of GDP or
135 percent of the 1997 total expenditure of the central government.11 According to
Nicholas Lardy’s estimate, total annual social expenditure financed by enterprises that
should be shifted to fiscal financing might amount to 3.3 percent of GDP.12 The World
Bank estimates that between 1995 and 2004 China would need to invest $744 billion,
about RMB 6 trillion, or 103 percent of its 1995 GDP, in electric power,
telecommunications, transportation, and water and sanitation infrastructure.13
11
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 102-103.
12
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), p. 161.
13
World Bank, Infrastructure Development in East Asia and Pacific: Towards a New Public-Private
Partnership (Washington, D.C.: World Bank, 1995), p. 4.
298
The above estimate is very conservative because it does not include extra spending
to support future economic reforms – such as payments for laid-off workers of
state-owned enterprises (SOEs), monetizing housing benefits, or the costs of reforming
the banking system. For example, in early 1999, Chen Qingtai, vice minister of the State
Economic and Trade Commission, pointed out that the direct cost for reforming SOEs in
the next three years would range from RMB 600 billion to 800 billion (more than twice
the 1998 total central government expenditures).14 In 2001, Dai Xianglong, governor of
the People’s Bank of China (the central bank), admitted that China’s non-performing
loans (NPLs) were as high as RMB 3,549 billion or about 40 percent of its GDP in 2000,
including NPLs transferred to the asset management companies (AMCs). 15 According to
Pieter Bottelier, the aggregate stock of remaining NPLs plus those transferred to the
AMCs may have ranged from RMB 4,000 to 4,500 billion by the end of 2000. Including
losses accumulated elsewhere in the public financial system, Bottelier estimates that total
irrecoverable losses in the state financial sector are RMB 3,700-4,250 billion (US$
450-510 billion or 45-50 percent of GDP). These losses ultimately need to be paid by the
central government.
16
Furthermore, to maintain the necessary economic growth rate after 1997, the
government resorted to fiscal expansion to boost domestic demand. The State Council
issued RMB 100 billion treasury bonds in 1998, RMB 110 billion in 1999, and RMB 150
billion in 2000, to finance investment to improve the country’s infrastructure. In addition,
14
15
16
“Reform of State-Owned Enterprises Needs 800 Billion Yuan in Next 3 Years” (in Chinese), Hong Kong
Ming Pao, November 11, 1998, p. b15, in FBIS-CHI-98-317.
Zhang-rong Kang, “Dai Xianglong: Commercial Banks’ NPLs Account for 25%,” Gongshang Shibao
[Commerce Times], March 27, 2001.
Pieter Bottelier, “China’s Domestic Debts: Will They Interfere with Financial Sector Liberalization and
WTO Commitments? Issues and Strategies,” Discussion paper for Wilton Park Conference #654 on
Economic and Enterprise Reform in China: the Challenges for Government and Business, November 5-8,
2001, pp. 5-6.
299
in 1998 the State Council also issued RMB 270 billion of special treasury bonds to
recapitalize four major state-owned commercial banks. The central government also
provided RMB 18 billion for reform of SOEs and for supporting post-flood rehabilitation.
According to Chinese Finance Minister Xiang Huaicheng, implementation of a pro-active
fiscal policy has stimulated economic growth by 1.5 percentage points in 1998, 2.0
percentage points in 1999, and 1.7 percentage points in 2000. These bonds totaled RMB
648 billion and were equal to more than two times the 1998 total expenditures of the
central government. This huge borrowing reflects Beijing’s extremely limited resources
and the significance of maintaining rapid economic growth for China. If this practice
continues for a sustained period, this will generate enormous fiscal burdens in the future,
as these bonds will have to be serviced.17
More specifically, while faced with ballooning demand for expenditures, the central
government faces a serious difficulty in raising additional revenues. For instance, the
Ministry of Finance proposed amending the Highway Law by replacing ad hoc
automobile and road fees collected by provincial and local governments with a uniform
national fuel tax, which would generate about RMB 100 billion of tax revenue, an
increase of 20 percent in central government collected revenues. A vote on the
amendment was postponed twice and in spring 1999 this proposal was voted down by the
Standing Committee of the National People’s Congress (NPC) because of strong local
opposition.18 In addition, some local authorities often maximize their revenues at the
17
18
Chu-yuan Cheng, “China’s Economy: Recent Development and Long-Term Prospects,” Issues & Studies,
vol. 36, no. 5 (September/October 2000), pp. 130-132. “Major Decision, Successful Practice – State
Planning Commission Official Answers Reporter’s Questions on Three-year Treasury Bond
Investments” (in Chinese), Beijing Xinhua Domestic Service, December 29, 2000, in
FBIS-CHI-2000-1229. “Xiang Huaicheng on PRC’s ‘Pro-Active Fiscal Policy’ in Report to NPC,”
Beijing Xinhua, March 6, 2001, in FBIS-CHI-2001-0306.
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
300
expense of tax contributions to the central government. Local authorities often grant local
SOEs generous exemptions from the taxes that are shared with the central government,
but preserve their own portion of tax revenues mostly untouched.19
Since the requirements for central government expenditures have exceeded available
funds considerably and continue to increase, the Chinese government has incurred an
increasingly large fiscal deficit and debt. The budget deficit increased from RMB 1.4
billion (0.3 percent of GDP) in 1980, to RMB 65.5 billion (1.0 percent) in 1996, and then
jumped to RMB 259.8 billion (2.9 percent) in 2000. (See Table 9.2.)
Table 9.2. The Fiscal Deficit of the Chinese Central Government, 1980-2000
Deficit (RMB billion)
Deficit/GDP (%)
1980
1.4
0.3
1984
4.8
0.7
1988
19.4
1.3
1992
23.1
0.9
1994
67.6
1.5
1996
65.5
1.0
1998
95.8
1.2
1999
179.7
2.2
2000
259.8
2.9
Note:
Fiscal deficit = total debt incurred – total payments for the debts.
Source:
National Bureau of Statistics (PRC), China Statistical Yearbook, no. 18 (1999) (Beijing: China Statistics
Press, 1999), pp. 266, 284.
Xinhua, quoting financial minister reports to the National People’s Congress, 2000-2001.
The 2000 figure almost reaches the internationally accepted alarm level of three
percent. 20 As a matter of fact, Chinese official figures gravely underestimate the
seriousness of the fiscal problem in China for two reasons: First, the World Bank argues
that more accurate representation of government activities is provided by the concept of
the consolidated government deficit. This consists of the fiscal deficit plus the part of the
People’s Bank of China (central bank) lending to the financial system that finances the
19
20
Reform, Stanford University, November 18-20, 1999, pp. 12-13.
Chi Lo, “China’s Fiscal Time Bomb,” China Business Review, September/October 1999, p. 17.
Junrong Tian, “Continue to Arose Nongovernmental Investment” (in Chinese), Beijing Renmin Ribao,
301
government-directed expenditure of the SOEs. Consequently, between 1986 and 1994 the
consolidated deficit may have averaged from 4.9 to 5.7 percent of GDP – more than triple
the 1.5 percent deficit in the 1994 official budget.21 In addition, Nicholas Lardy estimates
that by the mid-1990s, the broader public sector non-financial deficit had been running at
an unsustainable level of over 10 percent of GDP for almost a decade.22
Second, the Chinese government expenditures significantly depend on debt
financing. The Chinese government incurred only RMB 3.5 billion (0.9 percent of GDP)
of debt in 1979 and RMB 27.1 billion (1.8 percent of GDP) in 1988. Beginning in 1994,
however, the government was precluded from borrowing from the central bank to finance
its budget deficit. As a result, debt incurred by the government jumped from RMB 73.9
billion (2.1 percent of GDP) in 1994, to RMB 371.5 billion (4.5 percent of GDP) in 1999.
Thus, the stock of outstanding treasury bonds leaped from RMB 157.2 billion (4.5 percent
of GDP) in 1994 to RMB 996.5 billion (12.2 percent of GDP) in 1999. (See Table 9.3.)
According to Pei Minxin, the Chinese central government borrowed 55.2 cents for every
dollar it spent in 1997.23 According to Nicholas Lardy, by 1999 about 70 percent of
central government expenditure was financed by debt.24
Table 9.3. The Fiscal Situation of the Chinese Central Government, 1979-99
Period
Debt incurred (RMB billion)
Debt incurred/GDP (%)
Balance of cumulative government
bonds (RMB billion)
21
22
23
24
1979
3.5
0.9
n.a.
1988 1993 1994 1995 1996 1997 1998 1999
27.1 73.9 117.5 155.0 196.7 247.7 331.1 371.5
1.8
2.1
2.5
2.7
2.9
3.3
4.2
4.5
n.a. 157.2 257.8 355.9 462.0 550.9 786.2 996.5
April 20, 1999, p. 1, in FBIS-CHI-1999-0426.
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), p. 28.
Nicholas R. Lardy, China’s Unfinished Economic Revolution, (Washington, D.C.: Brookings Institution
Press, 1998), p. 5.
Minxin Pei, “Will China Become Another Indonesia?,” Foreign Policy, Fall 1999, p. 100.
David M. Lampton, “Rapporteur’s Summary,” in Dick Clark (ed.), U.S.-China Relations (Washington,
D.C.: Aspen Institute, 1999), p. 7.
302
Government bonds/GDP (%)
n.a.
n.a.
4.5
5.5
6.2
6.8
7.5
10.1
12.2
Note:
Government bonds include sovereign bonds, state investment bonds, and state investment company bonds.
Source:
National Bureau of Statistics (PRC), China Statistical Yearbook, no. 19 (2000) (Beijing: China Statistics
Press, 2000), p. 259.
Haocheng Gong and Guoqing Dai (eds.), 2000 Zhongguo Jinrong Fazhan Baogao [2000 China’s Financial
Development Report] (Shanghai: Shanghai Caijin Daxue Chubanshe, 2000), p. 25.
In addition, Nicholas Lardy estimated that the balance of outstanding non-treasury
government bonds, mostly issued by the State Development Bank, at year-end 1998 was
RMB 532.2 billion (7 percent of GDP). Inclusive of these bonds, according to Lardy, by
year-end 1998 explicit government debt was RMB 1606.1 billion (20.5 percent of GDP),
almost five times the level of 1993.25 According to World Bank’s estimate, Chinese
domestic public sector debt, including treasury bonds, policy financial bonds, and other
financial bonds, increased from 12.3 percent of GDP in 1997, to 16.4 percent in 1998, and
20.7 percent in 1999.26
This estimate excludes corporate bonds issued by state-owned manufacturing firms,
as well as other contingent or implicit government liabilities such as non-performing
loans extended by state-owned banks, pension arrears of the government and
government-owned firms, and unfunded pension liabilities of current employees of the
government and government-owned firms. It also excludes implicit liabilities of local
governments. For example, Nicholas Lardy argues that any serious attempt to recapitalize
the financial system will immediately push government debt to a level of over 50 percent
25
26
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 14-19.
World Bank, “China,” China Quarterly, September 18, 2000, p.15.
303
of output.27 According to a World Bank estimate, the implicit state pension debt was
about 50 percent of GDP in 1994.28
According to Pieter Bottelier’s estimate, the aggregate of registered, implicit, and
contingency state debt – sovereign and non-sovereign; foreign and domestic – was about
133-192 percent of GDP in 2000. “Contingency debt” includes government guaranteed
debt, the unfunded “old” pension debt, the non-performing loan portfolio of state banks
(now partially transferred to state-owned AMCs), and under-capitalization of state banks
and enterprises. Sovereign state debt -- external and internal -- accounts for 21 percent of
GDP; domestic bonds issued by AMCs and State Policy banks, 25 percent; contingent
NPL debt, 37-44 percent of GDP; the present value of unfunded future state pension
liabilities, 45-95 percent; the present value of the funds to recapitalize SOEs, 5-7
percent.29 According to another estimate by the World Bank, China’s explicit and implicit
debt was over 173 percent of GDP in 2000. Furthermore, new hidden debt in the form of
the under-capitalization of the financial system is being accumulated in state-owned
banks and enterprises at a conservatively estimated rate of 2 percent of GDP annually.30
Moreover, the government’s increasing reliance on debt financing for its spending
needs make the payment and servicing of the public debt a mounting concern. In 1998,
debt servicing and repayment accounted for RMB 235.3 billion, or over 70 percent of
new government debt incurred, rising from RMB 49.9 billion, or 42.5 percent in 1994.
27
28
29
30
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 20-37.
World Bank, China: Pension System Reform (Washington, D.C.: World Bank, 1996), pp. ix, 2, 15, 26
Pieter Bottelier, “China’s Domestic Debts: Will They Interfere with Financial Sector Liberalization and
WTO Commitments? Issues and Strategies,” Discussion paper for Wilton Park Conference #654 on
Economic and Enterprise Reform in China: the Challenges for Government and Business, November 5-8,
2001, pp. 8-9.
World Bank, “China,” issued on September 27, 2001.
304
(See Table 9.4.) The share of fiscal revenue spent on debt service and repayment rose to
24 percent of total government fiscal revenue in 1998, from less than 3 percent in 1989.
According to Nicholas Lardy’s estimate, interest payments on treasury debt in 1999 were
estimated to be RMB 83 billion, compared to RMB 5.2 billion in 1992, a 16-fold increase
in 7 years. Interest burden, a percent of central government outlays exclusive of transfers
to local governments, has quadrupled from less than 4 percent in 1993 to an estimated 19
percent in 1998, and 17 percent in 1999. Therefore, China cannot continue to service its
debt for long by simply issuing more. Worse still, if bond investors are worried about the
government’s credit or political instability, they will demand sharply higher interest rates,
causing government debt to spiral.31
Table 9.4. Chinese Government Debt Finance, 1985-99
1985
Total debt incurred (RMB billion)
9.0
Total payment for the debts (RMB billion)
4.0
Ratio of total payment for the debts to debt incurred 44.4
(%)
1990
37.5
19.0
50.7
1994
117.5
49.9
42.5
1995
155.0
87.8
56.7
1996
196.7
131.1
66.7
1997
247.7
191.8
77.4
1998
331.1
235.3
71.1
1999
371.5
192.3
51.8
Source:
National Bureau of Statistics (PRC), China Statistical Yearbook, no. 19 (2000) (Beijing: China Statistics
Press, 2000), pp. 259, 266.
Overall, China’s long-term fiscal sustainability is heavily threatened by the
contingent liabilities of the banking sector, the fiscal obligations arising from reform of
SOEs and the social security system, and mounting debts. Escalating fiscal pressures pose
a danger of renewed inflation if the government is tempted to monetize new debt. At this
31
Chi Lo, “China’s Fiscal Time Bomb,” China Business Review, September/October 1999, p. 18. Nicholas
R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the Conference on
Policy Reform in China, Center for Research on Economic Development and Policy Reform, Stanford
University, November 18-20, 1999, pp. 14-17. William Gamble, “The Middle Kingdom Runs Dry,”
Foreign Affairs, vol. 79, no. 6 (November/December 2000), p. 20.
305
moment, the Chinese state obviously does not have sufficient resources to address
necessary economic and social reforms and environmental protection. This could trigger a
downward spiral between economic development and social stability, which in turn
jeopardizes political legitimacy. These connected challenges for the Chinese government
will be further analyzed in the following sections.
II. State-owned Enterprise Reforms
By 1997, there were over 300,000 State-Owned Enterprises (SOEs) in China’s
economy, including those in the service sector. With a total of 120 million workers, the
SOE sector employs 17.2 percent of total employed persons, and accounts for 65 percent
of total urban employment. Most SOEs provide an extensive range of social services to
their employees -- such as housing, education, pensions, and medical care. Of 300,000
SOEs, there were over 118,000 industrial SOEs, including 4,700 large enterprises and
11,000 medium enterprises. Despite the fact that between 1978 and 1996, the SOEs’ share
of total industrial output fell from 78 percent to 30 percent, SOEs still accounted for over
one-half of total assets, two-thirds of urban employment and almost three-quarters of
investment in China. In addition, SOEs continue to absorb more than three-fourths of
domestic credit, and their borrowing comprises about 60 percent of the total nonfinancial
public-sector deficit.32 In 2000, outstanding loans by all financial institutions to SOEs
still accounted for more than 50 percent of the total loan portfolio.33
Despite the dramatic reduction of their share of total industrial output, SOEs are still
32
International Monetary Fund, IMF Staff Country Report, no. 97/72, pp. 5-8. World Bank, China’s
Management of Enterprise Assets: The State as Shareholder (Washington, D.C.: World Bank, 1997), p.
xi.
306
the primary sources of tax revenue for all government levels in China, from the center to
the urban localities. In 1978, profits and taxes handed over to the state by SOEs
accounted for about 87 percent of the state revenue. In recent years, the Chinese
government’s continued dependence upon SOEs for fiscal revenue is striking. For
instance, in 1995, SOEs produced only 35 percent of China’s industrial output value but
still contributed 71 percent of state revenue, and in 1998 the level was still as high as 55
percent.34
The Inefficiency and Losses of State-Owned Enterprises
However, the majority of SOEs are inefficient and unprofitable. The profits of
industrial SOEs have declined precipitously from RMB 73.8 billion (8.2 percent of GDP)
in 1985 to only RMB 41.3 billion (0.6 percent of GDP) in 1996. The ratio of pre-tax
profits to total SOE fixed assets significantly declined from 22.4 percent in 1985 to 7.9
percent in 1996. (See Table 9.5.) In addition, according to a 1999 official survey on the
production capacity of more than 900 major industrial products, the utilization ratio of
production capacity for two thirds of SOEs was under 50 percent.35
Table 9.5. The Financial Indicators of Chinese State-Owned Enterprises, 1985-96
Unit: RMB billion
Year
33
34
35
Total fixed assets
Total profits
Total loss
Total tax
Ratio of pre-tax profits
World Bank, “China,” September 27, 2001.
Edward S. Steinfeld, Forging Reform in China: The Fate of State-Owned Industry (New York:
Cambridge University Press, 1998), p. 17. Jiao Ran and Zhenjun, “State-Owned Enterprises as Viewed
From National Conditions” (in Chinese), Beijing Xinhua Domestic Service, September 17, 1999, in
FBIS-CHI-1999-0918.
Lo Mei, “Jiang Reported to Steer State Firm Reform” (in Chinese) Hong Kong Kuang Chiao Ching, no.
322, July 16, 1999, in FBIS-CHI-1999-0805. International Monetary Fund, IMF Staff Country Report, no.
97/72, pp. 6-8.
307
1985
1990
1992
1994
1996
595.6
1161.0
1567.0
2310.2
3476.5
73.8
38.8
53.5
82.9
41.3
3.2
34.9
36.9
48.3
79.1
59.6
111.5
140.9
204.7
232.4
to total fixed assets (%)
22.4
12.9
12.4
12.5
7.9
Source:
National Bureau of Statistics (PRC), China Statistical Yearbook (1997), no. 16 (Beijing: China Statistics
Press, 1997).
As a result of inefficiency and uncompetitiveness, many SOEs are generating
enormous losses.36 In 1985, 9.6 percent of all industrial SOEs declared losses. The share
of loss-making SOEs has risen steadily. In 1998, 45 percent of SOEs were operating at a
loss, even under generous PRC accounting standards. The SOE losses jumped from RMB
3.2 billion (0.4 percent of GDP) in 1985 to RMB 79.1 billion (1.2 percent of GDP) in
1996, and further up to RMB 102.3 billion (1.3 percent of GDP) in 1998. In 1996, for the
first time since 1949, the SOE sector as a whole generated a loss, which means that, other
than taxes, the state was not receiving any net return from its massive investment in the
state sector. Even large and medium SOEs were no exception. In 1997, about 42 percent
or 6,599 of 15,700 large and medium-sized SOEs were making losses. As of March 1999,
about 30 percent or 2,300 of 7,600 large and medium-sized SOEs were running at a loss.
These losses were absorbed by government subsidies, inter-firm debts, and, more
importantly, state bank loans.37
36
37
There is no proper accounting system on SOE profits and revenues. Sometimes SOEs might overstate
profits for managers to get the credit of achievement; sometimes SOEs might overstate debts in order to
get loans from state banks. As a result, the declared losses of the SOEs were not very reliable.
Edward S. Steinfeld, Forging Reform in China: The Fate of State-Owned Industry (New York:
Cambridge University Press, 1998), p. 18. Yuh-jiun Lin, “The Significance of China’s Entry into the
WTO for State-Owned Enterprise Reform,”
http://ww.dsis.org.tw/peaceforum/papers/2000-01/ME9912002e.htm, accessed November 8, 2000, p. 1
of 5. “China Industrial Firms Profits Down 17 Pct in 1998,” Reuters, February 26, 1998, 3:43 am Eastern
Time. Chen Jing and Chen Jian, “Accelerating Development Is the Fundamental Way Out” (in Chinese),
Renmin Ribao [People’s Daily] (Overseas edition), March 18, 2000, p. 3. Tian Zhu, “Restructuring
China’s State-Owned Enterprises: A Corporate Governance Perspective,” in Baizhu Chen, J. Kimball
308
The Chinese government claimed that, by the end of 2000, the 6,599 loss-making
large and medium-sized SOEs in 1997 had been cut by more than 70 percent. However,
during these three years, according to Chinese officials, “the factor of state’s policy
support, indeed, played an important role,” including discount interest rates for technical
transformation, debt-to-equity swap, interest rate reduction, and tax refund. In particular,
much of the improvement of the performance of many loss-making SOEs claimed by the
Chinese government resulted from the AMCs’ debt-for-equity swap program, which has
significantly reduced the interest expense for the SOEs.38
Furthermore, there has been an extraordinary build up of unsold and unsaleable
inventories over the past decade. According to Chinese statistics, the inventory of goods
increased by RMB 460 billion, or 6.6 percent of GDP in 1996. From 1990 to 1998,
China’s additions to inventories averaged 5.7 percent of GDP per year. By 1997 the World
Bank reports that in some years stagnant SOE inventories exceeded 10 percent of GDP. In
comparison, in the United States and Japan, inventory was only 0.5 percent on average.
This problem was exacerbated by the easing of credit since 1997 in an attempt to boost
growth. Investment by state-owned units in 1998 was more than RMB 2,210 billion, an
increase of 19.5 percent. As a result, more than 70 percent of Chinese commodities are
oversupplied despite a 9.6 percent real growth in total retail sales in 1998.39
38
39
Dietrich, and Yi Fang (eds.), Financial Market Reform in China: Progress, Problems, and Prospects
(Boulder, Colorado: Westview, 2000), pp. 349-350. Si Liang, “This Year China Actively Opens Up New
Prospects for Reform of State-Owned Enterprises” (in Chinese), Hong Kong Zhongguo Tongxun She,
March 14, 1999, in FBIS-CHI-1999-0329. Nicholas R. Lardy, China’s Unfinished Economic Revolution
(Washington, D.C.: Brookings Institution Press, 1998), pp. 34-38.
“PRC State Development Planning Commission’s Zeng Peiyan to NPC on SOE Reform,” Beijing
Xinhua, March 6, 2001, in FBIS-CHI-2001-0306. Szu Liang, “Perspective of China’s Economic Issues
in the New Century (Part 6)” (in Chinese), Hong Kong Zhongguo Tongxun She, February 20, 2001, in
FBIS-CHI-2001-0220. Moody’s Investors Service Global Credit Research, “China: Banking System
Outlook,” August 2000, p. 9.
Zhong Min, “China Pursues an Appropriate Monetary Policy” (in Chinese), Hong Kong Zhongguo
Tongxun She, February 20, 1999, in FBIS-CHI-1999-0223. Raymond J. Blanchard, “The Heart of
Economic Reform,” China Business Review, January-February 1997, p. 24. Nicholas R. Lardy,
309
Financing State-Owned Enterprises
A large number of SOEs are heavily indebted due to huge losses. Increasingly, SOEs
have been borrowing money not only to purchase equipment and other inputs, and to
make capital investments, as in the past, but also to pay salaries, and to meet social
welfare needs and pension and tax obligations. Because the return on assets had
plummeted, by 1996 the proportion of their investment that SOEs could finance from
their after-tax retained earnings had dropped to only one-tenth. Thus, these firms have
become ever more dependent on credit to finance their activities. Despite the rapid fall in
their share of GDP, between 1990 and 1998 SOE borrowing hovered at around 81 percent
of outstanding state bank loans. In 1998, the borrowing of SOEs stood at RMB 5,516
billion, or 81 percent of all outstanding state bank loans.40
As a result, SOEs are highly leveraged in debt. In 1995, according to Nicholas Lardy,
the liability-asset ratios of China’s SOEs increased to 85 percent compared to an average
of 18.7 percent in 1980. A liability-asset ratio of 85 percent is the equivalent of a
debt-to-equity ratio of well over 500 percent. Pieter Bottelier estimates that as of 1998 the
average SOE debt-to-equity ratio was probably in the range of 400-700 percent. Thus, the
40
“Permanent Normal Trade Relations for China,” Brookings Institution Policy Brief no. 58 (May 2000),
<hhtp://www.brookings.edu/comm./policybriefs/pb058/pb58.htm>, accessed May 1, 2000, p. 2 of 6.
Shuqing Guo, Economy and Policy in 1996-1998 (in Chinese) (Guiyang, Guizhou: Guizhou Renmin
Chubanshe, 1999), p. 358. The Economist Intelligence Unit, Country Profile 2000: China, November 3,
2000,
<hhtp://db.eiu.com/reports.asp?title=Country+Profile+China&Valname=CPACNB&doc_id=677130>,
accessed February 5, 2001, p. 2 of 3. “PRC Sees 70 Percent of Commodities Oversupplied,” Beijing
Xinhua, March 19, 1999, in FBIS-CHI-1999-0319.
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), p. 4. Haocheng Gong and Guoqing Dai (eds.), 2000 Zhongguo Jinrong Fazhan Baogao
[2000 China’s Financial Development Report] (Shanghai: Shanghai Caijin Daxue Chubanshe, 2000), pp.
102-103.
310
average SOE was even more leveraged than the Korean chaebols before their 1997-99
crises, which were notorious for their high ratios of 300 to 400 percent. In comparison, a
normal ratio for large U.S. corporations is about 100-150 percent. Therefore, SOEs are so
highly leveraged that an economic slowdown could create liquidity problems for banks
and SOEs are very vulnerable to possible increases in interest rates.41
Since most SOEs are inefficient and lose money, China faces a considerable threat of
SOE bankruptcy and thus of a financial crisis. According to the World Bank, only 8
percent of industrial SOEs were fundamentally viable enterprises in the mid-1990s. As of
1997, more than 2,000 SOEs applied for bankruptcy, of which half had already declared
bankrupt, leaving an estimated RMB 62.1 billion ($7.5 billion) in uncollectible debt by
the four policy banks. In turn, these bad loans given to SOEs have seriously undermined a
weak state-dominated banking system. As of 1997, 15-20 percent of the loans SOEs
received from banks were used to refinance SOE interest payments. The most serious
threat to the safety of China’s financial system is the possibility that a large number of
SOEs would become unable to pay any interest on their bank debts, precipitating a grave
liquidity crisis. In such a crisis, China’s total financial losses would amount to more than
20 percent of GDP and over four times the country’s current bank capital.42
Beijing’s Task and Difficulties
The stagnant SOEs have created serious concerns for Beijing with respect to
41
42
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), p. 43. Pieter Bottelier, “How Stable Is China? An Economic Perspective,” in David
Shambaugh (ed.), Is China Stable?: Assessing the Factors (Washington, D.C.: George Washington
University, 1998), p. 69.
Raymond J. Blanchard, “The Heart of Economic Reform,” The China Business Review,
January-February 1997, pp. 17-24.
311
macro-economic stability. During the period of 21.7 percent inflation in 1994,
fixed-investment loans to SOEs by the four policy banks increased by 32 percent that year,
while lending to the private sector nominally declined by 42 percent and loans to urban
collectives went down by 7 percent. During the AFC, the government’s budgetary support
of SOEs reached almost 40 percent of the central government expenditures in 1997 and
1998 -- around RMB 100 billion in 1997 and around RMB 120 billion in 1998.43 All this
has the effect of starving the most efficient sectors of the economy for capital.44
In addition, inter-enterprise debt rose steadily in the 1990s by roughly RMB 100
billion per year to a level of over RMB 1 trillion (near four times the central government
expenditures, or 13 percent of GDP) by the end of 1997. By spilling over to the fiscal and
financial sector, these debts and budgetary support jeopardize other critical elements of
the government’s economic reform program, undermine resource allocation and
macroeconomic stability, and significantly undermine the effectiveness of government
monetary and fiscal policy.45
Beijing faces a very difficult decision. Pushing through fundamental reform of SOEs
is fraught with risks because of a rising unemployment and under-developed social
security system. SOE bankruptcies and lay-offs will generate unprecedented levels of
unemployment. According to official Chinese estimates, the labor surplus in SOEs stood
at 21.5 million persons at the late 1990s. According to the estimate by Kao Charng, the
labor surplus in SOEs was between 26.9 and 32.3 million persons. Given the current
defective social security system in China, this huge potential unemployment could lead to
43
44
45
Government’s budgetary support includes subsidies, turning enterprise debts into state capital and
writing off banks’ debts through recapitalizing banks.
Raymond J. Blanchard, “The Heart of Economic Reform,” The China Business Review,
January-February 1997, p. 17.
“The Product Inventory of Chinese Enterprises Reaches 3 Trillion,” China Daily, March 25, 1998.
312
social instability or even turmoil.46
Delaying or slowing the current reforms might mitigate some of the adverse social
and political consequences of reform, but such a delay would probably force China to
give up the opportunity to create a more efficient system of resource allocation and
utilization, which is necessary for sustainable rapid economic growth. As a matter of fact,
the Chinese leadership may have few alternatives but to push its current reform agenda
aggressively and herein lies the answer to why it pushed ahead with WTO entry under
stringent conditions in 1999-2001.
For example, delayed reforms and misdirected state investments are responsible for
massive excess capacity in many sectors of the economy, which largely contributes to the
deflationary pressures in 1997-2000, low returns on capital, and serious weaknesses in the
financial system. As NPLs accounted for at least 25 percent of total bank loans, increasing
SOE demand to borrow money may soon bring down the whole banking system. In
addition, budgetary support for SOEs has drained very limited state revenues.
Furthermore, a growing number of firms have discontinued or delayed making
contributions to local pension pools in the 1990s. Beijing needs to transfer pension, health,
and education obligations from state enterprises to government bodies before the crisis
bursts.47
46
47
Central Intelligence Agency, China’s Economy in 1995-97, APLA 97-10008, December 1997, p. 6.
Charng Kao, “Unemployment and Underemployment in Urban Areas of Mainland China,” Yuanjing
Jikan [Prospect Quarterly] (Taipei), vol. 1, no. 4 (October 2000), p. 75.
Pieter Bottelier, “China’s Economic Transition and the Significance of WTO membership,” The First
Huang Lian Memorial Lecture, Center for Research on Economic Development and Policy Reform,
Stanford University, November 17, 1999, pp. 3-4. Nicholas R. Lardy, “Sources of Macro Economic
Instability in China,” in David Shambaugh (ed.), Is China Unstable? Assessing the Factors (Washington
D.C.: George Washington University, 1998), p. 56. Chu-yuan Cheng, “China’s Economy: Recent
Development and Long-Term Prospects,” Issues & Studies, vol. 36, no. 5 (September/October 2000), p.
134. Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 19-20.
313
Beijing has recognized the seriousness of its SOE problems. President Jiang Zemin
repeatedly emphasized that there must be a “heightened sense of urgency.” The CCP
adopted a “decision” at the 4th Plenum of the 15th CCP Central Committee on September
22, 1999, stating, “The transformation of the SOEs’ system and their structural
readjustments have reached a crucial stage, with some deep-rooted contradictions and all
the problems having emerged…. It is imperative to take practical and effective measures
to solve these problems, which has a vital bearing not only on the success or failure of
SOE reforms, but also on the success or failure of the overall economic restructuring.”48
The task ahead is arduous and immense for Beijing. The Chinese government
targeted 2,000 to 3,000 enterprises for bankruptcy, merger, or acquisition in 1998 – a year
when 49 percent of large and medium-size state enterprises suffered losses. In early 1999,
Vice Minister Chen Qingtai pointed out that in the next three years 4,000 large and
medium-sized enterprises operating in deficit would either be bankrupt or be merged with
others, and 8 to 10 million employees would be laid off. In addition, the SOE and
pertinent reforms need enormous funds, but the Chinese government does not have the
sufficient cash. Vice Minister Chen estimated that the direct cost for reforming SOEs in
next three years will range from RMB 600 billion to 800 billion (more than twice the
1998 total central government expenditures).49
48
49
Lo Mei, “Jiang Reported to Steer State Firm Reform” (in Chinese) Hong Kong Kuang Chiao Ching, no.
322, July 16, 1999, in FBIS-CHI-1999-0805. "The Decision of the Central Committee of the Chinese
Communist Party on Major Issues Concerning the Reform and Development of State-Owned
Enterprises" (in Chinese), Renmin Ribao [People’s Daily] (Overseas edition), September 27, 1999, p. 1.
World Bank, China: Weathering the Storm and Learning the Lessons (Washington, D.C.: World Bank,
1999), p. 30. “Reform of State-Owned Enterprises Needs 800 Billion Yuan in Next 3 Years” (in Chinese),
Hong Kong Ming Pao, November 11, 1998, p. b15, in FBIS-CHI-98-317.
314
III. Financial Reforms
The Inefficiency and Non-Performing Loans of State-owned Banks
As of 1996, China’s four state-owned commercial banks (SOCBs) together
accounted for more than 90 percent of bank assets and two-thirds of financial assets. At
the end of 2000, four SOCBs still accounted for over 70 percent of total banking system
assets. Nevertheless, these four banks are very inefficient. The rate of return on assets of
China’s four SOCBs fell from 1.4 percent in 1985 to only 0.2 percent in 1997. In addition,
there is a mountain of non-performing loans [buliang daikuan, NPLs], including past due
loans, doubtful loans, and bad debt, for these four state banks. According to Dai
Xianglong, governor of the People’s Bank of China, NPLs as a share of their total loans
increased from 20 percent at year-end 1994 to 22 percent at year-end 1995, and then to 25
percent at year-end 1997. The 2000 estimate by the research department of China’s
central bank put the aggregate NPL problem at about RMB 2,236 billion ($270 billion) or
close to 30 percent of GDP. In March 2001, Dai Xianglong admitted that, without
transferring NPLs to the AMCs, China’s NPLs were as high as 35 percent of state banks’
total loans, or about RMB 3,549 billion (about 40 percent of its GDP) in 2000. 50 And,
there are questions about how lax China’s definition of NPLs is in the first place.
50
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, p. 6. Nicholas R. Lardy, “The Challenge of Bank
Restructuring in China,” in Bank of International Settlements (ed.), Strengthening the Banking System in
China: Issues and Experience (Basel, Switzerland: Bank of International Settlements, 1999), p. 26.
Shalendra D. Sharma, “Weathering the Asian Financial Crisis: China’s Economic Strengths, Weaknesses,
and Survivability,” Issues & Studies, vol. 36, no. 6 (November/December 2000), p. 100. Pieter Bottelier,
“The Impact of WTO-Membership on China’s Domestic Economy,” speech at Johns Hopkins University
School of Advanced International Studies, China Forum, November 14, 2000, pp. 6-7. Zhang-rong Kang,
“Dai Xianglong: Commercial Banks’ NPLs Account for 25%,” Gongshang Shibao [Commerce Times],
315
In May 2001, president of Bank of China, which is the most prestigious and third
largest of the SOCBs, said in public that the bank’s NPLs amounted to 28.8 percent of
assets, after 20 percent of the bank’s loan portfolio had been transferred to the Dongfang
asset management company. 51 According to Pieter Bottelier, the aggregate stock of
remaining NPLs in four SOCBs plus those transferred to the AMCs may range from RMB
4,000 to 4,500 billion (45-50 percent of GDP) at the end of 2000.52
Moreover, non-bank financial institutions as a group, which includes not only trust
and investment companies but also credit cooperatives, finance companies, and leasing
companies, as early as 1996 had non-performing assets equal to 50 percent of their total
assets. Over the first half of 1999 the reported capital of rural credit cooperatives plunged
from RMB 34,370 million to a negative RMB 7,480 million. The risks that this
insolvency poses are substantial since rural citizens have more than RMB one trillion
deposited in savings accounts in these institutions.53 Equally alarming is that, according
to Ma Jun, by the end of 1997, about 90 percent of the trust and investment corporations
in China were effectively insolvent.54
China’s four SOCBs as a group have also a negative net worth and thus are insolvent
by Western accounting standards. For example, the total net worth of these banks at
year-end 1995, including paid-in capital, surpluses, and retained profits, stood at only
RMB 269 billion, while the 1995 state bank NPLs was about RMB 867 billion (22
51
52
53
March 27, 2001.
James Kynge, “Governor Liu Increases Pressure to Clean Out the Stables,” Financial Times, May 16,
2001, p. 30.
Bottelier, Pieter, “China’s Domestic Debts: Will They Interfere with Financial Sector Liberalization and
WTO Commitments? Issues and Strategies,” Discussion paper for Wilton Park Conference #654 on
Economic and Enterprise Reform in China: the Challenges for Government and Business, November 5-8,
2001, pp. 5-6.
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 7-8.
316
percent of total loans). In addition, state bank capital adequacy fell rapidly from 8.8
percent of assets in 1989 to only 4.0 percent of assets in 1996, far less than the 8 percent
Basle standard Chinese central bank adopted in 1994 and subsequently incorporated into
the Chinese Commercial Bank Law. Even after a RMB 270 billion capital injection in
1998, the adequacy ratios of the four SOCBs were between 1.4 and 4.6 percent [with the
exception of the 8.5 percent of the Bank of China] in September 2000.55
Beijing’s Task and Difficulties
In the lesson of the 1980s and 1990s, a large number of countries experienced
systemic bank problems when NPLs, net of provision, reach 15 percent of total loans. For
example, the share of NPLs in banking lending portfolios was 15 percent in Thailand and
16 percent in Korea just before the onset of the Asian financial crises in 1997. China’s
state bank NPLs appear to have reached at least 25 percent between 1997 and 2001. By
conventional standards for measuring financial sector robustness, China is past the point
at which a systemic banking crisis might be expected.56
Although technically insolvent, China’s SOCBs remain liquid because of their
enormous and still rapidly growing private deposit base, reflecting China’s extraordinarily
54
55
56
Jun Ma, The Chinese Economy in the 1990s (New York: St. Martin’s Press, 2000), pp. 64-65.
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), p. 119. Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,”
presented at the Conference on Policy Reform in China, Center for Research on Economic Development
and Policy Reform, Stanford University, November 18-20, 1999, pp. 6-7. Haocheng Gong and Guoqing
Dai (eds.), 2000 Zhongguo Jinrong Fazhan Baogao [2000 China’s Financial Development Report]
(Shanghai: Shanghai Caijin Daxue Chubanshe, 2000), p. 87. Meifang Deng, “PRC Academic on
Development, Problems of China’s Banking Industry” (in Chinese), Beijing Zhongguo Xinwen She,
October 30, 2001, in FBIS-CHI-2001-1030.
Nicholas R. Lardy, “Sources of Macro Economic Instability in China,” in David Shambaugh (ed.), Is
China Unstable? Assessing the Factors (Washington D.C.: George Washington University, 1998), p. 55.
Helmut Reisen, “Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance,” OECD
Development Centre, Technical Papers, no. 136, June 1998, p. 23.
317
high savings rate. A financial crisis has been avoided only because households continue to
add enormous amounts of funds to their savings accounts in the banks. However, they are
essentially participants in a shell game that will last only as long as people believe that
they can access their money, that they have no real investment alternatives, and that they
are not confronted with galloping inflation. In the long run, this situation is not
sustainable.
China faces enormous risks delaying the state bank reforms. First, China’s capital
account leaks and the leaks will almost inevitably become larger. This places enormous
dynamic pressure on China’s financial reforms. 57 Second, any growth slowdown is likely
to expose the underlying weakness of the domestic financial system. Slower growth
would cut into the operation profits of many SOEs, and thus undermine further the
financial position of China’s major banks.
Third, the proportion of household deposits in banks’ total liabilities increased
sharply from 8 percent in 1978 to almost 50 percent in 1996, and increased to 70 percent
by 1999. As the share of household deposits in total liabilities increased, any small change
in households’ saving behavior might lead to a major change in banks’ liabilities that
could not be easily controlled by the government. A large part of these savings are
invested by the banks in SOE loans that are non-recoverable, but the government’s
implicit deposit guarantee protects confidence and system stability. Therefore, a banking
crisis in China is most likely to be precipitated when domestic savers lose confidence in
the government’s implicit guarantee of the value of their deposits in banks.58
57
58
Pieter Bottelier, “China: Dynamics of Economic Reform and Institutional Development,” mimeo, April
1999, pp. 10-11.
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 2-3. Jun Ma, The Chinese Economy in the
1990s (New York: St. Martin’s Press, 2000), p. 66.
318
This loss of confidence could be triggered by a growth slowdown that weakens the
domestic banking system, by the prospect of a major devaluation in response to a large
emerging current account deficit and a sharp fall in inward foreign direct investment, or
by any other economic, social, and political crisis. For example, China’s leaders have
failed to cut interest rates fast enough (real rates were about 10 percent in 1998) to boost
domestic demand, perhaps because they fear that domestic savers will panic and seek
hard-currency havens, despite an officially closed capital account. If households in large
numbers attempted to withdraw their savings, the insolvency problem of China’s largest
banks could become a liquidity problem. Even in the absence of significant withdrawals
of savings deposits, the abrupt decline in inflows of funds would threaten to curtail the
ability of banks to continue to expand their lending to SOEs in a relatively
non-inflationary manner.59
Fourth, small city-based commercial banks, and rural and urban credit cooperatives,
have found it increasingly difficult to collect and retain deposits. In addition, while
liquidity at large Chinese banks could remain strong over the medium term, over time, as
China’s capital markets develop, more savings will inevitably be attracted away from
banks into stocks, bonds, and other investments. This structural shift, though likely a
gradual process, poses a long-term threat to the funding stability of China’s banks.60
With these risks, delay in banking reforms would make problems worse. According
to the Japanese banking saga, delay in banking reform will only allow NPLs to grow and
erode bank capital. 61 According to the Chinese State Statistical Bureau, Chinese
59
60
61
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), pp. 106-107, 200-202. “Red Alert,” The Economist, October 24, 1998, p. 23.
Moody’s Investors Service Global Credit Research, “China: Banking System Outlook,” August 2000, p.
8.
Y.K. Mo, “A Review of Recent Banking Reforms in China,” in Bank of International Settlements (ed.),
Strengthening the Banking System in China: Issues and Experience (Basel, Switzerland: Bank of
319
economic and financial risk was barely within the security range and the composite index
of financial risk has tended to increase annually. The financial index system includes five
aspects ranking from high to low in order: bank internal stability, T-bond risk,
macro-economic steadiness, bubble hazard risk, and foreign capital impact risk. The
financial risk index in 1999 was 47.6, 11.8 higher than that of 1991, almost approaching
the ceiling of the security range (50).62
The World Bank warned in 1997 that China faced a significant risk of major bank
insolvency and a banking crisis.63 Pieter Bottelier warns that a financial time bomb is
ticking, and it has to be defused as quickly as possible. In particular, Beijing has a very
short time to address the banking reforms because the time available for it to meet
conditions under its WTO commitments is extremely short.64
A banking crisis in China would be a disaster. Nicholas Lardy warns that a bank-run
“would likely lead to a collapse of credit and thus a major recession, something not
experienced in China for almost four decades.”65 A banking crisis in China will most
likely result in an inflationary spiral and thus massive popular discontent. Pei Minxin
warns that the impact of a full-blown banking crisis on political instability is far more
lethal than high unemployment because a banking crisis would hurt virtually everyone
while unemployment principally affects only one segment of society, namely,
manufacturing workers. A broad anti-regime coalition is therefore more likely to emerge
62
63
64
65
International Settlements, 1999), p. 101-103.
Yihua Shi, “PRC Statistics Bureau Data Show Financial Risk Surging Year by Year,” Beijing Renmin
Ribao (Internet Version), November 15, 2000, in FBIS-CHI-2000-1115.
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 30-31.
Pieter Bottelier “China’s Economy at the Turn of the Century: The Significance of WTO Membership for
Continuing Reform,” CSIS China Economic Outlook, January 2000,
http://www.csis.org/asia/chinaecon/ceo0100.html, accessed February 2, 2001, p. 6 of 7.
Nicholas R. Lardy, “China’s Economic Growth in an International Context,” Pacific Review, vol. 12, no.
2 (1999), p. 163.
320
following a banking crisis than high unemployment.66
The government was fully aware of this problem. In early 1998, it announced the
plan to recapitalize SOCBs through issuing RMB 270 billion ($32.6 billion) in treasury
bills, to improve commercial banks’ independence, and to strengthen bank supervision.
The recapitalization plan raised the capital of the SOCBs to RMB 478 billion from RMB
208 billion. In addition, the central government has also committed substantially more
funds to finance the write-off of enterprise bad debts. This program began in 1996 with an
allocation of RMB 20 billion to write off bad debts to banks of enterprises that were being
restructured. The funds earmarked for this purpose were RMB 30 billion in 1997 and
RMB 40 billion in 1998.67
However, the RMB 270 billion capital injection in 1998 and the RMB 90 billion
funds for the SOEs in 1996-1998 were not likely sufficient to recapitalize the banks and
solve the NPL problem. Recapitalization of the financial system, according to Nicholas
Lardy, would have required an injection equal to about $260 billion, or RMB 2,158
billion (27 percent of China’s GDP), in 1998. The 2000 estimate by the research
department of China’s central bank puts the financial cost of restructuring the state banks
at RMB 2,260 billion ($273 billion), or close to 30 percent of GDP. Note that in 1998 the
expenditures of Chinese central government were only RMB 313 billion. The
recapitalization needs pose a staggering threat to China’s fiscal sustainability. Lardy
argues that any serious attempt to recapitalize the financial system will immediately push
government debt to a level over 50 percent of GDP. Ultimate costs could be higher,
particularly because the flow of new bad loans to the SOEs by state banks does not appear
66
67
Minxin Pei, “Is China Unstable,” Foreign Policy Research Institute Wire, July 1999,
http://taiwansecurity.org/IS/Pei-990707.htm, accessed November 9, 2000.
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
321
to have been halted.68
To prepare the four SOCBs for WTO, China has begun to transfer massive amounts
of NPLs from the banks to state-owned AMCs. The AMCs will initially issue bonds to
finance their purchase of loans, but these loans are implicitly guaranteed by the Ministry
of Finance and will inevitably end up being paid off by the government. 69 This means
that the state itself is assuming responsibility for all or part of the NPL portfolio of the
state banks. In 1999 and 2000, RMB 1.4 trillion ($169 billion or about 16 percent of GDP)
worth of nominal value NPLs was transferred to the AMCs. Renmin Ribao reported that
the proportion of non-performing assets dropped by nearly 10 percent. Nonetheless, in
March 2001, Governor Dai Xianglong admitted that the NPLs still account for 25 percent
of SOCB loans after the AMCs absorbed RMB 1.4 trillion of SOCBs’ NPLs as of the end
of 2000.70
Many senior Chinese officials and other analysts admit that the ambitious scheme is
fraught with difficulties. The AMCs face shortages of experienced and qualified
68
69
70
Press, 1998), p. 207.
Nicholas R. Lardy, “The Challenge of Bank Restructuring in China,” in Bank of International
Settlements (ed.), Strengthening the Banking System in China: Issues and Experience (Basel,
Switzerland: Bank of International Settlements, 1999), p. 34. Pieter Bottelier, “China’s Economic
Reforms and American Interests,” Charles Neuhauser Lecture, Fairbank Center for East Asian Research,
November 30, 2000, p. 10. Y.K. Mo, “A Review of Recent Banking Reforms in China,” in Bank of
International Settlements (ed.), Strengthening the Banking System in China: Issues and Experience
(Basel, Switzerland: Bank of International Settlements, 1999), pp. 93-101. Nicholas R. Lardy, “When
Will China’s Financial System Meet China’s Needs?,” presented at the Conference on Policy Reform in
China, Center for Research on Economic Development and Policy Reform, Stanford University,
November 18-20, 1999, pp. 20-37.
Chinese Minstry of Finance has accepted responsibility for ultimate AMC losses, but legally this does
not amount to the same thing a formal guarantee for AMC bonds.
Zhenjun Han and Honghe Zhang, “Major Progress Scored Five Areas of Reform in State-Owned
Enterprises” (in Chinese), Beijing Xinhua Domestic Service, March 6, 2001, in FBIS-CHI-2001-0306.
Pieter Bottelier, “The Impact of WTO-Membership on China’s Domestic Economy,” speech at Johns
Hopkins University School of Advanced International Studies, China Forum, November 14, 2000, pp.
6-7. Tian Li, “PRC’s Dai Xianlong Discusses Current Financial Issues” (in Chinese), Beijing Renmin
Ribao (Overseas Edition), January 23, 2001, in FBIS-CHI-2001-0123. Zhang-rong Kang, “Dai
Xianglong: Commercial Banks’ NPLs Account for 25%,” Gongshang Shibao [Commerce Times], March
27, 2001.
322
personnel. There is no adequate operating and legal framework for the AMCs.
Unrecoverable loans are enormous while domestic and international investor interest in
the NPLs is probably limited even at substantial discounts. Finally, the AMCs are not
independent and need to obtain senior government approvals for many transactions.71
Furthermore, the required financial sector reforms are closely interlinked with many
other reforms so that a sequential or partial approach will not be effective. In essence,
declining tax revenues relative to the size of the economy until 1995 led the government
to force excessive social obligations on SOEs. These pressures as well as increasing
competition contribute to the declining financial performance of SOEs, which need to
borrow heavily from the SOCBs. In the 1990s, the loans of SOCBs to SOEs accounted
for about 81 percent of the total loans of SOCBs. This, in turn, is a major contributor to
the insolvency of large parts of the banking system. These three problems are closely
interrelated.
For example, bank reform slowed in 1998-99 as the difficulties of embarking on
SOE reform in the midst of the AFC became apparent. In both 1998 and 1999, Beijing
advised the SOCBs to increase their financial support of ailing SOEs. As a result, the ratio
of the outstanding loans relative to gross domestic output rose from 86 percent at
year-end 1995 to 109 percent at year-end 1998. Much of this rapid growth of lending
appears to have been used to pay for SOE inputs, workers’ wages, pensions of retirees,
and so forth.72
71
72
World Bank, “China,” China Quarterly, March 20, 2000, p. 5.
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 30-32.
323
IV. Unemployment and Migration Population
In 1990, after the sharp slowdown in the economic growth rate in 1989-1990, official
unemployment in China was only 3.8 million people, or 2.5 percent of the urban
workforce, according to official statistics, which understate the actual situation. The
official unemployment rate rose gradually in the 1990s. Between 1995 and 1998, there
were about 5.2-5.7 million people registered as unemployed, with the urban
unemployment rate running at 2.9-3.1 percent. Nevertheless, the real urban
unemployment rates were much higher. According to Chinese official surveys, the urban
unemployed population stood at 7.9 million and the unemployment rate was 4.3 percent
in 1995; 8.2 million and 4.6 percent in 1996; 9.8 million and 4.9 percent in 1997; and
11.5 million and 6.2 percent in 1998, respectively.73 Even these surveys understate the
situation, and do not include the “rural” or “floating” population.
Chinese official figures are seriously flawed because they do not take into account
laid-off employees and migration from rural areas. Beginning in 1994, SOE workers
began to be laid off in massive numbers. The World Bank estimates that, of the 140
million workers remaining in the state-owned sector, as many as 49 million workers (35
percent) could be fired. According to a 1999 United Nations report, at that time there
were still an estimated 28 million surplus state sector workers (including disguised
unemployed and laid off workers). However, Chinese authorities avoided recording a
significant increase in registered unemployment by creating a new category of laid-off
73
Angang Hu, “The Largest Challenges in the Eve of New Century: China Enters a High Unemployment
Stage,” in Angang Hu (ed.), Zhongguo Zoxiang [Prospects of China] (Hangzhou, Zhejiang: Zhejiang
Renmin Chubanshe, 2000), pp. 53-54.
324
(xiagang) workers, who retained ties to their former work units.74
According to Chinese official estimates and statistics, Chinese laid-off workers were
around 3 million in 1993, 5.6 million in 1995, 8.9 million in 1996, 14.4 million in 1997,
and 17.3 million in 1998, which was about six times that in 1993. Zhang Zuoji, minister
of Labor and Social Security, said that there were 11.7 million SOE laid-off workers in
1999 and as many as 12 million SOE workers could lose their jobs in 2000. Since
two-thirds of laid-off workers were from the SOEs and one-third from township, village,
and other enterprises, total laid-off workers in 1999 and 2000 could have been as many as
18 million.75
It is very difficult for these laid-off workers to find regular employment. According
to Chinese official statistics, the re-employment ratio, the percentage of re-employed
laid-off workers within one year to total laid-off workers, was only 37 percent in 1997, 50
percent in 1998, and 42 percent in 1999. For example, Minister Zhang Zuoji said that
there were 11.7 million laid-off workers in 1999, of which 4.9 million people were
re-employed and 6.5 million were still unemployed.76
Based on the re-employment rate of 40-60 percent, Kao Charng estimates that the
74
75
76
United Nations Development Programme (China), The China Human Development Report (New York:
Oxford University Press, 1999), p. 63. John Pomfret, “Miners’ Riot A Symbol of China’s New
Discontent,” Washington Post, April 5, 2000, p. A1.
Angang Hu, “The Largest Challenges in the Eve of New Century: China Enters a High Unemployment
Stage,” In Angang Hu (ed.), Zhongguo Zoxiang [Prospects of China] (Hangzhou, Zhejiang: Zhejiang
Renmin Chubanshe, 2000), pp. 56-59. Zhixia Chen and Yi Zhang, “SOE Reforms Attain Important
Progress, Laid-Off Workers Receive Effective Protection,” Renmin Ribao [People’s Daily] (Overseas
edition), March 8, 2000, p. 3. World Bank, “China,” China Quarterly, September 18, 2000, p.13.
Thung-hai Hsu and Le-sheng Xia, “Dalu Zhigong Xiagang Suo Yinfa Wenti Ji Jiejue Duice zhi Pingxi
[Analysis on the Issues and Resolution of Mainland Laid-off Employees],” Gongdang Wenti Yanjiu, vol.
27, no. 4 (April 2001), p. 49.
Angang Hu, “The Largest Challenges in the Eve of New Century: China Enters a High Unemployment
Stage,” In Angang Hu (ed.), Zhongguo Zoxiang [Prospects of China] (Hangzhou, Zhejiang: Zhejiang
Renmin Chubanshe, 2000), p. 61. “Bureau Reports on Efforts to Deal with Unemployment,” Beijing
Xinhua, March 1, 1999, in FBIS-CHI-1999-0301. Zhixia Chen and Yi Zhang, “SOE Reforms Attain
Important Progress, Laid-Off Workers Receive Effective Protection,” Renmin Ribao [People’s Daily]
(overseas edition), March 8, 2000, p. 3. “China to Help Most State Enterprises This Year,” Beijing
325
urban unemployment rates were between 3.3 and 3.7 percent in 1993 and between 6.9 and
8.8 percent in 1998. Estimated urban unemployed persons were between 5.4 and 6 million
in 1993 and between 12.7 and 16.1 million in 1998. (See Table 9.6.)
Table 9.6. Estimate on China’s Urban Unemployment, 1993-98
Unit: Thousand
Period
Urban registered
unemployed persons
Laid-off
workers
Real unemployed persons
A
1993
1994
1995
1996
1997
1998
4,201
4,764
5,200
5,530
5,700
5,710
3,000
3,600
8,640
8,916
14,352
17,343
B
5,401
6,204
7,456
9,090
11,440
12,650
6,001
6,924
8,584
10,880
14,310
16,120
Real unemployment rate
(%)
A
B
3.3
3.7
3.6
4.1
4.0
4.7
4.9
5.9
6.3
7.8
6.9
8.8
Note:
A: Estimation based on 60 percent of the laid-off workers who were re-employed.
B: Estimation based on 40 percent of the laid-off workers who were re-employed.
Source:
Charng Kao, “Unemployment and Underemployment in Urban Areas of Mainland China,” Yuanjing Jikan
[Prospect Quarterly] (Taipei), vol. 1, no. 4 (October 2000), p. 73.
These estimates were not far from Chinese official figures. According to China’s
Labor Statistics Yearbook, while the registered unemployment rate in the urban areas
remained at around 3.1 percent, the rate of unemployed plus laid-off workers increased
from 5.6 percent in 1996 to 6.5 percent in 1997 and 7.9 percent in 1998. Moreover, in five
large cities (Beijing, Chongqing, Guangzhou, Shanghai, and Shenyang) surveyed in 1997,
the unemployed and the laid-off together accounted for 13 percent of the labor force.
Xinhua, March 7, 2000, in FBIS-CHI-2000-0307.
326
Overall, China’s unemployment rate at least doubled between 1993 and 1998.77
In addition to registered unemployed persons and unemployed laid-off workers,
there are a large number of temporary and illegal rural migrants, known as the “floating
population” in Chinese cities. Several surveys on population mobility in China in the
1990s found that the total informal migrant population ranged anywhere from 80 to 120
million people. Registration statistics of the Chinese public security department put the
size of the floating population at 31 million in 1990 and 84 million in 1995. According to
the estimate by the World Bank in 2000, the floating population amounted to nearly 100
million nationwide.78
The situation of surplus labor force in the rural areas was also very serious in the
1990s. According to the United Nations and World Bank, there were an estimated
120-140 million surplus workers in agriculture in the late 1990s – roughly 35 to 40
percent of the agricultural workforce. According to Chinese economist Zhou Tianyong,
between 1997 and 2000, the surplus agricultural labor force were between 203 and 242
million persons. According to Renmin Ribao, in 2001 the surplus agricultural labor force
exceeded 150 million persons. Given the current basically non-existent social security
system in the rural areas, this huge unemployment could lead to serious social instability
or even turmoil.79
77
78
79
World Bank, “China,” China Quarterly, March 20, 2000, p. 12. World Bank, “China,” China Quarterly,
September 18, 2000, p.12. World Bank, China 2020: Development Challenges in the New Century
(Washington, D.C.: World Bank, 1997), p. 47. Pieter Bottelier, “How Stable Is China? An Economic
Perspective,” in David Shambaugh (ed.), Is China Stable?: Assessing the Factors (Washington, D.C.:
George Washington University, 1998), pp. 65-66.
United Nations Development Programme (China), The China Human Development Report (New York:
Oxford University Press, 1999), p. 66. World Bank, “China,” China Quarterly, September 18, 2000, p.13.
Dorothy J. Solinger, Contesting Citizenship in Urban China: Peasant Migrants, the State, and the Logic
of the Market (Berkeley: University of California Press, 1999), pp. 15-23.
United Nations Development Programme (China), The China Human Development Report (New York:
Oxford University Press, 1999), p. 63. World Bank, China 2020: Development Challenges in the New
Century (Washington, D.C.: World Bank, 1997), p. 45. Tianliang Bai, “Urban, Rural Areas Face
Considerable Pressure in Employment This Year” (in Chinese), Renmin Ribao (Internet Version),
327
China’s entry to the WTO will significantly exacerbate the problem of
unemployment in China, or would at least incur immense economic and social costs of
transitional unemployment and re-employment. In early 1999, official China Daily
reported that, in 1999,16 million city dwellers (11 percent of the urban work force) would
not be able to find work and another 120 million in the countryside would be out of work.
According to a 1999 estimate of the Institute of International Economics, liberalized trade
in the most protected industrial and agricultural products would add more than 11 million
unemployed persons in China. According to Chinese official estimates, demand for labor
may decline by 25 percent in traditional industries. According to Renmin Ribao, net
unemployed persons would have increased by 1.5 million if China joined the WTO in the
end of 1999 while surplus labor force in the agricultural sector would have increased by
9.7 million.80
The reemployment challenge continued to worsen in the early 2000s. According to
Renmin Ribao, total labor supply in the urban areas in 2001 would be at least 33.5 million.
In addition, the surplus agricultural labor force has already exceeded 150 million. The
scale of surplus labor entering the cities from rural areas and moving to other regions will
increase because of the difficulty in increasing income and other conditions in rural
areas.81 Minister Zhang Zuoji said that China’s total labor supply is estimated at 52
80
81
February 16, 2001, in FBIS-CHI-2001-0216. Tianyong Zhou, “China’s Social Stability and the
Sustainability of National Economic Growth” (in Chinese), in Xiaolu Wang and Gang Fan (eds.),
Zhongguo Jingji Zengzhang de Kechixuxing [Sustainability of China’s Economic Growth] (Beijing:
Economic Science Press, 2000), pp. 415-417.
“China – Action Required to Tackle Rising Unemployment,” China Daily, January 18, 1999. Nicholas R.
Lardy, “Clinton Spurned a Great WTO Deal With China”, Wall Street Journal, April 20, 1999, p. A22.
STRATFOR.COM’s Global Intelligence Update, “Beijing’s Balance Act: Economic, Security Concerns,”
February 1, 2001, http://www.atimes.com/china/CB01Ad01.html, accessed February 5, 2001, p. 2 of 4.
“Estimates on the Change of Domestic Employment Structure After Joining WTO” (in Chinese), Renmin
Ribao [People’s Daily] (overseas edition), November 22, 1999, p. 2
Tianliang Bai, “Urban, Rural Areas Face Considerable Pressure in Employment This Year” (in Chinese),
Renmin Ribao (Internet Version), February 16, 2001, in FBIS-CHI-2001-0216.
328
million in the 2001-05 period, but China’s industries can at best offer about 40 million
jobs, leaving 12 million unemployed persons or a 5 percent unemployment rate in the
cities, which is 2 percentage points higher than the official rates of the 1990s.82 However,
it was reported in early 2001 that the Chinese economy requires creating 40 million jobs
for new urban jobless and 40 million places for redundant people from the agricultural
sector in the 2001-05 period.83
The unemployment problem has imposed staggering concerns with respect to social
stability for Beijing. Speaking at a national conference on May 14, 1998, President Jiang
Zemin urged the Party and governments at all levels to give top priority to the issue of
laid-off workers, which he described as “an extremely arduous task.” He further
emphasized, “This is not only a major economic issue, but also a political one. It has both
realistic urgency and long-term strategic significance.”84 In 1999, Minister Zhang Zuoji
said, “The work of creating jobs is a protracted, formidable mission.”85 In 2000, he
warned again, “[T]he nation should be on full alert to the situation and improve its social
security system.”86
In particular, a large number of laid-off workers were concentrated in some
provinces with huge SOEs, including Liaoning, Heilongjiang, Hunan, Jilin, Jiangxi,
Hubei, and Shanxi.87 In a speech to party colleagues in Beijing in January 2000, Mayor
82
83
84
85
86
87
“PRC Zhang Zuoji Says Government to Maintain Unemployment Rate Below 5 Percent,” Beijing
Xinhua, March 10, 2001, in FBIS-CHI-2001-0310.
Paul Eckert, “China to Ensure Growth, Combat Foes in 2001-2005,” Reuters, March 5, 2001, 3:27 AM
ET.
“Jiang Zemin: Laid-Off Workers Top Priority,” Beijing Xinhua, May 14, 1998, in FBIS-CHI-98-134.
Chi Wang and Leiming Wang, “Minister on Laid-Off Workers’ Job Problems” (in Chinese), Beijing
Xinhua, August 28, 1999, in FBIS-CHI-1999-0902.
“PRC Official: 12 Million to Loss Jobs at State Firms,” Beijing Xinhua, January 10, 2000, in
FBIS-CHI-2000-0110.
Thung-hai Hsu and Le-sheng Xia, “Dalu Zhigong Xiagang Suo Yinfa Wenti Ji Jiejue Duice zhi Pingxi
[Analysis on the Issues and Resolution of Mainland Laid-off Employees],” Gongdang Wenti Yanjiu, vol.
27, no. 4 (April 2001), pp. 49-50.
329
Mu Suixin of Shenyang issued an extraordinary warning that conditions in his city could
be spinning out of control. “Our ability to govern is being seriously affected” by rising
joblessness, he acknowledged. “All the work units have collapsed…. It’s a dangerous
situation.” That same apprehension grips leaders in dozens of other troubled industrial
centers.88
The essence of the unemployment problem in China is that there is no adequate
social security net for these unemployed persons and laid-off workers. According to Hu
Angang, in 1997, around one-third of the total employed population had no
unemployment insurance, about 40 percent of the registered unemployed persons and
around 50 percent of laid-off workers in the urban areas did not get basic living expense
subsidy from the government.89 In 1999, Minister Zhang Zuoji pointed out that only
seven provinces have raised enough funds for ensuring laid-off workers’ basic living
needs. 90 Coupled with widespread perceptions of corruption or mismanagement,
especially at the local level, the defective security net will greatly enhance the chances
that labor unrest due to unemployment and laid-off will become politicized and threaten
social stability.
Furthermore, the floating population has substantially increased crime rates and the
potential for social unrest and instability in the urban areas. Masses of the unemployed
floating population are likely to be the catalysts if China descends into chaos. A
best-selling book in China during the early 1990s, China Through the Third Eye, argues
88
89
90
Clay Chandler, “WTO Membership Imperils China’s Industrial Dinosaurs,” Washington Post, March 30,
2000, p. A1.
Angang Hu, “The Largest Challenges in the Eve of New Century: China Enters a High Unemployment
Stage,” In Angang Hu (ed.), Zhongguo Zoxiang [Prospects of China] (Hangzhou, Zhejiang: Zhejiang
Renmin Chubanshe, 2000), pp. 49-59.
Chi Wang and Leiming Wang, “Minister on Laid-Off Workers’ Job Problems” (in Chinese), Beijing
Xinhua, August 28, 1999, in FBIS-CHI-1999-0902.
330
that if the government loses control over the flow of the floating population, it will lose
its power to rule because migrants will lead the country to chaos. The author asserts that
all Chinese dynasties, without exception, were destroyed by migrants [liumin] – those
who lost or abandoned farmland.91
In order to solve unemployment, laid-off, and floating population problems, China
needs to keep rapid, efficient, and sustainable growth rates and provide a sound social
security net for the unemployed, laid-off workers, and the floating population. The former
involves SOE and financial reforms while the later involves social security and fiscal
reforms. In particular, the fiscal constraint has been the most serious obstacle for
establishing a sound social security net as well as implementing SOE and financial
reforms.
The magnitude of the reemployment challenge is staggering. According to the
Business Week, if growth slips below 7 percent, China’s economy will not generate nearly
enough jobs to soak up the 6 million Chinese entering the workforce each year, as well as
the 12 million persons laid off by restructured state enterprises. 92 Furthermore, the
Economist argues that every percentage-point fall in GDP means 5 million more
unemployed.93 According to the first white paper on China’s economy, it is estimated that
when economic growth reaches 7 percent it will create more than 7 million jobs.94
Nevertheless, according to China’s official statistics, although the growth rate of GDP in
1998 was 7.8 percent, additional new employment nationwide was only 3.6 million
91
92
93
94
Cited from Cheng Li, “200 Million Mouths Too Many: China’s Surplus Rural Labor,” in Orville Schell
and David Shambaugh (eds.), The China Reader: The Reform Era (New York: Vintage Books, 1999), pp.
362-364.
Joyce Barnathan, Dexter Roberts, Mark L. Clifford, Bruce Einhorn, and Peter Engardio, “Can China
Avert Crisis?,” Business Week, March 16, 1998, p. 47.
“Red Alert,” The Economist, October 24, 1998, p. 23.
“Economic White Paper Reveals China’s Labor Target” (in Chinese), Beijing Zhongguo Xinwen She,
May 20, 1999, in FBIS-CHI-1999-0611.
331
workers. Worse yet, is that the labor supply has been increasing significantly in the late
1990s and 2000s because there have been more laid-off workers and rural migrants due to
China’s deepening economic reforms.95 In addition to unemployed or laid-off urban
workers, if economic growth slowed, China’s cities might find themselves awash with
millions of unemployed, lumpen, and angry workers of the floating population with no
welfare safety net to rescue them and no place to go.
V. Income Inequality and Poverty
While China has experienced rapid economic growth in the last two decades, at the
same time there has been a serious increase in income inequalities. From 1981 to 1993,
the ratio of per capita income of the top 20 percent to that of the bottom 20 percent in
urban areas increased from 2.29:1 to 2.87:1, and the absolute difference between these
two groups increased from RMB 432 to RMB 2,526. According to a 2000 Chinese
official investigation, the Gini coefficient96 in the urban area is 0.458, which is already
higher than the internationally acknowledged warning line of 0.4. On the national level,
assuming no difference between the rural and urban cost of living, the national income
distribution worsened, with the Gini index rising from 0.35 in 1990 to 0.42 in 1999.
Chinese officials recognize that this situation could produce a sense of acute social
injustice and eventually social instability and even turmoil.97
95
96
97
Angang Hu, “The Largest Challenges in the Eve of New Century: China Enters a High Unemployment
Stage,” In Angang Hu (ed.), Zhongguo Zoxiang [Prospects of China] (Hangzhou, Zhejiang: Zhejiang
Renmin Chubanshe, 2000), pp. 49-52.
The Gini coefficient is a single measure of relative inequality and the most frequently encountered in
studies of income distribution. The Gini coefficient ranges from 0 to 1 – the larger the coefficient, the
greater the inequality. Thus 0 represents perfect equality, and 1 represents perfect inequality.
Jun Ma, The Chinese Economy in the 1990s (New York: St. Martin’s Press, 2000), p. 11. Yaming Liu,
Yan Huang, and Xiaohong Yang, “China Must Make Efforts to Prevent ‘Polarization’ in Income
332
Income inequality coincides with regional disparities in China. In 1991, per capita
GDP in Shanghai was RMB 6,114, 4.5 times that of Guizhou’s RMB 1,360. The already
large disparities have also tended to worsen, as the coastal provinces have grown at a rate
higher than the inland areas. In 1996, per capita GDP in Shanghai was already RMB
22,275, 10.6 times that of Guizhou’s RMB 2,093. In 1999, per capita GDP in Shanghai
reached RMB 27,449, 11.2 times that of Guizhou’s RMB 2,458.98
Moreover, although rapid growth has helped lift more than 200 million Chinese out
of poverty since 1978, today the task of poverty-lifting in China is still very challenging.
Most of the poverty reduction occurred between 1979 and 1984, when agricultural
incomes soared following the introduction of the household responsibility system.
According to estimates based on China’s poverty line figure, China’s rural poor decreased
dramatically in the past twenty years, from 260 million in 1978 to 128 million in 1984.
Progress stalled in the mid-1980s, but has picked up since 1992. Chinese poor declined to
42 million in 1998. However, poverty estimates based on a one dollar per day (in
purchasing power parity terms) developed by the World Bank indicate substantially
greater numbers of absolute poor in China in all years. In 1998, China’s rural poor were
98
Distribution” (in Chinese), Beijing Xinhua Hong Kong Service, March 10, 2001, in
FBIS-CHI-2001-0310. Zhenjun Han and Honghe Zhang, “Warning Issued over Two ‘Over 40 percents’”
(in Chinese), Beijing Xinhua Service, March 12, 2001, in FBIS-CHI-2001-0312. Shaohua Chen and Yan
Wang, “China’s Growth and Poverty Reduction: Recent Trends between 1990 and 1999,” paper
presented at a WBI-PIDS Seminar on “Strengthening Poverty Data Collection and Analysis,” held in
Manila, Philippines, April 30-May 4, 2001, p. 6-7. Yanfeng Ge, “The Policy Consideration of Mitigate
Income Inequality in the Tenth Five-Year Plan” (in Chinese), in Hong Ma and Mengkui Wang (eds.),
Zhongguo Fazhan Yanjiu [China Development Studies] (Beijing: Zhongguo Fazhan Chubanshe, 2001),
pp. 43-50.
Shufeng Song, George S. F. Chu, and Rongqing Cao, “Intercity Regional Disparity in China,” China
Economic Review, no. 11 (2000), p. 252. Jun Ma, The Chinese Economy in the 1990s (New York: St.
Martin’s Press, 2000), p. 11. The Economist Intelligence Unit, Country Profile 2000: China, November 3,
2000,
<hhtp://db.eiu.com/reports.asp?title=Country+Profile+China&Valname=CPACNB&doc_id=677127>,
accessed February 5, 2001, p. 2 of 3.
333
still 124 million, or 13.5 percent of rural population.99
In most cases, the poorest people are entire communities living in isolated, upland
regions of the interior with few if any natural resources. Moreover, the poor tend to be
less educated, less healthy, and have more dependents for each working-age person. As
the aggregate number of the poor has dwindled, further reductions have been increasingly
difficult to achieve. President Jiang Zemin recognized, “To solve the problem of food and
clothing for this portion of the poverty-stricken population is the most difficult
poverty-relief task.”100 For example, the Chinese central government spent RMB 24.8
billion (nearly $3 billion) in poverty alleviation in 1999, 30 times more than that in 1980,
compared to 18-fold increase of China’s GDP in the same period.101
VI. Social Security Reforms
The urgency of social security reforms comes not only from the need to delink social
welfare responsibilities from state enterprise management so as to accelerate SOE reform,
but a sound social security net is also needed for current unemployed persons, laid-off
workers, the floating population, and rural residents in order to avoid large-scale social
instability. Furthermore, demographic change in China rapidly worsens the situation.
According to the United Nations, the proportion of those 60 years old and above will
grow from 7.6 percent of the Chinese population in 1982 to 9.8 percent in 2000, and
further to 15.2 percent in 2020. This trend is driving up the cost of health care and
Scott Rozelle, Linxiu Zhang, and Jikun Huang, “China’s War on Poverty,” Mimeo, Conference paper,
October 1999, pp. 8,18.
100
Zhenying, Jiazheng, and Jie Sun, Liu “Jiang Zemin Addresses Poverty Conference” (in Chinese),
Beijing Xinhua Domestic Service, June 9, 1999, in FBIS-CHI-1999-0610.
101
“China State Council Official Declares Elimination of Absolute Poverty,” Beijing Xinhua, November 17,
2000, in FBIS-CHI-2000-1117.
99
334
pensions. In addition, the Chinese labor force growth is slowing. In 1978 there were thirty
workers contributing to the pension system for each retiree, but in 1997 there were ten
people of working age for every pensioner. By 2020 there will be six, and by 2050 only
three. Moreover, an additional 16 years of life for the average worker retiring today and
indexing pensions to wages has dramatically increased the pension burden.102
More immediately, China is already facing a pension crisis in its state enterprises.
Some enterprises have more pensioners than workers. As the financial performance of
enterprises weakened in the 1990s, a growing number of firms discontinued or delayed
making contributions to local pension pools. The World Bank estimates that the reserves
of the pension system in the mid-1990s were only RMB 30 billion, or only 0.6 percent of
GDP and less than a third of the pension payments made to retirees in 1994. By the end of
March 1999 total social premium arrears of enterprises, including contributions both for
pensions and unemployment insurance funds, were RMB 33 billion. The World Bank
characterizes China’s situation as a “pension crisis in the state-owned enterprise sector”
and an “urgent and immediate problem.” In addition, in 1998, the 91.6 million persons in
the rural labor force, who were wage-employed in town and village enterprises, and 50 to
70 million persons in the urban labor force, who were the floating population, were not
provided by a retirement pension and unemployment insurance.103
Despite the urgency of social security reforms, Beijing has insufficient funds to
support adequate reforms. The World Bank estimates that implicit pension debt in the
102
United Nations Development Programme (China), The China Human Development Report (New York:
Oxford University Press, 1999), p. 65. Nicholas R. Lardy, China’s Unfinished Economic Revolution
(Washington, D.C.: Brookings Institution Press, 1998), pp. 44-47.
103
Nicholas R. Lardy, “When Will China’s Financial System Meet China’s Needs?,” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 19-20. Athar Hussain, “Social Welfare in
China in the Context of Three Transitions,” unpublished manuscript, p. 21. World Bank, China: Pension
System Reform (Washington, D.C.: World Bank, 1996), pp. ix, 2, 15, 26.
335
mid-1990s was equal to about 50 percent of China’s GDP. According to Nicholas Lardy’s
estimate, annual social expenditure financed by enterprises that should be shifted to fiscal
financing might amount to 3.3 percent of GDP. Beijing in 2000 injected only RMB 87.6
billion, or less than one percent of China’s GDP, into the program of pension and
unemployment insurance. Note the 2000 injection was already one-third more than that in
1999, but far from sufficient in order to establish a sound social security system in
China.104
VII. Environment Protection and Natural Disaster
Deforestation and desertification are two of the most challenging environmental
issues for China. From 1981 to 1990, China’s deforestation rate was 0.7 percent of total
forest area per year, compared with 0.1 percent in the United States, 0 percent in Australia,
and –0.4 percent in Germany. China has witnessed the desertification of some 100,000
square kilometers, or the equivalent of Zhejiang province, since the 1950s. The country’s
deserts have been expanding at an annual rate of 2,460 square kilometers between 1985
and 1995, compared with an annual rate of 1,560 square kilometers in 1950s-1960s. The
total area of land-turned dessert has surpassed 1.69 million square kilometers, or 17.6
percent of China’s territory. In addition, the total desert area is as much as 2.62 million
square kilometers, or 27.3 percent of China’s territory.105
Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution
Press, 1998), pp. 44-47, 161. “PRC Xiang Huaicheng Says Government to Provide More Funds for
Social Security,” Beijing Xinhua, March 10, 2001, in FBIS-CHI-2001-0310.
105
Jun Ma, The Chinese Economy in the 1990s (New York: St. Martin’s Press, 2000), p. 11. “Committee
Chairman Qu Geping Says NPC to Enact Anti-Desertation Law,” Beijing Xinhua, February 26, 2001, in
FBIS-CHI-2001-0226. “China Faces Challenges of Desertification,” Beijing Xinhua, August 31, 2001, in
FBIS-CHI-2001-0831. Ren-jie Wu, “Shachenbao Yiqi yu Dalu Tudi Huangmohua Xiankuang Fenxi
[Analysis on The Causes of Sandstorms and the Current Situation of Mainland’s Land Desertification],”
104
336
This dire environmental situation could bring disastrous consequences. For example,
China’s northern region was hit by eight sandstorms in the 1960s, thirteen in the 1970s,
fourteen in the 1980s, and was up to twenty-three in 1990s. Moreover, China was hit by
thirteen sandstorms in the spring of 2000 alone. Many localities suffered from the
negative effects of desertification. Chinese statistics show that desertification has been
causing an annual direct economic loss of RMB 207 billion ($25 billion) for China by the
late-1990s.106 At the present rate, the desert would reach Beijing in 35 years. Chinese
Premier Zhu Rongji was so alarmed by what he saw in a village located only 110
kilometers north of Beijing that he told party aides the capital “may eventually have to be
moved out of Beijing,” if the desertification process is not halted.107
In addition, air and water pollution is damaging human health and is also very costly
to the economy. The World Bank estimates that the annual costs of air and water pollution
in China were between RMB 262.1 billion (3.5 percent of GDP) and RMB 576.7 billion
(7.7 percent of GDP) by 1997, a number that is expected to almost double by the year
2020. In addition, the World Bank argues that as many as 289,000 deaths a year could be
avoided if air pollution alone were reduced to comply with Chinese government
standards.108
Despite this serious environmental damage, investment in environmental protection
remains very limited because of the fiscal constraint of the Chinese government. China
Studies on Chinese Communism, vol. 34, no. 7, p. 51.
“Xinhua: China 10th Five-Year Plan Gives Priority to Environmental Protection,” Beijing Xinhua,
March 12, 2001, in FBIS-CHI-2001-0312. Ren-jie Wu, “Shachenbao Yiqi yu Dalu Tudi Huangmohua
Xiankuang Fenxi [Analysis on The Causes of Sandstorms and the Current Situation of Mainland’s Land
Desertification],” Studies on Chinese Communism, vol. 34, no. 7, p. 51. Zhengling Kou, “Desertification,
a Grave Threat to China,” Beijing Review, September 21-27, 1998, p. 22.
107
Melinda Liu, “Waiting for Rain,” Newsweek (Atlantic edition), August 21, 2000, p. 44.
108
World Bank, Clear Water, Blue Skies: China’s Environment in the New Century (Washington, D.C.:
World Bank, 1997), pp. 23, 37. World Bank, China 2020: Development Challenges in the New Century
(Washington, D.C.: World Bank, 1997), p. 71.
106
337
contributed a mere 0.93 percent of its GDP to environmental protection spending for the
1996-2000 period and will raise the expenditure to 1.2 percent for the 2001-05 period. It
was estimated by the Chinese government that between 1996 and 2001 China needed to
spend an annual RMB 1.5 billion to prevent desertification, while, in reality Beijing only
invested an annual RMB 30 million. In addition, about 11.5 percent of Chinese
environmental investment was financed by foreign aid in the 1996-2000 period. Foreign
countries have contributed around RMB 42 billion to Chinese environmental protection
efforts in that period and, in particular, Japanese loans accounted for 30 percent of total
foreign aid. In 2001, Japanese loans totaled 197.2 billion yen (RMB 13.1 billion).109
Serious water shortages are another issue of serious concern for Beijing. China is
one of 13 nations worldwide which suffers from a water shortage. Based on official
figures, the per capita quantity of water is an average of 2,200 cubic meters in China,
about one-fourth of the world average, and will further decrease to about 1,760 cubic
meters by the year 2030. According to an official Chinese survey, 400 out of 600 major
Chinese cities are suffering from acute water shortages. In particular, China’s capital,
Beijing, had for just one-eighth of the national average of water and about 3 percent of
the world average. Therefore, NPC Chairman Li Peng warned, “[T]he task to ensure
water supply will be very arduous.”110
Moreover, water distribution among regions in China is very unbalanced. In the
“Xinhua: China 10th Five-Year Plan Gives Priority to Environmental Protection,” Beijing Xinhua,
March 12, 2001, in FBIS-CHI-2001-0312. “Sino-Japan Environment Seminar Opens; Says PRC Uses
Japanese Loans on Protection,” Beijing Xinhua, March 9, 2001, in FBIS-CHI-2001-0309. “China, Japan
Sign Documents for Yen Loans,” Beijing Xinhua, March 30, 2001, in FBIS-CHI-2001-0330. Zhengling
Kou, “Desertification, a Grave Threat to China,” Beijing Review, September 21-27, 1998, p. 23.
110
“Xinhua: China Moves to End Water Crisis,” Beijing Xinhua, March 7, 2001, in FBIS-CHI-2001-0307.
“Beijing Sets Goal for Conserving Water in 2001,” Beijing Xinhua, March 22, 2001, in
FBIS-CHI-2001-0322. Libin Wang and Leiming, “Li Peng Speaks at Forum on Water Conservation,”
Beijing Xinhua Domestic Service, March 22, 2001, in FBIS-CHI-2001-0322.
109
338
south, 450 million people – a third of the population – live under threat of flood; in the
north 300 counties and 479 cities are short of water. In agriculture alone the shortage of
water is estimated to be about 30 billion cubic meters (equal to total use in the Philippines
and to about 5.4 percent of China’s total annual available water). 111 The shortage will
double if China increases irrigated farmland area as planned, not to mention the pressure
put on water supply by mounting urban and industrial requirements.112
According to the U.S. National Intelligence Council, economic losses due to drought
in the arid northern plain are estimated at more than RMB 132.5 billion ($16 billion) in
2000. According to Xinhua News Agency, by 2001, water shortages were the cause of
economic losses amounting to more than RMB 120 billion annually. Water shortages have
led to additional problems for Beijing. For instance, in 2000, Beijing was haunted by crop
failures, unusual sandstorms, locust plagues and peasant uprisings – all owing to the
drought.113
To solve the water shortage, one ambitious scheme aims to pump water from the
Yangtze River, over 1,200 kilometers of mountain and desert to China’s dry northern
plains. The project, at an estimated cost of RMB 149 billion (about 48 percent of the
central government expenditure in 1998), will not be finished until 2010. Moreover, about
40 percent of China’s rivers and lakes are highly polluted, at least 10 percent of them are
so polluted that they are no longer potable. If China would like to divert water from the
south to the north, water in the south should first be well treated before being diverted to
In spite of these dire water problems, China’s agricultural output has shown a very healthy growth rate
over the past 21 years and food supply is now more abundant and diversified than perhaps at any time in
China’s history.
112
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), p. 65.
113
“Xinhua: China Moves to End Water Crisis,” Beijing Xinhua, March 7, 2001, in FBIS-CHI-2001-0307.
Melinda Liu, “Waiting for Rain,” Newsweek (Atlantic edition), August 21, 2000, p. 44.
111
339
the north. Therefore, the fiscal burden is quite challenging for the central government. 114
Finally, natural disasters, exacerbated by Chinese environmental destruction and
over-development, has also brought serious damage and sizeable costs to the Chinese.
According to Hu Angang, annual direct economic loss due to natural disasters between
1990 and 1994 was on average RMB 119 billion, between 3 to 5 percent of GDP. During
the 1990s, on average 380 million people, or one third of China’s population, were
affected by natural disasters every year. In particular, in the first ten months of 1998,
disasters killed 4,610 people in China, caused direct economic losses estimated at RMB
307.2 billion (about $37.1 billion), and affected some 380 million people. As a result, a
total of 22 million people were relocated. According to Cheng Chu-yuan, floods reduced
1998 GDP growth by 0.5 percentage points.115
VIII. Corruption
Early in the twentieth century, corrupt Manchu rulers, combined with widespread
economic distress, motivated Sun Yat-sen and his followers to overthrow the imperial
system. Nearly half a century later, popular indignation about runaway inflation and the
blatant graft of the Kuomintang (KMT) bureaucrats helped to topple the KMT regime.
The CCP leaders are quite aware of these historical lessons. In the wake of the Tiananmen
incident, Deng Xiaoping said, “If we don’t punish corruption, especially when it’s in the
Pamela Pun, “NPC Deputy Says 40% of PRC Lakes, Rivers Polluted,” Hong Kong iMail, March 10,
2001, in FBIS-CHI-2001-0310.
115
Angang Hu, “Great Challenges Faced in China’s Reforms,” In Angang Hu (ed.), Zhongguo Zoxiang
[Prospects of China] (Hangzhou, Zhejiang: Zhejiang Renmin Chubanshe, 2000), pp. 46-47. “Disasters
Kill 4,610, Cost $36.4 Billion in 1998,” Beijing Xinhua, October 16, 1998, in FBIS-CHI-98-289.
Chu-yuan Cheng, “China’s Economy: Recent Development and Long-Term Prospects,” Issues & Studies,
vol. 36, no. 5 (September/October 2000), p. 130.
114
340
Party, we’re really courting disaster.” Qiao Shi, a member of Politburo Standing
Committee at the time, also agreed, “The corruption cases…are clearly responsible for the
rising tide of popular dissatisfaction.”116 However, the CCP faces a fatal dilemma, which
is best summarized by Chen Yun, a former senior Chinese leader: “Not fighting
corruption would destroy the country. Fighting it would destroy the party.” The CCP’s
anticorruption record has proved Chen’s insightfulness: The party has found it impossible
to stamp out corruption without committing suicide.117
According to the Supreme People’s Procuratorate, annual criminal cases involving
corruption and bribery have increased rapidly in the last twenty years: there were on
average 20 thousand cases annually between 1978 to 1987; 66 thousand cases annually
between 1988 and 1994; and 77 thousand cases annually between 1993 and 1997. In the
1992-97 period, a total of 121,500 members were expelled from the CCP, among whom
37,492 were punished for their criminal acts -- averaging 7,500 annually, though this is a
very low rate considering the CCP has 60 million members. Between 1993 and 1999, the
number of corruption cases that have been investigated increased by 9 percent nationwide
each year and the number of officials given disciplinary punishments grew by 12 percent
annually. Between 1993 and 2000, Chinese authorities have recovered at least RMB 37.6
billion in direct economic losses through the anti-corruption campaign. These figures
illustrate the achievements of Beijing’s anti-corruption efforts, but also show that
corruption phenomena such as embezzlement and bribery have become a widespread and
severe problem.118
116
Liang Zhang (comp.), Andrew J. Nathan and Perry Link (eds.), The Tiananmen Papers (New York:
Public Affairs, 2001), pp. 138, 151.
117
Minxin Pei, “Will China Become Another Indonesia?,” Foreign Policy, Fall 1999, p. 101.
118
Ziming Chen and Wang Juntao, Jiechu Zhongguo Weiji [Defusing China’s Bomb] (Flushing, N.Y.:
Mirror Books, 1996), pp. 370-371. “China: Report: China’s Anti-Corruption Drive Successful,” Beijing
Xinhua, September 23, 1997, in FBIS-CHI-97-266. “China State Focuses on Corruption Fight,” China
341
Without attaching undue precision to official Chinese figures, the trends are clear.
According to the Chinese Auditing Administration, from 1992 to 1997 China suffered a
total loss of RMB 214 billion or about 40 percent of its total funds for purchasing grain,
of which over RMB 80 billion were misappropriated and over RMB 120 billion reported
lost. The money was used instead to speculate on land deals and stocks. 119 In addition, in
October 1998, Premier Zhu Rongji stated on national Chinese television, “A large
quantity of petroleum has been smuggled into our domestic market, almost crushing our
entire petroleum industry. Smuggling is not something that every boss of a private
enterprise can take a share of, and those bastards have [sic] all have links with the army as
well as public security and national security setups.”120
According to Xinhua News Agency, China loses RMB 80 billion a year in potential
tax revenue because of smuggling, and much of those activities are carried out, and
protected, by the PLA. According to the Washington Post, smuggling costs Beijing as
much as RMB 248 billion ($30 billion) annually. In particular, the Yuan Hua Group graft
scandal with more than 100 officials in Xiamen involved was China's biggest smuggling
and corruption case since 1949. RMB 80 billion is usually given as the value of the goods
smuggled by the Yuan Hua Group since the mid-1990s. According to the South China
Morning Post, a Beijing police source puts the total figure at least RMB 150 billion.121
Daily, March 11, 1998. “Han Zhubin on Intensifying Efforts Against Corruption,” Beijing Xinhua,
September 24, 1999, in FBIS-CHI-1999-0924. “Major Corruption Cases,” Beijing Review, vol. 43, no.
21, May 22, 2000, p. 14. “Han Zhubin Says: New Progress Has Been Made in China’s Anticorruption
Campaign” (in Chinese), Beijing Xinhua Hong Kong Service, March 10, 2001, in FBIS-CHI-2001-0310.
119
“214 Billion Yuan of Grain Funds Lost and Misappropriated” (in Chinese), Hong Kong Sing Tao Jih
Pao, October 14, 1998, B14, in FBIS-CHI-98-308.
120
David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations, 1989-2000
(Berkeley: University of California Press, 2001), pp. 281-282.
121
“PLA Withdrawal From Commerce Viewed,” Hsin Pao (Hong Kong), July 27, 1998, in
FBIS-CHI-98-208. John Pomfret, “China holds Security Officials,” Washington Post, January 8, 1999, p.
A23. Willy Wo-lap Lam, “Xiamen Graft Total Could Top $140 Billion,” South China Morning Post,
January 26, 2000, p.1.
342
Official reports, scholarly studies, and anecdotal evidence all suggest that corruption
in China has reached unprecedented levels and resulted in the theft and waste of huge
amounts of national wealth. The Chinese National Auditing Administration estimates that
RMB 124 billion was embezzled in China in 1999, more than 1 percent of the GDP.
Based on data released in the official Chinese media, the annual aggregate costs for
corruption was 4.8 percent of the Chinese GDP, or RMB 343 billion, by 1999, according
to Pei Minxin. Using a broader definition of corruption,122 Hu Angang estimated the
annual costs of corruption to be between RMB 995 billion (13.3 percent of GDP) and
RMB 1267 billion (16.9 percent of GDP) in 1995-99. If allowed to continue on this kind
of trajectory, Pei warned, corruption will sap China’s economic strength, further
delegitimize the ruling party, and increase the risks of a Suharto-style collapse in
China.123
The CCP knows that corruption is rampant and that something must be done to
reverse this course and preserve the party. According to three official social surveys
conducted in 2000, the Chinese public unanimously regards preventing and fighting
corruption as a top-priority issue.124 According to a survey conducted by the Central
Party School in 2000, more than 70 percent of Party and governmental cadres considered
corruption to be the most serious social issue facing China. 125 On March 9, 2001,
122
The losses of corruption, defined by Hu Angang, include the losses of tax revenues, state economic
investment and fiscal expenditure, illegal economic “black revenues,” and rents in monopolistic
industries.
123
Brian Bennett, “In the End, It’s All About Connections,” Time, October 9, 2000, p.28. Minxin Pei,
“Future Shock: The WTO and Political Change in China,” Carnegie Endowment for International Peace
Policy Brief, vol. 1, no. 3 (February 2001), p. 5. Minxin Pei, “Will China Become Another Indonesia?,”
Foreign Policy, Fall 1999, pp. 94-110. Angang Hu, “Corruption: China’s Biggest Social Pollution,” in
Angang Hu, Zhongguo: Tiaozhan Fubai [China: Fighting Against Corruption] (Hangzhou, Zhejiang:
Zhejiang Renmin Chubanshe, 2001), pp. 34-66
124
Si Liang, “China Intensifies Efforts to Prevent, Fight Corruption at the Source” (in Chinese), Hong
Kong Zhongguo Tongxun She, March 12, 2001, in FBIS-CHI-2001-0312.
125
Lianbin Qing and Zhiqiang Xie, in Xin Ru, Xueyi Lu, Tianlun Shan, 2001 Nian: Zhongguo Shehui
Xingshi Fengxi yu Yuce [Year 2001: Analysis and Prediction of China’s Social Situation] (Beijing: Social
343
Chinese NPC Chairman Li Peng frankly told NPC delegates, “We face destruction of our
party and destruction of our nation if we fail to fight corruption and promote clean
government.”126
Beijing intensified the anti-corruption campaign in the late 1990s. For instance,
between January and July 1999, nearly 900 cadres ranking at or above the provincial
department and bureau-levels were removed from office, expelled from the party, or
handed over to judicial organs to be dealt with according to the law. In September 2000,
China executed Cheng Kejie, who was formerly a NPC vice chairman and a protégé of Li
Peng, for accepting $4.9 million in bribes. Cheng Kejie became the most senior official to
be executed since the People's Republic was established in 1949. Hu Changqing, the
former vice governor of Jiangxi province, was also executed for corruption, and Chen
Xitong, the former party chief of Beijing, is serving a 16-year prison term for graft. In
November 2000, Justice Minister Gao Changli was detained for questioning on corruption
charges. In addition, former Vice Minister of Public Security Li Jizhou was sentenced to
death on charges of taking bribes and of blocking a probe into the Xiamen graft scandal.
These cases show that the CCP is fully aware of rampant corruption within the
government and is attempting to root out corruption.127
However, such efforts have failed to win the confidence of the Chinese people and
have been criticized by the CCP-controlled national legislature. In the 1996 session, 30
percent of NPC deputies openly opposed the report given by the Supreme Procuratorate
Sciences Documentation Publishing House, 2001), pp. 56-57.
Christopher Bodeen, “Top Chinese Legislator Warns Colleagues About Corruption,” Washington Post,
March 10, 2001, p. A17.
127
Hui-wen Jen, “Major Issues, Including Taiwan Policy, Discussed at Beidaihe Meeting” (in Chinese),
Hong Kong Hsin Pao, August 13, 1999, p. 22, in FBIS-CHI-1999-0814. Brian Bennett, “In the End, It’s
All About Connections,” Time, October 9, 2000, p.28. Mark L. Clifford and Dexter Roberts, “Can China
Tame the Corruption Beast?,” Business Week, December 18, 2000, p. 107. “PRC Sentences Former
Deputy Public Security Minister to Death,” Beijing Xinhua, October 22, 2001, in FBIS-CHI-2001-1022.
126
344
on law enforcement and anti-corruption. Twenty percent of the deputies refused to
endorse the report given by the chief judge of the Supreme Court. In the 1997 session, the
respective numbers were 40 percent and 32 percent. In the 1998 session, they were 40
percent and 31.5 percent, respectively. After the intensified anti-corruption campaign in
1999-2000, at the March 2001 session, about 35 percent of all deputies refused to accept
the annual report of the Supreme People’s Procuratorate and 32 percent of all deputies
refused to support the annual report of the People’s Supreme Court. At that session, the
deputies candidly criticized China’s top judge Xiao Yang and top prosecutor Han Zhubin
for failure to stamp out corruption and crack down upon crimes, as well as on the
existence of corruption inside courts and procuratorates.128
IX. Inflation
Chinese leaders have strong fears of high inflation and its resulting social instability.
The older generation in China remembers how high inflation during the final stages of the
civil war in the late 1940s helped to undermine support for the KMT regime. More
recently, rising inflation, coupled with declining economic growth and rampant corruption
within the government, contributed significantly to the fall of Chinese top leaders Hu
Yaobang and Zhao Ziyang in the late 1980s. Major mistakes made by Hu and Zhao were
to have focused too much on economic growth and not enough on price stability. As a
result, in 1985, inflation rose to 8.8 percent, which had not been seen in China since 1961.
128
Minxin Pei, “Political Change in Post-Mao China: Progress and Challenges,” paper presented at the
Cato Institute Conference “Whither China? The PRC at 50,” September 29, 1999, Washington, D.C., p.
12. Rena Miller, “China’s Parliament Bares Its Teeth Over New Chief Prosecutor,” Agence France Presse,
March 17, 1998, 10:10 GMT. Maryin Fackler, “China’s Congress Cites Corruption,” Associated Press,
March 15, 2001, 7:27 AM ET. Siyi Ni, “Will Judicial Work Reports Win High Approval Ratings?”
Beijing Xinhua, March 13, 2001, in FBIS-CHI-2001-0313.
345
In 1985-86, students in several universities held demonstrations against a motley
collection of personal complaints and social problems, mostly on the issues of poor living
conditions, the rising inflation rate, and corruption. Again, inflation leapt dramatically
from 7.3 percent in 1987 to 18.5 percent in 1988. Despite the austerity policies that
brought GDP growth down to 3.6 percent in 1989, inflation for that year was still 17.8
percent.129
In particular, public support for the demonstrations on Tiananmen Square in 1989
was mostly an expression of protest against high inflation and corruption. For example,
prior to the Tiananmen Incident, Li Ruihuan, a Politburo member, pointed out, “We said
there would be no inflation, then in fact inflation came – how could people not feel
rebellious?”130 A decade later, Lu Baifu, vice minister of Development Research Center
of the State Council, warned, “Letting inflation go unchecked is equivalent to suicide [for
the CCP].”131
Inflation surged again in China in the mid-1990s. The retail price index surged to
21.7 percent in 1994, which was higher than that in 1988-89 and could have triggered
another Tiananmen Incident. In 1995 and 1996, the retail price index increased by 14.8
percent and 6.1 percent, respectively. A 1995 study by the World Bank argues that
financial losses incurred by SOEs, the resulting monetization of budgetary and implicit
deficits by the central bank, and surges in local-government-led investment demand were
main causes for China’s inflation. Therefore, without further enterprise, financial, fiscal,
Wing Thye Woo, “The Economics And Politics of Transition to an Open Market Economy: China,”
OECD Technical Papers no. 153, October 1999, pp. 12, 39-43.
130
Liang Zhang (comp.), Andrew J. Nathan and Perry Link (eds.), The Tiananmen Papers (New York:
Public Affairs, 2001), p. 134.
131
Baifu Lu, “Macro-adjustments in China: Experience and Lessons,” in Bank of International Settlements
(ed.), Strengthening the Banking System in China: Issues and Experience (Basel, Switzerland: Bank of
International Settlements, 1999), p. 114.
129
346
and administrative reforms, inflation on average is likely to be higher in the future than it
was in the mid-1990s because of the increasing public sector deficit. The 1995 World
Bank report concludes, “In the interim, the risk of accelerating inflation remains high, and
the margin for maneuver is limited.” This poses a staggering challenge for the CCP in the
mid-1990s and beyond.132
X. Social Instability
Urban Instability
Protest rallies, group petitions, street blockages, street demonstrations, sit-ins,
slowdowns, industrial strikes (illegal since 1982), acts of sabotage and physical violence
against managerial personnel, tax riots, and the like, have become a prominent feature of
the social landscape in the Chinese cities in the reform era. Available sources indicate that
many types of social conflicts are on the rise at a rapid pace in China in recent years. In
addition, conflicts have been worsening in terms of scale of participants, damage, and
violence.
Grievances that sparked these public protests often reflected the predicaments of
debt-ridden state enterprises under reform, including lay-offs, benefit cuts, and
management corruption. In the mid-1990s, when massive lay-offs, plant closures, and
delays in pension payments occurred, strikes gave way to sit-ins and public
demonstrations by unemployed and retired workers as the most common forms of protest.
132
World Bank, Macroeconomic Stability in a Decentralized Economy (Washington, D.C.: World Bank,
1995). Nicholas R. Lardy, China’s Unfinished Economic Revolution, (Washington, D.C.: Brookings
Institution Press, 1998), p. 11.
347
Labor protests in the post-Tiananmen decade have witnessed a heightened tendency for
workers to go beyond the confines of their workplace. Situations might get out of control
since they are often joined by other disgruntled segments of the local economy and
peaceful protests could easily evolve into riots and violent conflicts.133
For example, in late 1995, in Nanchong, a Sichuan city, 20,000 workers besieged the
town hall for 30 hours in protest at not being paid for six months. In late February 2000,
more than 20,000 workers and their families in Yangjiazhangzi, a mining town 250 miles
northeast of Beijing, battled with police and soldiers for three days. The miners were
incensed over the loss of their jobs and the alleged corruption of officials. They burned
car, barricaded streets, smashed windows and set oil drums afire in protests that were
finally quelled by a detachment of soldiers from the PLA. In late December 2001, around
2,000 workers occupied the Shuangfeng Textile Factory to protest corrupt officials,
missing pension funds, and mass layoffs. They battled repeatedly with police for two
weeks.134
Protests by workers happened frequently in China in the 1980s and 1990s. In urban
areas, the China Federation of Trade Unions recorded 97 strikes in 1987, and over 100 in
1988. In the late 1980s, China’s leaders were acutely aware of and very worried about the
portents of a proletarian counterrevolution emanating from Eastern Europe. They feared
similar infections spreading to Chinese workers. Consequently, modest worker efforts to
establish independent trade unions during the spring 1989 demonstrations were met with
an especially hostile response.135
Ching Kwan Lee, “Pathway of Labor Insurgency,” in Elizabeth J. Perry and Mark Selden (eds.),
Chinese Society: Change, Conflict and Resistance (New York: Routledge, 2000), pp. 49-51.
134
Geoffrey Murray, China: The Next Superpower (New York: St. Martin’s Press, 1998), p. 25. John
Pomfret, “Miners’ Riot A Symbol of China’s New Discontent,” Washington Post, April 5, 2000, p. A1.
Philip P. Pan, “’High Tide’ of Labor Unrest in China,” Washington Post, January 21, 2001, p. A1.
135
Martin King Whyte, “The Changing Role of Workers,” in Merle Goldman and Roderick MacFarquhar
133
348
However, urban social stability has been worsening since then. According to the
Hong Kong magazine Cheng Ming, drawn from an allegedly secret State Council report,
more than 850 illegal parades and demonstrations, over 1,210 illegal assemblies
(including sit-in demonstrations and petitions), over 6,320 illegal strikes (including
go-slow actions), over 440 disturbances, and over 210 riots occurred in China just in the
year 1993.136
Internal reports compiled by the Department of Public Security recorded a national
total of 480 strikes in 1992, 1,870 in 1995, and 1,740 in the first nine months of 1996. In
1995 alone, by official reckoning, protest marches involving more than 20 people rose to
a record-high of 1,620, including more than 1.1 million people and occurring in more
than thirty cities.137 According to the Ministry of Public Security, there were 60,000
protests in 1998 and 100,000 in 1999.138 According to the calculation by Larry Wortzel,
director of Asian Studies at the Heritage Foundation, 100,000 “large-scale protests
involving hundreds of people” were reported in China’s media between January 1997 and
November 2000.139
One recent Chinese government report acknowledged the country is in the midst of a
“high tide” of labor unrest, with the number of workers participating in strikes more than
doubling in the first half of the 1990s alone. Another report in an internal party
publication said there were 30,000 protests of significant size in 2000, or more than 80
(eds.), The Paradox of China’s Post-Mao Reforms (Cambridge, Mass.: Harvard University Press, 1999),
p. 174. Jeanne L. Wilson, “The ‘Polish Lesson’: China and Poland, 1980-1990,” Studies in Comparative
Communism, vol. 23, no. 2 (1990), pp. 259-280.
136
Hsun-che Chuan, “Secret Report on ‘Disturbances’ on Mainland Last Year” (in Chinese), Hong Kong
Cheng Ming, no. 198, April 1, 1994, p. 21, in FBIS-CHI-94-062.
137
Ching Kwan Lee, “Pathway of Labor Insurgency,” in Elizabeth J. Perry and Mark Selden (eds.),
Chinese Society: Change, Conflict and Resistance (New York: Routledge, 2000), pp. 49-51.
138
Gordon G. Chang, “The Shahs of Beijing,” Far Eastern Economic Review,
http://www.feer.com/2001/0109_13/p031fcol.html, accessed September 21, 2001.
139
Murray Scot Tanner, “Cracks in the Wall: China’s Eroding Coercive State,” Current History, September
349
incidents per day around the country.140
According to the Chinese Ministry of Labor, in 1993 the number of large-scale
labor-management disputes, defined as anything from contract disagreements to outright
strikes, exceeded 12,000. In some 2,500 cases, workers became violent, besieging plants,
setting fire to facilities, engaging in strikes, or detaining their bosses or leaders.
Work-related disputes increased 10-fold between 1993 and 1999. Disputes in 1999 totaled
more than 120,000, a 29 percent increase from 1998.141
The depth of China’s internal problems was confirmed in a remarkably candid report
published in mid-2001 by a group under the Chinese Communist Party’s Central
Committee. It details mounting and increasingly confrontational “collective protests and
group incidents,” on a greater scale than had otherwise been reported. It cited corruption
as “the main fuse exacerbating conflicts between officials and the masses.”142
Crimes and Bombings
In addition to collective resistance to express people’s anger to the Chinese
government, crimes and bombings are two extreme ways in which individuals express
discontent with government policies as well as the social and economic situation. One
nationwide police tally found that in 1991 there were about 500 known criminal gangs
2001, p. 245.
Philip P. Pan, “’High Tide’ of Labor Unrest in China,” Washington Post, January 21, 2001, p. A1.
141
Yu-shan Lu, “CPC Guards Against Mass Disturbances” (in Chinese), Hong Kong Tangtai, no. 38, May
15, 1994, pp. 20-22, in FBIS-CHI-94-106. Ted Plafker, “Incidence of Unrest Rising in China,”
Washington Post, July 18, 2000, p. A20.
142
Robert A. Manning, “Beijing Rules, But It’s Got A Host of Problems,” Washington Post, July 15, 2001,
p. B1.
140
350
comprising a few dozen members to more than 100. By 1992, the figure had risen to
1,800, and by 1995 the number had mushroomed to nearly 11,000. By 1995, membership
was estimated at close to one million people, with each year thereafter almost doubling in
size.143
Gangs are active in both urban and rural areas and engage in smuggling, trafficking
of people and drugs, prostitution, armed robbery, racketeering, and even contract murder.
As a result, the total number of criminal cases has risen from 1.1 million in 1989 to 2.2
million in 1999. In that ten-year interval, murders soared 40 percent while the number of
armed robberies jumped nearly five-fold.144
Although the information on bombings was strictly concealed by the Chinese
government, some official reports have confirmed the seriousness of the situation. In
March 1997, a small bomb blew up outside a commercial building and another explosive
device ripped through a public bus in Beijing, at least killing two people and injuring 30.
Two months later, a suicidal migrant worker detonated a bomb in Zhongshan Park in
Beijing, just a few hundred yards from the Zhongnanhai compound where China’s top
leaders live. Meanwhile, five people were killed and six wounded in an explosion on a
bus in Guangdong.145
The Chinese Academy of Social Science revealed that an astonishing 2,500 bomb
blasts were recorded in the first nine months of 1998. In January 1999, crude bombs in 12
Patrick Tyler, “Crime (and Punishment) Rages Anew in China,” New York Times, July 11, 1996, p. A1.
Elizabeth J. Perry, “Crime, Corruption, and Contention,” in Merle Goldman and Roderick MacFarquhar
(eds.), The Paradox of China’s Post-Mao Reforms (Cambridge, Mass.: Harvard University Press, 1999),
pp. 323-324.
144
Martin Fackler, “China Battling Criminal Gangs,” Associated Press, 12:01 PM ET, February 18, 2001.
“ Serious Problem’ Remain in Public Order,” Central People’s Broadcasting Station, February 9, 1990, in
BBC Summary of World Broadcasts, February 13, 1990. Trish Saywell, “Crime Unlimited,” Far Eastern
Economic Review, November 2, 2000, p. 73.
145
Henry Chu, “Third Explosion in Beijing in 2 Months Reportedly Kills 1,” Los Angeles Times, May 14,
1997, p. A12.
143
351
different incidents were set off or discovered; 33 people died and more than 100 were
injured. In September 2000, five crude time bombs exploded in shops and on public buses,
injuring about 28 people. In January 2001, three bombs exploded in separate locations in
China, killing 19 people and injuring 41. On March 16, 2001, a series of explosions
caused by bombs tore through four apartment buildings in the northern industrial city of
Shijiazhuang, killing 108 people and injuring 38.146
Rural Instability
Peasants are similarly unhappy in much of China today, and frequently with good
reasons: informal taxation, fees, fines, appropriations, and other revenue extractions by
local officials place enormous burdens on farmers. Added to these issues are the frequent
resentment of peasants against the government for its birth control policies, corruption of
local officials, and their often gross abuse of power. Peasant unrest is substantial, but
mostly localized and sporadic, and occurs more often in the interior provinces than along
the coast. Rural discontent has manifested itself in a variety of forms, ranging from
protests and petitions to riots, some involving thousands of people. Burdened by arbitrary
and often unfair taxes and levies, Chinese farmers have shown a willingness to resort to
extreme means to gain attention and redress.
For example, according to the Sichuan Information Office, in June 1993, in Renshou
146
Nisid Hajari, “China’s Rage,” Time, February 15, 1999,
http://www.time.com/time/asia/asia/magazine/1999/990215/china_bomb1.html, accessed February 7,
2001. Philip P. Pan, “Deadly Blasts Level Apartments in China,” Washington Post, March 17, 2001, p.
A16. Trish Saywell, “Labor: On the Edge,” Far Eastern Economic Review, February 25, 2001,
http://www.feer.com/9902_25/p46labour.html, accessed February 19, 2001. Philip P. Pan, “Deadly Blasts
Level Apartments in China,” Washington Post, March 17, 2001, p. A16. Andrew Browne, “Chinese Blast
Suspect Driven by Hatred, Police Say,” Reuters, March 24, 2001, 2:39 PM ET.
352
County, Sichuan, local government demands for excessive highway repair contributions
resulted in riots involving more than 10,000 people. The armed police force fired tear gas
in order to disperse the crowd and rescue 180 policemen from the siege.147
It was reported that, from July 30 to August 2 in 1997, over 200,000 peasants in
twelve counties in Hubei province demonstrated against local officials who had used state
grain procurement funds to travel abroad and purchase cars, homes, office buildings,
leaving the peasants with IOUs. Eight of these demonstrations became violent. Peasants
called these officials “tyrants” and “swindlers” and asserted that “the peasant rebellion is
driven by the Communist Party!” The situation was quite similar in Jiangxi, Hunan, and
Anhui provinces, involving an estimated half a million participants, leaving at least 184
injured and 14 dead. In most cases, peasants attacked and occupied government buildings.
In some cases, leading cadres from the province and the prefecture were surrounded by
peasants and had to be rescued by the military. For instance, in August 2000, some 20,000
peasants rioted in Jiangxi province, and the government had to send in the army to stamp
out the unrest.148
According to the Hong Kong magazine Cheng Ming, drawn from an allegedly
top-level government report, the Chinese countryside witnessed some 1.7 million cases of
resistance in 1993, of which 6,230 were disturbances that resulted in severe damage to
persons or property. Among the so-called disturbances, 830 involved more than one
township and more than 500 participants; 78 involved more than one county and over
“Sichuan Spokesman on Riots” (in Chinese), Beijing Zhongguo Xinwen She, June 12, 1993, in
FBIS-CHI-93-112.
148
Cheng Mu, “Peasants Riots Erupt in Hubei and Jiangxi,” China Focus, October 1, 1997. Thomas P.
Bernstein and Xiaobo Lu, “Taxation without Representation: Peasants, the Central and the Local States
in Reform China,” China Quarterly, no. 163 (September 2000), pp. 754-755. Allen T. Cheng, “A Rural
Dilemma,” Asiaweek, February 23, 2001, <hhtp://taiwansecurity.org/News/2001/Asiaweek-022301.htm>,
accessed February 26, 2001.
147
353
1000 participants; and 21 were long-lasting events that enlisted more than 5,000
participants. This resulted in injury or death for 8,200 township and county government
personnel and peasants, of which 2,015 public security personnel were injured, and 385
killed. The following year showed a further escalation. In just the first four months of
1994, rural areas saw 720,000 protests, of which more than 2,300 were serious
disturbances that caused injury or death to nearly 5,000 township and county government
personnel.149
For 1997, Chinese officials reported that farmers had engaged in more than 10,000
cases of “unruly incidents” ranging from demonstrations and petitions to efforts to
surround and damage government offices. It was reported that between January and July
1998 alone, a total of 3,200 incidents of collective protests were sufficiently serious to be
recorded at the national level, and more than 420 of these involved conflicts in which
rural government buildings were surrounded by angry crowds. During the half-year
period, casualties were officially reported as topping 7,400, including more than 1,200
cadres and police wounded. Chinese government admitted there were 5,000 collective
protests in 1998.150
In 1999, the number of demonstrations reported to the central government reached
100,000 nationwide – about 270 a day, according to internal information leaked to the
Hong Kong-based Information Center for Human Rights and Democracy.151 According
Lu Nung, “Situation of Rural Instability Deteriorates” (in Chinese), Hong Kong Cheng Ming, no. 202,
August 1, 1994, pp. 28-29, in FBIS-CHI-94-152.
150
Willy Wo-Lap Lam, “Rural Unrest Sets Off Alarm,” South China Morning Post, October 16, 1998, p. 10.
Jonathan Unger, “Power, Patronage, and Protest in Rural China,” in Tyrene White (ed.), China Briefing
2000: The Continuing Transformation (Armonk, N.Y.: M.E. Sharpe, 2000), p. 87. Cited from Dongxiang
(Trends, Hong Kong), October 1998, pp. 11-12. Minxin Pei, “Is China Unstable,” Foreign Policy
Research Institute WIRE, Vol. 7, No. 8, July 1999, p. 5 of 9.
151
Cindy Sui, “Chinese Protesters Hit the Streets Demanding Government Attention,” Agency France
Presse, June 12, 2000.
149
354
to a speech attributed to Premier Zhu Rongji, China suffered 117 incidents of armed,
violent protest in 2000. Those incidents resulted in more than 4,300 casualties, of which
more than half were party cadres and government officials.152
The Root of Social Instability
The underlying problem of social instability is not simply corruption or malfeasance.
Fiscal stringency has significantly contributed to this instability. In the 1990s, the Chinese
government at all levels captured only 10-16 percent of GDP in taxes in its regular budget.
The result was that governments at all levels were beset by chronic shortages of funds,
while the Center’s capacity to redistribute resources from the rich to the poor provinces
drastically declined.
In fact, by 1999 more than 60 percent of total government revenues were derived
from fees. Poorer, agriculture-dependent regions had to rely on their own funds to
develop or provide essential services. Because agriculture was the major resource, rural
governments had to rely on extraction of taxes and fees from the peasants in order to meet
their expenses and to carry out development programs. An investigation by the central
government reported that almost 90 percent of the fees collected by local governments
were either unauthorized or illegal.153
In addition, gaining control over burdens was not simply a matter of securing the
compliance of local officials. Central agencies themselves were responsible for a part of
the burdens, especially fees, fundraising, and assessments. As a report by China’s
George Gilboy and Eric Heginbotham, “China’s Coming Transformation,” Foreign Affairs, July/August
2001, p. 34.
153
Minxin Pei, “Will China Become Another Indonesia?,” Foreign Policy, Fall 1999, pp. 100-101.
152
355
Agriculture Ministry revealed, by the end of 1991, 148 documents adding to the farmers’
economic burdens were in fact issued by 48 ministries and commissions of the State
Council. By 1999, about 20 percent of such fee revenues are collected by central
governments.154
Despite Beijing’s efforts to lighten farmers’ burdens, by the late-1990s, the situation
did not improve but, instead, worsened. The CCP Central Committee and the State
Council set requirements for reducing the peasants’ burdens almost every year in the
1990s, and issued orders in 1992 and again in 1996 to check fee rates and set the ceiling
for the rate at no more than 5 percent of the farmers’ annual net income. However, due to
heavy financial burdens and slumping agricultural product sale, income of some 900
million people living in the countryside decreased for four consecutive years – between
1996 to 2000. According to Chinese official figures, farmers in some places saw illegal
fees still rise in 2000, with fee charges, fund collections, and illegal fines rising by as
much as 21 percent. According to a 2001 official survey, pertinent fees for peasants in
Huanyuan, Anhui, was more than three times the agricultural tax.155
The Vigilance of Chinese Leaders and Public
Facing such social instability, Chinese leaders have been well alerted in the reform
Hao Jia and Wang Mingxia, “Market and State: Changing Central-Local Relations in China,” in Hao Jia
and Zhimin Lin (eds.), Changing Central-Local Relations in China: Reform and State Capacity (Boulder:
Westview Press, 1994), p. 49. Thomas P. Bernstein, and Xiaobo Lu, “Taxation without Representation:
Peasants, the Central and the Local States in Reform China,” China Quarterly, no. 163 (September
2000), pp. 742-752. Minxin Pei, “Will China Become Another Indonesia?,” Foreign Policy, Fall 1999,
pp. 100-101.
155
Shuguang Zhang, “China to Begin Comprehensive Reform of Taxes and Fees in Rural Areas” (in
Chinese), Beijing Xinhua Hong Kong Service, February 15, 2001, in FBIS-CHI-2001-0215. “China’s
Three Major Rural Reforms Introduced” (in Chinese), Beijing Xinhua Hong Kong Service, February 21,
2001, in FBIS-CHI-2001-0221. “PRC: Tax-for-fees Reform to Boost Economy Viewed,” Beijing Xinhua,
154
356
era. The seriousness with which the leadership views the situation can be seen in its harsh
response to the attempted formation of a tiny opposition party. The government feared the
nascent China Democracy Party would seek to politicize the workers’ complaints. On
December 23, 2000, President Jiang Zemin explained Chinese action and warned, “Any
factors that could jeopardize stability must be annihilated in the early stages.”156
In a meeting with President George Bush on February 26, 1989, Deng Xiaoping
emphasized, “In China the overriding need is for stability. Without a stable environment,
we can accomplish nothing and may even lose what we have gained.” 157 Even in 2001,
stability was still the foremost goal for Chinese leaders. In a March 6, 2001 meeting with
Hong Kong Chief Executive Tung Chee-hua on the Falun Gong spiritual movement in
Hong Kong, President Jiang Zemin stressed, “Stability is overriding. Any countries or
societies will have no prospects if they have no stability. Only stability will make the
economy develop and prosper.”158
Chinese leaders were very worried about the rural unrest. In 1991, Deng Xiaoping
reportedly said that China’s stability hinged on whether or not the lives of peasants
improved. Sometime in 1992, Deng warned, “Should problems arise in the economy in
the 1990s, they would most likely arise in agriculture.”159
The 1993 Renshou riots in protest against assessments for road construction shocked
central leaders. In early 1993, Wan Li, chairman of the NPC Standing Committee and one
February 22, 2001, in FBIS-CHI-2001-0222.
Trish Saywell, “Labor: On the Edge,” Far Eastern Economic Review, February 25, 2001,
http://www.feer.com/9902_25/p46labour.html, accessed February 19, 2001.
157
Deng Xiaoping, Selected Works of Deng Xiaoping (1982-1992), vol. 3, translated by the Bureau of the
Compilation and Translation of Works of Marx, Engels, Lenin and Stalin (Beijing: Foreign Languages
Press, 1994), p. 277.
158
“Chinese President Says Hong Kong to Deal With Falungong on Its Own,” Agence France Presse,
March 6, 2001.
159
Thomas P. Bernstein, “Farmer Discontent and Regime Response,” in Merle Goldman and Roderick
MacFarquhar (eds.), The Paradox of China’s Post-Mao Reforms (Cambridge, Mass.: Harvard University
156
357
of the pioneers of rural reform in the late 1970s, heard that when some peasants were
asked what they needed, the response was, “We need nothing but Chen Sheng and Wu
Guang,” the leaders of first large-scale peasant uprising in China’s history. Wan warned
that “the situation in the countryside is desperate…. Should the state neglect to find
solutions to these problems, conditions will go from bad to worse, with the peasants
turning against the state and letting agriculture slide into chaos.” 160 Vice Premier Tian
Jiyun told Tianjin NPC deputies at the 1993 session, “If there are problems in the villages,
no one in the present regime can hold on to power,” and the consequences would be
“unimaginable.”161
In retrospect, apocalyptic pronouncements of impending doom for the CCP regime
were obviously exaggerated. But in the years since, somber warnings have continued to
be issued by Chinese official media. In 1996, burdens on farmers were causing “extreme
anger.” In 1997, they were “a problem that still arouses the most vehement peasant
reaction,” and in 1998, they were “extremely unfavorable to the maintenance of overall
social stability.” Moreover, in the late 1990s, as the government’s worries about
instability increased, China’s Ministry of Public Security ordered the formation of
anti-riot police squads as a means of further beefing up the force for maintaining social
stability, including handling mass riots, violence, and terrorist cases.162
Press, 1999), p. 213.
Yu-sha Lu, “Outgoing NPC Chairman Warns of Peasant Unrest” (in Chinese), Hong Kong Tangtai, no.
25 (April 1993), pp. 13-14. “Wan Li Cites Deng Warning on Agriculture” (in Chinese), Beijing
Zhongguo Xinwen She, July 6, 1993, in FBIS-CHI-93-128.
161
“Tian Jiyun on Easing Farmers’ ‘Flight’,” South China Morning Post, March 22, 1993, p. 8, in
FBIS-CHI-93-054.
162
Thomas P. Bernstein and Xiaobo Lu, “Taxation without Representation: Peasants, the Central and the
Local States in Reform China,” China Quarterly, no. 163 (September 2000), pp. 753-757. Yibo Fang,
“Ministry of Public Security Will Strengthen Building of Anti-Riot Force,” Beijing Xinhua Domestic
Service (in Chinese), January 19, 2001, FBIS-CHI-2001-0119. STRATFOR.COM’s Global Intelligence
Update, “Beijing’s Balance Act: Economic, Security Concerns,” February 1, 2001,
http://www.atimes.com/china/CB01Ad01.html, accessed February 5, 2001, p. 1 of 4.
160
358
In fact, the Chinese public is also aware of the urgent need to maintain stability in
China. An international relations scholar in Beijing stressed, “After experiencing the
Cultural Revolution, people on the mainland greatly fear a repeat experience. This is why
the Mainland stabilized so quickly after the Tiananmen incident. People fear turmoil.”163
Another example is the Chinese suppression of the Falun Gong. An international
relations senior scholar in Beijing asserted that although Chinese authorities suppress the
Falun Gong with too heavy a hand, people basically support the government’s policy
because movements like the Falun Gong jeopardize social stability.164
XI. Conclusion
The challenges (or crises) described above were acute for China’s leaders by 2000.
This analysis has shown that the top Chinese leaders were constantly concerned about the
stability of their country and preservation of their power. Possibly, the challenges were
much more serious than this research explores. For instance, Thomas Rawski speculates
that cumulative GDP growth between 1997 and 2001 was no more than one-third of
official claims, and possibly much smaller. In particular, he considers that the growth
rates in 1998 and 1999 were between negative 2.5 percent and positive 2 percent.165
Rawski’s assessment was publicly confirmed by Premier Zhu Rongji, saying that if the
Chinese government had not adopted its proactive fiscal and prudent monetary policy
between 1998 and 2002, “China’s economy would probably have collapsed.”166 As a
163
An international relations scholar in Beijing, conversation with author, August 13, 2001.
An international relations senior scholar in Beijing, interview with author, July 11, 2001.
165
Thomas G. Rawski, “What Is Happening to China’s GDP Statistics?,” China Economic Review, vol. 12,
no. 4 (2001), pp. 347-354.
166
“Comparison – Xinhua Reports on Premier Zhu Rongji News Conference” (in Chinese), Beijing Xinhua
Domestic Service, March 15, 2002, in FBIS-CHI-2002-0315.
164
359
result, it is not simply a question of how to improve people’s living standards and thus the
CCP’s legitimacy, but a question of how to avoid major economic, social, environmental,
and political crises in China and thus save the country from possible chaos and
environmental calamity. At this point, any domestic or external instability, or a significant
slowdown in economic growth could lead China into chaos.
A senior economist at the DRC explained, “The Mainland has been emphasizing the
maintenance of stability since the mid-1990s due to staggering employment pressure
caused by SOE reform and migrants from the rural areas. Social stability can be only
maintained through economic development. However, the Mainland currently is facing
immense economic difficulties, including financial system reform and non-performing
loans, the unemployment problem, income and regional inequality, public finance reform,
and industrial development and upgrading. To solve the first four problems, the Mainland
needs to sustain rapid economic development. For instance, during the Asian financial
crisis, the reason the Mainland implemented active fiscal policy was to solve social
contradictions, not because leaders preferred high economic growth rates.”167
A scholar in Beijing added, “In the process of economic transition, there are many
factors of uncertainty that face the Mainland. They include inequality between urban and
rural areas, inequality between the East and the West, people’s psychological imbalance,
lay-offs, SOE reforms, medical insurance, housing, and enormous labor surplus in rural
area. As a result, social stability is extremely important. If there is any disturbance, the
result could be unimaginable. It could trigger farmers’ uprisings, a total collapse of the
state and social regime, and the rise of gangs. Such turmoil would have a very cruel
167
A senior economist at the Development Research Center of the State Council, interview with author,
July 31, 2001.
360
impact on China.”168
A senior scholar in Shanghai said, “In the process of economic reforms, the
Mainland needs to tackle serious internal problems, including SOEs, agriculture, financial
sector. After entering the WTO, these problems will deteriorate. The Mainland has
suffered tremendous pressure.”169 A senior scholar in Beijing also stressed, “Without 4-5
percent of economic growth, the society will become unstable and the CCP will hardly be
able to sustain its regime.”170
Many see China as a country governed by an effective authoritarian elite, but the
Chinese state is actually quite weak in terms of resource control. Beijing does not have
sufficient resources to meet the needs of economic and social reforms, in addition to
environmental protection. A Shanghai economist pointed out, “The Mainland’s internal
problems are very serious. The Central Government is powerless to promote reforms,
including the issues of state-owned enterprises, agriculture, and development in the West.
To be honest, in internal meetings, the Mainland clearly has bottlenecks.”171 Nevertheless,
if Beijing delays these reforms and protections due to fiscal constraints, the problems
could easily burst into crises in the very near future.
In fact, the conclusions of Chapters 6, 7, and 8 of this study all reflect these
staggering concerns in the minds of Beijing’s leaders. These challenges and fears faced by
Chinese leaders must be addressed through rapid, efficient, and sustainable economic
growth, which needs absolute domestic and external stability, sufficient economic, social,
and even political reforms, adequate environmental protection, and an international
economic and political environment conducive to these domestic priorities. China needs a
168
169
170
A scholar in Beijing, interview with author, July 12, 2001.
A senior scholar in Shanghai, interview with author, July 2, 2001.
A senior scholar in Beijing, interview with author, July 17, 2001.
361
peaceful and stable international environment to develop its economy for at least several
decades. In addition, China needs to cooperate with the international communities in
order to conduct foreign trade and acquire foreign capital and advanced technology.
With regard to the Taiwan issue, Chinese leaders have similar concerns and agendas.
In Chapter 7, the primary concern for Beijing not to impose sanctions against Taiwan as a
signaling tool might be the high costs of economic sanctions. In Chapter 8, it was shown
how Beijing’s emphasis on the absolute costs of imposing economic sanctions against
Taiwan reflected China’s priority on economic development. A Taiwan studies senior
scholar in Shanghai pointed out, “Since 1979, the Mainland has not wished to use
extreme measures to tackle Taiwan because the Mainland had to consider the overall
situation. The Mainland had to consider not only Taiwanese capital, but also foreign
capital and the progress of reforms and opening-up. The core of Mainland policies still
centers on economic development.” 172 A senior economist in Shanghai emphasized,
“Chinese leaders attach great importance to economic development. They would not
sacrifice the economy.”173 Many Chinese scholars unambiguously argued that Beijing
attaches great importance to economic development and would never sacrifice China’s
economic development in favor of imposing economic sanctions against Taiwan.174
An international relations senior scholar in Beijing further explained, “The Mainland
cannot afford the costs of China’s economic sanctions against Taiwan because the society
will be unstable and the politics will be in turmoil. For the Mainland, cross-Strait
economic interests involve the Mainland’s overall economic and social stability, as well
171
A Shanghai economist, interview with author, June 13, 2001.
A Taiwan studies senior scholar in Shanghai, interview with author, June 26, 2001.
173
A senior economist in Shanghai, interview with author, June 22, 2001.
174
An international relations senior scholar in Beijing, interview with author, July 17, 2001. A Taiwan
studies senior economist in Xiamen, interview with author, June 8, 2001. A Taiwan studies senior scholar
in Beijing, interview with author, July 13, 2001.
172
362
as the stability of the political regime. Whether the current regime can survive is at stake.
The Mainland regime dare not take this high of a risk.”175 A Taiwan studies senior
scholar in Shanghai and an international relations scholar in Beijing conveyed similar
concerns about what China has at stake.176
Actually, Chinese officials are very reluctant to jeopardize any economic
development, and usually cherish the achievement of economic reforms for personal
welfare. For instance, when asking whether China would impose economic sanctions
against Taiwan, a senior official of the Taiwan Affairs Office of the Beijing City
government said, “I grew up in Beijing and saw significant change due to rapid economic
development in the reform era. No one wants to ruin economic development by disrupting
cross-Strait economic exchange.”177
175
An international relations senior scholar in Beijing, interview with author, July 19, 2001.
A Taiwan studies senior scholar in Shanghai, interview with author, June 25, 2001. An international
relations scholar in Beijing, interview with author, July 13, 2001.
177
A senior official of the Taiwan Affairs Office of the Beijing City government, interview with author,
August 1, 2001.
176
363