[A-List] China: contradictions among the three represents

["Michael Keaney" <michael.keaney@xxxxxx>]

China's desperate local enterprises
By Macabe Keliher
Asia Times: January 17 2003

TAIPEI - In a VIP chamber at Taipei's Grand Hotel dinning room, Huang Song
handed out glossy brochures detailing the incentives for investing in his
township in Wujiang of southern Jiangsu province, the most prosperous region
in mainland China. Cheap land, high-quality laborers and, most important,
just up the freeway from Shanghai and Suzhou. "We are the best choice in the
Yangtze Delta," the township party secretary said, holding out his glass to
toast the 10 Taiwanese businessmen come to hear his pitch.

It was almost a plea. Local industry profits in his jurisdiction have
steadily declined over the past few years, depriving his local government of
its income. Furthermore, in 2001 his superiors in the municipal government
told him to bring in foreign investors or risk losing his post. With only
one foreign company having set up shop in his village, Huang has found
himself in a precarious position. "For any foreign investors you bring in, I
will give you 2 percent off the top," he said privately in near desperation.

Huang's situation is not unique. He is the old face of local Chinese
officials who now stand at the front of a quickly changing economy,
threatening to bring it to its knees with their incestuous habits of mating
government and personal interests. Township and village party secretaries,
who made themselves rich and powerful by building village industry
throughout the economic reforms of the 1980s and 1990s, have been loath to
relinquish control of their financial empires to privatization. Instead, as
Chen Chih-jou, author of a forthcoming book on China's rural developments,
points out, "they have kept control of their local industries' resources and
managerial decisions, often lining their pockets at the price of company
insolvency". With a crisis looming, their tack now is to populate the
countryside with foreign investors, creating a quick fix that, when it wears
off, could find the economy reeling and the countryside under a wave of
protest from disenchanted peasants.

This was not what the Chinese government envisaged when it decided to
privatize the economy in the late 1990s. With state-owned enterprises (SOEs)
and township- and village-owned enterprises (TVEs) running up horrendous
debts - making as much as half of the nation's loans non-performing - the
central government wanted to get the state sector off of government
financial records and into private hands. The reform, spelled out by
President Jiang Zemin at the 15th Communist Party Congress in 1997, aimed to
make this unwieldy state sector more efficient by giving control of the
industry to individuals interested only in building and running a company
and not managing a local government. That is, it aimed to separate the
capitalists from the bureaucrats.

While the reform has succeeded in getting party secretaries out of direct
managerial roles of the companies, it has been unable to unseat them from
their all pervasive financial and social control. "Officials are deeply
involved in virtually all major decisions regarding the hiring and
compensation of managers, the establishment or closing of firms, the
mobilization of investment capital, changes in production line and marking
strategies," Andrew Walder, chair of the sociology department at Stanford
University in California, wrote in the mid-1990s.

Take Huang's case for speculation. He received a junior-high-school
education - which only 15 percent of peasants did at the time - and served
in the People's Liberation Army, which guaranteed him a cadre post when he
returned home. This laid the groundwork for his appointment as village party
secretary in 1984 and promotion to township party secretary in 1994. The
five-odd enterprises that he, as the village party secretary, set up and has
run over the past 17 years have been his businesses, in which he gives
himself bonuses and makes all investment and managerial decisions.

With his local power base confirmed and profits flowing, he did not want to
privatize the local industries. He could build gaudy houses or travel abroad
as he pleased on village expense, carrying wads of cash in excess of
US$20,000. He even sent his son to study in Australia, buying a house for
him there. Wujiang city had to order him to privatize TVEs twice after 1997,
once in 1998 and again in 2001. When the reluctant transition came, Huang
maneuvered to continue to exert his influence. His wife, for example, is the
accountant at the village's most profitable company. The owner of the
company as well as the other companies of the village are hand-picked by
Huang and well under his thumb.

"The whole system has developed in a way in which the official and the
capitalist belong to the same group and the peasants are left far beneath,"
says Chen, who is a research associate at Academia Sinica, Taipei. "A type
of network capitalism or clique capitalism has emerged and been reinforced
in the privatization process."

One could argue that this network capitalism has created its own crisis.
Facing price wars with a burgeoning market, real profits have been shrinking
or even disappearing, while the lack of reinvestment and innovation has led
to a decline in production. From 1997-2001, for example, rural enterprise's
contribution to the country's gross industrial output has fallen from 32
percent to 28 percent, according to Chen's research. "Companies are reaching
their limit in technology and skill and unable to compete with foreign
companies moving in," says Lin Chu-chia, professor of economics at National
Chengchi University, Taipei.

Recognizing an impeding crisis, Wujiang city government has ordered the
townships and villages to bring in foreign investors. It has instituted a
type of game in which the party secretary who brings in the least amount of
foreign investment for the year gets replaced. Although the rule is aimed at
increasing cash flow, building up industrial output, creating jobs and
stimulating growth, it further solders together the party secretary's role
as official and capitalist. Instead of acting like a governing body
responsible for the society and its people, the local governments have gone
nearsighted and are out trying to make a quick buck for themselves.

With the region shifting economic emphasis from domestic industry to foreign
investment, it faces the danger of reliance. Total foreign contribution to
China's gross domestic product (GDP) growth grew from 7.6 percent in 1992 to
18.2 percent in 1999. Even if foreign companies continue to invest, they
will not hire enough workers fast enough to account for TVE layoffs. Foreign
investment offers a one-shot injection for cash-hungry local governments who
collect land rent to support the governments' coffers and lifestyle of their
officials, while the fundamental problem of sustaining economic growth and
providing enough jobs continues to fester.