The Long March to Development

BEIJING, China - A decade after the demise of Mao Zedong and his cultural revolution the Chinese are once more caught in a struggle between socialist modernization and orthodox Marxism.

Although initial debate focused on economic policy, many of the reforms seemed to blur the line between capitalist and socialist systems and prompted divisive calls for political liberalizations.

The ouster in January of Hu Yaobang, secretary-general of the Chinese Communist Party, was a significant setback in the eight-year campaign to reform China's highly centralized economy and may have been a personal setback for 82-year old Deng Xiaoping, the driving force behind the economic reforms that have westernized the Chinese economy.

Although Chinese officials reiterated their commitment to economic reforms in the days after Hu's fall, it is clear that the pace of change will be slowed.

"The resignation of Mr. Hu Yaobang will not change the Chinese policy of economic reforms," said China's Economic Counselor Xu Ji in Washington. "We will continue our economic reforms and our open door policy."

But Hu, a Deng protege, was perhaps the most prominent and vocal advocate of economic and political liberalization. Despite opposition from conservatives within the Communist Party, he was able to spur open debate on the Chinese economy and implement major reforms designed to bolster the country's flagging economy.

When student demonstrations shook the capital, Shanghai and other university cities in December and January, however, the conservatives gained the upper hand and purged the ranks of the reformers. Hu and several of the country's leading intellectuals advocating reform fell. There had been growing fear that the reforms had spawned too much open criticism, too much revisionism, too much "bourgeoisie liberalism."

In the months before January's crackdown the call for political reforms was widespread - printed over and over again, in various forms, in the Chinese press.

• The People's Daily carried an article by two graduate students arguing that "political democracy should be ensured by increasing the people's political participation and improving supervision on the misuse of political power." They advocated "direct general elections."
• An article in China Youth News: said "It is an ultra-left obsession to regard democracy as the preserve of the bourgeoisie and a taboo for the proletariat. In spite of certain I maladies inherent in the bourgeois democracy, such democracy has helped the world progress greatly. Certain forms of the , bourgeois democracy, such as the election system, can be used for reference in China."

Hundreds of articles in the Chinese press called for political and social reform and they were given perspective by a leading intellectual, Yan Jiaqi, director of the Chinese Academy of Social Sciences' Political Science Research Institute and vicedirector of China's Political Science Society.

When Paramount Leader Deng Xiaoping called for major economic reforms at the end of the 1970s, Yan writes in the magazine China Reconstructs, "many people did R not realize that far-reaching changes were ; needed in the social and political sphere, not just in the country's economic life. But the economic reforms themselves, as they developed, made the weaknesses in other spheres ever more apparent."

Yan called for revolutionary changes: "The current agenda for reform includes strengthening the legal system, reducing the overcentralization of power, developing a planned socialist commodity economy in which market forces have a supplementary role to play, making clear distinctions between the role of the Communist Party and the role of the government or of other institutions or economic enterprises, and establishing a socialist political system with a high degree of democracy."

Easier said than done, of course.

But in eight years, the government has made great strides on the economic front.

It decentralized decision-making - loosening control over enterprise managers and letting small farmers fend for themselves. It took steps toward allowing the market to allocate resources and set prices, and introduced material incentives to encourage both individuals and enterprises.

The initial results were impressive. By 1984, China Reconstructs was reporting on China's "gratifying economic progress," using figures from the state statistical bureau. The same figures also give an idea of just how poor China is and how far it yet has to go to lift itself from its Third World status to the ranks of fast-developing nearby nations, such as South Korea, Singapore, Malaysia, Thailand or the Chinesepopulated areas China claims, Taiwan and Hong Kong.

In 1983, states the report, the "total product of society" - presumably the gross national product, sum of the value of all products and services - was 1,105.2 billion yuan or $298.4 billion, about $298 per person, figuring 27 U.S. cents to one yuan.

The report is upbeat. "China's output of some industrial and agricultural products puts her among the top 10 world producers." The country is the seventh largest producer of crude oil and fourth in steel. It produces more grain and cotton than any other country. And the GDP grew at a rate of 8.2 percent per year from 1979 through 1983.

The report notes that an "imbalance" between heavy and light industry has been rectified - more light industry now - and "the average consumption level" has more than tripled, rising to an annual increase of 7.2 percent in 1979-83, compared to an annual increase rate of only 2.2 percent from 1953 to 1978.

Average wage per person in "collectively owned units" rose by 1.5 percent annually in 1953-1978 "but by 2.9 percent yearly in the last five years," according to the report. The rise in "rural disposable income" was especially marked, the report says, increasing only 2.7 yuan annually in the 1953-1978 period, but 20.2 yuan a year in the 1979 1983 period.

In 1983, states the report, China pumped out:

• 715 million tons of coal, up 7.4 percent over 1982
• 6.84 million TV sets, up 15.5 percent over 1982
• 40.02 million tons of steel, up 7.7 percent over 1982
• 108.25 million tons of cement, up 13.7 percent over 1982
• 387.28 million tons of grain, up 9.2 percent over 1982

The reforms sparked a booming joint venture climate. "From 1979 to 1985, 2,300 Chinese-foreign joint ventures, 3,700 cooperative projects and 120 foreign-run enterprises were approved," said Chen Bing-quan, vice-chairman of the AllChina Federation of Trade Unions, which represents about twothirds of China's 120 million urban workers. "Some 150,000 employees work in these enterprises," he added.

In the agricultural sector the reforms were the most successful. The communes were wiped out and farmers, though required to give a certain amount of produce to the state, were allowed to sell any excess on the open market. The amount of produce available to the Chinese population soared and many farmers became rich.

But while the reforms gave new dynamism to China's economy, they created dramatic problems. The reforms freed up part of the economy, but left the bulk of it still regulated from above. The result was a mild economic schizophrenia. The push for efficiency and the risk of bankruptcy for industrial enterprises failed to take into consideration that a worker's employer provided the social safety net. Attempts to encourage individuals to purchase homes were undermined because sale prices couldn't compete with rents, which hadn't been increased for 30 years. Rents, however, couldn't be increased without wage increases. And the Chinese government was forced to put on hold an essential price reform policy program because of rising inflation.

The reforms, deemed necessary to ensure development, at times seemed to contradict the basic tenets of socialism. Thousands of Chinese were now working in capitalist industries where the main motivating factor was profits.

"Part of the surplus value produced by the Chinese workers does go to capitalists in the form of profits," explained Chen Bing-quan of the All-China Federation of Trade Unions. "But these workers are protected by Chinese law from arbitrary treatment by their employers, and they know they are doing their job mainly for the sake of China's socialist modernization. They are not like the wage laborers in capitalist enterprises in other countries."

Vice Premier Wan Li was more to the point. "To develop the commodity economy, people should attach importance to profits," he said in a November speech to a rural conference here. "Make profits and seek profits by all legal means."

Although he conceded such talk seemed to contradict certain values, he said the need for socialist development transcended all.

The reforms, implemented in fits and starts, also failed to produce the kind of returns the Chinese leadership wanted. By mid-1986 it was clear that foreign investment was not growing by leaps and bounds.

The number of private businesses in China, on which the country pegged its future economic growth, soared from 150,000 in 1979 to more than 14 million by the end of 1985, but by mid-1986 had declined 3 percent.

Private businesses tend to be endlessly harassed by government bureaucrats and some private business people have simply given up.

The top Chinese leadership says it recognizes the problem and is trying to do something about it, just as it is trying to resolve the problems foreigners encounter when they attempt to invest in China. Foreign business people have complained loudly in the last year or so, and China responded in October by lowering taxes, reducing charges for labor, land and raw materials and allowing greater freedom in hiring and firing employees.

China also made efforts to reform its financial system.

In early December, 25 New York financiers lectured 200 high Chinese officials for four days at Beijing's Great Hall of the People on the intricacies of interest rates and swap mechanisms. The meeting was jointly sponsored by the New York Stock Exchange and the People's Bank of China as part of the Chinese push toward more capitalism. Deng Xiaoping received the financiers and told them "you are here to be exploited."

And reform of the banking system is just getting under way. China opened two experimental stock-and-bond exchanges, one in Shanghai, the other in Shenyang, capital of the northern province of Liaoning. A central Chinese industrial city, Wuhan, also opened a bond and foreign currency exchange. By the end of 1985 Chinese enterprises had sold one billion yuan in bonds and stocks.

Under the bank reorganization, the People's Bank became a central bank and the Bank of China, which deals in foreign currencies, is being restructured as a "federal reserve." Four specialized banks are being told to compete among themselves and with the newly re-established Bank of Communications, China's first bank since 1949 not wholly owned by the government. The basic idea is to undermine government control of capital: Under the system, up to now, state planners decided where money should go, and simply ordered the banks to deliver it. There was little or no risk assessment, as in western banks.

At the same time, China is planning to set up an insurance company for the purpose of underwriting project risks for foreign investors, according to Gu Ming, director of the nation's Economic Research Legislation Center. A separate bankruptcy law for insolvent joint ventures and foreign-owned enterprises is also being drafted, adds Gu.

And in a radical switch, banks in Beijing are now introducing personal checking accounts and local-currency credit cards for Chinese - the Bank of China began issuing credit cards for customers with foreign exchange accounts in mid-1985.

There's even been a Chinese insurance boom: Domestic insurance premiums of the People's Insurance Company of China registered a 58.6 percent increase in the first quarter of 1986 over the same period in 1985. The State Statistical Bureau reported first-quarter premiums topped one billion yuan.

But despite such radical reforms, foreign investment in 1986 was still down 20 percent. Stanley Lubman, a lawyer in Beijing with a San Francisco firm that represents many U.S. businesses, said the Chinese leadership, despite its jawboning, has ignored the fundamental question of whether foreign joint ventures can sell in the Chinese market and then take profits from those sales out of the country.

Chris Brown, director of the Beijing office of the National Council for U.S.-China Trade, said many problems investors face can be blamed on the drop in China's foreign exchange reserves, down from $16.7 billion in 1984 to just over $10 billion. Brown said "the Chinese ran out of money," and had to restrict the foreign exchange that foreign companies could remit in profits and dividends.

He said there are only three reasons to invest in China: Involvement in extracting oil, gas or coal; cheap labor and overhead in producing exports; or access to China's domestic market. "Almost all investment is in the first category," he said. ( See Powering the People's Republic, p. 10)

For instance, Armand Hammer's Occidental Petroleum has just signed a $475 million deal with three Chinese agencies, financed by 34 banks, to develop the world's largest open-pit coal mine in Shanxi Province.

China recently announced it would build 28 new power stations near coastal cities in the next 10 years to relieve acute power shortages: Shanghai, for example, fell two billion kilowatt hours short of its electricity needs in 1986. The new plants, some already under construction, will be coal-fed.

Atlantic Richfield and Santa Fe Minerals are negotiating, along with China National Offshore Oil Corp., to build a 620mile natural gas pipeline from China's Hainan Island to the Shenzhen Special Economic Zone just north of Hong Kong.

Recent non-energy deals include:

• Alcan, the Canadian aluminum company, has teamed up with a Japanese firm and a Chinese partner to build a $22.3 million aluminum plant in Shenzhen.
• Hua Shak Co. (USA), an American firm run by Riki Ishak, has concluded a joint management agreement with two Chinese garment manufacturers in Tianjin, with the U.S. firm buying 60 percent of the garments produced yearly.
• Pepsi-Cola will build a third bottling plant in China at Fuzhou, bringing its capacity to more than 15 million cases yearly. The other plants are in Guangzhou and Shenzhen. The new plant is a $4 million joint venture.
• A California entrepreneur, Charles Pankow, signed a contract with the Shanghai Farm Bureau to build a millionsquare-foot building on six acres to allow 600 non-Chinese families to live in a more Western style. The center will have modem apartments and offices, restaurants, supermarkets, a bank, a laundry, a swimming pool, a post office and racquetball courts. The idea is to fill the "needs" of such firms as IBM, General Motors, Hewlett Packard and General Electric, already operating in China. The cost: $60 million to $100 million.

Although China's open door policy has brought technology, capital and training to the country, its leaders are determined that investment and development be on their own terms. And for China - with its one billion people, its 3.7 million square mile land mass, its dependence on horse-drawn carts and coal fires, its self-imposed isolation - that pace will be slow. 0

William Steif, a freelance writer based in the U.S. Virgin Islands, writes regularly for the Multinational Monitor.