Business and Technology in China by Jing Luo

Business andTechnology in

China

The Understanding China Today series offers students and generalreaders the opportunity to thoroughly examine and better understandthe key contemporary issues that continue to keep China in the newsand sometimes at the center of global controversy. These issues includebusiness, technology, politics, government, civil liberties, family life,and gender concerns, among others.

Narrative chapters in each volume provide an introduction and briefhistory of the topic, followed by comprehensive discussions of the sub-ject area as it pertains to China’s present and future. With each vol-ume, specialists and scholars present a solid, up-to-date foundation forlearning about contemporary China, written in an accessible, engagingmanner.

As the world moves into the second decade of the 21st century, China’sposition on the global stage is more prominent than ever. The Under-standing China Today series provides vital insight into this interna-tional powerhouse for new generations of students, and others, seekingto understand a complex, ever-changing nation with a future as fasci-nating as its past.

Business andTechnology in China

JING LUO

UNDERSTANDING CHINATODAY

Copyright 2010 by Jing Luo

All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise,except for the inclusion of brief quotations in a review, without priorpermission in writing from the publisher.

Library of Congress Cataloging-in-Publication Data

Luo, Jing.Business and technology in China / Jing Luo.p. cm.—(Understanding China today)

Includes bibliographical references and index.ISBN 978-0-313-35732-9 (hard copy: alk. paper)—ISBN 978-0-313-35733-6

(ebook) 1. Business enterprises—China. 2. Technological innovations—Economicaspects—China. 3. China—Economic policy—21st century. I. Title.HD2910.L85 2010338.0951—dc22 2010000947

ISBN: 978-0-313-35732-9EISBN: 978-0-313-35733-6

14 13 12 11 10 1 2 3 4 5

This book is also available on the World Wide Web as an eBook.Visit www.abc-clio.com for details.

ABC-CLIO, LLC130 Cremona Drive, P.O. Box 1911Santa Barbara, California 93116-1911

This book is printed on acid-free paper

Manufactured in the United States of America

Contents

List of Figures and Tables vii

Preface ix

Chronology of Recent Events in the People’s Republic of China xiii

1. Growth 1

2. Handling the Global Financial Crisis 33

3. Growing Pains 49

4. Innovative Nation 85

5. Economic Reform 125

6. The China Model and Sustainability 161

Notes 193

Bibliography 217

Index 223

Photo essay follows page 84

This page intentionally left blank

List of Figures and Tables

Figure 1.1: China’s GDP Growth 1978–2008 2

Table 1.1: The U.S.-China Business Council Top 15U.S. exporters to China in 2008 14

Figure 1.2: Per Capita Annual Income (Yuan) 15

Table 1.2: Urban and Rural Incomes of SelectedRegions 16

Table 2.1: Losses of Chinese Banks during the GlobalFinancial Crisis 39

Table 2.2: Losses of Chinese Firms during the GlobalFinancial Crisis 39

Figure 4.1: Technical School Graduates in 10,000s 113

Figure 4.2: Number of Students Abroad andReturned 121

Figure 4.3: Number of Postdoctoral Graduates(1985–2008) 123


Preface

In roughly three decades, China has grown from a poverty-stricken country into the third-largest economy in the world. Aswe speak, China is making yet another leap: emerging from theglobal financial crisis, it is transforming from ‘‘world’smanufacturing center’’ into the world’s biggest buyer. But thebest part of the story is not yet heard: China’s next target is tobuild an ‘‘innovative nation’’ with a knowledge-based andenergy-efficient economy. Imagine that a blue sky will comeback to the cities and that rural streams once again will be safefor women to wash clothes and children to swim. In fact, that isexactly what the world depends on for a better future.The question is what has fundamentally changed to make

all this happen? An obvious answer is the adoption of the mar-ket mechanism in 1978. A less obvious but more profoundanswer is that Mao Zedong had created, unintentionally,through prolonged and ruthless class struggles, not only thereversing economic momentum, but also a mentality ready toreject ideological entanglement. Thus, the China phenomenonis a fruit of the conjugation of push and pull, of which thepushing force, or the internal force, was decisive. The result isoverwhelming: once the ordinary Chinese were allowed to get

rich, their will cannot be thwarted and their creativity knows nolimit. The new generation is free-thinking and pragmatic. Intheir mind, if the West appropriately learned technology andgot strong as a result, so too can the Chinese; if democracybrings social harmony, the Chinese embrace it and graduallyphase it in; if globalization is the way of modernity, the Chinesecharge in that direction wholeheartedly. If, however, the Westsinks into ‘‘subprime mortgage crisis’’ and the like, the Chineseare not willing to follow. The past 150 years of modern historyhave done much of the enlightenment, to a point at which theChinese are just too cynical to let the ‘‘invisible hand’’ of marketmechanism run loose. They carefully maintain the prosperity byshrinking the gap, building a safety net, developing domesticmarkets, and working toward justice, fairness, equality, rule oflaw, and so on, so that elements that may derail the economy areunder control. In this, the Chinese Communist Party, the mid-dle class, and people of all strata seem strongly bonded together.This is known as the ‘‘China Model.’’Going forward China faces a strong headwind. Rising costs

of labor, shortage of energy, shortage of natural resources, andgovernment-monopoly-induced corruption are but a few of along list of hurdles. Successfully managing the market mecha-nism may be the best of challenges. Ask a government officialor a grassroots entrepreneur, and they will tell you that themarket economy is such that if you try to regulate it, you mayend up killing it; but if you fail to regulate it, it grows out ofcontrol. This book presents China’s challenges in six chapters:Growth, Handling the Global Financial Crisis, Growing Pains,Innovative Nation, Economic Reform, and The China Modeland Sustainability. The book will present challenges and showhow the country prepares itself to win.The book was written with classroom needs in mind. Chap-

ters are structured to complement typical lectures on mod-ern China. Special terminologies are explained; a bibliographywith abundant online resources and a chronology are included.The book is also intended for the general public. Instead of

x Preface

extensive theoretical discussions, the reader will find individu-als’ stories and cases that are helpful for understanding thenature of events.I am indebted to the generous supporters surrounding me.

Dr. Lu Bin, chair of the Department of Urban and RegionalPlanning at Peking University, and Professor Gong Liwei,architect and senior engineer at the Design and Research Insti-tute at Tsinghua University, provided enormous help duringmy research in Beijing. Mr. Luo Qiang, of Golden ConcordNon-Ferrous Metals Holdings Limited, was an importantsource of inspiration on industrial development in China. Iam appreciative of Ms. Kaitlin Ciarmiello of ABC-CLIO forher careful editing work. Last but not least, I would like tothank Bloomsburg University where I work for its generoussupport of all academic work that I do.

Preface xi


Chronology of RecentEvents in the People’sRepublic of China

1949 The People’s Republic of China (PRC) is founded onOctober 1 in Beijing. The Nationalist governmentwithdraws to Taiwan. Mao Zedong declares the ‘‘Peo-ple’s Democratic Dictatorship.’’ Mao is appointed chairof the Central People’s Government; Zhou Enlai isnamed premier; and Zhu De becomes general com-mander of the People’s Liberation Army (PLA).

1950 The Sino-Soviet Treaty of Friendship, Alliance, and Mu-tual Assistance is signed in Moscow by Mao Zedong andJoseph Stalin. In June, Mao denounces American aggres-sion in Korea. In October, the Army of the Chinese Peo-ple’s Volunteers publicly enters Korea in support of NorthKorea. Also in this year, the Marriage Law is promulgatedby the central Government. The Trade Union Law andthe Agrarian Reform Law of the PRC are also passed.

1951 The Korean War progresses, with Chinese troops tak-ing Seoul. Mao Zedong’s son, Mao Anying, is killed in

Korea. Domestically, the Agreement of the CentralPeople’s Government and the Local Government ofTibet on Measures for the Liberation of Tibet is signedin Beijing; the agreement recognizes Tibet as part ofChina and grants the region autonomous status.

1952 The Three-Antis Campaign is launched in January, tar-geting corruption, waste, and bureaucratism. In Febru-ary, the Five-Antis Campaign begins; focused onbusiness operations, it is commonly viewed as the pre-cursor to deprivatization campaigns. Deng Xiaopingbecomes deputy premier.

1953 The armistice ending the Korean War is signed on July27. The First Five-Year Plan (1953–1957) starts. DengXiaoping becomes finance minister.

1954 Zhou Enlai and Indian prime minister Jawaharlal Nehrusign a joint communiqu�e that becomes the first interna-tional declaration to include the PRC’s ‘‘Five Principlesof Peaceful Coexistence.’’ The first National People’sCongress (NPC) convenes. Deng Xiaoping becomesdeputy chair of the National Defense Council.

1955 Zhou Enlai attends the Asian-African Conference (BandungConference) in Bandung, Indonesia; the conferenceseeks to build a united front of Asian and African nationsagainst colonialism and racism. Deng Xiaoping is electedto the Politburo. The Chinese Language Reform Com-mittee releases the first batch of simplified Chinese char-acters for use in newspapers in Beijing and Tianjin.

1956 In April, Mao Zedong delivers his influential speech ‘‘Onthe 10 Major Relationships.’’ In September, the EighthParty Congress elects Mao party chairman; Liu Shaoqi,Zhou Enlai, Zhu De, and Chen Yun are elected deputychairmen; and Deng Xiaoping is elected as secretary gen-eral of the Chinese Communist Party (CCP). In May,Mao Zedong calls for greater artistic and academic

xiv Chronology

freedom with the slogan ‘‘let a hundred flowers bloom,and a hundred schools of thought contend.’’

1957 Mao Zedong delivers his speech ‘‘On the Correct Han-dling of Contradictions among the People.’’ In June, thePeople’s Daily states that rightists are trying to overthrowthe Communist Party and an Anti-Rightist Campaign islaunched.

1958 In May, the Great Leap Forward is launched with thephrase ‘‘more, faster, better, and more economicallysoundly’’ as its general guiding principle. In August, atthe Politburo’s Beidaihe Conference, the People’s Com-munes plan is endorsed; the plan results in the organi-zation of 26,000 communes in less than two months.

1959 In March, the State Council appoints the Panchen Lamato chair the Preparatory Committee for the TibetanAutonomous Region. Democratic reforms start in Aprilin Tibet. In April, Liu Shaoqi replaces Mao Zedong aspresident of the PRC, with Song Qingling and DongBiwu as deputies. During July and August, an extremelyserious drought hits vast areas of China, affecting 30 per-cent of farm production. Rebellion erupts in Tibet. LinBiao replaces Peng Dehuai as defense minister.

1960 In July, the Soviets notify China of their withdrawal oftechnological support. With the exception of Xinjiangand Tibet, serious famine occurs across China, causingtens of millions of deaths.

1961 Wu Han’s controversial play Hai Rui’s Dismissal is pub-lished in January. The 26th World Table Tennis Cham-pionships take place in Beijing, with the Chinesewinning both the men’s and women’s singles titles.

1962 In October, Chinese troops launch major offensiveson the Sino-Indian border. A cease-fire is declared inNovember. Mao Zedong steps up emphasis on classstruggle.

Chronology xv

1963 In May, Mao Zedong launches the socialist educationmovement in rural areas.

1964 In January, Zhou Enlai launches an extensive tour ofAfrica. In August, the United States bombs North Viet-nam. In October, China carries out its first nuclear test.

1965 In May, China carries out its second nuclear test. In June,the Wenhuibao newspaper denounces Wu Han’s dramaHai Rui’s Dismissal as an anti-Party poisonous weed,thereby signaling the coming of the Great Cultural Revo-lution. The Tibetan Autonomous Region is formallyinaugurated in September.

1966 In May, the Politburo sets up the Cultural RevolutionGroup and calls for attacks on all representatives of thebourgeoisie who have infiltrated the party, government,army, and cultural world. In July, Mao Zedong swims inthe Yangzi River at Wuhan, refuting the rumor that he issick. In August, Mao Zedong, Lin Biao, and Zhou Enlaipreside at a Cultural Revolution rally in TiananmenSquare at which Red Guards make their first appearance.The Guards subsequently begin destroying historicalrelics. Chairman Mao’s Quotations are first published inthe form of the Little Red Book. Deng Xiaoping is oustedfrom his offices.

1967 In June, China tests its first hydrogen bomb. ByDecember 25, 350 million copies of Mao’s Little RedBook have been distributed.

1968 The army takes control of government offices, schools,and factories. Millions of young people are sent to thecountryside to receive reeducation from peasants.

1969 In March, Chinese and Soviet forces clash at Zhenbao-dao Island in the Ussuri River. More clashes occur inthe following months. In July, the United States liftsrestrictions on travel to China, and in December, it liftsits partial trade embargo. Liu Shaoqi dies.

xvi Chronology

1970 In April, China launches its first satellite.

1971 In April, the U.S. ping-pong team visits China and isfollowed by U.S. Secretary of State Henry Kissinger,who comes to Beijing in July. In October, China isadmitted to the United Nations.

1972 In February, President Richard Nixon signs the jointShanghai Communiqu�e in China, admitting that thereis one China and that Taiwan is a part of it. In September,China purchases 10 Boeing 707 civilian jet airlinersfrom the United States.

1973 Deng Xiaoping becomes vice premier in August. TheUnited States and China announce their intention toestablish liaison offices in each other’s capital.

1974 In April, Deng Xiaoping addresses the UnitedNations and denounces the world hegemony of theUnited States and the Soviet Union, the world’s‘‘superpowers.’’

1975 In January, Deng Xiaoping is elected deputy chairmanof the Chinese Communist Party Central Committee(CCPCC).

1976 An earthquake hits the city of Tangshan, killing morethan 250,000 people. Premier Zhou Enlai dies in January,and Mao Zedong dies in September at age 82. Mao’sdeath ends the Great Cultural Revolution. The radicalgroup called the ‘‘Gang of Four,’’ led by Mao’s widowJiang Qing, is arrested by Hua Guofeng, Mao’s hand-picked successor.

1977 University admissions based on college entrance exami-nations start. Enrollment based on recommendationsends. Deng Xiaoping is politically rehabilitated.

1978 The ‘‘Deng era’’ begins. Deng Xiaoping steps into thespotlight as an important leader and begins to repairthe devastation caused by Mao Zedong’s rule. Deng’smarket-oriented reforms, embodied in the maxim ‘‘to

Chronology xvii

get rich is glorious,’’ spark over 20 years of exponentialgrowth, lifting the masses out of poverty. In December,the Coca-Cola Company reaches an agreement withChina to sell its soft drinks in the country and open upbottling plants. In the same month, the Third Plenumof the 11th Chinese Communist Party Central Commit-tee (CCPCC) shifts the party’s focus to modernization,which is also seen as the onset of the economic reforms.

1979 In January, Deng Xiaoping visits the United States andresumes the Sino-American diplomatic relationship.From January to February, Chinese troops invade Viet-namese territory and destroy logistics facilities. In July,the Fifth National People’s Congress (NPC) announcesthe Criminal Law and the Organic Law of the Local Peo-ple’s Congresses and Local People’s Governments. Spe-cial economic zones are opened, including Shenzhen,Zhuhai, Shantou, and Xiamen. In September, the partycriticizes Mao Zedong’s Cultural Revolution as illjudged and calamitous. In October, political dissidentWei Jingsheng is sentenced to 15 years in prison.

1980 In February, the NPC Standing Committee declares regu-lations on issuance of academic degrees. In December, thePeople’s Daily declares that Mao Zedong made great mis-takes during his last years and that his Great Cultural Rev-olution was a disaster.

1981 Deng Xiaoping is elected chairman of the MilitaryCommission, and Hu Yaobang replaces Hua Guofengas chairman of the Chinese Communist Party CentralCommittee (CCPCC). Both Zhao Ziyang and HuaGuofeng are appointed deputy chairmen. The trial ofthe Gang of Four is held.

1982 In September, British prime minister Margaret Thatcherarrives in Beijing to start discussions about the future ofHong Kong.

xviii Chronology

1983 Selected Works of Deng Xiaoping is published in July.Sino-British talks over Hong Kong’s future begin.

1984 In October, the Third Plenum of the 12th Chinese Com-munist Party Central Committee (CCPCC) adopts a de-cision on reform of the economic structure, shifting thefocus to urban enterprises. Measures are taken tostrengthen the Tibetan economy. Fourteen coastal citiesand the island of Hainan are opened to foreign invest-ment. A Sino-British declaration on Hong Kong’s returnis signed.

1985 In May, the Chinese Communist Party Central Com-mittee (CCPCC) releases its Decision on the Reformof the Educational System.

1986 In September, Deng Xiaoping, during an interviewwith Mike Wallace of CBS for the television show 60Minutes, endorses Mikhail Gorbachev’s reforms in theSoviet Union and indicates that China’s economicreforms are not in conflict with communism. In Sep-tember, the Shanghai Stock Market reopens for the firsttime since 1949. The Bankruptcy Law is issued inDecember. In May and December, students in largecities stage demonstrations demanding more rapidreforms and more democracy.

1987 Faced with rising democratic pressures, the ChineseCommunist Party (CCP) reiterates its determination tostick to the ‘‘Four Cardinal Principles.’’ Hu Yaobangresigns in January. Writer Liu Bingyan is expelled fromthe party. Zhao Ziyang is appointed general secretary ofthe CCP, replacing Hu Yaobang. Student unrest occursin 22 Chinese cities. In November, Deng Xiaopingremains in control of the Central Military Commission.In December, Zhao Ziyang resigns as premier and isreplaced by hard-liner Li Peng. In October, 2,000 Ti-betan monks demonstrate in Lhasa in favor of Tibetan

Chronology xix

independence; the demonstrations lead to clashes withChinese authorities.

1988 China slides into economic chaos due to the rising infla-tion that peaks at more than 30 percent in the cities, ulti-mately setting the stage for future protests andprodemocracy demonstrations. Hainan is approved forprovincial status. The first exposition of nude paintingsopens in Beijing in December.

1989 On May 16, Deng Xiaoping and Mikhail Gorbachevmeet and announce the normalization of Sino-Sovietrelations. On June 4, followed by several weeks of stu-dents protesting in Tiananmen Square in Beijing,troops arrive with tanks, allegedly killing hundreds ofprotesters. The event once again isolates China on theworld stage. On June 5, President George Bush sus-pends high-level relations with Beijing in protestagainst the massacre. On December 10, U.S. NationalSecurity Adviser Brent Scowcroft meets Deng Xiaopingin Beijing. Soon after, Deng plucks Jiang Zemin, whowas relatively unknown, from Shanghai to be the newCommunist Party chief. Jiang replaces Zhao Ziyang.

1990 In January, almost 500 students who participated in thedemonstrations of the previous year are released fromdetention. In April, President Yang Shangkun promul-gates the Basic Law of the Hong Kong Special Adminis-trative Region (SAR) adopted by the Seventh NationalPeople’s Congress (NPC). The law is scheduled to takeeffect on July 1, 1997. Campaigns that aim at strength-ening patriotism and discipline are launched at educa-tional institutions.

1991 The first partial direct elections are held in HongKong.

1992 During his tour to Hainan and coastal cities, DengXiaoping reiterates his determination to continue

xx Chronology

China’s economic reforms. Beijing establishes diplo-matic relations with South Korea.

1993 Chinese president Jiang Zemin meets with U.S. presi-dent Bill Clinton in Seattle, Washington, during aninformal meeting of APEC leaders.

1994 The Three Gorges Dam project starts.

1995 Hong Kong holds legislative elections.

1996 Dong Jianhua (Tung Cheehua) is selected chief execu-tive of Hong Kong.

1997 Deng Xiaoping (1904–1997) dies at age 93. Deng’ssuccessor, Jiang Zemin, visits Washington. The Britishformally hand Hong Kong back to China on July 1.

1997–1998

The Asian Financial Crisis negatively affects many ofChina’s coastal businesses and causes severe deflation.The Chinese government maintains the yuan’s value.U.S. president Bill Clinton visits Beijing.

1999 NATO’s accidental bombing of the Chinese embassy inBelgrade, Yugoslavia, sparks a crisis in Sino-Americanrelations. China and the United States reach an accordon the terms of China’s entry to the World Trade Organi-zation (WTO). China recovers sovereignty over Macao.

2000 Chen Shuibian of the Democratic Progressive Party iselected president of Taiwan, while Li Denghui (LeeTeng-hui) of the Kuomintang Party (KMT) resigns.The 9th National People’s Congress (NPC) is held inBeijing in March; the Congress stresses anticorruptionefforts and economic cool down.

2001 In an act of terrorism, hijacked civilian planes takedown the World Trade Center in New York City onSeptember 11. An Asian-Pacific Economic Coopera-tion (APEC) meeting held in Shanghai in October isattended by American president George W. Bush. JiangZemin pledges to support the American war on

Chronology xxi

terrorism. China joins the World Trade Organization(WTO) in December. China wins a bid to host the2008 Olympic Games.

2002 The 16th Congress of the Chinese Communist Party(CCP) is held in November. The party completes asweeping leadership reshuffle. Jiang Zemin and otherolder leaders allow for a younger generation to takecontrol, headed by Hu Jintao and Wen Jiabao. JiangZemin remains chairman of the Central Military Com-mission. The SARS outbreak occurs in November, andattempts to cover up the spread of the SARS infectioncause scandal.

2003 The Tenth National People’s Congress (NPC) is heldin March. Hu Jintao and Wen Jiabao are elected presi-dent and premier, respectively, of the PRC. JiangZemin and Zhu Rongji step down.

2004 Hu Jintao quietly consolidates power while both he andPremier Wen Jiabao reveal populist agendas in their firstyear in office. Chen Shuibian is reelected president ofTaiwan in March, taking advantage of the popularity gen-erated by an unsuccessful attempt to assassinate him. Thegrowing belief that the assassination attempt was con-trived sparks suspicion of Chen Shuibian’s campaign strat-egy. In September, Jiang Zemin steps down from his lastposition as chairman of the Central Military Commission.In December, President Bush meets with Hu Jintao at the12th APEC meeting. Both sides express a commitment toa stronger Sino–U.S. relationship.

2005 CCP stresses curbing corruption and strengthen-ing education of morality and ethics. A Chinese explora-tion team reaches the highest peak of the South Pole.National People’s Congress passes the Anti-Secession Law.China starts floating the renminbi (RMB) based on mar-ket demand and in reference with major currencies.

xxii Chronology

Shenzhou 6, a manned spacecraft, is launched and returnssuccessfully. The agricultural tax of 1958 is eliminated.

2006 The State Council makes a proposal to stress China’sinnovative and competitive abilities in building a new-style country. Protection of migrant workers’ rights isurged. The Three Gorges Dam is completed with a totallength of 2,309 meters. The Qinghai-Tibetan Railway of1,958 kilometers opens. Three volumes of Selected Worksof Jiang Zemin are published. China hosts the BeijingSummit of the Forum on China-Africa Cooperation.

2007 National People’s Congress passes Property Rights Law,emphasizing investment in low-income housing. TheState Council proposes a plan to expand the service sec-tor and issues National Rural Minimum Living Stand-ard Guarantee System. Chang-e 1, a lunar explorationsatellite, is successfully launched. The Shanghai StockMarket Index rises from 3,000 early in the year to6,124 on October 16. The State Council makes energysaving and emission reduction part of the evaluationpackage for businesses managers.

2008 The Labor Law is promulgated to require a clearlydefined contractual period. Violent riots break out inLhasa, Tibet. A 7.9 magnitude earthquake hits WenchuanCounty, Sichuan Province, on May 12 killing 69,227people. During August 8–24 and September 6–17,Beijing successfully hosts the 29th Summer Olympicsand the Special Olympics. China ranks first in goldmedals in both Olympics. The scandal of melamine-tainted formula produced by Sanlu is revealed. Thou-sands of children are poisoned. China successfullyconducts the flight of Shenzhou 7, a manned spacecraft.Shanghai Stock Market plummets to 1,600; the gov-ernment cuts benchmark interest rate and one-yearbank deposit rate. Lehman Brothers declares bank-ruptcy; the government deploys a stimulus package of

Chronology xxiii

4 trillion RMB. The Chinese mainland and Taiwanstart direct air and sea transport and postal services,ending a 59-year ban.

2009 The State Council announces a plan of reform in health-care and medicine to provide basic healthcare to all ruraland urban residents. Hu Jintao attends a financial sum-mit in London and commits to joining efforts in com-bating the global financial crisis. The State Councilurges preventive measures for H1N1 flu. The China,Russia, India, and Brazil Summit is held in Russia tooutline cooperation between the countries. Serious eth-nic riots break out in Urumqi, Xinjiang AutonomousRegion, killing more than 180 people. Gross domesticproduct of the first six months grows by 7.1 percent,reflecting economic recovery.

2010 China reports 2009 GDP of 33.5 trillion RMB or 8.7percent increase over the 2008 figure. Google threatensto pull out of China after accounts of political dissi-dents are hacked, reveals that hackers exploited a ‘‘backdoor’’ intended for government’s forensics research.Secretary of State Hilary Clinton gives speech on freeInternet. U.S. makes $3.1 billion arms sale to Taiwan.President Obama meets Dalai Lama in the WhiteHouse, triggering Beijing’s strong protest. In defiance,Google stops censoring web searches and news servicesin China and plans to redirect users to its services inHong Kong.

xxiv Chronology

(China.

CartographybyBookcomp,Inc)


Chapter 1

Growth

The economic reform launched in 1978 by Deng Xiaoping hasresulted in profound changes in China. The most obviouschange would be the country’s productivity. As a result, people’sstandard of living is significantly higher. According to theNational Bureau of Statistics of China (NBS), back in 1978,China’s gross domestic product (GDP) was merely 364.5 billionrenminbi (RMB). In 2008, the GDP reached RMB30.067 tril-lion or approximately 4.2 trillion in U.S. dollars, which was a9 percent increase over the figure of 2007. Urban per capitaincome grew by 14.4 percent, and rural per capita income grewby 15 percent. The 9 percent growth represents, however, a fallfrom five years of consecutive double-digit growth due to theglobal financial crisis. Within three decades, China’s GDP hasrisen to number three in the world, next to Japan and the U.S.To get a feel of what the GDP figure means, one compares

the GDP with its value of purchasing power parity (PPP). ThePPP theory says that for each identical product or service thereis only one price, inflation and other adjustments considered.Although it is not always easy to find ‘‘identical’’ products, thetheory is a convenient tool for estimating purchasing powersacross economies. For example, a regular haircut costs 10 yuanin China, which includes washing, drying, and, occasionally, acup of tea. This converts to 1.45 in U.S. dollars at the currentexchange rate of $1 to 6.88 yuan. A barber in the United States

might charge $10 before the tip for a 10-minute quick cut with-out washing, drying, or tea. Obviously, the yuan is worth a lotmore in reality than what the exchange rate tells. The PPP valueof a nation’s GDP is measured based on the cost of a commonbasket of goods and services. To make it simple, if measured onPPP basis, China’s GDP is estimated to be $7.97 trillion,according to the World Bank, surpassing Japan and rankingnumber two in the world, second only to the United States (witha GDP of $14.44 trillion in 2008). Nevertheless, China remainsa middle-income country due to its large population of 1.3billion.1 The World Bank estimates that China’s ‘‘$1 per daypoverty rate’’ may have increased from 10 percent in 2004 tobetween 13 and 17 percent in 2008, as a result of rising prices.2

Yet, China’s progress is astonishing. In 2005, President HuJintao announced China’s goal of achieving the $4 trillion GDPby 2020. Results as of 2008 show that he surpassed his goal forGDP well ahead of his prediction. On May 16, 2005, in hisspeech delivered at the opening ceremony of the Fortune GlobalForum, Hu had the following to say:

We in China have identified the goal for the first 20 years of this century.That is to firmly seize the important window of strategic opportunities tobuild a moderately prosperous society of a higher standard in an all-roundway for the benefits of our over one billion people. By 2020, we will quad-ruple China’s GDP of 2000 to approximately 4 trillion US dollars with aper capita level of some 3,000 US dollars, and further develop the econ-omy, improve democracy, advance science and education, enrich culture,

China’s GDP Growth 1978–2008

Figure 1.1. Source: National Bureau of Statistics.

2 Business and Technology in China

foster greater social harmony and upgrade the texture of life for the people.We are deeply aware that China, for a considerably long period of time tocome, will remain a developing country. The population figure of 1.3 bil-lion alone will make the fulfillment of the above goal a formidable chal-lenge and we must be prepared for a long and uphill journey ahead.3

Many elements have contributed to China’s economic take-off; three seem to stand out: market mechanism, science andtechnology, and a stable society, all of which will be examinedthroughout this book. The book begins by selectively examiningthe GDP components in more detail and with respect to theunderlying changes in the society. For purposes of consistencyand convenience, up-to-date data compiled by the National Bu-reau of Statistics of China (NBS) will be used throughout thebook, unless otherwise indicated.

THE RISE OF THE TERTIARY SECTOR

Since the start of the economic reform, a fundamental changehas gradually taken place: China’s primary and secondary sector-dominant economy is changing into a tertiary sector-dominanteconomy. The ‘‘primary sector’’ is typically composed of agricul-ture, forestry, fishery, and mining. The ‘‘secondary sector’’ is typ-ically composed of heavy and light industry and construction.The tertiary sector is known as the service sector. Before 1978,approximately 90 percent of the GDP was contributed by agri-culture and industry. This situation had a political backdrop—that is, the primary and secondary sectors were home to peasantsand workers who were, according to the classical communism,the leading classes of the society. The Chinese Communist Party(CCP), as the leader of these elite classes, certainly would stressthese economic sectors more than anything else. Additionally,the Cold War was big reason why these sectors were special, asthey provided weaponry to the military.Around 1990, after some 12 years of economic reform, the

primary sector started to decline dramatically, ceding place tothe tertiary sector that provides services, such as education,

Growth 3

scientific research, hospitals, tourism, and so on. In 1990, theprimary, secondary, and tertiary sectors contributed 41.7 per-cent, 41 percent, and 17.3 percent of the GDP. By 2007, theshares of primary, secondary, and tertiary sectors were respec-tively 3.6 percent, 54.1 percent, and 42.3 percent.The economic structural change occurred for several reasons.

First, the reform of State-Owned Enterprises (SOE) in urbanareas had led to tens of millions of workers being laid off. Theservice sector suddenly becomes China’s new hub of employmentopportunities. The most practical way to rejoin the workforce isto open small businesses, such as restaurants, hotels, clothingstores, and other service-oriented businesses. Second, rapid urban-ization and expansion of farming technology meant three thingsto rural China: (1) many farmers lost their land and became towndwellers willingly or otherwise; (2) fewer farmhands are needed totill the family plot, more and more backbreaking work beingdone by machinery or by businesses that offer machinery farmingservices; and (3) farmers dream of enjoying a dazzling variety ofopportunities in the cities. This has led 150 million migrantworkers to find jobs in China’s cities, primarily in constructionprojects (secondary industry) and the service area (tertiary indus-try). Third, the service sector is a ‘‘gender-equal’’ sector, meaningthat women have better opportunities to develop their potentialthere than in the primary and secondary sectors. In certain areas,such as stores, hotels, airports, and banks, women have better jobopportunities than men.Equality is certainly a relative concept in China. Many say

that there was more equality, whether it is gender- or income-related, during Mao’s time than in the transitional society today.But few would want to go back. People are more willing to solvethe discrepancies that have arisen rather than give up the marketmechanism. That said, economic polarization and social dis-crimination are serious problems that the Chinese governmentmonitors closely. In fact, numerous reports have revealed exploi-tation of migrant workers, in particular, female migrant workers.Nevertheless, the general trend seems to be that the tertiary


sector is a favorable place for women to join the workforce. Forexample, the Statistics Bureau of Shandong reports that, in2007, 70.27 percent of working-age women (16 and above) areemployed,4 despite the fact that rural working women remainmore tied to farming-related jobs (64.19 percent) than men(50.64 percent), as a matter of tradition. In 2007, 18.98 percentof working women found jobs in the tertiary sector. This num-ber was 3.86 percent higher than two years ago. These womenfound jobs in business sectors, such as retail, hotel, catering,finance, education, health care, social welfare, and social securityoffices. The report indicates that most jobs are temporary or sea-sonal and pay hourly wages, reflecting characteristics of the sec-tor. Nevertheless, it is obvious that both economic growth andsocial stability will benefit from an expanding tertiary sector.Many speculate that China’s social equality in general will beimproved markedly due to the expansion of the tertiary sector.Finally, the dominance of the service sector has been the trend

of all developed economies where knowledge-based industrytakes the central position, pushing research and development(R&D) and education to a new height every day. According tothe World Bank’s data, in 2005 the United States, Britain, Canada,Israel, and Germany’s tertiary sectors respectively accounted for77 percent, 76.3 percent, 75.3 percent, 75.6 percent, and 68.7percent of these countries’ economies. The Chinese governmenthas put developing the tertiary sector on the top of the agendasince 1992. ‘‘The Decision of the CCP Central Committee andthe State Council on Ramping up Tertiary Industry,’’ issued in1992, is a milestone policy that led to the crucial economicstructural shift. For example, it carries the following directives:

Article 1.A developed tertiary sector is the necessary result of economic and socialprogress. It reflects the developmental level of a country’s economy. Ourcountry’s tertiary sector has lagged behind and no longer fits the broadereconomic development . . . We must seize the opportunity to raise the ter-tiary sector to a new level.

Growth 5

Article 4.During the 1990s, a large proportion of the labor force moves out of theprimary and the secondary sector each year, creating new demand foremployment opportunities. The tertiary sector has a unique potential inabsorbing the extra labor, thanks to its diverse disciplines, specialties, andin particular, its capability of hiring a great number of talents in scienceand technology. Accelerating the tertiary sector will be the primary meansto alleviate our country’s worsening pressure of employment.

Article 5.By the end of the 20th century, our people’s living condition will reach thelevel of ‘‘relative comfort.’’ In contrast with the ‘‘survival level,’’ ‘‘relativecomfort’’ not only represents a risen income level, but more importantly,the quality of life and social service must also improve. With the expansionof the economy, our people not only will raise their expectations on cloth-ing, food, housing, transportation, communication, hygiene, and livingenvironment, but also they will be more demanding with respect to cul-tural entertainment, broadcast and television, books, sports, physical reha-bilitation, travel, and spiritual life. Developing the tertiary sector is theonly way to answer the increasing material and cultural demands and tofulfill the task of promoting socialist material civilization and spiritualcivilization.5

CHINA’S MIDDLE CLASS

The rise of the tertiary sector brought along a new socialstrata—the middle class. There are debates on how the middleclass concept should be defined. Within the frame of these lines,let us adopt the popular consensus that intellectuals, governmentemployees, and businesspeople form the core of China’s middleclass. It is not by coincidence that the highest incomes are earnedby people in this group. Moreover, this is also the fastest expand-ing group. Economists, politicians, and marketing experts al-ready have conducted a good number of studies on China’smiddle class. Property ownership, housing and transportation,access to technology, and political tendencies are among themost studied topics. The following are some of the findings.The household income of a Chinese middle-class family tends

to range from $6,000 to $25,000 per year, according to a study


by MasterCard Worldwide, Asia Pacific.6 According to thisstudy, the population size of China’s middle class has grown to87 million in 2005 or 39 percent of China’s urban households.By 2016, this population is estimated to reach 340 million or60 percent of China’s urban population. Living in gated com-munities and driving import cars, the Chinese middle-class earn-ings currently account for 27 percent of China’s total disposableurban income. This percentage will likely reach 40 percent by2015, according to the study.Travel is not only a way to celebrate a long-deprived freedom;

for intellectuals, it is also about living a traditional ideal ‘‘readingten thousand books and traveling ten thousand miles.’’ The mid-dle class are known as ‘‘travelers class’’ for good reasons. NBSdata show that, in 2007, 34.9 million international-bound Chi-nese visitors (person-times) were traveling for private purposes,which was more than three times the number of 2002. Domesti-cally, there were 1.6 billion travelers (person-times) in 2007,which was approximately twice the number of 2002. The Moni-tor Group, an international marketing research firm, studiedpurchasing behavior of the Chinese middle class with respect totheir occupation and demographic features.7 Their study exam-ined China’s tourism market and found three distinct types ofChinese tourists—business, leisure, and backpacking travelers.Of the three groups, the backpackers tend to be the most sophis-ticated travelers who have time, do not mind spending heavilyon technology and equipment, and are focused on unique expe-riences. The business travelers are willing to spend as well due tothe fact that their trips are mostly reimbursed. The leisure travel-ers, on the other hand, tend to be cost-conscious.In the area of store shopping behavior, the Monitor Group

identified six categories of Chinese middle-class consumers,including ‘‘Early Heavy Buyers,’’ ‘‘the Smarts,’’ ‘‘the Quality-Oriented,’’ ‘‘Trend Followers,’’ ‘‘Driven Businesspeople,’’ and‘‘Value Seekers.’’ Early Heavy Buyers consist primarily of profes-sionals in the tertiary industries and junior managers at multina-tional business firms. They are typically young, well educated,

Growth 7

and generally familiar with Western lifestyles. As consumers,they often shop online and spend heavily on discretionary items.They tend to buy the latest products and fashions that set themapart as trendsetters. Trend Followers tend to be junior white-collar employees and civil servants who are newcomers to themiddle class. They have a stable salary and some leisure time.Less well informed than trendsetters, they tend to wait for dis-counts and promotions. Value Seekers consist of white-collarworkers and government employees who are at the lower level ofthe middle class, but who have become good shoppers as theirincome rises. They tend to be the most critical with respect toquality and prices. However, they do spend handsomely to showoff their status.The Smarts, the Quality-Oriented, and Driven Businesspeople

tend to be old timers of the middle class. The Smarts tend toshop in specialty stores rather than outlets; the Driven Business-people possess higher purchasing power and tend to pay premi-ums for convenience, because most of them are wealthy and busyentrepreneurs. The Quality-Oriented are similar to the Smartsand the Driven Businesspeople, but they have more leisure timeand focus on family priorities when making purchasing decisions.The middle class is behind the wheel. A popular saying goes

that ‘‘behind every private car there is a middle-class family.’’Statistics provided by NBS show a dramatic change in privatecar ownership. In 1985, there were 19,000 private passenger carson the streets. In 2000, 3.65 million cars were registered. By2007, 23.16 million private cars were owned. In urban areas,there are 10.2 private cars per 10,000 residents, up by nearly 50percent from the figure in 2000. These numbers do not includeprivate trucks that are related to business uses. If private lighttrucks are included, however, the registered vehicles in 2007 total28.76 million. In comparison with the 135.9 million registeredpassenger cars in the United States in 2007 and 74.4 million gal-lons of gasoline consumed in the year,8 China’s passenger car mar-ket has a lot of catching up to do. That said, the 2009 passengercar sales figure is reported to be 45 percent above the 2008 number


reaching 10.3 million units, making China the biggest auto mar-ket in the world. Much of the surge, however, was attributed toBeijing’s economic stimulus.9 As a result, Beijing will constantlykeep an eye on signs of inflation for many years.Political tendencies of the Chinese middle class are certainly

no less tempting an area of study to researchers than their shop-ping behavior. It is widely believed that the middle class is thestandard bearer of democracy, freedom, and rule of law. In real-ity, however, it would be a mistake to equate the Chinese middleclass to radical democratic revolutionaries who would strive toreplace the CCP’s one-party rule with a multiparty government.In that respect, the Chinese middle class favors gradual democ-ratization under the socialist system, which they liken to SunZhongshan’s ‘‘tutelage’’ stages. Sun Zhongshan, founder of theRepublic of China in 1911, realized that the Chinese populacewas not ready to accept democracy. His plan was to install astrong government to teach the people their rights and proce-dures, before letting a full-fledged democratic system take over.Keenly aware of China’s contemporary history, and in particular,the impacts of the Opium War (1840s) and the Great CulturalRevolution (1966–1976), China’s middle class supports the cur-rent government in achieving a harmonious and relatively afflu-ent society (xiaokang shehui). Having witnessed the unsuccessfulRussian reform, they are appreciative of Deng Xiaoping’s stronghelmsmanship in guiding China to engage in a socialist marketeconomy. The Chinese middle class believes that no other politi-cal force could play the role of the CCP in leading China to eco-nomic prosperity. For them, the economy is number one, therest is of lesser importance. Despite the fact that members ofthe middle class view corruption of government officials with theutmost disdain and anger, that they complain loudly about lackof justice, and that they even braved the deadly repression dur-ing the 1989 Tiananmen Event to demonstrate against govern-mental corruption, members of China’s middle class areessentially of the opinion that China’s problems can be resolvedthrough the reforms. They share the understanding that while

Growth 9

the CCP has made mistakes, it is capable of correcting mistakestoo. Professor Jonathan Unger, head of the ContemporaryChina Center at the Australian National University, describesthe political stance of China’s middle class as follows: ‘‘Don’texpect regime change or democratization any time soon. Therise of China’s middle class blocks the way.’’10

As such, it becomes relevant, too, to reevaluate the representa-tion of the CCP. Is today’s CCP the same communist-leadingforce that works to eliminate capitalism and to bring about a so-ciety of communism in which there is no private possessionwhatsoever and in which people’s motivation is driven not bymaterial gain but rather by the communist conscience? Is theCCP the same party that engaged in bloody class struggle duringthe 1960s and 1970s? The popular Chinese consensus is that the21st-century CCP is no longer one man’s party but rather itembodies a broad representation within itself. It is no longer theleader of the proletariat marching toward the goal of wiping outcapitalism. As evidence, the CCP is implementing former Presi-dent Jiang Zemin’s theory of ‘‘Three Represents’’—representingthe advanced productive force, the advanced culture, and themajority of the people. President Jiang’s theory openly welcomesentrepreneurs to join the CCP, as long as they support socialismwith Chinese characteristics. The 21st century’s CCP hasemerged as a fan of the market mechanism. The image is boostedby thirty years of economic growth, as well as a successful recordin maintaining Hong Kong and Macau’s prosperity. Despite dis-beliefs in the West, the Chinese reality has become far more com-plex. The traditional catch-all label of ‘‘communism’’ can nolonger represent the new reality. The traditional view needs to bechanged. Metaphorically, to watch a 3-D film, one needs to wear3-D glasses or risks missing much of the details.

THE RISE OF AN OUT-GOING ECONOMY

One way to understand the growing scale of China’s import andexport sectors is to watch the impacts of each global economic crisis.


China stood strong against the Asian Financial Crisis of 1997–1998 without devaluing RMB, largely thanks to RMB’s inconverti-bility, which served as a protective shield against speculators. TheChinese government was able to peg the renminbi to the U.S. dol-lar at the exchange rate of 8.3 RMB to the dollar. Additionally, atthat time, almost all of China’s foreign investment was in the formof fixed assets, a situation that prohibits drastic funds movements.China suffered limited losses thanks to an underdeveloped finan-cial system at the time, as well as through tough interventions bythe government in timely diffusing construction bubbles. Thesemeasures helped China stave off recession temporarily, but likewisethey dragged the growth when the economy should have surged.Countries such as the United States have pressured China to give upthe peg system. Eventually, the renminbi-dollar peg was partiallyeliminated in 2005, and RMB has dropped to below 7 to the dollaras of mid-2009. The Chinese economy gradually has grown out ofthe cocoon of protectionism to open up to the world.NBS data show that the total volume of imports and exports

for 2008 was at 2,561.6 billion U.S. dollars, of which the valueof exports was 1,428.5 billion U.S. dollars, with a moderatetrade surplus of 295.5 billion U.S. dollars. The year-end foreignexchange reserves of China reached 1.95 trillion U.S. dollars, upby 27.3 percent over the previous year. Because of the global fi-nancial crisis, however, both imports and exports were on thedecline.11 The economy was hit hard.One way to look at the growth of China’s foreign trade is to

compare changes with respect to dependency ratios. In 2008,the ratio of import and export to GDP was 60.9 percent, inwhich export to GDP ratio was 34.1 percent. In contrast, in1997, the ratio of import and export to GDP was 34.5 percent;and export to GDP was 19.4 percent. In other words, during aperiod of 11 years, China’s foreign trade sector has almostdoubled, and the export sector alone has grown to be close tothe level of import and export combined in 1997.Wider exposure to foreign trade means more money made,

but it also means that China is becoming more vulnerable to

Growth 11

global economic crisis, and that has become the reality. Despitethe 9 percent rise in GDP in 2008, analysts predict a slowdownahead, snapping a five-year streak of double-digit growth. TheChinese government is doing all it can to safeguard an 8 percentGDP growth in 2009. The challenge has set in: on the onehand, China relies on fast economy growth to alleviate pressureof job demand that seems to grow even faster; on the otherhand, the sudden drop of orders from foreign buyers is takingits toll. For example, exports fell in November and December of2008 for the first time in seven years. As a consequence, thou-sands of factories were shut down in China’s export-drivensoutheast region. Job losses are in the tens of millions. Accordingto a Wall Street Journal report, out of the 200 million migrantworkers nationwide, 10 million had already returned to theirfarmlands by January 2009.12 The latest figure from the Bureauof Agricultural Administration of China indicates that, by Janu-ary 2009, 20–25 million migrant workers had lost their jobs.13

With factories closing due to the plunge in orders, the masses ofjobless workers raise the specter of more social turmoil and con-flicts over land and farming rights. Although migrant workers havetheir buffer space—the family plot—to return to, job loss tends tohave a psychological impact, as it involves a difficult adaptationprocess.14 The government is doing everything possible to easeunemployment pressure, and more important, to prevent unrestthat may arise when laid-off migrant workers return to their home-towns that likely have insufficient accommodative services. On theheels of the U.S. government’s $700 billion bailout package, theChinese government announced a 4 trillion RMB ($586 billion)plan in November 2008 to boost domestic consumption throughhigher domestic spending, particularly on construction and otherinfrastructure-related projects.15 In the West, the concern is cen-tered on potential consequences if China’s economic slowdowncontinues, which is likely to drag down surrounding economies.In January 2009, the Chinese government set out a budget of

850 billion RMB ($124 billion) by 2011 to improve health care.The long-awaited reform plan for its health care system will


provide universal medical coverage to the entire population ofChina. Insurance will cover all medicines, and an agency will beestablished to administer the system.16 These measures, how-ever, tend to take time to show effects. Domestic industries havealready weakened as demand for autos, real estate, and othergoods drops, particularly in the early stage of the economic cri-sis. The economy was hit again by the Sichuan earthquake thatoccurred in May 2008; the death toll was close to 70,000. TheChinese government, once again, intervened to stop theencroachment of the financial downturn.The Chinese government is fully aware of rural troubles,

including occasional violent protests, and deals with them aggres-sively. The government attributes such incidents to the followingcauses: (1) peasants’ land rights have not been properly protected,(2) environmental pollution has not been properly contained,(3) migration has not been properly handled, and (4) peasantassets have not been protected. The government openly admitsthat in the past years all focus has been placed on growing theGDP, leaving rural interests insufficiently attended.17

Further measures will be taken, according to the Bureau ofAgricultural Administration, to ensure peasants’ land rightsissued in Document Number 1 of 1984, including their rightto transfer land. Under these measures, no one will be allowedto force peasants to give up their land or to divert land use fornonagricultural purposes. Furthermore, the government willincrease investment in agricultural infrastructure, and raise levelsof subsidies for agricultural machinery, animal feeds, and fertil-izer. The government also will raise the minimum purchasingprice for grains. To do so, the government will increase publicgrain reserve levels as a measure to stabilize market prices. Mean-while, agricultural exports also will be encouraged. To improvepeasants’ life quality, the government encourages manufacturersand vendors of home appliances to open rural markets anddeliver quality products.As a result, China’s trade sector continued to grow through

2008, ranking third on the list of the largest export markets

Growth 13

of the United States, next to Canada and Mexico, with a total of$71 billion in 2008 up from $65 billion in 2006 and $41.9 bil-lion in 2005. Top exports to China include (1) computers andelectronics, $13.9 billion; (2) crop production, $9.2 billion;(3) transportation equipment, $7.6 billion; and (4) waste andscrap treatment equipment, $7.6 billion.18

The U.S.-China Business Council lists 15 top U.S. exportersto China in 2008 (see Table 1.1).19 In 2006, the U.S. pharma-ceutical industry exported approximately $346 million toChina—increasing by 54 percent from 2005 and by 305 percentfrom 2003. In 2007, according to industry sources, U.S. medi-cal device exports to China totaled $870 million—a 29 percentincrease over 2005 and a 71 percent increase over 2003.20

China’s role in the world economy is becoming increasinglyimportant. Former treasury secretary Henry Paulsen states,‘‘today more than ever the world is looking to China to be a bigcontributor to global economic growth.’’21

Table 1.1. The U.S.-China Business Council Top 15 U.S. exporters to China in2008

State Exports ($billion)Export Growth

(percent), 2000–2008

California 11.0 221Washington 9.9 422Texas 8.4 482Louisiana 3.5 230New York 2.8 263Illinois 2.5 371Oregon 2.5 710Georgia 2.0 512North Carolina 1.9 455Ohio 1.8 522Pennsylvania 1.6 491Massachusetts 1.6 211Tennessee 1.4 771Michigan 1.3 509Arizona 1.3 724


THE RISE OF PEOPLE’S LIVING CONDITIONS

A good way to understand China’s economic changes is to fol-low rural and urban household income and spending, and thetrend of Engel’s Coefficients (EC). When one examines Figure 1.2,the first thing that catches one’s attention would be the dis-crepancy between rural and urban incomes. In general, easternprovinces enjoy higher disposable incomes than inland westernprovinces. The closer to the east coast, the more money is made.Table 1.2 compares incomes of 2007 in a number of provinces.In 1999, worsening income gaps were a major reason under-

pinning the launch of a national economic movement known as‘‘Developing the Northwest’’ launched by former President JiangZemin. Filling the gaps is seen by the government as fundamen-tal to social harmony. On the other hand, however, there is con-cern that a drastic equalization of income gaps regardless ofeconomic conditions may cause difficulties, too. For example,some experts suspect that while income discrepancies mayindeed lead to social instability, whether reducing income dis-crepancies may generate real benefits for rural people is not nec-essarily certain. One scenario is if income levels are moreequalized the economy may fail to produce enough goods tomeet rising expectations.

Figure 1.2. Source: NBS

Growth 15

Despite the eye-catching differences, the rising curve repre-sents a fundamental uplift of people’s lives across the nation.The rough reality was when Deng Xiaoping’s economic reformwas initiated a schoolteacher made a 60 RMB monthly salary onaverage; a senior factory worker made 100 RMB per month onaverage; and the national average of per capita annual incomewas 343 RMB (urban) and 134 RMB (rural). This differencewas insignificant when the market was generally short of goodsand services. In less than three decades, despite the fact that thepopulation had increased by about 300 million, the average an-nual per capita incomes have risen to 15,781 RMB (urban) and4,761 RMB (rural) in 2008. Bank savings have dramaticallyrisen as well. The total rural and urban savings also rose to1,725.3 billion RMB in 2007, from 21 billion RMB in 1978.People’s living standard has tremendously improved, essentiallybecause of the dazzling variety of goods and services that moneycan buy.Nevertheless, China’s primary challenge remains with guaran-

teeing people’s basic life needs. China’s per capita GDP ranksnumber 127 in the world as of 2010. China’s Premier Wen Jiabaoconsiders China’s population both its strength and challenge:regardless of how small a difficulty is, when multiplied by

Table 1.2. Urban and Rural Incomes of Selected Regions

EasternRegionsand Cities

Annual Per CapitaHousehold (RMB)

WesternRegionsand Cities

Annual Per CapitaHousehold (RMB)

Urban Rural Urban Rural

Shanghai 23622.73 10144.62 Sichuan 11098.28 3546.69Beijing 21988.71 9439.63 Chongqing 12590.78 3509.29Zhejiang 20573.82 8266.15 Shanxi 11564.95 3665.86Guangdong 17699.30 5624.04 Qinghai 10276.06 2683.78Jiangsu 16378.01 6561.01 Ningxia 10859.33 3180.84Tianjin 16357.35 7010.06 Yunnan 11496.11 2634.09Fujian 15506.05 5467.08 Xinjiang 10313.44 3182.97Shandong 14264.70 4985.34 Gansu 10012.34 2328.92Liaoning 12300.39 4773.43 Tibet 11130.93 2788.20

Source:NBS Yearbook 2008


1.3 billion, it turns into a huge problem; regardless of how big aproblem is, as long as 1.3 billion people concert their efforts todeal with it, the problem will be easily solved.22 In 2008, theChinese government raised the poverty line from average annualincome of 785 RMB, or 115 billion in U.S. dollars, to 1,067RMB or 156 billion. This new poverty line has increased thenumber of poor people to 43.2 million who now qualify forgovernment relief. The government has promised to eradicatepoverty by 2020.23 Such efforts have won global praise.While income numbers reflect living conditions, economists

also resort to EC to gauge expenditures on basic materials, asincome levels may fail to reflect living conditions under certaincircumstances. EC refers to the percentage of spending on foodin the total consumption expenditure. Thus, lower EC numbersrepresent better living conditions. When Deng Xiaoping set thenational standard of living to reach the ‘‘relative comfort’’ by2000, his goal was translated into more specific objectives. Pro-fessor Xiao Jingjian of the University of Rhode Island and editorof the Journal of Family and Economics, looked into Deng Xiaoping’splan as it was laid out from the perspective of calorie intake.For example, for urban areas, a relatively comfortable life includedfulfilling the following requirements: an EC range between45 percent and 47 percent; per capita daily intake from food to be2,600 calories which may come from 80 grams of protein and70 grams of fat; life expectancy to be 70 years; every three lit-erate persons to subscribe to one newspaper; per capita livingareas to be 8–10 square meters or approximately 100 square feet;a family of three to have a living space of a two-bedroom house;the rate of complete living suites to be 60 percent; and per capitagreen public area to be 8 square meters. For rural areas, thefollowing objectives were set: the EC range to be between45 percent and 50 percent; daily protein intake to be greater than75 grams; reinforced concrete-structured living areas to accountfor 80 percent or more of living areas; household television pos-session rate to be 75 percent; the average educational level to beeight years; life expectancy to be 70 years; the rate of households

Growth 17

using electricity to be more than 95 percent; and the availabilityof clean water to be greater than 90 percent. On the scorecard, 95percent of the country had achieved the goal by 2000, including100 percent in the eastern regions, 78 percent in the centralregions, and 56 percent in the western regions. Professor Xiaonotices that Chinese consumers are paying more attention to foodquality, and as a result, non-staple foods have increased.24

NBS surveys show that the ECs have been on steady decline,indicating continuous improvement in living conditions. In1978, the ECs were 57.6 percent for urban residents and 67.7percent for rural residents. In 2002, these numbers were respec-tively 37.7 percent and 46.2 percent. The ECs in 2007 were36.3 percent for urban residents and 43.1 percent for rural resi-dents. According to a 2007 report by the Beijing Bureau of Sta-tistics, people in urban Beijing are on the verge of reaching a‘‘wealthy’’ life per global standards. The EC declined from 58.7percent in 1978 to 30.8 percent in 2006 for Beijing’s urban fam-ilies with an average spending of 1,442 RMB on clothing, up91 percent from 2000, which still represents a decrease of 0.8percentage points in the period. In 2006, every 100 familiesin urban Beijing had 206.1 mobile phones (up 650 percent),95.7 personal computers (up 198 percent), and 18.9 video cam-eras (up 250 percent), all of which had dramatically increasedsince 2000. The 15 million permanent residents of Beijingowned 1.81 million private cars in 2006, up 17.6 percent from2005.25

A fast pace of life calls for fast food; and eating out results in abigger proportion of the income spent on food. Does this tipthe EC model? Although no conclusion has been made withregard to this question, some experts point out that many urbanfamilies, particularly those in big cities, do eat out frequently,and rural families seldom go to restaurants. In a 2009 report byEmily Chang, CNN–Beijing, titled ‘‘The Kings of the West AreRuling the East Too,’’ Chang reveals that China has 2,573 KentuckyFried Chicken restaurants, and a new one is opened every day.McDonald’s has 1,065 restaurants, and plans to add 10,000 jobs


and more than 150 more restaurants in 2009. Beijing residentsdo not consider Western foods the cheapest in town; how-ever, they generally appreciate Western fast foods as trendy, con-venient, clean, and even healthy. The fast food has obviouslyattracted the modern middle class pursuing a modern lifestyle.Chang reports that China’s fast food business will balloon to58.8 billion U.S. dollars in 2009, and that it weathers the globalfinancial storm quite well. Moreover, as Chang indicates, whilemany factories are shutting down, the ones that provide fastfood businesses with cooking equipment are thriving.26

However, food expenditure makes only part of the samplingrange of the EC model; the proportion of other expenditures onlife’s basic needs present an important picture too. For example,the Chinese are paying more for education and health care thanindustrial countries. In 2005, Chinese urban residents spent 7percent of their income on health care, higher than Japan’s 3.97percent and South Korea’s 4.37 percent, and doubling that ofmany other industrial countries. Expenditures on entertainmentcontribute to the quality-of-life picture as well. The Chineseurban and rural people spent only 3.5 and 2.13 percent of theirtotal income on entertainment and service in 2006, while aver-age Americans spent 20 percent.27 These numbers are expectedto improve in the next phase of economic reforms. The follow-ing are a few more aspects reflecting China’s living standard.

Housing Space

Changes in family housing space represent a great leap for-ward. Housing reform, which will be further discussed later, hasmade it possible for every family to own a home. According toNBS data, at the time when housing reform started in 1986, theper capita floor space was approximately 14 square yards incities, and 17 square yards in rural areas. In 2006, urban percapita floor space had risen to more than 32 square yards incities and 36.7 square yards in rural areas. Rural floor space in2007 was up further to 37.7 square yards according to NBS.

Growth 19

The increase of home space is among one of the changes thathas a profound psychological impact. It reversed the humblingsituation under the public housing era in which three generationssharing a small apartment was not uncommon. The change hasgiven people a sense of pride and dignity, and a feel for modernlife. Strong evidence is in the booming new home decoration andrepair business in which foreign companies like Home Depot arecatching up with other industrial leaders that arrived earlier.

Social Welfare

Before 1978, the SOEs offered a ‘‘cradle-to-grave’’ benefitumbrella to employees. Rural residents never enjoyed health careor pension benefits. After the reform started, SOEs gave up theirbenefit programs, due to restructuring or simply bankruptcies.Today, providing basic insurance and pension benefits to 1.3billion people is a new challenge that the government is still try-ing to find ways to meet.The health care system is a good example. From the 1950s to

the early 1990s, the urban population was served by two majorpublicly funded insurance programs: the Labor Insurance Pro-gram (LIP) and the Government Insurance Program (GIP). LIPcovered approximately 10 percent of the total population work-ing for SOEs, and GIP covered approximately 5 percent of thepopulation working for the government. Inequality and insuffi-ciency are two main problems with these programs. Since thelate 1980s, the government has implemented reforms in multi-ple stages. From 1988 to 1994, a system of medical cost-sharingand social-pooling accounts to cover retired population, and cat-astrophic insurance programs were tested in a number of cities.The cost-sharing solution was tested further between 1995 and2000 during which time several models were tested, including athree-tier program for which costs were shared among patients,government subsidies, and providers. Such a program requiredrationing of drug coverage with a predetermined payment plan.These pilot measures were promoted in 57 cities. Beginning in


late 2000, reforms were made to hospital systems. The goal wasto reduce high drug costs that amount to as high as 50 percentof total health care expenditures, whereas in other countries suchas the United States, drug costs account for less than 10 percent.This was primarily caused by the existing system that allows hos-pitals to run pharmacies, linking drug sales to profit.28

By 2011, China plans to provide health insurance to all ruraland urban populations.29 Currently, China has three main basicmedical insurance plans, which vary greatly.

1. Urban Employed Basic Medical Insurance (UEBMI), established in 1998, isemployment based and covers only urban workers. It is made of a collectedfund for inpatient stays and individual medical savings accounts for outpa-tient visits. Payroll taxes paid by employers and employees finance theUEBMI. Contributions are equivalent to 14 percent of annual salary inShanghai, but only 8 percent in western provinces. About 200 million outof a total of 250 million urban employed participate in UEBMI.

2. New Rural Cooperative Medical Insurance (NRCMI), established in2003, consists of a pooled fund for inpatient stays and is financed byvarious government bodies and participants. Monthly contributions areon average 50 yuan ($7) in western provinces, split RMB10 ($1.50)from participants, RMB20 ($3) from provincial government, andRMB20 from the central government. Benefits are limited, with reim-bursement rates that can be as low as 30 percent for inpatient expenses,and operated on a ‘‘pay-first, claim-later’’ basis. Nevertheless, thescheme has expanded rapidly, and an estimated 800 million out of atotal of 850 million rural citizens participate in NRCMI.

3. Urban Resident Basic Medical Insurance (URBMI), established in 2007,covers the urban population not covered by the UEBMI scheme, such aschildren and students. It consists of a pooled fund for inpatient stays anddoes not cover outpatient visits, except in wealthy regions. Various govern-ment bodies and participants finance URBMI, with total contributionsper participant standing somewhere between UEBMI and NRCMI levels.Benefits are limited, and significant copayments are required. Coverage isexpected to be available in all cities by the end of 2010, and an estimated100 million urban residents already participate in the URBMI.30

Two health care reform documents released in April of 2009announced further details. The State Council’s ‘‘Opinions on Deep-ening Healthcare System Reform’’31 sets the reform framework

Growth 21

through 2020. The Ministry of Health’s ‘‘Implementation Plan forImmediate Priorities in Healthcare System Reform 2009–2011’’32

provides implementation details. According to these documents, in2010, the government will raise subsidies for health insurancepremiums of the URBMI and NRCMI schemes, which togethercover 900 million people, to gradually narrow the huge differen-ces in benefits among these plans. To reduce drug costs, the gov-ernment will publish a National Essential Drug List (NEDL)expected to contain 400–700 items with many low-cost genericsand traditional Chinese medicines. The central government willguide prices, provincial governments will be responsible for pro-curement and distribution, and basic medical insurance willcover prescriptions. Grassroots health care providers may notlevy a surcharge on drug sales. The government will require allhealth care providers and retail pharmacies to stock and retaildrugs on the NEDL, and grassroots health care providers maystock and retail only those drugs listed on the NEDL. All otherhealth care providers will be encouraged to use drugs on theNEDL as their primary choice remedy. Thus, the NEDL isexpected to largely define the drug market in all but the urbanhospitals. Additionally, the documents stress training of morehealthcare professionals to assure equal access. To achieve thisgoal, hospitals will be asked to reform their fee structuresas well.A few other areas have shown significant development as well,

such as pensions, accident insurance, and unemployment insur-ance. NBS reports that at the end of 2008, a total of 218.90 mil-lion people or approximately one-sixth of the total populationparticipated in a basic pension program, showing an increase of17.53 million people from 2007. Of this figure, 165.97 millionwere staff and workers, and 52.93 million were retirees. A total of316.98 million or more than one-quarter of the population par-ticipated in urban basic health insurance programs. Migrantworkers are receiving health insurance as well—a total of 42.49million participated in urban health insurance programs, anincrease of 11.18 million. Increasing participation in unemployment


insurance and accident insurance programs illustrates the transi-tion of workers’ mentality from the planning economy. Around124 million participated in unemployment insurance programs,increasing by 7.55 million, and 138.10 million participated inwork accident insurance, an increase of 16.37 million, of which49.76 million were migrant workers. About 2.61 million insuredreceived reimbursement in 2008. A total of 23.34 million urbanresidents and 42.91 million rural residents received the govern-ment minimum living allowance, an increase of 7.25 million.Education has become more accessible today than in 1990. In

2007, the promotion rate from primary schools to junior sec-ondary school was 99.9 percent; the rate from junior high schoolto senior high school was 79.3 percent; and the rate from seniorhigh school to higher education was 71.8 percent. These num-bers contrast with 74.6 percent, 40.6 percent, and 27.3 percentin 1990, respectively. China has obviously invested heavily indeveloping higher education.One perspective to keep in mind is that improving living con-

ditions is not the government’s responsibility alone. It involvespublic acceptance, which may take time. By tradition, the Chi-nese family was a self-sufficient unit and relatively closed to theoutside world. Modernization brought people onto a new plat-form on which mutual dependence at the society level is a neces-sity. Moreover, risks and related costs far exceed what atraditional family could handle. During the past three decades,the Chinese public has been increasingly aware of social benefitsand has become more confident in programs that are commonin the West. On the other hand, the public also has been devel-oping their trust in the government that is still reminiscent ofpolitical turmoil in the past and capable of making powerfulinterventions to the economy in the 21st century.

THE RISE OF ENTREPRENEURS

Economically, China is in a transitional state with a shrinkingpublic sector and an expanding sector of Privately Owned

Growth 23

Enterprises (POEs). Ideologically, the pursuit of material wealthis no longer regarded as a root of evil there, but rather, admiredas ‘‘glorious’’ (Deng Xiaoping). Moreover, the CCP encouragesits members to take the lead in getting rich. A CNBC programrefers to China as the ‘‘Republic of Profits,’’ which shows in away that American media are gradually becoming aware of thenature of modern China’s Communism. The CCP has switchedto populism since former President Jiang Zemin envisioned that astable society is one that enables people to get rich. This is by nomeans an invention of the CCP. The concept of storing wealth inpeople’s homes rather than in the government’s warehouses wasan idea of Mencius (fourth century BCE). This change has beensubstantiated by hundreds of entrepreneurial stories.China’s Finance Net published ‘‘10 Hundred-Millionaire

CCP Members Taking the Lead in Getting Rich.’’33 ‘‘Red capi-talists’’ is a new phenomenon of the transitional society. Manyare still trying to find a compromise with the concept. The atti-tude has been to get rich first and ask questions later. A few ofthese stories are selected and presented below.Lu Zhigang, 56, is chairman of the board of the Fanhai

Group, a real estate firm headquartered in Beijing. His personalproperty is worth 27.98 billion RMB, ranking number eight inForbes Richest Chinese 2007. His key to success was to be able tosecure funding to develop 8 million square meters (approxi-mately 2,000 acres) of prime land and to market real estate atthe peak of the market.Not every billionaire had smooth sailing; some worked their

way up the hard way. Lu Guanqiu, 62, is chairman of the boardand party secretary of Wanxiang Group, a manufacturing firmfor automobile parts headquartered in the Zhejiang Province.Lu is worth 13.13 billion RMB and ranks number 33 in ForbesRichest Chinese 2007. Back in 1969, Lu headed the NingweiCounty People’s Commune’s Farming Machinery Repair Shopand worked on the job for 10 years. In 1979, he turned therepair shop into a car parts factory, producing ‘‘wanxiang zhou,’’or ‘‘universal joint’’ (a device connected to the steering system),


and from which the company’s name ‘‘Wanxiang’’ (meaning‘‘multidirection’’) was derived. In 1983, Lu posted the tree seed-lings grown in his family plot as collateral, a total worth of20,000 RMB, equivalent to approximately $4,000 at the time,and contracted the factory under his leadership. The policy atthe time, known as Contract Responsibility System (CRS),allowed public firms to enter into a profit-sharing agreementwith the local government. Lu was one of the first to takeadvantage of this opportunity. In 1988, Lu bought out the factoryby purchasing all of its shares originally owned by the county gov-ernment for 15 million RMB. In 1990, Lu’s Wanxiang Groupwas established, with the company’s stock listed at the ShenzhenStock Exchange. From 2000 to 2001, Lu bought out three largecompeting firms. By then, Lu had turned a rural county’s farmingmachinery repair shop into a modern industrial firm.Some billionaires are entertainment experts. Chen Tianqiao,

34, chairman of the board of the popular online gaming com-pany Shengda Net (snda.com) headquartered in Shanghai, isworth more than 8.6 billion RMB, ranking number 52 in ForbesRichest Chinese 2007. When Chen was a student at Fudan Uni-versity’s Economics Department in 1990, he was awarded ‘‘BestStudent Leader.’’ Networking pays, in addition to sound busi-ness decisions. An expert in public relations, Chen maintainedgood relationships with government organizations. After servingon several deputy positions in a variety of companies, Chen roseto the top of Shengda Net and established a most popular interac-tive gaming network offering among other services a multiplayergaming platform (MMORPG). Chen has seen profit flowing inas China’s net users jumped to number one in the world: in 2008total Internet user-accounts in China were 300 million.34 Accord-ing to China Internet Network Information Center (CNNIC),555 million ‘‘netizens’’ play games on the Internet, and 52 percentof the total number of accounts are held by 22-year-olds andunder.35

Although most people never made it to the rankings of theseleading entrepreneurs, they improved their lives by hard work

Growth 25

and creative thinking, and their stories are no less exciting. WangYuancheng’s story is one such example.36 In 1988 Wang Yuan-cheng left his village in Ningyang County, Shandong Province,to join the millions of the migrant workforce. After working as alaborer on odd jobs for a few years at Taian City, he started aprinting business named ‘‘Oriental Press.’’ As SOEs wentthrough restructuring, millions of employees were laid off. Theunemployed population brought an opportunity: they urgentlyneeded retraining. Seizing this opportunity, Wang openedTaian’s first computer skill training school, ‘‘Oriental ComputerSchool,’’ in 1993. During the next 10 years, the school trained15,000 people, mostly migrant workers and laid-off employees.In 1999, he donated to the construction of three ‘‘Hope Com-puter Schools,’’ which provided computer skill workshops tothousands of children residing in mountainous villages. In 2001,Wang invested 200,000 RMB to set up the first hotline tele-phone service to help migrant workers find jobs.Like everywhere else in the world, the rich in China tend to

be politically active as well. Fighting for equality for the under-privileged working people of whom he was a member hadbecome Wang’s top agenda. Unlike doing physical labor, fight-ing along the legal front requires special training. When Wangleft his home village, however, he had to drop out of highschool. Despite the fortune he had built up, he had an uphillbattle ahead—making up the lost education. Over the years,Wang had always managed to make time in his busy schedule tostudy on his own. The hard work eventually paid off. Hereceived a bachelor’s degree and a master’s degree in law. Wanghas published profusely in professional journals and has been apopular speaker at universities. His personal Web site hasbecome a source of inspiration for many young people (http://www.wangyuancheng.com/about.asp).In 2003, Wang was elected representative to the 10th

National People’s Congress (NPC). During his term as represen-tative, Wang sponsored a number of bills to protect migrantworkers, all of which were passed. These bills included ‘‘Bill


of Protecting Interests of Migrant Workers in Urban Area,’’ ‘‘Billof Establishing a Law of Residential Relocation,’’ ‘‘Bill of Estab-lishing a Law for the Promotion of Equal Employment,’’ ‘‘Billof Establishing a Law for Promotion of Equal Access to Educa-tion,’’ ‘‘Bill of Establishing a Law for Guild Organizations,’’ and‘‘Bill of Establishing a Law of Business Operations under SpecialPermissions.’’It is not surprising that education has been stressed in China

more than ever. From top leaders to the grass roots, the Chineseare convinced that the country’s future lies in utilizing modernscience and technology. If the West is ahead because Westernerswere able to learn science and technology properly, so too canthe Chinese. One case was reported by Nicholas Kristof, aprominent journalist with the New York Times, who specializedon China issues. He recorded what he witnessed during a visit toa small village in Shandong where his wife grew up:

I visited several elementary and middle schools, accompanied by two ofmy children. And in general, the level of mathematics taught even in thepeasant schools is similar to that in my children’s own excellent schools inthe New York area. My children’s school system does not offer foreign lan-guages until the seventh grade. These Chinese peasants begin English stud-ies in either first or third grade, depending on the school. Frankly, mydaughter got tired of being dragged around schools and having teacherslook patronizingly at her schoolbooks and say, ‘‘Oh, we do that two gradesyounger.’’

Most impressive, after Kristof had posted a video of his visiton the New York Times’ Web site, a reader responded that shesaw in the video the house where she grew up. Her name wasLitao Mai; she was the third college student in the village. Ms.Mai; worked for Merrill Lynch in New York and described her-self as ‘‘a little peasant girl’’ transformed into ‘‘a capitalist onWall Street.’’37 As a side note, Merrill Lynch was bought out byBank of America in 2008 at the peak of the financial crisis.The most profound experience, one that marks China’s era of

transition, belongs to a small and shy country woman. Tang

Growth 27

Ruiren was born in 1930 in Xiangtan County of the HunanProvince. Her family was so poor that she had to beg for a livingin early years. At age 14, she was married into Shaoshan, MaoZedong’s hometown. Like all hardworking women at the time,she was never able to go to school. In 1959, when Chairman Maoreturned home for a visit, Tang was honored to pose next to thegreat leader for a photo opportunity during which Mao kindlyaddressed her as a ‘‘relative,’’ since her husband’s family name isalso ‘‘Mao’’ and his family was actually Chairman Mao’s neighbor.This meant a great deal at the time when Mao was worshipped asa god. Because of this coincidence, tens of thousands of RedGuards who were on pilgrimages in Shaoshan during the GreatCultural Revolution sought her autograph. Tang Ruiren remem-bers her sore fingers and the fervor of the radical youngsters.When Deng Xiaoping disbanded the People’s Commune in

1980 and implemented the ‘‘Household Responsibility System(HRS),’’ like her fellow villagers, Tang Ruiren found it hard toadapt. She wept for days when her family was also allocated afarm plot. People were clearly trotting on the capitalist road far-ther and farther, she complained. More shock was yet to come,however, when Shaoshan County decided to turn ChairmanMao’s hometown into a tourist hotspot. Everybody cheered andhundreds of small tourist businesses were started overnight.Unwillingly, Tang took out her life’s savings of 1.7 yuan andstarted a rice gruel stand. She was so embarrassed to be a vendorat first, since Mao had said that profit was evil, that she hid her-self behind trees to attend the business. One day, a Shanghainesetourist stopped by and yelled, ‘‘Boss, I need a bowl of gruel!’’Tang was shaken; she was struck by the word ‘‘boss.’’ No onehad ever called her ‘‘boss’’ throughout her life, and she loved it.Not long after, Tang started her first restaurant named ‘‘Mao’s

Family Kitchen.’’ By 2007, her MFK chain counted 202 restau-rants across China, employing more than 20,000 workers, earninga respectable revenue of 1.1 billion yuan annually, and paying90 million yuan in annual taxes. Back in the 1950s, the averagepersonal annual income in Shaoshan was 69.9 yuan. That numberhad turned into 9,452 yuan in 2008. When a foreign journalist


asked her whether she liked Chairman Mao or Deng Xiaoping bet-ter, Tang smiled, ‘‘Chairman Mao gave China independence, andDeng Xiaoping brought us prosperity. They are both great.’’38

There are many explanations about how China has developedinto one of the world’s top economies within merely three deca-des. In this regard, Kishore Mahbubani, a former diplomat ofSingapore, provides possibly the best of answers in his recentbook The New Asian Hemisphere: it is the market mechanism.Mahbubani states:

The explosive impact of the application of free-market economics to Chinashould not have been surprising. Each Asian society that has applied free-market economics has experienced spectacular economic growth. Most dis-cussions on the virtues of free-market economics have focused on efficiency.Clearly, countries that apply the principles of free markets experience hugeincreases in productivity.39

Another factor that has played a defining role in China’s risingwas Deng Xiaoping’s helmsmanship. The market system wasshunned as taboo during Mao Zedong’s era. Deng Xiaoping notonly had the iron wrist to break the taboo, but also was able toimplement a gradual transformation, avoiding turmoil such asseen in Russia’s reform. Deng named the gradual economic tran-sition the ‘‘socialist market economy’’ and prescribed two strat-egies to make the transition happen, both of which have onlycome to be appreciated over time: (1) domestic stability, and (2)peaceful rising on the international stage. Deng held firmly thatwithout a stable social environment, there would be no mean-ingful economic development. Here, China had already learneda hard lesson in the 19th and 20th centuries while dealing withforeign invasions and domestic political turbulence. Deng Xiaop-ing was determined to engage in stability and economic develop-ment without wavering. For example, here is how Deng stressedhis opinion with respect to China’s international stance:

With respect to world situation, I have three sentences to say. The first sen-tence is, we must adopt an objective view of things; the second sentence is,we must stand our ground firm; the third sentence is, we must handleevents calmly. Let us not rush things; we can’t rush anyway. Let us be calm,

Growth 29

be clear minded, and maintain an absolute tranquil mind. Let us bend ourhead and focus on one thing only, that is, our own business.40

Moreover, to remind the citizens of his message, Deng wrotethe following 28-character verse:

Lengjing guancha (observe analytically),Chenzhuo yingfu (handle calmly),Wenzhu zhenjiao (secure battle formation),Taoguang yanghui (keep a low profile),Juebu dang tou (never be the front-footer),Yousuo zuowei (strive to make real achievements).

In practice, China carries out the ‘‘equal distance diplomacy,’’staying away from power struggles while seeking every businessopportunity. One example of China’s diplomatic handling is theway it resolved the U.S.-China air collision event in 2001 inwhich a Chinese fighter jet crashed killing the pilot after a collisionwith an American intelligence gathering aircraft over the SouthChina Sea. The Chinese government demanded an apology,without deepening the conflict further. Throughout the Bushera, Beijing maintained a good relationship with the U.S. gov-ernment although, at the same time, Beijing maintained a goodeconomic and diplomatic relationship with Islamic countries aswell. In the same period, it improved relationships with neigh-boring countries and made inroads into Latin America andAfrica. As such, China maintained its concentration on eco-nomic development while steering clear of major global con-flicts. China was not able to stay clear, however, from Westerncriticisms on its business ties with countries that have a poor re-cord of human rights. On the issue of ethnic conflicts, the Chinesestance has been one of non-interference which was elaboratedby the former premier Zhu Rongji during an interview withCNN’s Judy Woodruff in 1999.41 Zhu Rongji believes that eth-nic conflicts rooted in history belong to ‘‘internal affairs’’ andmust be resolved by the groups involved. If international


intervention is needed, such responsibility would lie with theUnited Nations.Broad international business connections have allowed China

to secure energy resources to fuel its growing number of vehicleson the road, as well as its high energy consumption industries.Lacking fossil fuel resources, China must extend its quest overthe border to Russia, the Middle East, Africa, and Latin Amer-ica. In August 2008, China’s state-owned China National Petro-leum Corp (CNPC) signed a $3 billion agreement with Iraq todevelop the Al-Ahdab Oil field south of Baghdad, one of 41contracts that Iraq put out for international bidding.42 The non-intervention and economic-trade-above-all principle has domi-nated China’s diplomacy for decades. China’s strategy in Asia,for example, known as implementation of ‘‘Good Neighborli-ness’’ and ‘‘Mutual Trust, Mutual Benefit, Equality and Coordi-nation’’ has led to its leadership in the Association of SoutheastAsian Nations (ASEAN). The diplomatic adeptness has beenadmired by many scholars in the field. ‘‘It took Beijing 150 yearsto learn,’’ as Joshua Cooper Ramo, author of The Beijing Consen-sus, pointed out, and it has turned ‘‘China Threat’’ to ‘‘ChinaOpportunity.’’43

China’s fast economic growth raises many questions withrespect to its sustainability. President Hu Jintao has assured theworld that China will continue to stick to the following courses:

(1) China will continue to improve the quality of lives of 1.3 billion peo-ple, satisfying their growing material and cultural needs. To achievethis goal, China will develop technology and a knowledge-basedeconomy.

(2) China will continue with its current economic reform for a socialistmarket economy. In the meantime, China will also step up its institu-tional innovation to encourage creativity and inherent dynamics foreconomic and social development.

(3) China will participate more broadly in the international market place.To do this, China will improve its quality and efficiency of its eco-nomic growth, develop vigorously the circular economy and build asustainable eco-system.

Growth 31

(4) China will endeavor to create a win-win market place for its tradepartners. This includes increasing imports, encouraging foreign invest-ment, and stepping up improvement of intellectual property rightsprotection.44

The world is keeping a critical eye on whether China will beable to live up to these promises. In a sense, the test has beenserved: will China be able to survive the global financial crisis of2008–2009 and come out a stronger economy? There is evi-dence that it will.


Chapter 2

Handling the GlobalFinancial Crisis

The devastation of the 2008–2009 global financial crisis onChina’s economy is yet to be assessed. One could say with cer-tainty, however, that the crisis has generated a broader anddeeper devastation than the 1997–1998 Asian Financial Crisis.During the latter crisis, the Chinese government defended theeconomy by pegging the yuan to the dollar and simply safe-guarding the renminbi valuation with force. This time, however,the government has to do more by setting up a stimulus packageof 4 trillion RMB or US$586 billion. Moreover, the package isin close range to the $700 billion U.S. stimulus package, despitethe fact that China’s GDP is less than one-third of the U.S. GDP.This reflects a significant change in the structure of China’s econ-omy wherein the size of exports has risen to one-third of its GDPas of 2008.1 In 1998, the export sector was less than one-fifth ofthe GDP.Ripples of the U.S. subprime mortgage crisis reached China

in the second quarter of 2007, but the crisis did not take its tolluntil 2008. By the time the mortgage crisis had triggered aworld financial tsunami, China’s GDP growth rate had main-tained a double-digit pace for four years in a row: 11.4 percentin 2007, 10.7 percent in 2006, 10.2 percent in 2005, and 10.1percent in 2004. The momentum extended into 2008 when

Western economies fell into recession. Despite the fact that Chi-na’s exports sector was hard hit and tens of millions of jobs werelost, China’s GDP growth of 2008 was a spectacular 9 percent.2

For 2009, China makes all efforts to ‘‘safeguard’’ the target of 8percent growth, while experts generally expect a growth of nomore than 6–8 percent.In fact, before the economic downturn in the latter half of

2007, the Chinese government was concerned about the over-heated economy reflected by the runaway stock markets and thehigh-rising housing market, all of which reminded it of the 1997Asian Financial Crisis. The government therefore had initiatedcooling procedures, including tightening credit and suspendingconstruction projects. The correction efforts turned out to beunnecessary because of the world financial crisis and some preven-tive steps had to be undone. For example, the two hydroelectricprojects—Longkaikou Dam and Ludila Dam on the JinshaRiver—were asked to halt work. According to a China CentralTelevision (CCTV) report (June 20, 2009), in 2008, the Ministryof Environmental Protection had urged these projects to wait foran environmental assessment before starting construction. Theprojects went forward anyway encouraged by local governmentsof Yunnan. Construction companies believed that, given theadvanced stage of the projects, the construction plan eventuallywould be approved, despite the fact that the halt work order wasreissued. Analysts believe that again economic pressure has takenan advantage over environmental protection, as the stimulus pack-age was set to support energy and infrastructure improvement.3

Unlike the U.S. banking sector, the Chinese financial systemhad limited exposure to the U.S. subprime market, and there-fore it was able to operate without major corrections. The seri-ous effects that China suffered were primarily exports-related.During the first half of 2007, the export sector was on track forhigh growth, having reached close to 30 percent of its GDP. Thesudden collapse of Lehman Brothers in the United States haltedthe growth and resulted in loss in November, for the first timesince 2001. Because of increased reliance on exports, the impact


hit hard in coastal cities, such as Shanghai and Shenzhen. Mas-sive layoffs dampened consumer confidence, which immediatelyled to drastic contraction in sales of automobiles and real estate.Markets for building materials declined, affecting all other infra-structure-related industrials. October of 2009 was the worstmonth for China’s stock markets. Tao Wang, head of ChinaResearch, UBS Securities, expected the number of unemployedto rise above the announced 20 million urban registered laid-offworkers to about 40 million by the year’s end. This increaseaccounts for migrant workers who were excluded from the regis-tration process. Wang further worries about sporadic unrest dueto the fact that migrant workers do not enjoy insurance benefits,health care, or a ‘‘safety net,’’ and also due to widespread unfairtreatment to migrant workers. Many migrant workers are owedback pay and do not have proper channels to air their complaints.4

Observations by Chinese media seem to corroborate Wang’spredictions. One phenomenon was the early return to home ofmigrant workers. Every year, around the end of December, cities’train and bus stations across China are crowded with homeboundmigrant workers. With their luggage of all sizes, shapes, and col-ors, they stage a most miraculous scene of the time—migrantworkers on their way home to celebrate the new year and springfestival. In 2008, however, under the storm of the world financialcrisis, many returned home earlier. According to a report in ChinaBusiness News, the Guangzhou Railway Station served 1.174 mil-lion passengers from October 11 to 27. A total of 129,000 morepassengers passed through the station than the same time a yearago. Sun Guang, one of the migrant workers interviewed at thestation, told the journalist that he had worked in Guangzhou andthe vicinity for 11 years, making an average monthly income of3,000–5,000 yuan ($404–$674). Sun had decided to go back tohis village in Zhumadian of the Henan Province where he wouldstart a business of raising livestock.5

Bankruptcy waves hit small and medium-size enterprises(SMEs) particularly hard, and those that were weak in technologywere the first to bear the brunt of the crisis. Reports indicate that

Handling the Global Financial Crisis 35

during the first half of 2008 alone, 68,000 SMEs across thecountry collapsed. On the other hand, companies that hadupgraded technology thrived. One thriving fabric manufacturerin Dongguan of Guangdong Province, backed by an investmentfrom Hong Kong, had purchased 500 computerized weavingmachines; each is capable of producing more fabric than what28 skilled workers do in a low-tech factory.6

The toy industry turned out to be a most vulnerable sector. Thetoy industry in China has several unfavourable characteristics: itis (1) one of the largest export-oriented businesses, (2) primarilylow-tech, and (3) hub of massive employment. Because jobsin the toy industry typically are contracted to a wide range oftown and village enterprises (TVEs), its failures tend to affect awider geographic zone. The Xinhua News Agency reported thatmore than 50 percent of China’s toy exporters had closed in thefirst seven months of 2008. When Hejun Toy Company, one ofthe world’s largest toy makers, collapsed, 7,000 unemployedworkers congregated for two days in front of the county govern-ment’s building requesting to be paid salaries that had beendelayed for two and a half months, amounting to 24 millionyuan total. The government advanced the payment, quelling apotential major protest.7 China’s State Council has announcedmeasures to address the situation faced by exports and real estatedevelopment, both of which have dulled industrial production,and both of which are among the biggest employers. These stepsincluded raising export tax rebates on toys and textiles to 14 per-cent and providing policy incentives to homebuyers. For exam-ple, the governor of the People’s Bank of China (PBOC), ZhouXiaochuan, indicated that, given the state of the global economy,more needs to be done to stimulate domestic demand. Addi-tional measures may include further interest rate cuts, which thegovernment already has done multiple times since September2008, and an increase in infrastructure spending designed tostimulate economic growth.8 As a result, analysts speculate thatChina’s deployment of the economic stimulus package mayresult in a slower appreciation of the yuan against the dollar.9


Earlier, the Bush administration had vigorously pressured theChinese government to float the yuan in hope of reversing tradedeficits. The recent devaluation of the dollar and China’s domesticstimulus package seem to lead toward the same results anyway.Symptoms of psychological trauma, such as depression and

suicide, rose; the trend alerted medical and social organizations.One example is Yingshan County’s relief project. Many migrantworkers returned early to Yingshan County of the Sichuan Prov-ince from their employment cities in Guangdong. Many wereemployed by factories that produced shoes for export. Out ofthe 6,000 or so shoe factories across the Guandgong, 1,000 hadcollapsed by the end of 2007. Yingshan County’s survey indi-cates that most migrant workers know little about what the fi-nancial crisis is except that they lost their jobs as a result. Theyremain in disbelief that the good-paying jobs were gone over-night. The hardest part is coping with the psychological barrierto re-adaptation. Many unemployed migrant workers found itunrewarding to work at their home villages making less than halfof the monthly income they earned in the cities. The countyworked to provide counseling and retraining. Psychologicalcounseling has traditionally been a neglected area, as psychologi-cal disorder used to be attributed to ideological weaknesses. Thefinancial crisis changed this view.10 Most of the returnees lackappropriate guidance and opportunity for retraining. To fill thegap, freelance advice circulates on the Internet, like the onecalled ‘‘10 Things to Avoid’’:

1. Don’t resign; don’t change job; don’t change work field; don’t start anew business;

2. Look for possible back-up jobs;3. Don’t ask for raise, since job cuts hit high-salary makers first;4. Help friends get a job, so they’ll help you;5. Save money, buy government bonds, don’t buy stocks;6. Send money to parents; older people may have a harder time;7. Don’t buy car;8. Don’t be overconfident, expect the end of the financial crisis to be

more difficult;


9. Don’t divorce, don’t give birth;10. Even if life is still easy, be thrifty; trim spending to 70 percent.

In a way, the candor of these admonitions reflects the realityof a serious hardship felt by the common Chinese. However,Pieter Bottelier, a senior adjunct professor at Johns HopkinsUniversity School of Advanced International Studies, indicatesthat what may be more troublesome for China is the situationof college graduates. As tens of thousands of university graduatesfail to find jobs, the economy as well as social stability may beaffected down the line. Professor Bottelier writes:

The problem of unemployed university graduates is new in China, butpolitically and socially not less troublesome than the problem of unem-ployed migrants. In this respect, China’s labor market is beginning toresemble India’s, where large numbers of university graduates have beenunemployed or underemployed for many years. Of China’s 5.6 millionuniversity graduates in 2008, 1.7 million are reported to have been unableto find a job (Ming Pao [Hong Kong], December 15, 2008). The mainblame for this is thought to be a disconnect between some of China’shigher education programs and market needs, but the slowing economymust also have been a factor. The projected number of university graduatesfor 2009 is 6.1 million (Ming Pao, December 15, 2008).11

The silver lining of economic recovery is in China’s restructuredbanking system that had shaken off much of the nonperformingloans (NPLs) during the SOE reform in the late 1990s. Banks con-tinued with lending, reducing impact of the global crisis. The badnews is that China’s financial system did not completely stay clear ofthe U.S. derivatives market. Banks that held U.S. mortgage-backedsecurities (MBS) or derivatives through bankrupted U.S. banks,such as Lehman Brothers, lost heavily. Table 2.1 lists a numberof bank losses based on data from the fourth quarter of 2008.12

The indirect impacts, however, affected the economy morewidely. Table 2.2 shows losses resulting from a slowing exportmarket and fluctuations of the currency market. The Chinesemarket typically suffered from the latter kinds of impact.13


People in business widely believe that China’s crisis is an ‘‘eco-nomic crisis’’ rather than a ‘‘financial crisis.’’ What this means isthat with governmental stimulus money in place, bank lendingin China not only stabilized, but also expanded sharply inDecember 2008 and January 2009. It is widely speculated thatChina’s recession may bottom out in 2009 ahead of the rest ofthe world. Analysts agree that final outcomes will depend on theefficiency of the recovery measures and transparency with whichthese measures will be implemented. Chinese newspapers featurepages of debates about how deep China’s recession is, whether a

Table 2.1. Losses of Chinese Banks during the Global Financial Crisis

Banks Losses (billion)

Bank of China $1.996Industrial and Commercial Bank of China $1.34People’s Construction Bank of China $.673China Life Insurance Company RMB 1.08Ping An Securities Ltd RMB 15.7

Source: Geng Zhaojun and Guo Qibang, ‘‘A Report of Losses of Chinese Companies duringFinancial Crisis.’’

Table 2.2. Losses of Chinese Firms during the Global Financial Crisis

CompaniesLosses

(RMB billion) Causes

Air China 1.9 Fuel futures and currencyexchange rates.

Eastern Airlines 2.3 Fuel futures and currencyexchange rates.

China Railway Engineer-ing Corporation

1.9 Devalued Australian dollar.

U-Right InternationalHoldings Ltd

2.8 Loss of export contracts intextile products.

He Jun Toy Industry .836 Loss of export contracts of toyproducts.

CITIC Pacific Ltd. 14.7 Devalued Australian dollaraffecting real estate.

Country Garden 1.8 Losses due to derivatives inreal estate.

Source: Geng Zhaojun and Guo Qibang, ‘‘A Report of Losses of Chinese Companies duringFinancial Crisis.’’


second and a third wave of financial crisis will occur, and howthe government will deal with social unrest if they do take place.On March 13, 2009, in his press conference held at the Great

Hall of the People and attended by hundreds of Chinese andforeign journalists, Premier Wen Jiabao revealed details of Beij-ing’s recovery plan. The package of 4 trillion RMB (equivalentto $586 billion) will be dispensed during a two-year period tocurb the current crisis. Out of this money, 1.18 trillion RMB(or approximately $169 billion) will come out of the centralgovernment’s coffer, while the rest will come from banks andother financial sources. The government’s share will be investedprimarily in projects concerning people’s daily life, technologicaltransformation of existing industries, ecological protection, andmajor infrastructure constructions, such as highways, railroads,and bridges. The premier stresses that the stimulus package isdeployed to offset risks, rather than to plug financial holes. Thepremier guarantees that the funds’ use will be traced and moni-tored with the utmost care, and that dedicated phone lines willbe set up for people to report abuse of the stimulus funds.14

Premier Wen indicates that because Beijing unfailingly placesensuring social harmony on the very top of its agenda, it plansto put in place several welfare benefit plans beyond the 4 trillionRMB stimulus package. These plans include a reduction of taxesand fees by more than 600 billion RMB for 2009, an increase ofretirement payments, a performance bonus plan in addition topay raises for 12 million teachers, more subsidies aimed atincreasing farmers’ income, and investment of 850 billion RMBwithin three years to revamp the nation’s health care system.About 1 trillion RMB will be used to complete infrastructureand energy-related projects, such as new highways, railways,electricity grids, and nuclear plants from 2009 to 2010. About100 billion RMB had been allocated for the rest of 2008 with25 billion RMB going into roads, railways, and airports; 34 bil-lion RMB for improving rural infrastructure; 10 billion RMBfor subsidized housing; and 13 billion RMB for new medicaland education facilities.


Premier Wen states that offsetting risks alone is not enoughand that the economy must be creative in turning crisis intoopportunities. Wen shares the opinion that the most promisingway to recover China’s economy is to explore China’s domesticmarket. Allegorically, Wen said that, following the Chinese men-tality, if one wants to have water to drink, the surest way is todig a well. With respect to the Chinese government’s Keynesiannew deal, Willy Lam, an analyst with Jamestown Foundation,says that the main goal here is to ‘‘bao-ba’’ (literally, ‘‘to save the8 percent’’)—that is, to maintain an 8 percent GDP growth in2009 and 2010 by creating enough domestic demand to balancethe slowly disappearing exports to regions such as the UnitedStates and the European Union. Lam believes, however, thatthere is room to suspect whether the stimulus plan will producethe kind of multiplier effect expected. Lam writes:

[G]iven that unemployment will continue to rise until the rescue plantakes effect some time next year, urban as well as rural residents will likelyremain frugal. Moreover, the preemptive rescue plan does not address akey reason why the Chinese citizens’ savings rate of 46 percent is one ofthe highest in the world, which is the paucity of social security benefits. Itwas only after the Hu-Wen team had taken office in late 2002 that thecentral government began putting together a nation-wide health insuranceand pensions program.15

Premier Wen is confident, however, that the government willspend on building a safety net in addition to not only achievingthe 8 percent GDP growth, but also absorbing the 2008 fiscaldeficit of 180 billion RMB. Wen indicates that since the govern-ment had issued only 30 billion RMB worth of governmentbonds in 2008 in comparison to 140 billion RMB worth ofbonds issued in 2003, there remains ample room for deficitspending. For the Chinese, the nerve-wracking fact is, however,that a large asset had been invested in U.S. treasuries and bondsas China’s ‘‘strategic investments.’’ These investments play awide range of functions, basically leveraging China’s currencyvalues, trade policies, and, sometimes, political maneuvers.


Safeguarding these assets has remained on the mind of Chineseleaders in the economic recession during which time the dollarhas devalued against other currencies amid drastic domestic in-terest rate cuts and during which inflation has remained a threat.As of March 2009, China owned $767.9 billion worth of U.S.government treasury bonds, making it the largest buyer of U.S.debt and surpassing Japan.16 An uneasy moment occurred dur-ing one of the premier’s press conferences when a Wall StreetJournal reporter inquired about the above concerns. PremierWen took the opportunity to express his ‘‘deep concerns’’ and tourge President Obama to ‘‘keep his promise’’ in protecting Chi-nese assets. His emphatic pitch when stating ‘‘as a matter of fact,I am indeed rather worried,’’ was clearly heard by the West.The Chinese government and the whole world are waiting to

see whether China’s measures will work. Once again, the spot-light shines on China’s role as a heavyweight global player. Thefirst quarter GDP numbers released by NBS show that from Jan-uary to April 2009, value added of the industrial enterprisesabove designated size (enterprises with an annual income morethan 5 million RMB) was up by 7.3 percent year-on-year,although this represents an 8.4 percent drop over the same pe-riod of the previous year. Textiles and automobiles continued tobe profitable, whereas exports decreased by 14.4 percent year-on-year.17 Investments in real estate, railway, highway, and air-ports went up year-on-year, reflecting infrastructure spending aspart of the stimulus plan. On the downside, electricity and steelproduction was lower than the same period last year. The reducedexport figure, a year-on-year decline of more than 20 percent asof the end of April, caused a great concern to policymakers. TangGuoqiang, deputy bureau chief, International Trade ResearchCenter of the State Council, believes that much of the improve-ment in the foreign trade area will be slow due to the interna-tional economic environment. Tang believes, however, that withthe global recovery that started taking place in 2009, people willstart buying.18 For Wang Yiming, deputy chairman, National MacroEconomy Research Institute, the first quarter results showed a


mixture of warm and cold. As he puts it, ‘‘We are half happyand half worried. This means that our economy is at a stickypoint.’’19

Car sales during the first quarter was a bright spot, thanks tothe stimulus policy that cut sales tax by 50 percent for cars withsmall-cylinder engines (1.6 liters and below). Sales of the firstquarter surpassed the same quarter last year by 9.4 percent.Huang Yonghe, chairman of the China Automobile ResearchCenter, says that Chinese consumers need cars and do havemoney in their pockets; however, boosting their confidence iskey to bringing consumers back to the market. Huang assuresthat the government’s stimulus measures indeed have raised con-sumers’ confidence levels.20 In April 2009, overall sales hadincreased by 14.8 percent year-on-year, which is related to a se-ries of measures taken to stimulate domestic demand. For exam-ple, rural spending increased by 17.7 percent, which is 3 percenthigher than urban regions. Chinese economists attribute thesurge to a recent policy of promoting home appliance sales torural China.21 Li Daokui, chairman of the International Econ-omy Research Center at Tsinghua University, believes that dueto the rising consumer confidence, China’s economy already mayhave come out of the valley and is picking up steam. He believesthat China’s GDP volume will surpass that of Japan by the end of2009.22 China’s GDP of $4.2 trillion in 2008 is already close toJapan’s GDP of $4.3 trillion.While former Communist countries have suffered from the

global financial crisis as a group, some bear more losses thanothers because of their transitional economic structures thatmake them vulnerable. Does China’s ‘‘socialist market econ-omy,’’ marked by strong government intervention, have anadvantage in defending the domestic economy against the globalfinancial crisis? The answers by most Chinese economists areoverwhelmingly positive. Chinese financial experts believe thatChina, in effect, has suffered much less damage, thanks to itscurrent system, than a number of former Communist countries,such as the Czech Republic, Hungary, and Romania. These


countries had developed an overreliance on Western econo-mies, such that their markets lack China’s kind of strongprotective mechanisms. Overall, the successful experience ofweathering both the 1997 Asian Financial Crisis and likelythe 2008–2009 global financial crisis has made the Chinesemore confident of the China Model—and part of thatmodel is not relying on conservativeness but rather in seekingopportunities.Benefits raked in from economic reforms and openness have

led Wang Lengyi, a research scientist of Shanghai Academy ofScience, to believe that Shanghai’s opportunity lies in openingnew trade relationships with developing countries, as its exportsto the ‘‘Four Asian Dragons’’ (Hong Kong, Singapore, Taiwan,and South Korea) have been on steady decline. Hua Sheng,economist and president of Yanjing Overseas Chinese Univer-sity, believes that those countries exposed to the subprime mort-gage crisis feel the pain, whereas China stands to enjoyopportunities. In his opinion, the current financial crisis hurtsChina’s manufacturing firms more directly, with only rippleeffects reaching the financial system. Therefore, China’s financialsystem remains sound and, in particular, backed by a strong for-eign exchange reserve, one of the world’s largest, valued at nearly$2 trillion. U.S. Treasuries and other dollar-denominated bondsmake up more than half of those holdings. In March 2009, thePBOC proposed a new international currency reserve system toreplace the dollar, which reflects China’s increasing concernsover dollar devaluation and confidence in the country’s growinginfluence.23

Not all analysts are optimistic. Opposite opinions hold thatmore financial tidal waves are on the way, and what is seen isonly the precursor of more severe economic attacks. Sun Lijian,vice president of the College of Economics at Fudan University,warns that because the market has little liquidity, each round ofdebts due will turn into a new session of financial crisis andresult in more bankruptcies and cause more damage to con-sumer confidence. Sun believes that the stimulus package of


4 trillion RMB serves only as a blood transfusion to the patient;whether the patient’s body is capable of generating its own bloodwill be the determining factor. Sun projects that the recovery ofChina’s economy will be in a ‘‘W’’ shape for quite some timeuntil a new economic structure emerges.24

The multiple-wave theory is explained more systematically byChen Jian, an influential economist of Shanghai, who believesthat, unlike the first wave of a financial storm that attacks fromwithin the financial systems of industrial countries, secondarystorms will strike manufacture-oriented developing countrieslike China. Because such attacks come from outside, damage tothese countries will be more difficult to control due to muchwider and diverse areas of impact, and the impact will be greaterthan the current losses in foreign trade–related areas alone. Forexample, unlike dealing with the financial crisis, whereby thedirect injection of Troubled Asset Relief Program (TARP) fundsinto larger banks or even the temporary takeover by the govern-ment of insolvent banks could save the situation, it will be almostimpossible for the government to adopt a similar strategy to savea manufacturing crisis. The government could not possibly bailout troubled manufacturers who exist as a function of the marketdemand for their products. Chen’s scenario would be a muchmore intensive version of what has happened already to coastalregions like the Zhujiang River Delta Region and the YangtzeRiver Delta Region. Chen foresees the potential secondary stormsto develop in a six-step sequence:

1. Sharp decline in exports causes rise in bad debt in international trade.2. High reliance on exports will result in high unemployment, particularly

in coastal areas.3. As a result of lowered confidence, stocks and housing markets collapse

which in turn seriously constrains domestic demand.4. As a result of reduced consumption, receivables decline and warehouses

are stuffed with unsold goods. Moreover, this causes ‘‘triangle debt’’ torise sharply.

5. Banks will tighten credit and adopt conservative lending practices. Suchpractices often require borrower to pay back the dues before new loansare advanced.


6. Increase in nonperforming loans will result in lowered trust by custom-ers of the banking system. As a result, the phenomenon of ‘‘run on thebank’’ occurs, and social unrest arises as a consequence.

As a matter of prevention, Chen urges the government tomaintain transparency and to be highly vigilant of precursors ofsuch a storm on the financial horizon. Additionally, Chen recom-mends promoting the traditional-style education with moralityand patriotism as core themes.25 One must not underestimatethe potential power of mass ideological movement in dealingwith financial crisis, although the two seem unrelated. If confi-dence is key to rejuvenating spending, as both Premier Wen Jia-bao and President Barack Obama believe, then, mass ideologicalcampaigns, the ones that had rallied the Chinese people behindthe government and the Communist Party during Mao’s revolu-tion, may indeed work.The multiple-wave scenario, however, is a minority opinion.

Most analysts believe that the worst is behind. Per CCTV’s fi-nancial reporting, the real estate market has resumed its previousrapid pace.26 Conversely, cool-minded economists urge thatattention should be paid to economic performance in 2009 as awhole and in the few years ahead.In the long run, the real solution, as most economists agree, is

in developing China’s domestic market. Unlike Japan, SouthKorea, and other Asian countries with limited domestic markets,which drive their economies to rely on exports, China has a hugedomestic market yet to open. This reality has been obvious tothe world and to the Chinese since early years of the reform.However, a real determination to develop the domestic marketseems to finally have been put into practice only recently. Inter-estingly, the inspiration comes from the fact that export demandhas collapsed. Tao Wang, head of research at UBS Securities inChina, believes that rebound will not come from external situa-tions improving, but rather from the Chinese government’sstimulus package, the terms of fiscal policies and credit (banklending), and the ability of implementation of the stimulusplan.27


What then is essential to developing the domestic market?What would be the magical button to push such that spendingwill go up, and a vibrant new production phase will arise?According to Tao Wang, the magical button is named the ‘‘safetynet.’’ When the quality of life improves, in particular, when asystem is put in place to provide health insurance, social security,and other kinds of insurance that are essential to people’s liveli-hood, the Chinese consumers will change their habit of saving50 percent of earnings in the bank. Thus, China is faced with adifferent kind of transition—from focus on investment to focuson consumption. Wang calls this transition ‘‘forced rebalanc-ing.’’ She believes that China’s sustainable growth will dependon it. Professor Bottelier of Johns Hopkins University drives thisopinion further by saying,

If they (the Chinese government) do the right things, China could comeout of this crisis stronger than when it entered it, with a more balancedeconomy, a lower external surplus, a higher proportion of GDP dependenton consumer spending, and lower overall investment and savings rates.That would be good for China and the rest of the world.28

The stimulus policies seem to suggest that the Chinese govern-ment shares this perspective. However, it may take a long timeto depart from the high growth pattern because of employmentpressure among other factors.Many question whether China will ever be able to resume its

double-digit growth. Here, opinions on both sides seem to con-verge. On the Chinese side, ‘‘safeguarding 8 percent’’ has beenthe open slogan. Few would chant for the double-digit perspec-tive. Professor Bottelier does not expect China to go back to theturbo growth rates of recent years, as the bubbles in the propertysector may take a long time to diffuse. He indicates that com-mercial real estate and high-end residential housing are over-built, and that China needs to build low-cost housing with thegovernment’s stimulus money. This low-cost housing will beconsumed by decades of continued urbanization ahead; thus it


will provide a way to sustain economic growth.29 David Dollar,director for China and Mongolia of the World Bank, foresees agrowth rate of 7 percent following the pattern of most medium-income countries.30 Tao Wang of UBS Securities believes thatChina is not likely to resume double-digit growth at least beforethe United States and other Western economies recover fromthe global financial crisis. She believes that the double-digitgrowth in the past was more of an exception than a trend, andthat an 8–9 percent growth would be healthy.The preliminary 2009 GDP figure announced on January 21,

2010, by NBS bureau chief Ma Jiantang is 33,535.3 billionRMB, representing an 8.7 percent increase over 2008. Quarterlygrowth rates were 6.2, 7.9, 9.1, and 10.7 percent respectively.31

Ma Jiantang attributed the progress of recovery to people’s con-fidence in the system. However, Ma urged a close watch on theConsumer Price Index (CPI) figure which rose toward Decem-ber 2009. CPI is used to gauge inflation and policy changes.The 2009 GDP figure, however, was interpreted broadly as aprecursor of a credit-tightening policy and caused sharp down-ward swings in stock markets worldwide.32

In fact, a prolonged recovery in the United States and someEuropean economies may be a direct and immediate test to theChinese economy. Recent reports indicate that since the begin-ning of May 2009 exchange rates between RMB and the U.S.dollar have been tracking an unfavorable trend, with RMB drop-ping to 6.82 yuan to the dollar. As a result, Chinese exportsas well as export-related jobs are faced with higher pressure.Whether China could quickly stimulate its domestic market willbe key to its ability to sustain recovery and growth. In a sense, itdetermines whether China could turn crisis into opportunities.


Chapter 3

Growing Pains

For three decades China has been developing its economy withoutpaying due attention to damages to the environment. As a result,the growth has become a double-edged sword. On the one hand,it has pulled tens of millions of people out of poverty in shortorder; on the other hand, it has produced environmental conse-quences that nearly offset the value of growth in real terms. Theramp up in laws and regulations to protect the environment inrecent years has yet to show results. The good thing is, the gov-ernment has finally come to the understanding that China’s sus-tainable growth depends in large part on effective control of thedamages to the environment. However, the issue is a more com-plex one. Environmental challenges represent only the tip of theiceberg. They are found to be closely related to corruption andto the fast-paced urbanization that often spins out of control.Thus, pollution, corruption, and runaway urbanization areunderstood as a triple threat to the harmonious developmenttoday.

POLLUTION

In a sense, becoming the ‘‘manufacturing center of the world’’has been a costly deal. To prepare for the 2008 Summer Olympics,for example, Beijing had invested $10 billion since 2001—whenthe city was named host of the Olympics—to improve air quality,including relocating and temporarily shutting down factories,

according to Jeff Ruffolo, a media consultant for the BeijingOrganizing Committee for the Olympic Games.1 Other re-ports put the spending figure at $20 billion.2 In deciding Beijing’squalifications for hosting the Games, its level of pollution was amajor negative factor. Beijing’s smog-covered sky, the city’s free-ways crowded with slow-moving traffic, which were major sour-ces of pollutants, and the tens of thousands of factories withinthree to four hundred kilometers feeding a variety of particles tothe wind were clearly incompatible with the world’s most cele-brated athletic event that promotes health. Beijing had promisedto clear the air by the time of the Games’ start. The promise wasindeed fulfilled. Implemented on July 20, 2008, the odd-evenlicense plate rotation system that restricted the number of carson the road must have worked magically during the last push.About a week before August 8, at the Games’ opening ceremony,air quality readings indicated 103 to 109, which approached thecritical number 101, the acceptable level on a scale of 1–500,with 500 being the worst air quality.3 During the days of theOlympics, August 8–24, the air quality reached the requiredstandard with ‘‘Grade 1’’ air quality (on a scale of 1–50, with 1being ‘‘excellent’’) for 13 out of 17 days, and the rest withinstandard range.4 Beijing’s residents reported that for decades theyhad not seen a deep blue sky over the yellow-glazed palace tiles.Beijing showed to the world that it has the capability of control-ling its air quality and will be able to solve other environmentalproblems effectively. For people who watched the Olympics’opening ceremony, they must be convinced too that the show sig-nifies that China not only has determination, but also the disci-pline to achieve its goals.According to the 2006 survey conducted by the Bureau of

State Environmental Protection (upgraded to the Ministry ofEnvironmental Protection in 2009),5 the urban air quality wasfar below standard in that the air was filled with a dangerouslevel of particles from construction and industrial emissions.The survey showed that out of 559 cities, only 4.3 percentbelonged to ‘‘level I’’ (‘‘good air quality’’), 28.8 percent belonged


to ‘‘level III’’ (‘‘bad air quality’’), and 58.1 percent belonged to‘‘moderate air quality.’’ Oddly enough, the remaining 9.1 per-cent of air was ranked ‘‘below level III.’’ According to the samesurvey, water pollution also painted a gloomy picture: 28 per-cent of China’s freshwater was rated ‘‘Grade V’’ (‘‘No directhuman use; appropriate for use in agriculture’’), and 10 percentwas rated as ‘‘Below Grade V’’ (‘‘Not appropriate for humanuse’’). The country’s two longest rivers were heavily polluted: 12percent of the water from the Yangtze River was rated ‘‘GradeV’’ or below; and 25 percent of the Yellow River’s water wasrated as ‘‘Grade V.’’Problems such as these were not generated overnight. During

the prereform era, environmental concerns were dismissed ascapitalism; factories and workers followed production quotasand disregarded everything else. Agricultural policies at the timestressed production quotas. To achieve higher production, peas-ants were called on to claim land from mountains and forests.Ecological habitats were destroyed because of routine use of fer-tilizers and poisonous pesticides. As a result, the Great Leap For-ward (1958) and the Great Cultural Revolution (1966–1976)wreacked havoc on China’s resources and ecology. The processleft one-third of the land devastated by soil erosion.6

In addition to the ideological impact, uncontrolled populationgrowth had taken its toll on the environment. The governmenthad encouraged a large population as a strategy to boost its laborforce and military capacity. Today, China accounts for approxi-mately 22 percent of the world’s population, but only 7 percent ofthe world’s arable land. In 1980, the population reached the 1 billionmark, which triggered the family planning campaign launched bythe government with the most stringent efforts in enforcement.During the 1990s, however, the population was still growing at125 million per year, and the newly added population would con-sume 45 million tons of grain each year. As a result, forest coveragewas fast shrinking and went as low as half of the world’s average.Until China joined the United Nation in 1973, awareness of

environmental protection was next to nonexistent. Progress was

Growing Pains 51

achieved soon, although much of the improvement wasprompted by disasters such as the one that happened in 1974 inTianjin, one of the four provincial-level municipalities. In thatevent, farmers piped heavily polluted Ji-River water into 3,000acres of farmlands. Not a single stalk of wheat was harvested thatyear. The State Council was alerted, the Tianjin Chemical Plantwas identified as the polluter, and the remaining water from theJi-River canal was diverted into the sea. Damage to marine ecol-ogy was never known. The chemical plant was ordered to buildmore than 50 water treatment facilities.7 In the same year,Beijing held the first national conference on environmental pro-tection during which time the environmental Protection LeadingGroup of the State Council was established to coordinate variousministries and government organizations to promote environ-mental education and to implement a series of remedial meas-ures. This is one of the cases in which cultural exposure and theconsequences of pollution generated new concepts, in this case,awareness of environmental protection. Admittedly, most of thesimilar events that happened in places of lesser political and eco-nomic importance were ignored.Since the economic reform started, China has made tremen-

dous progress in establishing a regulatory framework to addressrampant environmental problems. Such efforts have increasedmost obviously during the past decade. For example, Beijing hasimplemented the State Automobile Emission Standards, whichare defined in terms of levels of emission quantity and pro-portion of carbon dioxide (CO2), nitrogen dioxide (NO2),and ozone gas (O3). Four standards of automobile emission,popularly known as State Number 1, 2, 3, and 4, with State 4being the highest standard, have been issued so far. State 5has been drafted and is said to be forthcoming. In 2009,Beijing began to collect pollution treatment fees according toautomobile emission levels.8 As of early 2009, 90 percent of taxicabs and 97 percent of city buses qualified for State 3, and4,000 city transportation vehicles already used natural gas.Checkpoints are set up on 230 city streets to detect substandard


vehicles; dedicated telephone numbers for reporting illegal prac-tices are also announced on billboards. Starting January 1, 2009,vehicles with yellow stickers, those below the State 2 standard,were not permitted to operate within the 5th Beltway (out of atotal of six beltways, with the 6th Beltway being the outermost).Additionally, the Beijing Municipal Government has set aside 1billion RMB ($145 million) in incentives to encourage upgradesto Green Sticker vehicles (State 2 and above). Incentives are dis-tributed in the forms of rewards and tax benefits in amounts of500 RMB to 22,000 RMB. Moreover, Beijing has launched aclean air campaign known as ‘‘Drive One Day Less (perweek).’’9

According to the New York Times, China surpassed the UnitedStates in 2009 to become the world’s biggest buyer of wind tur-bines. China’s automakers will be required to reach a corporateaverage of 42.2 miles a gallon to beat the current average of 35.8miles a gallon for new cars, minivans, and sport utility vehicles.By comparison, the corporate average goal announced by Presi-dent Obama is 35.5 miles per gallon by 2016.10

The following is a list of laws enacted since 1989 with a briefoutline.

Environmental Protection Law, 198911

In 47 articles, the law urges individuals, government organiza-tions at all levels, and production units to dutifully protect theenvironment by following the standards set by the State Coun-cil. The law stresses integration of environmental planning withproduction planning. For example, Article 24 stipulates,

Units that cause environmental pollution and other public hazards shallincorporate the work of environmental protection into their plans and es-tablish a responsibility system for environmental protection, and must adopteffective measures to prevent and control pollution and any harms caused tothe environment by waste gas, waste water, waste residues, dust, malodorousgases, radioactive substances, noise, vibration and electromagnetic radiationgenerated in the course of production, construction or other activities.

Growing Pains 53

Although, this is one of the earlier laws, its coverage is neverthe-less comprehensive. Its framework for punitive measures becamestandard in newer environmental laws.

Law on Prevention and Control of Environmental Pollutionby Solid Waste, 1995 (amended 2005)12

The 2005 amendment includes 95 clauses. In addition to pre-ventive and punitive measures, one feature of this law is to callon every citizen to adopt a lifestyle that generates minimal solidwaste. Much stress is put on eliminating one of the most tradi-tional and yet increasingly serious problems—the littering ofpackaging materials. Article 18 stipulates that manufacturersand vendors must recuperate packaging materials once used.Moreover, the law is careful enough to include a clause onrecyclers:

Units and individuals that collect, store, transport, utilize or treat solidwaste shall take measures to prevent the scattering, running off and spillingof solid waste, or other measures to prevent pollution of the environment;they shall not dump or pile up, without authorization, or discard or littersolid waste. (Article 17)

In particular, the law stipulates that substandard technologies mustnot be used or imported. An important dimension of this law isthat it set strict measures to prevent polluting companies fromtransferring their operations to remote and poor regions. Articles59 and 60 require any transfer of hazardous materials to be strictlycontrolled. Extensive punitive measures are listed in Articles 67–87,with respect to levels and categories of perpetration.

Law on Prevention and Control of Atmospheric Pollution, 1995(amended 2000)13

This law particularly stresses atmospheric protection in urbanareas. The law encourages use of clean fuel for home use; and ifcoal must be used, then, only coal with low-sulfur discharge ispermitted. Strict restrictions are placed on automobiles’ exhaust


emissions. Article 37 stipulates, ‘‘Automobiles that dischargepollutants in excess of the national discharge standards shall notbe permitted to be manufactured, sold or imported. Specificmeasures for supervision and management shall be formulatedby the State Council.’’

Law on Prevention and Control of Water Pollution, 199614

This law was enacted for the purposes of preventing waterpollution, protecting and improving the environment, safe-guarding human health, ensuring effective utilization of waterresources, and applying science and technology in water treat-ment. The law forbids discharging a number of common pollu-tants, such as oil, sewage, mercury, cadmium, arsenic,chromium, lead, cyanide, and yellow phosphorus into surfacewater. It carries stipulations that allow qualifying governmentbodies, usually above the county level, to delineate protectionzones, particularly those in scenic spots and cultural sites, and toprovide protection and maintenance for these sites. Individualswho suffer from damages of polluted water have the right to filelawsuits against the polluting party. However, there are obviousloopholes with respect to enforcement procedures. For example,Article 14 does allow enterprises to discharge pollutants intowater bodies as long as they register and report to local govern-ment, or pay a fee (Article 15). When decisions are left withlocal governments that may not have relevant technology, andwhen permission of discharge is fee-based, effective environmen-tal protection becomes questionable.

Law on Prevention and Control of Pollution fromEnvironmental Noise, 199715

This law was enacted to control noise pollution that maycause damage to people’s health. Like many early laws there isambiguity, some of which may be intentional, in favor of urbanconstruction needs. Construction projects may emit noises withpermission or on a fee basis. Article 3 stipulates, for example,

Growing Pains 55

‘‘This Law shall not apply to prevention and control of noisehazards incurred in the course of production or business opera-tion one is engaged in.’’ Here, the logic of the law is question-able, leaving loopholes for companies to avoid punishment orrestrictions by getting unqualified projects underway anyhow.

Energy Conservation Law, 1998 (amended 2008)16

To crack down on rampant waste in energy consumption,China now considers energy conservation a fundamental nationalstrategy. The government will be cutting down on energy con-sumption per unit of gross domestic product by 20 percent by2010. The 2008 amendment shows tougher requirements onenergy conservation. It requires construction projects, the trans-portation sector, and government buildings to cut energy con-sumption. The amended law also requires governments at alllevels to increase investment in public transportation infrastruc-ture, improve public transportation services, and encourage peo-ple to use public transportation. Additionally, the law requireslocal governments to set up their own energy regulations based ongeographic situations, following the spirit of Energy ConservationLaw, and to raise the standards of saving wherever possible.

Renewable Energy Law, 200617

To increase the share of renewable energy, which includes so-lar, wind, hydraulic, geothermal, and marine energies, from 3percent in 2003 to 10 percent by 2020, the Renewable EnergyLaw imposes a number of requirements. The law requires powergrid operators to purchase resources from registered renewableenergy producers. Frameworks for financial incentives, such asfunds to encourage renewable energy development, discountsand tax preferences for these projects, are also offered. The lawprovides pricing advantages to renewable energy companies bysetting national standards through the National Developmentand Reform Commission (NDRC), a regulatory departmentof the State Council. NDRC will adjust the buying price as


necessary, primarily by averaging the costs across the total num-ber of buyers. NDRC also will set a renewable energy plan forthe entire country, including specific renewable energy targetsthat act as a framework for implementation of the law, wherebyprovincial governments and planning agencies will then developspecific implementation plans and local goals. NDRC willexamine what would be entailed to purchase and use solar pho-tovoltaics (PV), solar water heating, and renewable energy fuels.The law lists penalties for companies and businesses that do notfollow related regulations and policies.

Administrative Measures on the Control of PollutionCaused by Electronic Information Products, 200718

The products covered by this law include electronic radarequipment, electronic communications equipment, broadcastand television equipment, computer products, and some house-hold electronic products. The law requires products marketed inChina to use materials, technologies, and processes that are safefor the environment and are in compliance with national orindustrial standards for the prevention and control of pollution.Products must include labels that indicate the names and con-tents of hazardous and toxic chemicals, and whether they can berecycled. The law requires packaging materials to be nontoxicand easily recyclable. The government will publish an annualcatalog listing banned or restricted toxic and harmful substancesinvolved in the production of electronic information products.The law applies to both imports and domestic products.

Circular Economy Law, 200819

The Circular Economy Law was passed on August 29, 2008,by the National People’s Congress and went into effect on January1, 2009. According to this law, industries and factories that mayemit high-pollution emissions, including steel and nonferrousmetal production, power generation, oil refineries, construction,and printing facilities, must be closely monitored. Recycling,

Growing Pains 57

energy-saving, and waste-reutilization projects must meet strictstandards. Industrial manufacturers as well as farmers must adoptwater-saving rules and water-saving technologies, strengthen reg-ulation systems, and install water-saving equipment in newbuildings and farming projects. Traditional oil-fired fuel genera-tors and boilers must be converted to clean energy consump-tion generators using natural gas or alternative fuels instead ofpetroleum-based fuel. Government buildings are required tomaximally adopt renewable energy such as solar and geother-mal energies for heating purposes. The law requires coal-usingenterprises to recycle waste products. In agriculture, the lawencourages local governments to fund methane generatingprojects, such as those that use livestock waste and other farm-ing by-products. Tax incentives are granted to enterprises thatparticipate in these projects by providing equipment, technol-ogy, or direct investment.In general, from the 1989 Environmental Protection Law to

the 2008 Circular Law, coverage in protection of the environ-ment through legislative means has gradually broadened. Newlaws and regulations are more refined and more comprehensive.However, because China relies on governments above the countylevel to monitor and, at times, draft supplemental procedures,and given that at least for the time being these agencies tend tobe poorly trained and prone to corruption, law enforcementremains a weak link. Additionally, local governments are boundto balance between environmental protection and job creation.Given these circumstances, a clean and healthy environment canbe achieved only gradually.

CORRUPTION

Curbing corruption is of top importance to the Chinese govern-ment. Because of the single-party ruling system, corruption casesgenerate direct consequences on the ruling party’s legitimacy.Hence, more than anything else, corruption provokes popular dis-content and threatens social stability. As the process of globalization


advances, the Chinese society bears more symptoms of Westernsocieties, such as drug use, prostitution, and a variety of types ofcorruption and fraud that were unseen during the prereform time.One could be certain, for example, that for every type of corruptionfound in the West, whether it is Bernie Madoff’s Ponzi scheme orEliot Spitzer’s scandal, one may find its Chinese match. Yan Sun, aprofessor of political science at City University of New York, pointsout that, in fact, corruption is endemic in all post-communist soci-eties, and China is no exception.20

In the Chinese system, two factors have provided hotbeds forcorruption: (1) the weak legal environment versus a strong admin-istrative power in which law enforcement lacks effectiveness becauseof the absence of an independent judiciary; and (2) the transitionaleconomic system in which private and public sectors coexist makespower-for-money swap a typical category of economic crimes. Inaddition, greed is gaining ground at all levels; the spiritual vacuumleft by the collapse of traditional communism is yet to be filled.In the latter case, efforts are made by experts who are particularlyconcerned with morality of the society, like Yu Dan, professor atBeijing Normal University, to interpret the traditional Confucian-Daoist ethics to address the spiritual needs of an industrial andglobalized society. They examine people’s behavior from the per-spective of Confucian values, such as respect, responsibility, gener-osity, forgiveness, and filial piety. The central theme is to helppeople tame materialistic urges. Not surprisingly, the CCP is draw-ing from Confucianism such concepts as harmony, serving byexample, and so on. Typically, however, laying any ideologicalgroundwork is a long-term process. In the meantime, one witnessesa mixture of traditional ethics, pragmatism, Western ideology (suchas ideals of individual freedom and social democracy), and nation-alism on the ideological background.

Civil Service Corruption

Traditionally, CCP members are called on to lead the com-munist cause without seeking self-interests. ‘‘Serve the people

Growing Pains 59

heart and soul,’’ Mao used to admonish. In a transitional society,profit-seeking remains embarrassing or confusing to a goodnumber of party leaders. The law of Public Service (1984), Arti-cle 53, stipulates that public service personnel are prohibitedfrom ‘‘engaging or participating in profit-making activities, ortaking a part time position in a profit-making firm.’’21 Exceptfor bonuses in SOEs and government offices, public officials—who nonetheless harbor dreams of material wealth—do not havea venue to personal wealth. This is a remarkable transitional di-lemma. Under such circumstances, the system suffers anunavoidable deficiency. During the past 30 years of reform, theChinese government of absolute power under Chairman Mao’scontrol has been reformed into a government under the law.Despite this outcome, and the CCP’s collective leadership, theadministrative power nevertheless is uniquely strong. The rootof the problem exists in the ownership structure. Because thegovernment owns all natural resources, including rivers, land,forests, mines, and so on, government officials who deploy theseresources on behalf of the government have a unique privilege.Rules and regulations are set by administrative bureaus, makingit possible for higher-level officials, mostly party members, tobecome local lords. This gives corrupt officials convenientaccess. On the surface, they serve according to democratic proce-dures; in reality, their words are final decisions that directlyaffect people’s lives and the economy. They are at liberty to levyfees, impose fines, and set up zoning codes. As a result, farm-lands are lost to real estate developers, and polluting factoriesmay never get shut down. Cases such as these are not uncom-mon. As Wang Lin, author of Anti-Corruption—A War betweenRule of Law and Rule of Man, points out, ‘‘those who possessadministrative power possess money, wealth, and even women.’’22

Like elsewhere, power and money make the most dangerous mix,probably all the more so in China. The party does not seem to havea particularly effective way to stop power-money trade, but rather ituses harsher punishment each time crimes have been committedand damages done. The reality is that because people’s servants may


not always have sufficient inner strength to refrain from helpingthemselves, they will do it again when the time is right. The situa-tion is often increasingly complex. An investigation of a residentialconstruction accident in Shanghai in July 2009, for example,revealed that government officials were shareholders of the real estatedevelopment.23 Anticorruption campaigns, such as the ‘‘Strike HardCampaigns,’’ seem to have only slowed down the crimes. In fact,the more campaigns are launched, the more sophisticated andfrightening the cases become. Conversely, corruptive forces findevery opportunity to subjugate their targets to achieve their goals. Assuch, weaknesses of public ownership give rise to a rampant blackmarket. The political and economic reforms in the new era aregeared toward uprooting these problems by changing the rules ofthe game. Obviously, changes of this kind do not happen overnight.On the demand side, non-state-owned small businesses that

exist outside central plans, for example, lack access to variousmaterial allocations and financial means. As Professor Yan Sunindicates, it is not uncommon for these businesses to offerinducements to party officials. Favor seekers often exceed smallbusinesses to include ambitious developers, dubious constructioncontractors, land speculators, public office buyers, strugglingSOEs, organized smugglers, or any business trying to grab a pro-ject or loan. After 1992, SOEs were forced to restructure and tocompete in the market, and more local power was accumulated atthe local level; this situation made the scale of corruption widenbeyond government officials. There have been a number of casesof executives at smaller SOEs who strip their firms of substantialassets to engage in stock flipping; local agencies have also beenfound to hike fees.24 As such, profiteering by administrative lead-ers in conjunction with interest groups constantly plagues thesociety, causing heavy economic losses, even losses of lives, despiteharsher punishment. According to Hu Angang’s estimate, the eco-nomic loss between 1999 and 2001 due to corruption mountedto between 14.4 percent and 14.9 percent of the GDP.25

One of the major and earliest exposed high-level corruptioncases, in the postreform era was that of Chen Xitong, a former

Growing Pains 61

mayor of Beijing. In 1998, Chen was sentenced to prison for16 years for bribery and embezzlement of state funds. The moneywas used to cover his extravagant lifestyle and that of his croniesbetween 1991 and 1994 during which time Chen headedBeijing’s municipal administration. Among the spending figures,35 million RMB were used to build villas, 2.4 million RMB wereused to purchase services, and more than 1 million RMB wasspent on food.26 Two years after Chen’s sentencing, Cheng Kejie,a former vice chairman of the National People’s Congress, wassentenced to death for taking $5 million in bribes. While Cheng’swas one of the highest-profile cases in the country’s marathonanticorruption drive,27 around the same time, three smaller caseswere no less shocking. Wang Xuebing, former president of Bankof China and alternate member of the Central Committee, andZhu Xiaohua, vice governor of the People’s Bank of China, werejailed for banking fraud. Li Fuxiang, director of China’s StateAdministration of Foreign Exchange, committed suicide whilebeing investigated for illegal foreign currency trade. On May 29,2007, Zheng Xiuyu, former chief of China Food and Drug Unit,was sentenced to death after pleading guilty to accepting bribesworth $850,000 in exchange for approving drug licenses. Duringhis term, China’s food and drug exports were suspected to havebeen tainted with poisonous chemicals.28 A more recent courtsentence was handed to Liu Zhihua, former deputy mayor of Bei-jing. He was handed a death sentence with a two-year reprieve(equivalent to life in prison) on October 18, 2008. The lightersentence was due to Liu’s cooperation in recovering most of thebribes paid to him and his mistress. Liu was elected to deputymayor of Beijing in 1999 and was dismissed from the Commu-nist Party in 2006. Liu was charged for accepting bribes totalingabout 696.59 million RMB (more than $100 million) and giftsin return for favors for real estate developers.29

These high-level corruption cases suggest that the party is lim-ited as to what it can do to maintain healthy government—primarily by practicing self-policing. This becomes difficultwhen police officers or their cronies are the perpetrators. As a


result, more high-level corruption is followed by even harsherpunishment, and the cycle continues. As mentioned earlier, withdeepening decentralization, provincial-level governments haveacquired more control over resources and corruption hasbecome more widespread as well. Local officials nearest thegrassroots level, for example, have been found trading farmers’land, taking advantage of the land rights system according towhich China’s land ownership is actually lease-based with thestate as ultimate owner. Thousands of farmers have lost theirland to local officials who resold to developers, according to Pro-fessor Yan Sun who names the phenomenon ‘‘competitive corrup-tion’’ where, unlike the central planning era, local officials nowenjoy discretion over quality and quantity of services they provide:

They can arbitrarily decide whom to award land, projects, or contracts andat what prices; whom to grant loans, shares, and services and on whatterms; or how much in fees and levies to demand or absolve. Because thestakes are so much larger now, involving capital goods rather than manu-factured goods, the payoffs for officials and the cost for businesses escalateas well. This entails great waste and burden on the economy.30

In practice, a typical behavioral pattern is that the perpetra-tors hide behind exemplary performance until they climb to ahigher position to trade power for wealth. Such is the case ofLiu Zhihua. The former Beijing mayor worked his way upfrom an ordinary coal miner. He was remembered as a dedi-cated hard worker and an exemplary party member.31 Whilethis does not mean that all party officials fall when bribes esca-late, it is popular opinion, however, that even good officialshave trouble avoiding traps, because corrupting parties are cre-ative in getting what they want. Therefore, China’s civil servicesystem must reform such that the power-for-money swap is nolonger convenient or worthwhile to the perpetrator. The con-tinued introduction of market mechanism, democratization,and supervision by news media is likely to make this happen.Already, the Chinese government has made it routine to set up

Growing Pains 63

report hotlines. More important, the Chinese government ispursuing structural changes to provide a systemic immunityfor government organs at all levels. One such effort is seen inrecruitment and promotion. These procedures used to beguanxi-based (connections); in the 21st century, they havebecome more meritocratic.To improve government transparency, China reinstated the

civil service examination for all junior positions in 1993. In2008, about 775,000 people took the exam, competing forroughly 13,500 positions and marking a 21 percent increase intest takers over 2007. The ministries with the largest numberof applicants include the Ministry of Commerce, Ministry ofForeign Affairs, and the NDRC.32 Similarly, promotion isbased more on evaluations and sometimes on public opinionpolls. Evaluation of organizations and firms is no longer basedon productivity alone, as it was in the 1980s, but rather on along list of considerations, including fiscal revenue, per capitaincome, worker safety, education, employment, social welfare,family planning, conservation of land and natural resources,environmental protection, and investment in scientific andtechnological development. Green GDP or ‘‘smart growth,’’ inPresident Hu Jintao’s words, has become an evaluation stand-ard. That said, CCP membership is still important—as mostsenior-level officials, whether in municipal, provincial, or cen-tral government, are party members. Overall, it appears thatthe competitive review process is different. In fact, it marks asignificant departure from the traditional political loyalty-based evaluation. One noticeable change is in the knowledgestructure of officialdom: more positions are filled by college-educated applicants. College or equivalent education is now astandard requirement. Candidates for leadership posts at thecounty-chief level or higher must meet standardized minimumrequirements—such as a bachelor’s degree, specified trainingprograms at the Central Party School (CPS), or experience intwo posts at a level of leadership immediately lower. Cadresalso receive on-the-job training. In addition to the CPS, inland


cadres are sent to coastal regions to attend workshops. Addition-ally, the government sends approximately 40,000 officials fortraining each year to European countries and the United States,ranging from yearlong programs to weekly training at HarvardUniversity’s prestigious John F. Kennedy School of Government.According to one report, more than 90 percent of cadres at theministerial level have received some training abroad.33

These changes contribute to healthy government by raising itslevel of professionalism. At the current stage, however, profes-sionalization is a rather uneven process with remote and under-developed regions lagging far behind. Also, the governmentfinds itself in market competition in hiring. From 1999 to2001, the Ministry of Commerce (MOFCOM) lost 72.8 per-cent of all new recruits within the first three years of employ-ment. The 2006 Civil Service Law is believed to have addressedthis problem by allowing more flexibility in salary levels.34 Ulti-mately, however, the reform will have to put administrationessentially under the supervision of law and media. Proposalsincluded introducing competition in the administrative systemand separating the party’s role from the administration, thus,making administrators answer to people’s interest rather thanserving themselves and their bosses.35

Grassroots-Level Corruption

Grassroots-level corruption reflects weakness in law enforce-ment, ineffective regulatory systems, and society’s rising level ofgreed. The case of cough syrup serves as an example. In 2007,Wang Guiping, a tailor of a small town located in the YangtzeRiver Delta Region, unsatisfied with the thin profit in tailoring,decided to sell chemicals—in this case, counterfeit glycerin ofindustrial grade—to pharmaceutical manufacturers. The cost ofpharmaceutical grade syrup was $1,815 a ton at the time, muchmore expensive than the industrial grade which is not for humanconsumption. Yet, to maximize profit, he went for something hecould buy for about 60 percent less than the price of the

Growing Pains 65

pharmaceutical grade glycerin—diethylene glycol, which is usedin antifreeze and is deadly to humans. Wang, with a ninth-gradeeducation, located the cheaper chemical with similar sweet tastein a chemistry book. Profit was all he cared about. According toan investigative report by the New York Times, Wang’s sales tal-ent and forgery skills worked. He forged licenses and clinical testresults, fooled pharmaceutical manufacturers, and shipped thetoxic product to Qiqihar Pharmaceutical who used it in fivedrug products: ampoules of Amillarisin A, a medication for gallbladder disease; a special enema fluid for children that wassweetened with this chemical; and as an additive to painrelievers, arthritis treatments, and blood vessel disease injections.One of southern China’s most well-known hospitals in Guangzhouadministered Amillarisin A in April 2006. At least 18 peoplewho were treated with the medicine, some of whom were inadvanced stages of these diseases, died within weeks. Once onthe market, sales companies added their might in pushing theproduct. When Wang was finally caught and put in jail, manymore had died, and some may never be identified because thedeaths occurred in remote and less populated locations.36 Thecase reveals, in addition to a weak food and drug regulatorycapability in China, the astonishing level of money craze,immorality, and ignorance of some 21st-century entrepreneurs.Counterfeiting seems to be a major enemy faced by the Chi-

nese law enforcement. Before Wang’s case was forgotten, a foodpoisoning case surfaced in September 2008. This case wasknown as the Scandal of Sanlu Milk Powder.37 The manufac-turer was found mixing tripolycyanamide, also known as mela-mine, in milk to ‘‘raise’’ its protein level and fool quality checks.Melamine is commonly used in coatings, laminates, wood adhe-sives, fabric coatings, ceiling tiles, and flame retardants. It wasestimated that approximately 53,000 children were poisoned af-ter consuming tainted formula or milk. Some developed kidneyfailure and four died. The quality control chief of the Bureau ofDrug Regulation, equivalent to the U.S. Food and Drug Admini-stration (FDA), resigned as a result. Melamine was found in a


number of overseas markets in Asia, reflecting extended damagebeyond China’s border. This episode is one of a string of eventsof tainted food products. In 2007, many pets in the UnitedStates became ill after eating melamine-tainted pet food. Some69,000 toys made in China, for example, were recalled in theUnited States over concerns of excessive amounts of lead paint.Premier Wen Jiabao, during his visit to Beijing’s hospitals, wasquoted as saying,

What we need to do now is to ensure that nothing like this happens in thefuture, not only in dairy products, but in all foods. Manufacturers andowners of dairy companies should show more morality and social responsi-bility in these cases. They are heartless, so we have to create strict law andlegislation. I’m sorry.38

Tian Wenhua, former head of Sanlu, the first dairy companyimplicated in a scandal that engulfed much of the Chinese dairyindustry, was sent to prison for life and fined 20 million RMB(approximately 3 million in U.S. dollars). The now-collapsedSanlu was fined 50 million RMB. Two men who made and soldmilk tainted with melamine were sentenced to death.39 The pun-ishment did not bring closure for the many critics who dugdeeper into the facets of a larger situation that keeps generatingsimilar events. Their scrutiny implicates the government’s short-falls. Although the government directed its spearhead toward themilk industry, many believe that Chinese cow farmers had beenstruggling to cope with rising costs of animal feed. Since 2006,corn prices had risen sharply as a result of the hype of alternativeenergy, which involves producing ethanol from corn. Meanwhile,a rice shortage had resulted in further squeezes of feed grainsproduction. Melamine was sold and bought openly as a ‘‘pro-tein booster,’’ because of its nitrogen content. In the quality-check process, nitrogen is detected as an indicator for proteinlevels. The technology is said to have been upgraded since the milkscandal; however, melamine had been in use for a few years.40

Thus, one costly lesson that the Chinese government learned is the

Growing Pains 67

importance of updating its regulatory technology. In a deepersense, the Sanlu case was a lesson about how to manage theinfinitely complicated market economy. To reduce damagescaused by the shrinking demand for milk products, the Chinesegovernment decided to subsidize dairy farmers. In northernHebei Province, the government earmarked 316 million RMBin late 2008 for subsidies which translates to giving a farmer200 RMB per cow.41

Gray Areas

Some practices may not be straightforward to judge, andtherefore, they customarily are classified into the category of cul-tural practice, rather than corruption. The way guanxi (connec-tions) is maintained is a typical example. Guanxi derives fromthe tradition of the family-based and Confucianism-oriented so-ciety. Businesses are maintained within the family circle and theprivilege of business partnership is shared only with members ofthe family or connections. This tradition is by no means uniqueto China. One encounters its various forms wherever Confucianculture reaches, such as South Korea, Japan, and Singapore.Indeed, cultural boundaries do not always match geographicboundaries; and geographic boundaries may not signify differen-ces when it comes to the business negotiation table. ‘‘In Chinapeople make friends before they do business as interpersonalrelationships are an important part of China’s traditional cul-ture,’’ says Ye Sheng, a consultant in Guangdong Province. Yeattributes guanxi to a complex cultural system of personal rela-tions or moral obligations, which most Chinese conceive as ashortcut to achieve success. ‘‘Chinese people believe in humanrelationships, but Westerners believe in contracts . . . it is all cul-tural difference.’’42

The line between cultural differences and violation of the lawmay from time to time come too close. Relationship-building,for example, could occasionally cross the line, making the Chineseguanxi closely resemble corruption. One case is that of Jason Chi,


former president of Lucent China, who turned the companyinto the largest Code Division Multiple Access (CDMA) tech-nology equipment provider in China. In April 2004, Lucentfired four top executives, including Chi, citing possible violationof the Foreign Corrupt Practices Act (FCPA). According to areport in The Global Times,43 from 2000 to 2003, Lucent Tech-nologies invited more than 1,000 Chinese officials from telecomfirms, mostly SOEs, to visit Lucent’s facilities in the United States,with all expenses paid by Lucent, approximately $10 million.Some of these officials apparently visited Hawaii, Las Vegas, theGrand Canyon, Disney World, and New York City. The Chi-nese officials were allegedly identified as being capable of bring-ing business to Lucent.Guanxi is less and less appealing to China’s younger genera-

tion, those who are age 35 and under, who grew up as singlechildren in an urban environment, according to Suzanne Fox,founder and president of Fox Intercultural Consulting ServicesLLC. She found that younger, urban generations tend to puttheir own careers and nuclear families ahead of their extendedand elderly family members. One influential factor may havebeen that many of these younger men and women were wit-nesses to modern Western business practices, because manyattended master’s programs or worked in foreign countries.Rather than basing their credentials on familial ties, theseyounger citizens focus more on individuals’ merits. CollectedWorks of Mao Zedong and Confucius’s Analects are no longerread; instead, readers are looking to success stories from WarrenBuffet and Donald Trump. For them, the ends justify the means.Getting ahead and making money is seen as being more impor-tant than group dynamics or saving the credentials of a col-league. Thus, Fox indicates that the emphasis is now on theimportance of sound business principles and credentials, makingit easier to accomplish things without relying exclusively onguanxi in contemporary China. The backdrop is a change inaccelerated industrialization, marketization, and globalization,which push China’s shift toward the rule of law and which, in

Growing Pains 69

turn, weakens the need for guanxi. According to Fox, ‘‘Guanxi iscertainly still relevant—it is a simple fact of life that having theright connections helps anywhere—but it is no longer thegolden ticket to obtaining good jobs and accomplishing businessobjectives in China.’’44

WHY HIGH CORRUPTION DID NOT HAMPER HIGH GROWTH

It is obvious that the Mao-style anticorruption campaigns areinsufficient in curbing modern economic crimes. The rule oflaw and the use of modern technology must be relied on to guar-antee maximum safety for the people. While this is true andChina’s law enforcement has been increasingly technology-equipped, economic crimes become more sophisticated as well.One question that arises is why has China’s economy been capa-ble of sustaining its high growth amid high corruption? Severalfactors have been identified that have kept corruption at bay:

1. The expanding private sector may have been a natural control over cor-ruption, according to Professor Yan Sun.45 Although the private sectoris not free from corruption, it is more mindful with production detailsand quality control, due to competition. Employees tend to have astrong sense of responsibility because of their accountability. Currently,the private sector stands at 65 percent of the GDP and contributes upto 80 percent of the GDP’s growth.46 Based on this theory, as moreSOEs are converted to POEs, it is hopeful that corruption will be fur-ther reduced.

2. From the angle of economic systems, despite serious shortfalls, the mar-ket mechanism seems to have a built-in immunity. The stock market, forexample, demonstrated an immediate response to the tainted milk case.Following the Sanlu scandal, several companies with questionable prod-ucts saw their stocks dive sharply. The price of Mengniu, China’s largestdairy producer in volume and a source of contaminated milk, fell 64.6percent to 7.68 Hong Kong dollars at the Hong Kong Stock Exchange.In a similar scenario, Yili Group, another large dairy producer headquar-tered in Inner Mongolia, saw its shares tumble at the Shanghai StockExchange by the daily limit of 10 percent to 9.93 RMB. In the mean-time, good companies, such as Beijing-based Sanyuan Dairy’s shares roseby 46.67 percent during four trading days in a row.47


3. International engagement helps. With China becoming a more andmore involved global player, particularly since it joined the World TradeOrganization (WTO), transparency of its economic and political sys-tems has been steadily improving. For example, the Chinese govern-ment has grown more confident and more open with each major test.The handling of the avian flu of 2003 may have represented the firstleap toward transparency. Due to pressure from the World Health Or-ganization (WHO), the Chinese government reluctantly turned fromcovering up to punishing the guilty parties and aggressively tracing thesources of infection. Since then, the government has learned to mobilizepublic support. Reversing the cover-up tradition, the Chinese govern-ment has actively reported coal mine accidents, major corruption cases,major natural disasters such as the Sichuan Earthquake, impacts of the2008–2009 global financial crisis, and every case of the H1N1 flu in2009. Moreover, it encourages people to report on corruption using ahotline under the ‘‘Sunshine Project.’’ In so doing, the government haswon people’s support through their own involvement. For example,donations to Sichuan earthquake recovery from ordinary peopleamounted to billions of dollars. The 2008 Summer Olympic Gameswas a success credited to support by every Beijing citizen. In exposingcorruption, people’s participation plays an effective role. Hence, theincreasing involvement by the people in what used to be the govern-ment’s responsibilities contributed to curbing crimes.

4. The CCP has a true interest in throwing out bad apples and replacingthem with people who are highly trained and with honorable professio-nal records. As the ruling political party, the CCP as a whole is keen onstaying in power. The party sees corruption as its deadliest enemy,because each case poses a great threat to its legitimacy, particularly dur-ing sensitive times such as economic downturns. In this regard, theWest is often wrong in applying its broad assumption that the CCP isan enemy of the people.48 The reality is that the CCP and the peopleshare a common interest in eliminating corrupt officials. Thus, collabo-rative effort in monitoring power abuses may have stopped many cor-ruption plots in the process.

5. The CCP takes law building and raising people’s trust in the legal sys-tem more seriously than ever. In a recent speech on the ‘‘constructionof judicial human resources,’’ Wang Shengjun, president of the SupremePeople’s Court, noted that judicial personnel must be imbued withthe spirit of running the courts with seriousness, credibility, and sup-port for the courts. They must strengthen the courts with scienceand technology. He urges China to build a body of judicial staff that is

Growing Pains 71

politically reliable, professionally up to the job, devoted to the people,and ‘‘fair and uncorrupt.’’49 Hence, the increasing professionalism withwhich cases are investigated and processed may also have contributed tokeeping down business crimes.

The Chinese economy is in a transitional phase, a dynamicprocess loaded with changes, opportunities, loopholes, confu-sion, new laws, and creative ways of perpetration; and corrup-tion rides along. As the system stabilizes, corruption is expectedto decline. The Chinese government has been acting aggressivelyto plug holes in the system. For example, the government iskeenly aware that an independent judiciary is critical for lawenforcement. Without such independence, law enforcement canbe hampered by the administration, and therefore, cannot effec-tively conduct ‘‘independent investigation’’ as defined in theconstitution.50 The NPC has been trying to create a viable sys-tem for some time. In that regard, models from neighboring sys-tems in Hong Kong and Singapore offer experiences that maybe applicable. One feature of these systems is that they offer highsalary and benefits packages to civil service personnel, andrequire high levels of morality and accountability in return. Tothe corruptive official, punishment includes heavy fines and lossof pension. In reality, however, whichever model China adoptshas to be an integral part of its own system. Furthermore, anti-corruption will be a never-ending struggle.

URBANIZATION: TOO MUCH TOO SOON?

According to NBS, in 2007, the total population had grownto 1.32 billion with 44.9 percent living in urban areas. In 1978when the economic reform just started, the total population wasabout 1 billion (0.96 billion), and the percentage of urban pop-ulation was only 17.9 percent. These numbers show that thepast 30 years have witnessed an unprecedented development inurbanization and migration. These two terms customarily referto expansion of cities and rural population moving into urbanareas or from smaller urban areas to larger ones. Urbanization


and migration complement one another to form a unique phe-nomenon in 20th- and 21st-century China. According to HuAngang, professor at Tsinghua University, the scale of China’smigration during the past three decades has surpassed that ofEuropean migrations overseas between 1820 and 1920 andmigrations in U.S. history between 1870 and 1913 during thepostwar industrialization period. Professor Hu believes thatthere is yet ample room ahead for further migration due to thefact that China’s urban population remains far below the urbanpopulation levels in industrialized countries, such as England(89 percent), France (77 percent), and the United States (81 per-cent). In his opinion, urbanization is the real solution to therural-urban divide. Among the goals of freeing hard physicallabor, redistributing rural population, investing in peasants,enriching peasants, and reducing the farming population,Professor Hu believes that the most important goal is reducingChina’s farming population.51

Many factors led to rapid urbanization. From the demandside, the primary factor is the economic reforms that set off arampant industrial expansion. New production sites were built,new services were offered, and urban residents acquired theirown homes and automobiles. These changes cannot be accom-plished without extra labor and space. And, the extra labormostly came from rural regions. Moreover, economic reformsrestructured SOEs, resulting in tens of millions of state employ-ees being laid off. Cities therefore are constantly under pressureto create new employment opportunities for these workers.Ironically, urbanization itself creates not only jobs but also joblosses, such that even larger scale urbanization is needed to fillthe gap. For example, when urbanization invades suburbs caus-ing peasants to give up farmland and become town dwellers,work opportunities for these people are essential. Because ofhigh rural population density, this often results in more landlesspeasants waiting for employment than jobs created. If the chal-lenge is not properly diffused, social unrest could result. In real-ity, this has become an unstoppable cycle, as well as a force that

Growing Pains 73

has driven a double-digit GDP growth for more than a decade,and that is a daunting reality. The concept that sustainability ofan upward-bound economy is key to harmonious society is cer-tainly justified.‘‘Village in the city’’ (VITC) is a new phenomenon born by

rapid urbanization. When cities expanded into the countryside,village after village found themselves enclosed in new city boun-daries; high rises surrounded these villages in no time, beforethey could be absorbed into the urban structure. Shenzhen, forexample, had 91 VITCs and had to resolve land rights issueswith these villages. Because the land is collectively owned, thegovernment could not simply seize the village property by force.The villages eventually will be urbanized, given that the incom-patibility is simply too drastic for the two types of lifestyles tocoexist. Moreover, village life is directly threatened by urban pol-lution; village constructions may likely turn into city slums,which the Chinese government strictly forbids. To reach a mutu-ally beneficial solution, however, proves to be a thorny issue,because village properties are more valuable as time passes, tothe point that municipal governments cannot afford to purchasethem.VITCs provide many functions that are needed in the urban-

ization process. For example, when migrant workers come totown, they need dining and lodging services. In warmer cli-mates, many migrant workers reside under the cities’ bridges,but this becomes inconvenient in colder climates. Under suchcircumstances, ‘‘villagers’’ build extensions to their housingunits, often violating zoning regulations, to serve the migrants.In Shenzhen, for example, the zoning regulation for the villagesrestricts the highest residential construction to no higher thanthree floors. It has been reported that the actual average height,however, is 10 floors and many exceed 20.Not only does a large population dwell inside the commun-

ities, but also dwellers are grouped into communities accordingto cultural affiliations. It is a cultural tradition that migrantsfrom the same provinces reside in the same ‘‘home villages,’’


such as the ‘‘Hunan Village,’’ the ‘‘Henan Village,’’ and so on.Oftentimes, the villages conduct little or no communicationsamong them, not even playing Mahjong together.52

In addition to serving Chinese migrant workers, VITCs shel-ter many foreigners as well. Some villages in Guangzhou areinhabited by West Africans, Arabs, and people from other inter-national origins doing business in China. After a day of loadingand unloading, they too have a great need to enjoy ethnic com-munication and their own cultural traditions. Cultural needssuch as these seem to be better served by theses VITCs, than byhigh-end hotels in Guangzhou.Despite zoning code violations and other kinds of perpetra-

tions against state or local standards, the urban villages are notequal to ‘‘slums.’’ According to Professor Wen Tiejun, head ofthe Institute of Rural Development of the People’s University inBeijing, two factors prevent communities from deterioratinginto slums: (1) public ownership, and (2) the Confucian tradi-tion. First, traditionally, the Chinese do not tolerate communitydisorder. Calling it ‘‘zero tolerance’’ is not an exaggeration.Whoever can work must find work, rather than drifting intohomelessness or committing crimes. Additionally, strict socialcontrol, from family to society, based on traditional values, hasalways been in effect. Promoting order and collective spiritrather than disorder and individualism is essential in pan-Confucian cultures. Second, the Chinese government has alwaysplaced harmony at the top of its agenda. Despite occasionalriots, the government has been successful in avoiding extremedissent. In favor of control, public ownership allows the govern-ment many venues of direct intervention. Unlike Western coun-tries where land ownership is completely privatized, landremains in the hands of the state in China; individuals may leaseland only according to government terms. Therefore, the gov-ernment retains the right to remove illegal constructions inurban villages.53

Cities devise their own strategies to improve their VITCs,depending on availability of resources. In Shenzhen’s case, it was

Growing Pains 75

not until 2004 that the Shenzhen municipality had reached themutually accepted strategy of letting the VITCs develop theirown real estate following the city’s standard codes. With rentsgoing up, the cost of living rises as well, and so too does thedemand for higher pay. Companies that cannot afford to payhigher salaries either relocate to the underdeveloped hinterlandor collapse because of a labor shortage. The early stage of cheapproducts and cheap labor is phasing out. In this case, the VITCsplay an important role in adapting to the fast rising economicstandard.Is modernization to be blamed for the pains of urbanization?

Professor Wen Tiejun believes so. He argues that China’s urbaniza-tion developed too fast (in fact, the fastest in the world) and hasresulted in negative impacts on ecological environment, naturalresources, and many social problems. Professor Wen calls it‘‘plague of urbanization.’’54 However, an alternative model thatProfessor Wen favored—developing small towns to absorb mi-grant population—did not work out. It has been proven wrongto assume that Chinese peasants are traditionally rooted in theirhometown and, therefore, would more likely find jobs in localtowns first. Instead, migrant workers go directly to the largestcities, such as Guangzhou, Beijing, and Shanghai,55 because theycould find the jobs and lifestyles they pursue. On the otherhand, small towns are not free from problems of large cities;more important, small towns do not have the kind of accommo-dative resources that large cities do.On the supply side, approximately 150 million migrant work-

ers come to cities to find jobs every year. Multiple factors drivepeasants to quit farming. These factors can be further catego-rized as ‘‘pull’’ and ‘‘push oriented.’’ The ‘‘push’’ factor primarilylies in the reality that better farming technology has made farm-ing less dependent on physical labor. Many jobs now can behandled by women or can be subcontracted to farmers whospecialize in offering farming services, such as harvesting, seed-ing, and so on. Costwise, it is more beneficial for the farmer towork in town and pay for farming services at home rather than


doing the farm work himself or herself. Technology has createda superfluous labor force ready to work in town. However, otherforces, one of which is management, also generate extra labor.Unlike urban industries that make plans based on supply anddemand, family-based agriculture is essentially unorganized,constantly resulting in unsynchronized production. The lack ofplanning drives the farmer to seek better and more reliableincome.On the ‘‘pulling’’ side, one finds the best explanation for a

typical farmer’s motivation for coming to town. The wideningeconomic gap has created a powerful propensity for migration.Since the start of the economic reform 30 years ago, the gapbetween the rich and poor has provided a great momentum formobility. In 2008, Beijing, Fujian, Hubei, and Hunan becametrillionaire provinces, which is a term the Chinese media uses togroup provinces whose GDP exceed 1 trillion RMB. Guang-dong, Shandong, and Jiangsu are the three leaders in GDPgrowth. In 2007, Guangdong’s GDP was approximately 3 tril-lion RMB, and by 2008, it had reached 3.4 trillion RMB (witha 10 percent rate of growth). Shandong’s GDP grew by 13 per-cent in 2008 as well, exceeding 3 trillion RMB. Jiangsu’s GDPreached 2.5 trillion RMB in 2007. In 2001, Guangdong was thefirst province to reach more than 1 trillion in GDP, and Shan-dong and Jiangsu soon followed in 2002. Zhejiang broke thetrillion mark in 2004, Henan and Hebei in 2005, Shanghai in2006, and Liaoning and Sichuan in 2007. Guangdong, Shan-dong, Jiangsu, and Zhejiang have since taken the lead.56 In con-trast, inland provinces like Qinghai (78.3 billion RMB),Ningxia (88.9 billion RMB), and Gansu (270.2 billion RMB)fall far behind.Farmers in poorer provinces simply want to be in richer prov-

inces, and become urban dwellers in the largest cities. Their willcannot be thwarted for good reason. Rural people dream ofurban conditions, such as education, health care, pay, and enter-tainment. Studies show that in the 1980s, for most migrantworkers, working in remote cities and leaving their families

Growing Pains 77

behind was only a temporary solution; they would eventuallyreturn to their hometowns. While this is still true in 2010, therising trend is for migrant workers to settle down in cities. Tosome scholars, the trend now warrants differentiation betweentwo demographic terms: ‘‘migrant population’’ and ‘‘floatingpopulation.’’ Professor Ge Jianxiong, director of Fudan Univer-sity Library and professor of geography and history, believes that‘‘migrant population’’ is different from ‘‘floating population’’ inthat migrants have a sense of settlement while the floating popu-lation does not. In terms of disposition of income, migrantswould save their income in local banks and spend it locally,while floating population tends to send money home. For thesenew city residents, readapting to the rural lifestyle is becomingless convenient with each passing day. For the migrants, anotherphenomenon is that when they are deprived of the right to settledown permanently, they develop hostility toward local residents.Historically, conflicts between locals and foreigners are notuncommon.57

The Xinhua News Agency estimates that one-third of Shang-hai’s population came from the provinces in 2006. While mi-grant workers filled Shanghai’s labor shortages, the city was notready to manage migrant communities. One consequence wasthat 88 percent of unplanned births were in migrant families.58

On the family planning front, a headache for the government isthat some migrant communities have their own midwives. Theirpractice is illegal and endangers women’s safety.In general, farmers with better education and from areas of

better economic conditions do better, as they tend to move totown with business plans in mind. In large cities, such as Beijingand Shanghai, restaurants and hotels at all levels are operatedmostly by provincial entrepreneurs. Migrants belonging to thiscategory could easily acquire city Hukou (a city residential per-mit); they count for less than 10 percent of migrant workers.Migrant workers with lower education levels and from ruralregions of medium economic conditions are likely to engage inlabor-intensive jobs, such as construction work.


The migrant workforce is expected to grow stronger. The2000 Census shows that, of the 6.7 percent of the populationthat never went to school, most lived in rural areas and tendedto stay home. A significant number of potential migrants whoare educated are not yet able to join the migrant labor forcebecause they cannot afford the travel expenses.59 This situationis not to be underestimated when the majority of the hinterlandprovinces fall into this category. Currently, a shortage of fundingand the lack of psychological preparation discourage peasants inGansu to seek jobs in Shenzhen. But this will change over time.China’s large cities must be prepared to accommodate more than150 million migrant workers per year.Currently, the urban population stands at 44.9 percent, which

means 727.5 million people are residing in rural China. In hisspeech at the 17th CCP Congress, in March 2008, PresidentHu Jintao set the tone for the next phase of development(through 2012) to vigorously pursue industrialization, informa-tionization, urbanization, marketization, and globalization.60

Many suspect, however, that if China steadfastly pursues theurbanization levels of industrial countries, or 70–80 percenturban population, this would put 250 million new workers inthe cities in a short time. Problematically, because China’s indus-trialization level is behind its rate of urbanization, and becauseemployment opportunities are primarily born out of the servicesector and the labor-intensive manufacturing sector, an intensi-fied migration may indeed exhaust the cities’ accommodativeresources. China may see slums, overwhelmed social benefit sys-tems, and many other social problems. In fact, such concernswere behind past practices for decades.It was as early as 1958 that the Chinese government started

the Hukou system. The system was intended to tie peasants toland and prevent an influx of workers to big cities. The Hukoufollowed the food ration management during those years ofhardship. In the 21st century, some cities, such as Shanghai andBeijing, continue to use it for temporary migration managementpurposes although 12 out of the 23 provinces already have

Growing Pains 79

phased out Hukou completely. Until 1984, however, peasantswere not permitted to seek employment in urban areas, and resi-dents with provincial Hukou were not entitled to social benefits,not even schooling. Soon, the Hukou system was perceived as asocial discrimination system in effect rather than a populationmanagement system. Not only was the rural population discour-aged from moving into urban areas, but also residents fromminor urban regions were not granted permission to reside inlarger cities. The discriminatory function has angered many. ‘‘Itlocks people into different social classes entitled to differentrights, which is objectionable,’’61 as Professor Ge Jianxiong putsit. In fact, many believe that the Hukou system is now a mainbarrier to industrialization and market economy.After five years of implementation of the CRS (1979–1984),

peasants’ income rose and many started rural industries thatdirectly served urban industries. As such, peasants were graduallyallowed to migrate to towns. With the overall increase of per-sonal wealth and an increasing awareness of social equity, thetraditional residential restriction has become increasingly intol-erable. Hukou has become a symbol of rural-urban divide. How-ever, the answer to the question of whether to remove thesystem immediately is not clear.Professor Hu Angang of Tsinghua University calls for abolish-

ing the Hukou system without delay. He believes that urbaniza-tion provides employment solutions to 70–80 percent of the jobseekers. According to his estimate, migrant workers contributed13.3 percent to the GDP in 2004, which does not includeunregistered business activities. Professor Hu calls on govern-ments at all levels to set up programs to help migrant workers,converting the traditional ‘‘restrictive policy’’ to a ‘‘welcomingpolicy.’’62

Questions remain, however, with respect to associated costs,should more migrants come to town, especially with the short-age of a social welfare system to deal with unemployment-related problems. Professor Cao Jinqing, director of the SocialDevelopment Research Center of Huadong Technical Institute,


believes that the cost of receiving migrant workers is low thanksto the rural land tenure system. A remarkable thing that the Chi-nese government did, in his opinion, was the reallocation ofland, finance, and labor within the Chinese countryside in the1980s. Because rural households were assigned plots on a leasebasis, they do not have the right to resell their land. The negativeside of this policy is that, not being real landowners, many farm-ers lost their land to public officials who traded them with realestate developers; the positive side is, for most farmers, they areguaranteed a home to return to. Thus, peasants may leave theirland, but remain residents in their village and work in factorieswithout being long-term urban dwellers. For many farmers, it istheir dream to work in cities but settle down in their hometown.For example, building a house in a large city may cost some-where between 10,000 and 20,000 RMB per square meter orapproximately 11 square feet, while the same space costs as littleas 500 RMB to build in a typical rural town. Such benefits makethe rural hometown a valuable buffer against contingencies out-side. Thus, the land tenure system has become a form of socialsecurity that alleviates much of the pressure of dealing withunemployment and slums. Professor Cao attributes China’s landtenure system to having a critical role in the sustained growthfor decades.63

Professor Peng Xizhe, director of the Institute of Social Devel-opment and Public Policy at Fudan University, agrees thaturbanization is an effective way to reduce the divide, becausepeasants typically make more money in a month working incities than they do in a whole year working in the countryside.However, Professor Peng went on to discover the education ben-efit of urbanization with respect to a migrant workforce. Hebelieves that the 150 million annual migrant workers willchange a harsh cultural reality left by the rural-urban divide: thecountryside remains outmoded, whereas cities are undergoingindustrialization. At least 150 million peasants are educated withthe most advanced knowledge at no government costs. Urban-ization educates the rural population through migrant working

Growing Pains 81

conditions, introducing them to such concepts as a modernway of life, entrepreneurship, and industrialization. This is whatthe peasants could hardly learn even after years of schoolingat home. Professor Peng calls this phenomenon ‘‘the Chineserenaissance.’’64

On the opposite side, Zhou Chunshan, director of Urban andRegional Research Center of Sun Zhongshan University, isagainst removing the Hukou system and setting migration com-pletely free. He believes that the system must be maintained as abuffer to prevent an influx until cities are capable of handlingthe migrant population. Hukou has the added benefit of keepingsufficient labor on the farmland and preventing farming fromcompletely falling on the shoulders of women and senior men.Moreover, Professor Zhou believes that the goal of a modern cityis to reach high quality; it is about converting real estate devel-opment to the development of research and technology. Citiesthat started earlier in the economic reform, such as those in theZhujiang River Delta Regions (the Guangdong Province), grad-ually transitioned into high-tech manufacturing. In these cities,highly educated and better trained labor has replaced migrantlabor straight from farmlands.65

Cai Fang, director of Demographics and Labor EconomicsResearch Center at the Academy of Social Sciences of China,believes that abolishing the Hukou system may not provide anunfailing solution to the rural-urban divide, because employ-ment of rural labor will not be necessarily compatible withurban development needs in the long run. Demand for highersalary jobs and better living conditions will rise following declin-ing labor-intensive production and rising product quality. Firmsthat are not able to compete will have to relocate, unable to sur-vive on thin margins that are derived from suppressing workers’compensation. In such a situation, it likely will become difficultto hire qualified labor at the low pay levels of the past, andmeanwhile, a large number of migrant workers will not be ableto find jobs. He believes that despite the rise in cost of produc-tion, products made in China will remain competitive, because


a Chinese worker’s salary will remain below 3–4 percent of anaverage American worker’s salary.66

China’s urbanization characterizes its economic developmentin the 21st century. The process presents unique challenges andgrowing pains, most of which are generated by industrialization,political system changes, and urbanization. The pressure is tre-mendous, and the propensity for change is great. A successfultransition will lead to sustained economic growth, a better envi-ronment, and social harmony based on the elimination of therural-urban divide, all of which are of global interest as well. Toachieve success, China must rely on science and technology.Hence, therein lies the most important motivation behind thegovernment’s slogan of building the country into an ‘‘innovativenation.’’ The next chapter will look into science and technologypolicies with respect to reforms in industry.

Growing Pains 83


Three Chinese bills. Chinese currency is known as the yuan. (Courtesy of Corel)

In this 1979 photo, thenChinese vice premier DengXiaoping tries on a cowboyhat presented to him at arodeo in Simonton, Texas.Forged in absolute secrecy atthe height of the Cold War30 years ago, the diplomatic tiesestablished between the UnitedStates and China were meant tobalance out the Soviet threat.(AP Photo/File)

A Chinese peasant woman carries vegetables on a shoulder pole to her village nearYanan, in central China’s Shaanxi Province in 1995. As men move to cities to findbetter paying jobs, women are often left to look after the farms so that their fami-lies can retain long-term leases on the land. (AP Photo/Greg Baker)

A group of Chinese children have their McDonald’s lunch in the southern Chinesecity of Guangzhou in 1999. (AP Photo/Vincent Yu)

Cars drive on Beijing’s second ring road in murky weather in 2004. Beijing vowedto clean up its often-polluted skies before the 2008 Olympic Games. (AP Photo/Greg Baker)

Heavy traffic is seen along a city highway in Beijing in 2009. Beijing trafficauthorities said the city will extend by another year traffic restrictions aimed atreducing congestion and improving air quality in the capital. (AP Photo/AndyWong)

Anxious parents wait for their children to emerge from national college entranceexams in Beijing in 2005. While the number of students taking the examsincreased by 1.4 million in 2005, reaching a record 8.67 million, the number ofavailable positions in universities rose by only 280,000, reflecting the ever increas-ing competition amongst students for a space in the colleges. (AP Photo/GregBaker)

Baidu.com founder Robin Li is interviewed as he arrives at Beijing airport in 2005.Li returned to Beijing after a successful initial public offering on the NASDAQstock exchange in New York. The Chinese Internet search engine’s stock soared to$122.54, a 354 percent gain from its initial public offering price of $27. (AP Photo)

Eighteen-year-old students line up to get their ballot papers before voting for thefirst time in local legislature elections in Beijing in 2006. Voting to elect represen-tatives for Beijing’s local legislatures began as millions of residents streamed tobrightly decorated polling stations throughout the Chinese capital. Some 8.5 mil-lion voters were expected to cast their ballots for People’s Congress delegates toBeijing’s 18 counties and districts, and 181 townships, part of the communistleadership’s tightly controlled version of democracy, with mostly government-approved candidates making it to the ballot. (AP Photo/Greg Baker)

Students look for job opportunities at the 2007 Graduates Job Fair in Shanghai.Graduates from 28 universities attended the fair. According to state media young Chinesefaced a severe job crunch in an increasingly competitive labor market, with nearly 4.13 mil-lion graduates entering the workforce in 2006, 750,000 more than the previous year. (APPhoto/Color China Photo)

Job seekers crowd stalls at a job fair in Beijing in 2009. Thousands crowded thefirst job fair in the city since a weeklong holiday for Chinese New Year. China’seconomy is suffering from a collapse in global demand for Chinese textiles, toys,and other goods and a downturn at home in real estate, auto sales, and otherindustries. The government says some 20 million migrant workers lost their jobs.(AP Photo/Greg Baker)

Former President and Party Chief Jiang Zemin, right, smiles as he shakes handswith current top leader Hu Jintao, left, as they came together on stage at a cere-mony celebrating the 80th anniversary of the founding of the People’s LiberationArmy at Beijing’s Great Hall of the People in the Chinese capital in 2007. Pastand present Chinese leaders appeared together on army day Wednesday, in a strik-ing show of unity ahead of a key Communist Party congress later in the year.(AP Photo/Elizabeth Dalziel)

Performers paint on a giant scroll during the opening ceremony for the Beijing2008 Olympics. (AP Photo/Julie Jacobson)

China’s Yao Ming carries the flag of China next to a small child during the opening cere-monies for the Beijing 2008 Olympics. (AP Photo/Itsuo Inouye/File)

A man walks past a display showing stock prices at a brokerage firm in HongKong in 2008. Hong Kong’s Hang Seng Index tumbled 12.7 percent, or 1,602points, to 11,015.84—the lowest close it had in more than four years. (AP Photo/Vincent Yu)

Aworker assembles solar power panels at the Suntech factory in Wuxi, China. China hasrecently set new laws for the generation of renewable energy, including financial subsidiesand tax incentives for the development of renewable energy sources. (Qilai Shen/EPA/Corbis)

A woman with her baby looks at powdered milk products with notice boards of‘‘no melamine’’ displayed inside a supermarket in Chengdu, Sichuan Province.(AP/Wide World Photos)

Customers surf the Internet at an Internet cafe in Beijing in 2009. Two more Websites dedicated to social networking went offline in China in July 2009, amid tighten-ing controls that have blocked Facebook, Twitter, and other popular sites that offeredmany Chinese a rare taste of free expression. (AP Photo/Greg Baker/File)

A Starbucks staff member hands out free coffee to customers at an event to markthe 10th anniversary of Starbucks’ launch in China, at the company’s original out-let in Beijing in 2009. The coffee chain Starbucks has started producing coffeegrown by farmers in China and hopes to bring the blend to stores all over theworld. (AP Photo/Greg Baker)

A model poses next to Chinese automaker Geely’s new model Panda on display atthe Beijing Auto Show in 2009. China surpassed the United States as the world’sbiggest auto market for the first half of 2009 after June sales soared 36.5 percentfrom a year earlier. In March 2010, Geely signed a $1.8 billion deal for Ford’sVolvo car unit. (AP Photo/Andy Wong)

Chapter 4

Innovative Nation

SCIENCE AND TECHNOLOGY IS KEY

China’s reality is such that education and science and technology(S&T) have been slow reforming sectors, for historical and eco-nomic reasons. Education, for example, is on the expenditure sideof the government’s balance sheet; so are national basic researchprojects. As a result, the government’s role in developing the knowl-edge sector and in creating an environment conducive to a broad-based innovation is of critical importance. New policies demonstratea strong commitment by the government. Due to political turmoilof the Mao Zedong era (1949–1978), however, valuable time waslost. Consequently, China’s economy was on the edge of collapse bythe time Mao died. During nearly two decades of reform, resourceswere invested in manufacture, leaving S&T behind. Thanks to thehistoric lesson, however, in the 21st century the Chinese govern-ment is going all out to develop S&T. In The Guideline of Mid- toLong-term Development of Science and Technology 2006–2020 (TheGuideline),1 S&T is said to be essential to sustaining China’s eco-nomic growth. Finally, transforming the Chinese economy into aknowledge-based economy and the country into an ‘‘innovativenation’’ through an enterprise-centered national system with stronginnovative capacity at the enterprise level is pronounced as the ulti-mate goal. In a speech given by Premier Wen Jiabao, he argues thatto develop a country, a nationality, or an enterprise, developing itsstrength in innovation is more important than anything else. Under

his initiative, the 17th Party Congress held in 2007 proposed thatthe CCP take the lead in building China into an ‘‘innovativenation’’;2 the term has since become the slogan of the new era. Presi-dent Hu Jintao went even further in stating that S&T is the numberone productive force and that China must take a road of independ-ent innovation with Chinese characteristics. To achieve this goal,Hu states,

[I]t is a must to give top priority to increasing the capabilities of independ-ent innovation in the development of S&T; it is a must to promote theprogress and innovation in S&T by innovating the system; and it is a mustto foster a large army of innovative talents in the country; and it is a mustto encourage S&T progress and the nation’s innovativeness with an innova-tive culture.3

More recently, during a 2008 tour of industrial facilities inGuangdong, Premier Wen stressed that only continuous innova-tions can enable the Chinese nation to stand up in the worldand become a leader in industrialization.4 What all these politi-cal propaganda imply is a new reality: despite 30 years ofreform, China is facing more challenges rather than less; and thenew challenges will not likely be solved with the traditionalapproach of mass campaigns. Moreover, to break out of the bar-riers, relying on government’s resources is less and less a viablesolution. The company’s innovative capacity will ultimatelydecide its fate.The concept of innovation is broader than scientific invention.

It is more of an economic concept related to changes in produc-tivity outcomes. Examples include creative use of existing prod-ucts and ideas to provide new solutions, such as creating newmethods, identifying new resources, finding ways to break upold monopolies to build a new economic structure, and so on.5

Saving energy and reducing cost is on top of China’s agendain the 21st century. The sources of innovation are no longer gov-ernment initiatives alone; they are becoming the responsibilityof each and every company in the economic network. For SOEs,typically, the government sets the goals; the company finds its


ways to meet them. While POEs have diverse goals and objec-tives, national projects are attractive to them and often make animportant part of their planning as well. Everyone has nowcome to the understanding that S&T is essential to innovation,and companies rely on innovation to stay ahead; therefore,Chinese companies of the 21st century must expect to raise R&Dexpenditures. On the other hand, the society is convinced thatan S&T-friendly environment is essential. It is unimaginablethat innovation could prosper in a society where intellectualproperty is poorly protected and bureaucratic constraints ham-per exchanges of personnel and opinions. In these respects, theChinese government has made a great deal of efforts comparedto the prereform situation, but obviously has not done enough.In a sense, more innovation comes from a freer society as awhole.As shown in the first chapter, what underlies China’s eco-

nomic growth is the ongoing reform of the entire economic sys-tem. The reform has changed the framework of China’sownership structure, leading to a thriving private sector and amore efficient public sector after a series of SOE reforms. Ingeneral, because of the challenges they are faced with, the POEsare more competitive in acquiring research and developmentcapacities than SOEs, although the latter have demonstratedachievements in national-level projects, such as space and nu-clear programs. The situation is reflected in patent applications.According to NBS, in 2007, the total number of patent applica-tions submitted by domestic firms was 27,741 or a 31 percentincrease from 2006. Out of this number, private enterprises sub-mitted 2,312 or an 18.5 percent increase from 2006. SOEs sub-mitted 1,921 or about a 26 percent increase from the 2006figure. The large remaining portion of patent applications wassubmitted by various kinds of joint ventures established with stateand private funds. These data suggest that currently state fundingprovides the main support for S&T, although most activitieshappen in companies of joint ventures. SOEs’ active engagementwith S&T activities is considered a significant trend. It implies

Innovative Nation 87

that SOE restructuring continues to weed out weaker companiesthat have lost competitiveness. However, due to concerns that anexpedited transformation may result in wide-scale layoffs and socialconsequences—and that the government intends to prevent theseat all costs—SOEs’ S&T progress will likely be slower than the pri-vate sector, despite their privileged funding preference status.Also noticeable is the patent applications number of foreign-

invested firms which was 5,034 in 2007, an increase of 35 percentover the number of 2006. Since 1978, foreign companies haveserved as channels of technology transfer. The data shows thatthey continue to be active in supporting China’s S&T progress.The data also implies that China’s IPR environment has been con-stantly improving, providing the much needed legal environmentfor S&T transfer to sustain. Companies with investment fromHong Kong, Taiwan, and Macau submitted 3,299 patent appli-cations which represents a decrease of 3.8 percent from 2006.This reveals that the main operations of these firms in China areprimarily manufacturing-related, such as assembly lines. Never-theless, they maintain a high-level of R&D activities.NBS data shows that overall China’s funding for activities in

S&T, which includes R&D, application of R&D results, andR&D-related services, has been rising year after year. Expendi-ture on R&D increased rapidly. An interesting trend in this areais that expenditure on purchases of foreign technology taperedoff from 372.5 billion yuan in 2002 to 320.4 billion yuan in2006. In the meantime, purchases of domestic technology rosefrom 42.9 billion yuan in 2002, more than doubling to 87.4 bil-lion yuan in 2006. Although expenditure on imports remainsdominant, the rise in domestic technology purchases may implythe beginning of a significant change, that is, China is graduallycoming out of the manufacturing-intense phase of the early-reform era and developing toward a knowledge-based economy.This transition has long been the target. The high-technologyarea, for the time being, continues to be dominated by foreigncompanies. In a few sectors, however, the situation is being turnedaround by China’s acquisition of foreign firms. In such cases, the


Chinese companies own or share ownership of the technologyas well. China is exporting many kinds of high-tech products,but mainly in the areas of office machinery and informationcommunication technology (ICT) equipment. In 2004, Chinasurpassed the United States and European Union to becomethe biggest exporter of ICT goods.6 One example is the acqui-sition of IBM’s personal computer section by the China-basedcompany Lenovo in 2004. The acquisition, which cost 1.75billion in U.S. dollars, resulted in a joint venture with IBMholding an 18.9 percent stake. The price tag may be high; thedeal, however, raised Lenovo’s sales ranking worldwide fromnumber nine, just ahead of Apple Computer, to number three,just behind Dell and HP. The combined venture, headquar-tered in New York with operations in Beijing and in Raleigh,North Carolina, employs approximately 10,000 IBM employ-ees and 9,200 Chinese employees.7

CHINA’S POSTREFORM INNOVATIVE SYSTEM AND S&T POLICIES

During the prereform period, the government set the goalsand objectives for S&T primarily for national defense purposes.A notable achievement was the ‘‘two-bombs-and-one-star pro-ject’’ (or, the project of the atomic bomb, the hydrogen bomb,and the satellite). During the postreform era, although much ofthe traditional planning function has been decentralized, thegovernment continues to manage the general direction of theeconomy. One difference is that the government tends to makedecisions through wider consultations. Directly affecting S&Tdevelopment are the policies made by the Ministry of Scienceand Technology (MOST). Policies of MOST represent collabo-rative opinions of those agencies that represent the mostdynamic sectors, including the NDRC, the Chinese Academy ofScience (CAS), the Chinese Academy of Engineering (CAE), theMinistry of Industry and Information Technology (MIIT), theMinistry of Agriculture (MOA), the National Science Founda-tion of China (NSFC), the Ministry of Finance (MOF), the


Ministry of Commerce (MOC), the Ministry of Personnel(MOP), and the State Intellectual Property Office (SIPO). Infact, the list often extends to other institutions that are some-what peripheral to policymaking. In addition to planningand management, these ministry-level agencies, along with theirsubagencies, also represent the largest government R&D resour-ces. Chinese S&T policies are based on ministry-wide coordina-tion conducted by the National Steering Group on Science,Technology, and Education whose responsibility it is to helpMOST identify priorities, and design policies, laws, andregulations.One noticeable postreform characteristic of the State Council

is its constant restructuring to retire outdated institutions andcreate new ones. For example, MIIT is a new ministry estab-lished in March 2008. This new powerhouse with 24 depart-ments replaced the former Ministry of Information Industry. Itintegrated the NDRC’s former authorities on industry and trademanagement; the former functions of the Commission of Sci-ence, Technology, and Industry for National Defense, except nu-clear power management; and the former functions of theMinistry of Information Industry and the State Council Infor-matization Office. Additionally, MIIT is responsible for manag-ing Internet domain registrations and creating Internet policies.In general, Chinese S&T policies are developed to cover

major areas pertaining to innovation activities that are ofnational interest. These areas include identifying and supportingcore research programs that are perceived to be critical to theeconomy or national security, such as biotechnology, informa-tion technology, space technology, energy technology, new mate-rials, and so on, as well as commercialization of researchachievements. These policies also address peripheral issues, suchas developing policies to facilitate S&T human resources, settingup reward systems, and appropriate measures to protect IPR.China’s economic progress has been in synchrony with the

reforms in S&T policies. During the Mao era (1949–1978),especially during the Great Cultural Revolution (1966–1976),


the slogan was ‘‘Red and Expert,’’ meaning intellectuals wouldhave to be proven loyal before their knowledge could be of use.S&T was labeled ‘‘capitalist,’’ and so were most of the nation’sintellectuals. S&Twas conducted by the government, in govern-ment labs, and for national defense purposes in particular. Since1978, Deng Xiaoping worked hard to remove the traditional ide-ological constraint and paved the way for a new era of S&T.Under his leadership, the college entrance examination systemwas resumed in 1978 to replace the recommendation systembased on family background and political loyalty. Special Eco-nomic Zones (1980) were opened in coastal regions to experi-ment with Western management, and the S&T system wasreformed to encourage responsibility and connection of S&Twith the needs of the society (1985). As such, Deng’s profoundcontribution is remembered as deprogramming the traditionalmentality to release people’s long hidden enthusiasm in pursuinginnovation. Under Deng’s leadership, the Communist Party’score task was shifted from class struggle to the ‘‘Four Modern-izations’’—industrial modernization, agricultural moderniza-tion, defense modernization, and S&T modernization. Dengwas a magician of terminologies, and was known for creatingsuch terms as ‘‘socialist market economy,’’ ‘‘to be rich is glori-ous,’’ and ‘‘S&T serves not only capitalism but socialism aswell.’’ With these concepts, he fenced off attacks from hardlinersand assured the people that it was okay to pursue material well-being even under socialism. As such, Deng ignited an economicdevelopment at a pace rarely seen in history.As the reforms continued, university labs began to offer R&D

services to economic demands; many faculty members tookadvantage of their expertise to engage in entrepreneurship. Thislater became popularly known as ‘‘jumping into the sea,’’ whichmeans giving up the ivory tower and trying one’s luck with thevolatile market competition. In 1986, the Provisional BankruptcyLaw was promulgated, which marked the start of SOEs’ restruc-turing. As more and more SOEs were privatized, the pressure ofmarket competition led companies to seek solutions from S&T


to stay ahead. In the meantime, the government launched dedi-cated S&T funding programs under the direction of MOST,including the ‘‘National Natural Science Foundation’’ (1986)to support basic research, and the ‘‘863 Program’’ (1986) toaddress targeted basic research areas in which China needed tocatch up with advanced world levels. The ‘‘Spark Program’’(1986), the ‘‘Torch Program’’ (1988), and the ‘‘TechnologySpreading Program’’ (1990) aimed at applying technology toimprove productivity and bring changes to people’s living condi-tions. To acquire funding, individuals and institutions may sub-mit research projects to MOST. There are certain restrictions,however; for example, individual applicants must be affiliatedwith a large company, preferably an SOE; additionally, the appli-cant must be a Chinese national less than 55 years of age.8 Moreabout the national programs will be explained in the followingpages.From the mid-1990s to 2001 when China joined the WTO,

Chinese firms went through an intensive learning and restruc-turing process to comply with WTO standards. Transparency,for example, was a weak area of most domestic firms due to thefact that SOEs and most semi-state-owned firms were not yetstructured to be accountable to shareholders, the dominantshareholder being the government. One consequence of thisshortfall is that it gave rise to enormous volatility to a stock mar-ket, adversely impacting on a company’s ability to draw fund-ing from the broad public. Buying and selling stocks tended tobe short-term operations, popularly known as ‘‘flipping’’ stocks.Traders typically relied on technical analysis as it is abundantlyavailable through the media. Few investors would hold securitiesfor the long term. This is part of the reason why most peoplepreferred parking their hard-earned money in a savings accountor investing in government bonds. Since joining the WTO, Chi-na’s capital market has been improving gradually, as more Chi-nese securities are listed in Hong Kong and foreign stockmarkets. Internationally traded companies abide by interna-tional reporting standards and provide a better transparency


than the rest. Their practice set an example to other firms andinspired changes. On the government side, it appears thatthe Chinese government is determined to learn from Westernexperience and stabilize the financial market by implementingWestern-style regulations. On the other hand, the society as awhole is adopting the concept of transparency, being aware thata well-structured capital market means profit because it is funda-mental in enabling solid enterprises and weeding out weak ones.The Guideline (2006–2020) demonstrates the Chinese govern-ment’s commitment to building up indigenous innovation capa-bilities and to creating a suitable framework, part of which is tostabilize the capital market. While a stable capital market is criti-cal to the survival of new technology companies without shiftingS&T to the enterprise-level, companies will nevertheless beunable to benefit from it. The legacy and mentality of statemonopoly must be replaced by one of diversity at the level ofcompanies and according to their needs.In personnel management, new policies attract overseas schol-

ars with critical expertise. More and more research institutionsare hiring managers through open search which appeals to over-seas scientists who wish to work in China. New policies, such asthe Guideline (2006–2020), encourage teamwork and the dare-to-take-the-lead-and-dare-to-be-different spirit. For example,the Guideline (2006–2020) stresses respecting personal differen-ces, promoting academic freedom, encouraging exploration fornew theories, increasing tolerance for failure, and creating a newrelaxed and harmonious cultural environment conducive to sci-entific research. These ideals were spelled out in such terms forthe first time. How they will be realized remains to be seen.

HIGH-TECH FRAMEWORK IN TRANSITION

Despite rapid economic growth for 30 years, China’s high-tech framework remains at an early stage. Much emphasis hasbeen put on borrowing Western technology, building assemblylines, and ramping up exports. Investing in building the country’s


own high-tech infrastructure has not been seriously addresseduntil recently. Understandably, the priority was relief frompoverty. This having been very much achieved, economic sus-tainability has come to be the next challenge. The questionremains wide open: can the Chinese government bring aboutan innovative environment and, if so, how would they do it?The following is a review of what the government has done toput together a framework.The transformation in S&T framework is conventionally di-

vided into five phases surrounding historical decisions made bythe Central Party Committee (CPC): (1) Break-Ice (1985–1992),(2) Weight-trimming (1993–1998), (3) Localization (1999–2003),(4) Market Integration (2003–2006), and (5) Reassuming Direc-tion (2006–2020).9 The nature of the transition was to expandfunding channels and to expand the latitude of freedom to conductS&Tresearch.

Phase 1, Break-Ice (1985–1992)

The CPC published The Decision of Reforming the S&TFramework in March 1985. The goal was to diversify S&T fund-ing resources according to the nature, scope, and urgency ofprojects. Typically, national and local S&T projects are fundedby the central government and provincial governments. For themost part, the government budgets for basic research and certainapplied research projects that are of national interest. Otherfunding instruments are mobilized as well, including privatefunding, contractual funding, and so on. The Decision encour-aged commercialization of research products. At the time of itsissuance, the IPR laws came into existence to protect registeredproducts. Furthermore, according to the Decision, as long asindividual scientists do not violate rules and regulations con-cerning the public project with which they were involved, theywere allowed to conduct personal S&T research in their sparetime, outside the company, and through private ventures. Addi-tionally, the Decision encourages cooperation between research


centers and higher education institutions, supports agriculture-related S&T research, decentralizes governmental control overS&T research, and promotes younger scientists of achievementto important management positions. Although the Decision wasinspiring in many aspects, it did not result in tangible changesin the direction of competition, commercialization, and crea-tiveness. S&T remained separated from the reality of economicdevelopment, and S&T personnel remained confined to state-funded labs and universities.

Phase 2, Weight-trimming (1993–1998)

Based on Deng Xiaoping’s speech given during his 1992 tour ofsouthern cities, which essentially confirmed that the economicreform would continue despite the crackdown of students’ demon-stration in 1989, the CPC issued The Decision of Accelerating S&TProgress. This Decision played an essential part in breaking the tradi-tional SOE inertia prevalent in the S&T area. According to theDecision, the government guarantees funding only to a limitednumber of national-level S&T projects; and for that purpose, S&Tpersonnel at state labs also were trimmed. Other S&Tagencies wereencouraged to seek funding from enterprises, local governments,and foreign direct investment (FDI), or by setting up business ven-tures. The SOE-style of free and unaccountable government budg-etary support came to an end. Suddenly, a great number of S&Tcenters were formed following the Decision’ s call of ‘‘openness,mobility, competition, and cooperation.’’ Many S&T centers estab-lished during this period became pillars of the economy.

Phase 3, Localization (1999–2003)

In August 1999, the State Council issued The Decision ofStrengthening S&T Innovations, Developing High-tech and Indus-trialization. The goal of this Decision was to encourage S&Torganizations to put research into production. The Decisionpoints out that to come out a winner in the increasingly fiercecompetition in the world depends on integrated national


strength, and S&T is essential to determining a nation’s competi-tiveness, sovereignty, and economic security. As a result, develop-ing S&Twas pushed to the level of national security once again.The Decision urges S&T organizations to engage in market-

oriented innovative activities; to reform education systems; and toimprove related legislatures. It encourages transferring R&D fromgovernment labs to the enterprise level, and urges further openingto the outside world through international cooperation andexchanges. Finally, the Decision is mindful of improving logisticsupport. For example, it encourages the construction of nationalhigh-tech industrial development zones. The concept is largelyinherited from Deng Xiaoping’s Special Economic Zones thatwalled off domestic interference at the time. The Decisionaddresses the need to support private S&T enterprises andmedium-size S&T organizations by providing investment andbanking services. Additionally, it encourages improvement ofS&T personnel management system, and convenience of trans-fer of S&T results. To make these happen, the Decision stresses(1) providing meaningful rewards to scientists with achieve-ments; and (2) further improving IPR environment.

Phase 4, Market Integration (2003–2006)

In October 2003, the CPC issued The Decision on IssuesRegarding the Improvement of the Socialist Market Economic Sys-tem. The focus is on improving citizens’ quality by arming themwith S&T knowledge. Meanwhile, the Decision stresses reform-ing scientific, education, and cultural systems to improve China’snational innovation capability. Free flow of human resources is aprerequisite to an innovative environment. Hence, to nurture,attract, and retain talents, a flexible personnel system is essential.The Decision encourages S&T organizations to adopt the marketsystem that allows human resources to be distributed accordingto market needs. An important contribution of this Decision isthat it stresses that China’s education system must be connectedto the practice and that entrepreneurship must be encouraged.


The Decision indicates that the greatest advantage of developingS&T is that it is capable of turning China’s huge population intoa powerful resource of innovation, completely changing the pop-ulation-burden pessimism.

Phase 5, Reassuming Direction (2006–2020)

This period is marked by the release of The Guideline of Mid- toLong-Term Development of Science and Technology 2006–202010

by the State Council in February 2006. The Guideline sets sus-tainable economic growth as the primary target. In addition, theGuideline aims to achieve a number of world-class S&T break-throughs by 2020, qualifying China as a member of the ranks ofinnovative nations in the world.A major difference between this latest guideline and previous

documents lies in its admirable candor in identifying areas ofweaknesses. For example, the Guideline recognizes serious mis-management during the reform that resulted in waste of energy,environmental pollution, irrational economic structure, weakagricultural foundations, and underdevelopment in service andhigh-tech sectors. It indicates a weak education system that fallsshort in fostering entrepreneurship, creativeness, sense of com-petitiveness, and efficiency. The straightforward revelation ofthese weaknesses suggests that the Chinese government is deter-mined to revolutionize the domain.The Guideline indicates that despite past success in economic

reforms, serious problems remain. For example, the S&T systemis not intrinsically congruent with R&D, because of its lack ofconnection with the market. Enterprises have yet to become themain bodies of innovation. R&D organizations generally lackcoordination among themselves resulting in redundancy andwaste. Lack of coordination among decisionmakers results inirrational allocations of resources. Additionally, evaluation sys-tems fail to provide useful feedback to management. Moreover,the inadequate reward and advancement system fails to encour-age innovative efforts.


The Guideline indicates that solving environmental problems,preserving water resources, and clearing bottlenecks that con-strain economic development will be critical to growth. Popula-tion growth and looming pressure of population aging areamong the deepest concerns. The Guideline vows to containChina’s population to within 1.5 billion and birth defects tobelow 3 percent by 2020. The Guideline recognizes S&T as thenumber one resource in reaching these goals. It stresses the im-portance of self-reliance and integration of new learning andpoints out that it is insufficient to just import technology, becauseany learning without integrating with China’s own system wouldbe futile.The Guideline identifies the following details to achieve by

2020:

1. Acquire a set of information technologies and manufacturing servicesthat are critical to the country’s competitiveness in this area.

2. Promote integrated scientific farming technologies, guarantee foodsafety, and bring China’s agriculture to an advanced level.

3. Raise efficiency in energy consumption and preservation. In energy ren-ovation, develop nuclear energy, and in the meantime, promote renew-able energy.

4. Improve urban environment and community building; adopt a modelof recycling economy to preserve resources.

5. More effectively prevent serious diseases such as liver-related diseasesand HIV.

6. Ensure S&T self-reliance in national defense, particularly in weaponrysystems.

7. Improve education, increase the level of tolerance, and bring up a newgeneration of scientists who will lead the nation’s scientific research andpush it to the most advanced world level. Increase the rate of researchcitations, such that China will rank among one of the five most citedcountries.

To achieve the above goals, the Guideline pledges to increaseinvestment in S&T to 2 percent of the GDP by 2010, and above2.5 percent by 2020; realize a 60 percent S&T return rate; andreduce reliance on foreign technology to below 30 percent.


THE SYSTEM OF NATIONAL S&T PROGRAMS

S&T projects of national interests or initiatives are fundedby the government, primarily through national-level S&T pro-grams. As of now, 10 programs have been established to sup-port national priorities. These programs are an important partof China’s innovative system in that they serve to activate awide range of dependent research networks. S&T labs, univer-sities, and private research centers may submit proposals tocompete for funding or to participate in the bidding ofnational projects. Application guidelines are normally postedon the programs’ Web sites. Applications are reviewed andmonitored by planning committees. However, typically manyresearch results are not publicized, particularly the ones relatedto national security. The 10 major government programs arebriefly introduced as follows:

Key Technology R&D Program

The program sponsors key areas of S&T, with varying focusesin each Five-Year Plan. During the 10th Five-Year Plan (2001–2005), for example, 12 projects were prioritized: large-scale cir-cuit and software design, online security of banking and datamanagement, genetic testing chips, electric automobiles, mag-netic high-speed transportation, new drugs and modernizationof traditional medicine, agricultural product processing, milkproduct processing, food security, water-saving agriculture,water pollution management, and research on technologicalstandards.11 During the 11th Five-Year Plan (2006–2010), thepriority was put on technologies related to energy saving andsustained economic growth.

National High-Tech Development Program (863 Program)

The 863 Program was established in March 1986, hencethe name. The program was originally designed to focus onseven areas, including biotechnology, space, information, laser,


automation, energy, and new materials. The program subse-quently expanded its coverage to interdisciplinary domains andS&Teducation.12

The Spark Program

Founded in 1986, the Spark Program aims at helping ruralChina with modern farming technologies, including developingrural industry, and training rural entrepreneurs. Operationsinclude building Spark technology support centers, agriculturaltechnology enterprises, and technology training bases.13

China Torch Program

Founded in 1988, this program aims at implementing S&Tproducts in production processes, and at commercializing tech-nological products. An important part of its operation is to pro-mote international S&T cooperation; help returning overseasscholars set up their businesses; and develop such research facili-ties as business incubators, university science parks, and enter-prise service centers. Training technical managerial personnel isan important part of its function.14

National Key Basic Research Program (973 Program)

Founded in 1997, the 973 Program focuses on funding basicresearch with four main tasks: (1) conduct multidisciplinarystudies in agriculture, energy, information, energy resourcesenvironment, population, health, and new materials; (2) engagein explorative forefront basic researches; (3) conduct training inS&T; and (4) build centers for basic research. A few examples ofresearch projects funded include ‘‘Basic Research on the New-generation of Iron & Steel Materials,’’ ‘‘Establishment of theTheoretical and Technological System on Disease Genome,’’and ‘‘Research on Structural Performance, Molecular Design,Micro-structural Design and Manufacturing Process of the Photo-electrical Functional Crystal.’’15


Key National S&T Industrial Program

Founded in 1992, the program focuses on supporting projectsin agriculture, energy, transportation, communication, electron-ics, biomedicine, new materials, and social development. Theprogram is particularly interested in funding the most advancedinterdisciplinary, inter-domain projects, and projects that arekey to the national economy but banned by foreign embargo.16

National S&T Program for Social Development

Founded in 1996, the program aims to improve the quality oflife through conducting S&T projects in areas of medication,environment, natural resources, housing, marine resources pro-tection and exploration, and natural disaster prevention. Theprogram expires in 2010.17

National S&T Innovative Program

Founded in 1996, the program supports S&T-related periph-eral projects, such as demonstration centers, test-drive pro-grams,international coordination, product publicity, and so on.The program aims at providing services in these areas to theother research funding programs, such as the 863 and 973Programs.18

National Knowledge Innovation Experiment Programof Chinese Academy of Science

Founded in 1998, the program aims at mobilizing S&Tresources domestic and abroad, including human and dataresources. The program manages the Hundred-Scientists Pro-gram, which was designed to recruit hundreds of scientistsworldwide and to provide funding and research support tothem. Another effort was to set up a project named ‘‘Light inthe West’’ that encourages scientists to contribute to the govern-ment’s ‘‘Developing the West’’ campaign.19 The program expiresin 2010.


S&T Funding for Small and Medium-Size Enterprises

Founded in 1999, the fund supports SMEs in S&T projects.In 2009, the program funded 2,725 projects in areas of electronicinformation, biomedicine, new energy resources, and environ-mental protection, for a total investment of 1.6 billion RMB.20

State-funding programs have supported many projects. Over-all, the policy mix has been effective to a great extent in gettingthings done. Despite lagging structural reform, China’s S&Tinvestment has been accelerating with unprecedented speed.According to data from the Organisation for Economic Co-operation and Development (OECD). China’s R&D spendinghas increased nearly 19 percent since 1995 and reached $30 bil-lion in 2005, making it the sixth-largest worldwide. Its totalnumber of researchers ranks behind only the United States inworld figures, followed by Japan. R&D has yielded importantprogress. China’s share in the world scientific publications rosefrom 2 percent to 6.5 percent over the decade ending in 2004.In some areas, China is quickly gaining the top ranking. Forexample, China already ranks second in international publica-tions on nanotechnology. The country’s patent applicationsaccount for 3 percent of applications filed under the PatentCooperation Treaty (PCT) of the World Intellectual PropertyOrganization (WIPO), and these patents are doubling every twoyears.21 Dr. David Lampton, director of China Studies, JohnsHopkins University, indicates that the multiple facets of innova-tion are often ignored when assessing China’s progress. Forexample, packaging existing technologies for new purposes isalso a kind of invention, and China has been good at that.22

The concept of targeting a few critical areas and dedicatingavailable resources to them has been a successful strategy sincethe Mao era. It reflects the reality of a country with 1.3 billionpeople and very low per capita GDP. According to OECD-compiled data, in 2005, 66.5 percent of government fundingwent to government research institutes, with the remaining goingto higher education (20.4 percent) and businesses (13 percent).


There were 3,091 government research institutes, 1,792 univer-sities and colleges, 28,567 large and medium-size enterprises(LMEs), and 248,813 SMEs.23

In higher education, more than 50 percent of S&T and R&Dfunding comes from the government. In 2005, expenditure bythe top 50 universities accounted for 66 percent of total R&Dexpenditure in natural sciences and engineering in the highereducation sector. Funds are distributed based on projects. Directparticipation by higher education in the S&Tmarket was 8 per-cent in 2005.24 A wide alliance between higher education andbusinesses is forming, taking advantage of S&T personnel andfunding sources. Business incubators and science parks areexamples. Government programs such as the 863 Program, theTorch Program, and the Sparks Program have lent support.However, funding efficiency could be improved. Despite the

titles of the funds and their declared goals and objectives, fund-ing scopes overlap. With respect to project selection, every pro-gram vows to maintain ‘‘openness, fairness, and accountability’’as its guiding principle, and to choose projects to fund based onthe priority ranking of national needs. However, official descrip-tions on respective Web sites are filled with political jargon that ishardly informative about the funds’ specifics. Evaluation proce-dures and standards are vague for most programs. These reflectnot only a lack of transparency, but more important, a lack ofresponsibility, which was typical with state programs in the past.It is a fact that China is still struggling with the heritage of theplanning economy, which may be the reason why funding allo-cation favors government research institutes.In addition to national programs, an increasing number of

other programs are funded by provincial governments or by uni-versities and research centers. Some are co-funded between theChinese government and private investors. For example, theYoungtze River Scholars Program (YRSP) was founded in 1998by the Ministry of Education (MOE) and a Hong Kong–basedprivate foundation, the Li Ka-shing Foundation. The programsponsors young and middle-age scholars, home and abroad, to


lecture at Chinese universities.25 Lecturers must be administra-tive leaders or high-achieving innovators. From 1998 to 2006,the program sponsored 1,107 scholars to lecture at 97 univer-sities. Additionally, each year, the program gives out 0.5 millionto 1 million yuan awards to ‘‘scholars of the year.’’ Similar pro-grams include the ‘‘Hundred Talents Program’’ of the CAS and‘‘National Distinguished Young Scholars Program’’ of the NSFC.Local programs funded by provincial governments include‘‘Zhujiang River Scholar Program’’ (Guangdong), ‘‘Minjiang RiverScholar Program’’ (Fujian), and ‘‘Sichuan Scholar Program’’(Sichuan), which emerged to meet the demand.

RISING HIGH-TECH EXPORTS

During the past three decades, China’s S&T has achievedremarkable progress in freeing itself from the rigidity of the plan-ning economy and going in the direction of market orientation,open competition, enterprise-centered models, and individual cre-ativity. The benefit of the transformation is reflected in the risingproductivity, in particular, in boosting exports to unprecedentedlevels, and in the founding of new and innovative companies.The sector that most directly benefits from S&T is China’s

exports. In the past 10 years, China has greatly increased itsshare in leading markets and exporting a wide variety of prod-ucts. Products made in China are more ‘‘sophisticated’’ thanthose of countries with similar endowments and have expandedinto many high-tech fields. According to NBS, in 2007 high-tech exports were $347.8 billion compared with $281.4 billionin 2006. These exports are heavily concentrated in two catego-ries: (1) office machinery, and (2) television, radio, and commu-nication equipment. Exports such as pharmaceuticals arerelatively weak. According to OECD, China had become thepredominant assembler of Information and CommunicationTechnology (ICT) equipment by 2005, contributing from 4percent in 1996 to 20 percent of the world’s total in bothimports and exports.26 According to an OECD policy review,


however, foreign-owned enterprises, joint ventures, and whollyforeign-owned firms, including those controlled from HongKong, Macau, and Taipei, tend to be the producers of exportinggoods. Their contribution accounts for 88 percent of the totalexports. In particular, wholly foreign-owned enterprises have sig-nificantly increased their share in exports during the past decade,whereas that of joint ventures and especially SOEs somewhatdecreased. This explains why in high-tech industries, notablyICT-related manufacturing, national brand names are still rare,and technologies transfer is characteristic of this period.27

SPROUTING INNOVATIVE COMPANIES

The government’s efforts in leveraging S&T organizations toseek their own futures rather than survive on public sponsorshiphas created many types of fallouts. These measures created bothinsecurity and opportunities for the scientific community. Whilemany SOEs vanished, several among them later grew into Chi-na’s major S&T powerhouses. At each stage, creative entrepre-neurs take advantage of the venues opened by new policies andstart exciting businesses. Three stories illustrate the entrepre-neurial dynamics; they are the stories of Lenovo, New OrientalEducation and Technology Group, and Baidu.com, Inc.

Lenovo

In 1984, 11 like-minded young scientists headed by LiuChuanzhi started an importer technology firm with 200,000RMB (US$25,000) funding from the CAS. Some 21 years later,the company took over IBM’s personal computing division. At atime when IBM’s portable computer weighed 30 pounds, LiuChuanzhi launched the New Technology Developer, Inc. (thepredecessor of the Legend Group) to engage in the PC market.In 1987, Legend Group was founded and the company rolledout the Legend Chinese-character card that later received thehighest National Science-Technology Progress Award in China.A breakthrough both in technology and marketing in 1990


allowed the company to leap ahead. When personal computersfirst appeared on the market, China’s PC producers merelyassembled computers in small workshops in response to cus-tomer needs. Soon after, brand names were launched, includingthe Legend PC. Legend’s products became competitors of IBMPCs, and competing with IBM was the company’s strategy togrow. For example, to counter IBM’s ThinkPad line launchedin 1992, the first notebook with a 10.4-inch color Thin FilmTransistor (TFT) display and a TrackPoint (red ball) pointing de-vice, Legend introduced its 1þ1 home PC that entered the Chi-nese marketplace in the same year. Legend’s competitive strategycaught the attention of the Chinese government, which was look-ing to support domestic high-tech companies, especially thosethat were competing globally. In 1992, Legend PC products wereaccepted by the China Torch Program. In 1994, the company’sstock was listed on the Hong Kong Stock Exchange. By 1996,Legend had become the market-share leader in China.The opportunity to become the dominant player in the

domestic market and subsequently one of the biggest PC pro-ducers in the Asia-Pacific market came in 1997 when Legendsigned an Intellectual Property agreement with Microsoft, themost valuable deal made for China to date. Two years later,IBM announced its exit from the PC retail business. As a result,Legend leaped to the top PC vendor position in the Asia-Pacificregion, and came out number one in the Chinese national Top100 Electronic Enterprises. To take advantage of the futureInternet market, Legend developed an Internet PC, with its‘‘one-touch-to-the-net’’ feature, which enabled millions of Chi-nese users to easily access the Internet.The current company name, Lenovo, came in 2003 when

Legend announced its new logo to mark the company’s new direc-tion of expansion into the overseas market. In 2004, Lenovo andIBM announced that Lenovo would acquire IBM’s Personal Com-puting Division, including its global PC (desktop and notebookcomputer) business. This decision was finalized in 2005, makingLenovo a top-tier (third-largest) global PC leader. Subsequently,


Lenovo announced the closing of a $350 million strategic invest-ment by three leading private equity firms: Texas Pacific Group,General Atlantic LLC, and Newbridge Capital LLC. The sameyear, Lenovo launched the ThinkPad X41 Tablet, the industry’sthinnest and lightest PC. Later on, the ThinkPad Z60 wasequipped with a biometric fingerprint reader.28 As of 2010, Leno-vo’s ThinkPad is the most popular PC in the world.

New Oriental Education and Technology Group

Michael Minhong Yu was a country boy who went to PekingUniversity to earn a degree in English. In his office at New Ori-ental Education and Technology Group in Beijing, a companydedicated to English training, Yu still hangs a photo of his fam-ily’s old farmhouse where he had lived for 18 years. The house isa duplex, with one side for residential use, and the other side forraising domestic animals.29 Michael Yu’s company was listed onthe New York Stock Exchange (NYSE) in 2006. As of 2010, thecompany had a market capitalization approaching $3 billion. Inthe 1980s, Yu, like most young people of his age, cherished theidea of studying in the United States. Studying English was seenas a ticket to a better life. Then, the 1989 Tiananmen Eventoccurred, making it suddenly difficult for students to get visas.Yu had to stay home, not knowing all the opportunities thatwere waiting for him. By that time, Yu had become an Englishteacher at Peking University. To fulfill his dream of studying inthe United States, however, he began teaching extra hours atEnglish training schools, in the hope that he one day couldsponsor himself to study in the United States. Having witnessedhow English training schools operate, Yu realized that he mightbe able to start an English training school himself. When Yustarted New Oriental in 1993, he was immediately successful,and the rest became history. In 1995, the number of students en-rolled reached 15,000; by 2005, the cumulative enrollment hadreached 3 million. In 2007, the enrollment for the year wasmore than 1 million. The New Oriental had become a business


phenomenon: the company’s network includes 257 schools andlearning centers, 23 New Oriental bookstores, more than 5,000third-party bookstores, and approximately 4,900 teachers in 39cities throughout China.30

Baidu.com, Inc.

In China, when computer users want to find informationonline, they ‘‘Baidu’’ it. In Chinese, ‘‘Baidu’’ means crossing theriver on a ferry boat. Now it also is the name of a companyreferred to as the ‘‘Google of China,’’ except that Baidu has farsurpassed Google in the Chinese search space. Baidu.com, Inc.provides Chinese and Japanese Internet search services primarilyin China and Japan. The company offers Chinese and Japaneselanguage search platforms that enable users to find Web pages,news, images, and videos. One popular feature is Baidu’s MP3Search that provides algorithm-generated links to songs and othermultimedia files.31 Robin Yanhong Li, trained in the UnitedStates, returned to China to start the search company. The com-pany’s stock went up 350 percent on the first day of trading onthe NASDAQ in 2005. Li was surprised at the stock market’sreaction: ‘‘I thought $27 was a very reasonable number; if it couldgo up to $40, I would have been very happy. It went to $150.Who could imagine that!’’ As of March 2010, the stock of Bai-du.com (BIDU) is being traded on the NASDAQ at around$600 a share, surpassing Google’s share price.Born in an impoverished town 200 miles from Beijing, Li is

grateful to Deng Xiaoping’s reform. In a TV interview withMSNBC, Li says:

I feel very fortunate that I was born in the right time. When I grew up,China had a lot of open opportunities. The first opportunity for me wasto go to college; the second one was to go to the U.S. to receive education.In 1999, I decided to open my own company.32

Li opened Baidu.com, Inc., in 2000, just two years after Googlewas founded in the United States. In 2009, Baidu enjoyed


approximately 63 percent of the market share in China, whileGoogle’s share was around 26 percent. With respect to Baidu’snumber-one popularity in China, Li believes that the company’scultural understanding and expertise in addressing the demandgives the company an edge. ‘‘We are closer to the user, and wecan make decisions quicker,’’ says Li.33 Social networking andmobile search services, for example, are strong areas of Baidu.Kaifu Li, Google China’s president, believes that the primary rea-son for lagging behind is Google’s delayed entry into China’smarketplace. With regard to criticisms that Baidu’s search enginefacilitates illegal music downloads, Robin Li vehemently denies itby indicating that Baidu does not store content files, as it is asearch company. The founder of Baidu.com is confident thatusers will choose his company.34

Many factors contributed to these successful experiences, oneof which was the opening of the stock market. The launch ofthe Shenzhen Stock Exchange (1990) opened up the capitalmarket for company-based R&D, allowing the transformedSOE firms as well as private firms to tap into a wider range offunding resources, both in China and abroad. Companies mayissue ‘‘H shares,’’ for example, to trade on the Hong Kong StockExchange for international investors, and ‘‘A shares’’ of the samestocks in the domestic market. The liquidity of funding resour-ces energized R&D activities at companies’ labs, and universityresearch centers. The government’s policy was to mobilize a con-certed effort to promote S&T and let it receive financial supportfrom the entire society. This turned out to be particularly helpfulto SMEs that are short of funding opportunities.

LIMITATIONS OF CHINA’S S&T FRAMEWORK

Because of its planning economy background, S&T reform isprimarily a process of claiming freedom from the planning tradi-tion. Under the traditional framework, everything was planned bythe central or local governments, innovation was stifled, little wasleft to individual creativity. The Guideline (2006–2020) identifies


a number of remnant barriers to S&T innovation. Not all barrierscome from the planning legacy, however; some of the challengesderive from China’s traditional culture which stresses the mainte-nance of the status quo more than breaking new ground. The newgeneration is breaking new ground in all aspects, and that is areality. When it comes to building an innovative nation, the inno-vator has to be the center.

Education

Building an ‘‘innovative nation’’ is a widely encompassingprocess. To achieve this goal, China’s education system must dotwo things: a) further expand the coverage of higher education,making it more accessible; and b) stress the training of practicaland creative abilities. During the Mao era, education experi-enced the heaviest damage. Unlike the manufacturing sector thatmade dramatic ramp-up during the past three decades, educa-tion modernization seems to have been changing at a slowerpace. NBS data show that in 2006, out of every 100,000 popu-lation, on average, 1,816 students (or 1.8 percent) were enrolledin a four-year college, which was higher than previous years. InBeijing and Shanghai, the percentages were 6.9 percent and 4.2percent, respectively; in Qinghai and Guizhou Provinces, thepercentages dropped to 0.9 percent. Less than 8 percent of thepopulation currently has a college degree, while 24 percent inthe United States have a Bachelor’s degree or higher. These num-bers suggest that offering higher education to more studentsremains a challenge. More important, education ideology needsa revolutionary change. Traditionally, Chinese education doesnot foster critical and innovative thinking, or entrepreneurship.Educators stress strict discipline and high examination scores;rote learning is by far a favored method; training in creative andcritical thinking is suppressed, in a sense, when a high test scoreis the only thing that ensures high school admission and collegeentrance. The annual national college entrance examination isnotoriously difficult because it stresses intricate details rather


than problem-solving skills. Tests such as these force students tostudy for tests rather than foster innovativeness.Secondary schools that send more students to top national

universities tend to command higher respect and, hence, highertuition and fees. As such, pressure on students is high, comingfrom both parents and community. As early as kindergarten, stu-dents are loaded with afterschool lessons and assignments, andleft with little time to play or engage in community activities.An English class may dedicate most of the class time to spellingand grammar drills, but little to communicative activities,because the latter is not included in high school or college en-trance examinations. Hands-on experience is a much lesser com-ponent than found in schools in the West. Little training isoffered to prepare students for future work environments. Thus,testing is more of a tool for selection than a learning aid thathelps the student identify goals and objectives and improve.This test orientation makes China’s education incongruent withthe country’s innovative goals, and it is not conducive to traininga creative workforce, but rather may counter creativeness. Theold saying that ‘‘grades are what students depend on to survive’’remains a valid description of the reality. Reforming the test-oriented education will liberate creativeness of students andmust be done rapidly.On the other hand, these problems are also attributable to

insufficient funding and lack of a high quality teaching force. Forexample, in provincial colleges, science lab conditions are widelyinsufficient. The availability of hands-on opportunities in second-ary schools falls short even further. When teachers are insuffi-ciently equipped, it is difficult for them to train students incritical and creative abilities. For example, in foreign languageeducation, strong emphasis on grammar and vocabulary often atthe expense of communicative skills training may be associatedwith the fact that most teachers are unfamiliar with target cultures.These shortfalls call for an increase in education expenditures.In 2008 the government’s education budget was 3.48 percentof the year’s GDP of 30.07 trillion RMB.35 Comparatively,


developed countries’ education expenditures proportional toGDP are higher, for example: France—5.7 percent (2005), theUnited States—5.3 percent (2005), and Canada—5.2 percent(2002).China’s examination tradition dates back to as early as the Tang

Dynasty (681 CE–960 CE), and some scholars push the dateback to the Han Dynasty (206 BCE–220 CE). Civil serviceexaminations had been the only venue to officialdom until theearly 1900s. While civil service examinations had given equalopportunities to many brilliant statesmen who would haveremained unknown, they were profoundly restrictive, primarilyserving the state philosophy—Confucianism. S&T had no placein traditional civil service examinations at all and was repressedduring the prereform time.Successful reform of education largely depends on support

from the society. Here again, the market mechanism will be adriving force. When the market commands practical ability andencourages the connection between the classroom and economicdevelopment, changes in education will likely follow. In fact,this is already happening. Schools, students, and parents arecoming to the understanding that what the job market expectsof a college graduate is problem-solving skills, rather than aPeking University or a Tsinghua University diploma alone. NBSdata show that more and more students are enrolled in technicalschools instead of 4-year colleges (see Figure 4.1).36 In 2009,10.2 million candidates took the annual college entrance exami-nation; among them 62 percent were enrolled.37 The total num-ber of candidates, however, was 400,000 fewer than 2008. Mostof those candidates had chosen to attend vocational schools.Some speculate that the outcome may also have been a result ofthe ongoing global financial crisis.It is a fact that only the top-tier universities are actively con-

nected to industries and are contracted with R&D projects.Hopefully, a positive cycle will prevail sooner rather than later,during which time the tie between education and industries willbe closer, and to the extent that they become integral to one


another. As Western experience proves, such a relationship is notonly fundamental to an innovative culture, it is also a viable edu-cation funding solution.

Competition

During the period of the planning economy, competition didnot exist. In the postreform era, China struggles to set up aframework to not only encourage competition, but also ensurethat competition achieves its original purpose—that is, reward-ing the innovator. Market competition provides stimulus as wellas guidance for innovation. The success stories listed in thisbook show that the market mechanism is achieving effects.Never has there been a time in China’s history during which suc-cessful entrepreneurs have grown in such a great number. Fur-ther improvement is critical to making this growth sustainable.A favorable system would be one in which distortive factors arekept so low that they do not hamper competition. One suchcondition would be rule of law rather than rule of guanxi; more-over, government intervention and protectionism at local levels

Figure 4.1. Source: NBS.


need to be further reduced. Another condition includes theavailability of financial resources that support SMEs, which tendto be the most innovative entities and the least funded. In theseaspects, China has room for improvement.

IPR Protection

IPR protection is key to stimulating innovative activities.The transition to more innovation-driven growth needs theprotection of strong IPR, which includes powerful antitrustlaws and reliable law enforcement. ‘‘Strike-hard’’ campaignsmay achieve temporary results; however, real solutions will liein establishing an effective legal environment. Since Chinajoined the WTO and signed the Agreement on Trade-RelatedAspects of Intellectual Property Rights (TRIPS Agreement),the Chinese patent system has been reforming to align withinternational standards. More patent applications have beenfiled as a result. A great deal of progress has been made, butmuch needs to be done to meet the needs of both domesticand foreign-owned innovative enterprises operating in China.OECD’s study indicates in its annual review of China’s IPRcondition that infringement of IPR, particularly of copyrightsand trademarks, continues to cause concerns. Both judicial andlaw enforcement are inadequate and need substantial improve-ment.38 Other reports indicate that legal training for lawenforcement officers and legal personnel is insufficient. Thelack of effective IPR protection could have direct consequencesin the economy: it may offset motivation in R&D develop-ment both domestic and abroad, affect foreign trade, and leadto production of poor-quality and even dangerous products.The Chinese government and state media are putting a greateremphasis on IPR education. In the meantime, the legislationhas been passing tougher laws that would make IPR infringe-ment increasingly costly to the perpetrator.In 2006, China’s National IPR Protection Working Group

released the 2006 Action Plan on IPR Protection targeting four


areas: trademarks, copyrights, patents, and imports and exports.To date, many international benchmarks have been met success-fully according to OECD. IPR protection laws are constantlyupdated to add new protective features. For example, the Trade-mark Law issued in 1993 and revised in 2001 was again revised in2008 to guarantee that inventions outside the country are appropri-ately recognized.39

An immediate beneficiary of the improved IPR protectionenvironment is the U.S.-based Pfizer Inc. The company hastaken several trademark cases to Chinese courts. The company’sdrug Viagra has become a profitable product in China with aprice of 99 RMB or approximately $14 a pill, while the cost ofproduction is only 1 RMB. The market was estimated to beworth 10 billion yuan.40 It follows that China’s domestic com-panies started to produce the drug under the trade name Weigeand Pfizer filed for rights under that name. In 2001, the Bureauof National Intellectual Property Rights (BNIPR) grantedPfizer the patent for its erectile dysfunction (ED) drug Viagraunder Pfizer’s registered Chinese drug name Wan Ai Ke. Essen-tially, the patent granted the exclusive right to Pfizer for usingsildenafil citrate in treating ED. The ruling was appealed by 12Chinese drug producers on the ground that Pfizer’s descriptionof its product lacks specificity. In 2004, BNIPR revoked thepatent, which prompted Pfizer to bring its case to the People’sCourt.In a December 2006 ruling, the First Intermediate People’s

Court of Beijing (FIPC) rejected BNIPR’s decision and orderedtwo Chinese companies to stop producing counterfeit Viagra. InJanuary 2007, however, the same court reversed its ruling on theground that several Chinese drug makers’ use of Weige, the Chi-nese name for Viagra, does not constitute trademark infringe-ment.41 Pfizer eventually brought the case to Beijing’s HighCourt, which overruled FIPC’s ruling on September 7, 2007,and reaffirmed that Pfizer holds the patent on Weige effectiveuntil the patent expires in 2014.42 According to the patent, anyChinese company producing ED drugs using sildenafil citrate


would constitute patent violation. Pfizer China was pleased withthe ruling and posted the following statement:

We view today’s decision as a confirmation of China’s commitment toeffective patent protection in China and will enhance the confidence of thebroader business community interested in investing in China. Pfizer willcontinue to vigorously defend its IP rights in China.43

In the area of copyright protection, the Chinese governmenthas intensified its campaigns against piracy. For example, anational crackdown Hawk Action netted 5,981 counterfeitersin 2005, which was followed by Operation Mountain Eagle in2006 that aimed at utilizing technology to raise effectiveness inlaw enforcement, and another series of campaigns dubbed Oper-ation Sunshine I, II, and III through early 2007. Meanwhile, thegovernment issued a regulation that imposes a 100,000 yuanfine per copyright infringement of works disseminated over theInternet. Despite these efforts, China’s copyright protectionremains in its developing stage and inconsistencies are notuncommon.44 IPR laws are interpreted differently at timesresulting in inconsistent rulings. Nevertheless, as the economicreform progresses, the awareness of copyrights and the pursuitof IPR protection are now embedded in people’s consciousness.One example is the recent lawsuit brought by 482 graduate stu-dents against Wanfang Data Co., Ltd.,45 in September 2008 atthe People’s Court of the Chaoyang District of Beijing.The case concerns whether students owned copyrights of their

theses. Students alleged that Wanfang included their theses inthe company’s database ‘‘Dissertations of China’’ without theirauthorization. They demanded an apology and compensationfor economic losses and emotional distress. Wanfang defendedthat the company’s practice does not constitute a violation ofcopyright on the ground that the company had signed agree-ments with related administrations, such as the universities andthe hosting network of China Science and Technology Informa-tion Research Center (http://www.istic.ac.cn/). Wanfang’s secondargument is that the database is designed to serve public benefit,and for that reason, the company collects only a nominal charge


of 2 yuan, or approximately 30 cents in U.S. dollars, per disser-tation copy when sold to the National Library. The plaintiffsargued, however, that the signed agreement was to allow theschools to publish their dissertations in different media, but notfor transferring the usage rights. They believe that, essentially,any form of publication without the author’s authorization con-stitutes violation of copyright. With respect to the public benefitargument, the plaintiffs disagree in that, although the per-copycharge is low, the quantity is large. For example, the NationalLibrary in recent years has paid more than 700,000 yuan toWanfang for using its database. Additionally, according to Wan-fang’s own claim, their clientele includes 50 percent of all highereducation institutions of China, which puts the company’s reve-nue well above 100 million RMB. Moreover, the court discov-ered that Wanfang also sold the access rights through mobiletelephone services and other instruments such as access cards.46

The 482 graduate students sued for a compensation of 40 yuanper thousand words in addition to 7,000 yuan of compensationfor emotional distress, or 350 million RMB in total. On Octo-ber 15, 2008, the People’s Court of the Chaoyang District ofBeijing decided in favor of the graduate students, ordering Wan-fang Data to pay 364 graduate students economic damages andcourt expenses, ranging from 2,300 yuan to 3,200 yuan per dis-sertation theses. The judgment was hailed as a major victory inIPR protection.47

SME FINANCING

SMEs are leaders of homegrown innovative forces. Theybelong to the private sector that is producing more than half ofChina’s GDP. SMEs are active in launching new ventures thatare essential to innovation and in fostering an innovative atmos-phere. They also tend to have difficulties in securing loans fortwo reasons: (1) they are volatile, and most of them do not qual-ify for the investment grade for domestic or foreign banks; and(2) their success threatens the very existence of SOEs. Hence,given that China’s financial system is state-owned, it traditionally


does not serve SMEs as a priority. As a result, large government-sponsored S&T projects are funded by state appropriation; pri-vately owned firms largely depend on self-funding; large-size pri-vate firms have access to both state funded programs and foreignventure capital; and as a result, SMEs are left with few fundingopportunities. A typical way for small firms to acquire fundingis to partner with large firms, in which case they trade a significantportion of patent rights. It is a traditional practice for the bankingsystem to favor SOEs, in part because SOEs are the largest employ-ers and must be supported at all costs. Conversely, the state systemdoes not have the legal and regulatory settings for operating anyadequately functioning venture capital system. It takes time forstate banks to acquire experience so that they can identify andinvest in high-risk ventures. The top-down approach, on the otherhand, whereby the government instructs state banks to invest inSMEs’ R&D projects (known as ‘‘policy-lending’’) without suffi-cient regulatory oversight yet in place, is unlikely to produce de-sirable outcomes. Instead, this may result in new bad loans. Thesame shortfall exists with foreign banks as well, as most of themlack the expertise needed to manage risks with China’s SMEs.Succinctly put, how to fund innovations is a great challenge.The Guideline (2006–2020) proposes to introduce new fund-

ing mechanisms for policy banks and commercial banks toincrease exposure to high-technology SMEs and startups. As theeconomy becomes more market-based, venture capital that canaddress market failures when they occur is needed. This is particu-larly important for SMEs that by nature have higher risk-returnlevels. One way for the government to support SMEs’ innovativeventures is through public procurement. While this is not uncom-mon in the West, the Chinese government typically does its pro-curement primarily with SOEs. Now, it has become importantfor the government to expand procurement to SME sources. TheGuideline (2006–2020) treats public demand as a key factor ininvigorating economic development and innovation. This repre-sents a policy shift from the traditional entirely supply-side poli-cies and indeed favors technology development. To conduct fair


government purchasing, the government must first maintaintransparency through coordination of agencies. The Guideline(2006–2020) clearly states that public procurement in technologyproducts cannot be ‘‘ordered’’; it must be based on the demandfor innovative and competitive products or services and throughan apparent bidding process, regardless of the provider’s status.Given the size of the Chinese market and the importance of the

government in the national economy, public procurement has thepotential to become a significant financial source for innovativeactivities. For example, despite the fact that the volume of govern-ment procurement has been expanding rapidly, it accounts foronly about 2 to 2.5 percent of the GDP, which is still far belowthe levels in most industrial countries, which average 10–15percent of the GDP. China has much room to grow in this area.From OECD countries’ standpoint China’s government pro-

curement must not be a domestic operation only, now thatChina is a member of the WTO. OECD countries are watchingChina’s government procurement practices with the highest in-terest, because whether China’s new procurement policies con-flict with the WTO’s Government Procurement Agreement(GPA) carries a tremendous impact. China’s public opinion withrespect to entrance into the WTO’s GPA is positive: it opensup China’s public procurement market and will not likely affectChinese producers, China being ahead on many products.48

Joining GPA will likely broaden funding opportunities toChinese SMEs as well. Following the principle of reciprocity,Chinese companies also may enter public procurement marketsabroad.49 It is a fact that China’s domestic credit market mayremain small for a long period and thus China will continue toattract foreign investment. As of early 2010, China’s entry intoWTO’s GPA was under preparation.

S&T Human Resource Management

In S&T development, successfully managing highly trainedpersonnel is just as important as locating capital resources, and


higher education is the main source of talent. According toOECD,50 university enrollments in China have increasedquickly to the same level as in the United States and the Euro-pean Union. The number of graduates has increased to compa-rable levels. Some 70 percent of S&T personnel work indomestic firms, mostly in large and medium-size companies,while 30 percent work in joint venture companies.One of the challenges in S&T human resources that China is

faced with is known as ‘‘brain drain.’’ The history of persecutionof intellectuals takes a long time to fade. At early stages of the eco-nomic reform, the repatriation rate of overseas students was low.As the economic reform sustains, more and more overseas intel-lectuals are returning to serve the country as the government’s atti-tude toward knowledge and intellectuals has changed. Favorablepolicies have been created to attract overseas students to returnand establish businesses or research facilities. Nevertheless, the1989 Tiananmen Event was a setback to an improving situation.However, the record of the past eight years indicates that thereturning rate has been increasing. For example, out of the144,000 students who were studying abroad in 2007, 44,000(30 percent) have returned. This compares favorably with the dataof 2000, for which out of 38,989 students abroad 23.3 percentreturned (see Figure 4.2).51 OECD and U.S. data indicate thatthe European Union has become a more attractive destination forChinese students, overtaking the United States in 2004. The sec-ond-ranking host country is Japan. The United States is by far thelargest recipient of the highly skilled Chinese (57 percent), fol-lowed at a distance by Canada (18 percent), Japan (9 percent),Australia (7 percent), and the United Kingdom (3 percent).52

Although most overseas students return to take advantage ofthe favorable domestic opportunities, some are driven by patri-otism. Dr. Chen Aimin is now president of Jinjiang College, aprivate undergraduate college affiliated with Sichuan University.She left the country to study economics at Pennsylvania StateUniversity in 1983, and later became a professor at Indiana State


University where she won top honors for teaching. In 2005, Dr.Chen returned to Suchian University and assumed the positionof vice president, before becoming president of Jinjiang Collegein 2006. Dr. Chen’s goal is to build a first-class junior IvyLeague school in China. In a televised interview, Dr. Chen statesthat having worked and lived for 22 years in the United States,she finally finds an opportunity to fulfill her wish to serve hermotherland with her expertise in education. ‘‘I had achievedeverything a professor could hope for in the United States, suchas tenure, promotion to full professor, and the award of out-standing professor. What remained ahead for me was to fulfillteaching duties,’’ says Dr. Chen. She returned to China for amore rewarding cause, which is to help China become a nationof educational excellence, to introduce new Western concepts,and to build a bridge of cultural understanding that includesintroducing China to the world. ‘‘In that way, I expect to return aservice to my country,’’ Dr. Chen says.53

Reform in human resource management could be a criticalpart of higher education reform. Without a competitive mec-hanism put in place, healthy changes could hardly happen. Inthe West, collaboration between universities and industries andother economic aspects is routine. A great number of the faculty

Figure 4.2. Number of Students Abroad and Returned. Source: NBS.


rely on such relationships for grant opportunities and for iden-tifying research projects. Personnel exchange between univer-sities and industries, and among universities are not uncommon,given that the tenure system is a competitive process. In China,however, universities typically inherit the SOE legacy of life-term employment. Reform in personnel management in highereducation has been a slow process. Higher education’s fundingprimarily came from the appropriation of the Ministry ofHigher Education before 1986. After 1986, an evaluation-basedhiring was applied, but only nominally. Contracts are renewedwith few exceptions. In recent years, several universities havetaken the lead to reform the system by installing a contractualsystem in the real sense, the goal is to ‘‘break the iron bowl (sta-ble job),’’ to invigorate research and teaching through competi-tion. Peking University and Tsinghua University startedcontract-based hiring as early as 2000.54 Shanghai Universitydid not renew contracts with 19 percent of its faculty including40 associate professors and 5 full professors in 2001, an eventthat stirred much debate.55 Tsinghua now hires research scien-tists uniquely on a contractual basis starting in 2009. Reform inthe tenure system is believed to be an important step towardenergizing innovativeness.In addition to overseas returnees, postdoctoral research centers

in China are quickly becoming a main domestic source of S&Tpersonnel. The postdoctoral centers recruit the most advanced sci-entists from among young doctoral degree recipients whose workrepresents state-of-the-art advancements, and offer a prestigioussalary and the best research facilities.The Chinese postdoctoral system was founded in 1985 at the

recommendation of Nobel Prize laureate Tsung-Dao Lee withsupport from Deng Xiaoping.56 As of October 2009, a total of1,670 postdoctoral centers are located throughout the country.57

According to China Postdoctor, a network that coordinatesresearch and employment opportunities, there were 7,903postdoctoral researchers in research centers nationwide, represent-ing a 19.2 percent increase from 2006. Some 2,640 researchers


(33.41 percent) were enrolled in research centers in Beijing.Financially, the majority (59.64 percent) was self-sponsored andabout one-fifth received government financial support. Withrespect to areas of studies, 40.35 percent of the postdoctorsworked in the area of engineering, followed by science (20.09 per-cent), medicine (10.11 percent), economics (7.41 percent), andmanagement (6.82 percent). The remaining 15 percent were dis-tributed among areas of agriculture, literature, law, philosophy,history, education, and military science.58

From 1985 to 2008, the postdoctoral centers have produced atotal of 35,124 graduates (see Figure 4.3).According to China Postdoctor, the Chinese postdoctoral sys-

tem is different from the American system in at least three aspects.

1. The Chinese postdoctoral centers are funded and managed by the gov-ernment through the Postdoctoral Commission involving representa-tives from a variety of government agencies. Daily management work isdone by the office of human resources at the research-center level. Post-doctoral candidates must be reviewed and approved by the PostdoctoralExperts Review Committee at the government level. Much of the

Figure 4.3. Number of Postdoctoral Graduates (1985–2008). Source: ChinaPostdoctor.


research projects are under scrutiny of related managing agencies. Bu-reaucracy and rigidity of rules and procedures are often eminent hin-drances. In contrast, the American system features government supportand local management. Researchers have a greater flexibility in researchand in selecting ways to take advantage of the market mechanism.

2. In the American system, postdoctoral students are normally paid one-third to one-half of the salary of professionals in the field. The Chinesesystem treats postdoctors with utmost respect, paying them higher sal-aries than those received by professionals, devising special incentive pol-icies, offering the best working and living conditions, and making surethat their achievements are protected.

3. As a result of differences in social systems, with the Chinese being asemi-market economy, employment flexibility is more limited com-pared to that of the U.S. Employers and job seekers do not always havethe right to their own hiring decisions. Forced retention is an existingresidual of the planning economy that is being phased out.59

With regard to the last point, the Chinese government is fullyaware of the personnel management deficiency and has made ita target of the current reform. A government newspaper, TheGuangming Daily, had the following comments:

With the development of the socialist market economy, competition isintensifying among regions, government organizations, and enterprises. Asa result, free floating of talented personnel is unstoppable. It is absolutelynormal for any talented person to join or leave a locality, an organizationor a firm. What keeps people is a fair and just work environment. . . .However, some organizations set every barrier possible, including notreleasing personnel documents and retaining the Hukou from being trans-ferred to block talented people from leaving. They ignore the fact that the‘‘jailed’’ talents are not able to deploy their expertise. The bureaucraticpractice results in waste for both private and public interests.60

The situation of China’s postdoctoral system adds to thepicture at the starting point of China’s innovation race. Manychallenges are not unique to the domain of S&T, and some ofthe challenges have a greater impact on S&T than elsewhere.Deficiencies in personnel management belong to this category.The bright side, however, is that the Chinese are aware of theirproblems and are determined to make changes.


Chapter 5

Economic Reform

Many questions about China’s changes can be answered by look-ing into the country’s past. In fact, the onset of industrializationdates back to the mid-19th century with the forced opening oftreaty ports followed by China’s division into foreign conces-sions. The French opened a railway line connecting Yunnan toIndo-China, while the British and the Germans gained groundalong the east coast. After the warships came the ‘‘soft power’’—U.S. and French missionaries—preaching from the coast to thehinterland, challenging the Confucian dominance. The OpiumWar opened a window to a heart-wrenching reality—China wasa dysfunctional, corruption- and crisis-stricken medieval feudalempire managed under the most intricate bureaucracy one couldfind that had little chance to defend itself against invasion byWestern industrial powers. It was thus agreed, from the emperordown to the farmer, and not without reluctance, that Chinamust learn from the West and start to reform itself. Braids werecut, new schools opened, American-style republicanism wasexperimented. Then, came Mao Zedong who implemented apowerful European ideology—Communism. By 1949, the Com-munist movement had shifted property ownership from land-owners to poor peasants in the vast rural areas through the LandReform. The First Five-Year Plan that started in 1953 furtherconverted private property into state-owned property. Urbancapitalists were forced to surrender their enterprises, and

farmers were organized into the People’s Communes. By the endof the 1950s, deprivatization was completed, the People’s Com-munes and SOEs became new homes to rural and urban popula-tions, and the planning economy was in full swing.While the new Communist regime was prone to economic

mismanagement, it was efficient in many aspects. Politicalmovements suppressed dissent and mobilized the nation to buildthe country primarily through selfless contribution. Householdspending was reduced to the survival level; savings went to theboosting of national defense. The successful detonation of the firstatomic bomb (1964) and the launch of the first satellite (1969)happened during the years in which the nation was recoveringfrom a deadly famine (1958–1961) that had killed more than 25million. In addition to the heavy toll on the economy, subsequentwaves of political purification campaigns eventually put the Com-munist regime in doubt. The last revolutionary upheaval, theGreat Cultural Revolution (1966–1976), lasted for a decade andcaused the heaviest devastation ever on China’s economy. Perhapsas devastating as the Mao era was the Communist failure that pro-vided guidance and momentum—do the opposite and wait nolonger. Deng Xiaoping’s economic and political reforms led to avolcanic eruption of economic ventures that have improved peo-ple’s lives by many folds.The current reforms are in greater depth than at any time in

Chinese history. Market mechanism seeps into every corner, andSOEs are being transformed into private or semiprivate enter-prises. Yet, China remains under the rule of one single politicalparty, the system is officially still communist, and the economyis divided into two sectors—the state-owned and the private sec-tor. Despite the prolonged period of growth in GDP in doubledigits or high single digits, questions point to the nature of thesystem that underlies perspectives of sustainability. To get a bet-ter understanding on this issue, it serves to look into details ofeconomic reforms in areas that have been essential to founding21st-century development.


ECONOMIC STRUCTURAL REFORMS

In the 1950s, following the Soviet model, the Chinese econ-omy was divided into the primary sector (agriculture), the sec-ondary sector (manufacture and construction industries), andthe tertiary sector (service industries). The shares of GDP pro-duced by these three sectors were 50.5 percent, 20.9 percent,and 28.6 percent, respectively, in 1952. In urban areas, SOEsand POEs coexisted. By 1957, through the movement of Social-ist Transformation, the private sector vanished, yielding to thedominance of public enterprises. The private sector was reducedto collectively owned enterprises from mergers of former privatebusinesses and a small number of sole proprietors. The moderneconomy has evolved from reforms to this base structure. Theprocess is known as building socialism with Chinese characteris-tics or market economy with Chinese characteristics in DengXiaoping’s terms. ‘‘Chinese characteristics’’ refers primarily toCCP’s leadership.The prereform system was composed of two core mechanisms—

central planning and SOEs. Typically, the Chinese governmentcarried out the central planning through the State Planning Com-mission of the State Council, which prioritized the production fora period of five years at a time. Pricing and distribution of goodswere decided by the state rather than by the market. Informationof supply and demand was gathered by the Planning Commissionas an important basis for decisionmaking. Political agendas, how-ever, often had the upper hand. This explains why China was ableto carry out nuclear weapon research in the 1960s, even while thenation was struggling with an unprecedented famine. Typically,while central planning can be stunningly effective in allocatingresources to critical programs and achieving results, it is ineffectiveelsewhere. Poor planning was routine, because efficiency is not asimportant in a central planning economy as it is in a market econ-omy. One example is the Shenyang Smelter and the ShenyangCable Factory case.1 Shenyang Smelter was a copper producerlocated next to the Shenyang Cable Factory, which used copper as

Economic Reform 127

raw material. Both are located in the northeastern province ofLiaoning. Despite their proximity, the Shenyang Cable Factoryhad to receive its copper supply from the remote province ofYunnan, thousands of miles away. Meanwhile, the copper pro-duced at the Shenyang Smelter was shipped to the HeilongjiangProvince and other more distant provinces.The Chinese central planning economy was different from the

Soviet’s economy in several ways, one of which was its lack of theSoviet-style uniformity, which was due to China’s extensive agri-cultural tradition and an extremely weak industrial background.Hence, the Chinese central planning economy focused on pro-grams that were of national concern, leaving provinces with morefreedom to make local economic plans, resulting in a strongerextraplan economy, or the portion beyond the national plan.Because of the lack of the Soviet uniformity, the Chinese govern-ment had its own way to ramp up production—through politicaland economic campaigns, such as the Great Leap Forward(1957), a widely impacting movement that was implemented in avariety of local ways. This background had its impact on the cur-rent economic reform. Professor Yi Feng of Claremont GraduateUniversity, California, points out that the stronger extraplanningeconomy (versus the Soviet’s economy) resulted in an eminentfeature of the Chinese reforms: they are more gradual and exper-imental than their Russian counterpart in the early 1990s.2 Thisturned out to be an advantage in the sense that it allowed urbanindustries to gradually absorb labor demand rather than havingto face drastic pressures all at once.The right and left arms of central planning were the SOEs.

Theoretically, SOEs are all directed by the central government.In reality, however, differences exist. Enterprises immediatelyunder the central government rank higher in privilege than thoseunder the provincial and county-level governments. Therefore,state control often yields to local control at lower levels. Becauseof this feature, SOEs are also known as ‘‘people-owned enter-prises’’ (quan min suo you zhi) run by managers who serve asagents of the government. In the early 1950s, the Gross Value of


Industrial Output (GVIO) produced by SOEs was 77.6 percent,and the remainder was contributed by the private sector. By1978, the year of announcement of economic reforms, the pri-vate sector had been replaced by the public sector.Because planning was centrally conducted, state enterprises

typically were assigned production quota and took no part indistribution and pricing. As such, the enterprises did not worryabout market pressure, because it did not exist. Quality controland work motivation were notoriously weak. Political cam-paigns, such as ‘‘catching up with the U.S. in 30 years,’’ or theelection of model workers and so on, may have boosted produc-tion, but they never had a long-term effect. Competition wasnonexistent within and without the firms. Material reward waslabeled capitalist style and hence excluded. A two-hour lunchbreak was universal. And, in the workplace it was not unusual tosee workers chat, smoke, or play cards on the shift. By the timethe Great Cultural Revolution ended in 1976, the Chinese econ-omy was on the brink of collapse. On the other hand, employeeswere guaranteed lifetime employment, free medical care, childcare, housing, and retirement benefits. Larger SOEs operated afull-service system, including hospitals, child care centers, pri-mary and middle schools, and benefit packages that covered‘‘from cradle to grave.’’Deng Xiaoping’s economic reforms changed the whole pic-

ture. State enterprises were given autonomy in many areas,including planning and distribution to a high level. For exam-ple, at an earlier stage, the government instituted a ‘‘two-tracksystem’’ to combine government quota with enterprise profitmargin. State enterprises had to first submit the state quota atgovernment-set prices, and then they were allowed to sell thebeyond-quota products on the market at their own prices. Asimilar system was adopted in rural areas, which was known asthe ‘‘Contract and Responsibility System (CRS),’’ that allowedfarmers to keep their beyond-quota agricultural products andmarket them to earn cash. These measures gradually relaxed thegovernment’s position in planning, ownership, and pricing

Economic Reform 129

control, and led to a market-based supply and demand. The eco-nomic impact was significant, and production and motivationwere boosted to a level higher than ever.As SOE restructuring deepened, the government retreated

to maintaining control of large enterprises, letting smaller andmedium-size companies go through the privatization process.More than 80 percent of small and medium-size SOEs had toundergo restructuring, mergers, leases, contracting, joint-stockcompanies, and bankruptcies by the new millennium. To clearbad loans made by state banks, the government opened up acredit market and traded these loans as initial public offerings ofstocks in 2002. The debt-equity-swap scheme lessened banks’burden by getting rid of 1,400 billion RMB of NPLs.3 It turnsout that this process remotely prepared China’s banking systemfor dealing with the 2008–2009 global financial crisis.Structurally, the reform had changed the state sector’s propor-

tion in the economy: the GVIO produced by state enterprisesdecreased from 77.6 percent in 1978 to merely 33.4 percent in2007. The number of SOEs also came down from 118,000 in1995 to 20,680 in 2007. Most important, the remaining SOEsfreed themselves from their social responsibilities, such as provi-sion of housing, day care, schools, and hospitals for employees.Finally, the ownership structure of SOEs had changed from 100percent state owned to a plurality of ownership, with the statehaving the majority share. The full exit of SOEs, however, willbe a prolonged process because of ideological constraints andbecause of the ongoing establishment of a social security systemis not yet ready to fully take care of unemployed workers.4

The GDP structure has also changed. Shares of primary, sec-ondary, and tertiary sectors now stand at 3.6 percent, 54.1percent, and 42.3 percent in 2007, compared with 41.7 percent,40.1 percent, and 17.3 percent in 1990. The tertiary sector willbe the source of new jobs, becoming a hotbed for private indus-tries. Deng Xiaoping’s Open-Door Policy as well as China’sentry into the WTO created valuable opportunities for privatefirms to gain access to a wide range of economic fields previously


held by the SOEs, such as banking, insurance, telecommunica-tions, and the auto industry. SOEs went into a series of restruc-turing processes, mostly breaking up into privately owned orsemi-privately owned entities. By 2006, private industries pro-duced 65 percent of China’s GDP, and 70 to 80 percent ofthe GDP growth.5 The contribution is particularly eye-catchingin import and export businesses. In 1978, total imports andexports were valued at $20.64 billion, with a trade deficitof $1.14 billion. In 2007, the value increased to $2,173.7billion, with a surplus of $288 billion. The ratio of foreign tradeto GDP increased from 9.8 percent in 1978 to 66 percent in2007.The fastest economic growth first took place in geographically

advantageous coastal cities with convenient transportation systems,as well as in large cities located in the eastern plains. Comparedwith inland provinces, these regions enjoyed lower rural-urbanincome disparities, higher numbers of educational institutions,more FDI, and better-suited infrastructure for modern indus-tries. Resulting from these advantages, however, is a wideningdisparity between China’s east and west regions. Twelve westernprovinces and autonomous regions are particularly hit by harsheconomic conditions, including Xinjiang, Gansu, Qinghai,Ningxia, Shaanxi, Tibet, Sichuan, Yunnan, Guizhou, Guangxi,Inner Mongolia, and Chongqing. To channel investment intounderdeveloped regions, the government has created a numberof incentive policies since 1999 under the slogan of ‘‘Openingthe Great West.’’ This effort gained more urgency during the2008–2009 global economic recession, as stimulating domesticdemand becomes the only venue that can stimulate China’seconomy when the global economy is shrinking quickly. In thecase of a semi-market-based economy, the Chinese governmenthas an advantage over its Western counterparts in setting up andimplementing stimulus plans. However, a worsening situation ofthe economy was feared to be a factor behind the July 5, 2009,unrest in Xinjiang that led to more than 180 innocent citizensbeing killed. The government blamed it primarily on Uygur

Economic Reform 131

separatism and sabotaging forces beyond the border. The realityis widely perceived as more complicated. Thus, governmentintervention has shortfalls.While the SOEs are reformed into more effective work units,

POEs gained ground at a faster pace. A POE is defined as anenterprise owned by domestic entrepreneurs with at least eightemployees. Thus, by convention, the term POE refers to privateenterprises in urban areas. Rural China predominantly has oper-ated on family-based farming since 1978 when People’s Com-munes were disbanded and land was allotted to families. Inurban regions, there is a growing number of sole proprietors.These two categories are not listed as POEs, however, becausethey are not employers. By 2002, one-third of the GDP wasproduced by the private sector. As of 2010, the private sector asa whole contributed more to GDP growth than the public sec-tor. This is primarily because POEs have an advantage over theirSOE counterparts—that is, they are free from employment ofsurplus labor. This allows POEs to effectively compete anddynamically upgrade their S&T advantages. Additionally, Chi-na’s POEs are admired for their aggressiveness in risk-taking. Apopular joke goes, in March 2003, the air-bombing campaignover Baghdad quickly drained the U.S. air force’s stockpile ofsmart bombs. As generals at the Pentagon were busy trying tolocate a supply line, a POE representative from Guangdongshowed up at the door, carrying a case of the company’s ammu-nition samples. Obviously, producing weaponry is nowhere closeto any POE’s capacity. However, the joke reflects a reality—theChinese POEs are informed, competitive, and ready to turnevery crisis into a business opportunity.Nevertheless, the development of POEs has not been smooth.

When SOEs and POEs coexist, unequal distribution of resour-ces is expected to favor SOEs. This is obvious in loan access, andthe situation is exacerbated when large banks are themselvesSOEs. POEs constantly complain about discrimination. Thechairman and chief executive officer (CEO) of the privatelyowned New Hope Corporation, a fodder producer based in


Sichuan, once described the disadvantage of being a POE as hav-ing to give SOEs a head start of 100 steps in a short-run race.6

Complaints such as these persist.The three decades of reform are marked by the victorious

march of POEs. In the 1980s, POEs were allowed to operateonly in sectors that were not of national importance, such asretail sales and agricultural products. Banking, insurance, theauto industry, telecommunication, and so on were out of theirreach. With the deepening of economic reforms and China’sentry into the WTO, barriers are being cleared one afteranother. Private enterprises are beginning to enter these areas.Private-capital-controlled banks have been increasing rapidly,despite the fact that they remain small in size. POEs haveentered such sectors as the auto industry and gold mining. Thefirst Chinese brand automobile, Geely (good fortune), serves asan example. Geely Corporation was founded in 1997 by an en-gineering graduate student who first went into business to pro-duce Geely refrigerators. Targeting the vast majority of low-income Chinese households, Geely now specializes in affordable,compact, and energy-saving minicars. By January 1, 2009, thecompany ranked number nine in sales reaching 221,800 unitsper year. Geely’s international sales, primarily to African andLatin American countries, reached 30,000 units.7 In March2010, Geely inked a $1.8 billion deal for Ford’s Volvo car unit.POEs have become major employment sources. By the end of

2002, POEs had employed 30 million workers. And, when con-sidering the total employment of the private sector, includingrural China, the employment capacity reached 88.8 percent ofthe workforce. As a result, the CCP 16th Party Congress held in2002 denounced discrimination against private enterprises andvowed to offer equal opportunities. The CCP revised its Consti-tution to welcome private entrepreneurs to become members. In2007, according to NBS data, POEs employed 127.4 millionworkers versus 614.8 million employed by SOEs. The economicreforms have profoundly changed China’s economic landscapeof which a few sectors are reviewed below.

Economic Reform 133

INDUSTRIAL REFORM

Reforms in industrial sectors represent the most remarkablechanges. During the three decades from 1949 to 1979, China’sindustrial development was modeled after the Soviets. The trendcontinued after China broke away from the ‘‘big brother’’ in theearly 1960s. Two distinct features of the Soviet model are nota-ble. First, heavy industry became the top agenda of central plan-ning. This emphasis was justified ideologically and strategically—because there is no compromise with capitalism, China muststrengthen weaponry production. Thus, mining and manu-facturing became areas of the biggest investment. Second, to saveresources for heavy industry, service and light industries thatproduced items needed for people’s daily needs were suppressed.From 1953 to 1978, out of the yearly industrial output,the proportion of light industries dropped from 64.5 percent to43 percent.In addition to central planning policies that favored heavy

industries, the political situation of the 1950s also contributedto the shift. In the 1950s, industrialization paralleled transfor-mation of private enterprises into SOEs or collectively ownedentities. These enterprises were located predominantly in urbanareas and in the light industry sector, such as textile mills andsmall factories of daily utensils. The Socialist TransformationCampaign in the early 1950s caused this sector to drasticallydecline in production output. Additionally, the Korean War(1951–1953) created further opportunities to assault the privatesector, and many capitalists were suspected as being West–friendly, which was enough reason at the time for their propertyto be confiscated.By the late 1950s, ramping up industry production had

turned into a production campaign known as the Great LeapForward, which was aimed at catching up with the West in shortorder, the consequence of which was, however, a great famine. Apopular understanding of this disaster is that strong labor wasmobilized to the front of mining and steel producing, leaving


farmlands in the hands of women and senior men. Natural dis-asters and poor farming policies also were blamed for thedisaster.Since 1978, both the political agenda and economic planning

have been revised to favor the rule of market mechanisms. Thequasi-wartime industrial strategy was abandoned and replacedby export-led growth. Coastal cities were among the first tothrive. Heavy industry has gradually yielded to light industry,and the tertiary industry (the service industry) has grown themost rapidly. Moreover, a variety of modern industries emergedand quickly took the spotlight, such as transportation, telecom-munication, computer, office machinery, pharmaceutical, nu-clear energy, bioengineering, environmental products, and soon. Meanwhile, mining, ordinary machinery manufacturing,and the textile industry sank into the category of ‘‘sunset indus-try.’’ In lieu of uniform central planning, the government is lean-ing toward market-friendly strategies to steer the economy, suchas tax incentives and various kinds of subsidies. As the govern-ment economic policies purport, China’s economy eventuallywill head for a knowledge-based economy in which S&T andthe market mechanism ultimately will replace the traditionalindustrial gridlock.8 Within the industrial sector, the energyindustry is probably the area in which reforms have gone ingreater depth, and thus an up-close view benefits an understand-ing of these industrial reforms.

REVAMPING THE ENERGY INDUSTRY

The fast economic development has put a heavy toll on thenation’s energy resources, causing fuel prices to rise. The mostnoticeable consequence is that it has caused widespread inflationin China during the past 10 years. Acquiring more energyresources is a pressing task. In reality, despite its emphasis hy-draulic and wind-power projects, only 16 percent of the nation’selectricity is currently generated by renewable energy and 75 percentis generated by burning coal.

Economic Reform 135

China has a long history of coal reliance. In recent years, ithas become the world’s largest source of carbon dioxide emis-sion, surpassing the United States. Coal is expected to be respon-sible for three-quarters of that carbon dioxide.9 To modernize itsindustry and save its environment, China must transform itsreliance on coal to other energy resources. In recent years, Chinahas stepped up its diplomatic and economic outreach in Africa,Latin America, the Middle East, and other possible directions aswell in search for oil—these efforts have been labeled ‘‘oildiplomacy.’’In the 1950s, China’s transportation ran on natural gas that

was stored in a bus’s set-top gasbag. The discovery of the DaqingOil Field in the 1960s freed China from insufficiency in militaryand basic nonmilitary transportation, and buses no longer car-ried gasbags. This fragile self-sufficiency could support only thesurvival economic needs during the Mao era. After the economicreforms started in 1978, this development easily burned up thedomestic supply of fuel. After 1993, China could no longermaintain its fuel self-sufficiency and became a net fuel importer.By 2002, China ranked number two in the world in energy con-sumption, after the United States and surpassing Japan. In2003, its petroleum consumption ranked third, after the UnitedStates and Japan. Nuclear power in China remains underdevel-oped, representing only 1 percent of total electrical power in2003.China’s energy consumption structure is divided into four

categories—utility, residential and commercial, industrial, andtransportation. Utility fuel is used to generate heat and electric-ity. Because it is fundamental to every economic sector andto people’s daily life, utility fuel represents the largest categoryof energy consumption. The second-largest category is theresidential and commercial areas, driven primarily by urbaniza-tion and booming commercialism. This sector representsabout one-third of the nation’s total energy consumption. Thethird category is the industrial sector. As heavy industry hasbeen shifting gradually away from old machinery that was


inefficient in energy consumption, the reliance on coal hasbeen yielding to the use of electricity, liquefied petroleum gas,and natural gas. Finally, transportation represents the fourth-largest area of energy consumption. This sector is expected torise faster than other sectors because of the increasing numberof personal cars.10

China’s energy consumption is anticipated to double between2010 and 2020. Since 2008, the Chinese government has beenforcing small to medium energy-inefficient companies to shutdown. Despite the increase of imports and the utilization ofother energy resources, such as hydro and nuclear power, energysupply nevertheless may fall short. To deal with this problem,one strategy is to examine China’s strength—its abundant coalreserve. China’s coal reserve accounts for 13 percent of the totalworld reserve, enough to sustain the country’s economic growthneeds for a century or more, if it could be converted to clean-burning fuel. Indeed, one technology aims to extract liquefiedproducts out of coal.11 The project of transforming coal’s com-plex mix of hydrocarbons into gasoline and diesel fuel (liquefac-tion) began in 2001 and has been given prime support by thegovernment as an 863 Project.Coal-liquefaction technology was developed in Germany in

the 1920s. During World War II, Nazi Germany relied heavilyon liquefaction technology to fuel its mechanized armies. Thetwo popular methods, known as Fischer-Tropsch and theBergius approaches, both reduce coal’s long hydrocarbon chaininto shorter hydrocarbon chains that form gasoline, diesel, andaviation fuels. The Bergius approach is more productive, yield-ing 55 to 56 percent of energy in coal, whereas the Fischer-Tropsch approach results in a lower yield of around 45 percent.The Bergius approach, however, is more complicated and costly,requiring separate plants being built to process liquefactionunder different conditions. The Chinese picked the Bergiusapproach.If China could successfully transform coal into synthetic oil,

the country would rake in top profit, particularly in an era of

Economic Reform 137

energy crisis. Oil prices have been declining since the mid-1980s, and interest in coal liquefaction has seen an internationaldecline. Despite this, China joined with the United States, Japan,and Germany to study liquefaction in the Inner MongoliaAutonomous Region, Heilongjiang Province, and Yunnan Prov-ince. In 2003, China’s largest coal producer, the ShenhuaGroup, started mining the Erdos Coal Mine in Inner Mongoliawith an initial investment of 25 billion RMB. Earlier in 2002,Shenhua had invested 10 billion RMB to build a liquefactionplant, the largest in the world, next to the Erdos coalmines. InDecember 2008, a trial run of 300 hours was conducted success-fully. The result proved that China was capable of producing 1million tons of fuel annually. A second and a third trial run wereconducted in 2009, and if successful, the production capacitywould increase three times. A report indicates that the first phaseof a project of 5-million-ton annual capacity went into produc-tion in May 2009.12 In 2007, China’s crude import was about178 million tons, representing 50 percent of dependency on for-eign oil. The Shenhua Group believes that if more liquefactionplants are built, China’s dependency on foreign oil will bereduced.13

There are, however, two major dragging factors, one of whichis the world’s oil prices, which fluctuated in 2008 alone from$147 per barrel down to $33.87 per barrel. Feasibility studiesindicate that the per-barrel price must be above $40 for Shenhua’sliquefaction project to be free from financial risks. As a result,the NDRC called for a suspension of all liquefaction ventures,excluding the two run by Shenhua, one in Inner Mongolia andthe other in Ningxia Hui Autonomous Region. Shenhuaremains optimistic that coal liquefaction will have a brightfuture, given the reality of China’s energy demand. The otherdragging factor is environmental concerns. The liquefactionprocess involves using large quantities of water (6.5 tons of wateris used to produce 1 ton of fuel), which would take a heavy tollon the desert region. Shenhua’s solution is to pump groundwaterfrom 100 kilometers away. Shenhua believes that the industrial


water could be reused to water trees, thus reducing sandstormsblowing in the direction of Beijing. With respect to the treat-ment of CO2 released from the production process, the com-pany plans to develop a sequestration project to prevent CO2

from being released into the atmosphere.From relying on raw coal to liquefaction, this development

shows a profound transition from the traditional framework, bothin ideology and in technology. During this transition, the modernChinese industry pursues efficient and environment-friendly waysand means, not solely GDP figures. Shenhua’s story is only one ofmany. Most of these battles, however, are fought by SMEs whoseprimary challenges are of another order: obtaining credit. In otherwords, SMEs need a supportive banking environment.

BANKING REFORM

According to the Financial Stability Report issued in May2008 by the PBOC,14 by the end of 2007 China’s officialexchange reserves grew by 43.3 percent over the 2006 figure to$1.53 trillion.15 Total external debt outstanding increased 16.68percent over the previous year to $373.618 billion. These fig-ures, according to PBOC, indicate a strong balance sheet. Addi-tionally, fiscal revenue totaled 5.13 trillion RMB, an increase of30.5 percent year over year; and fiscal expenditure grew 23.3percent to 4.96 trillion RMB. PBOC noticed, however, that theconsumer price index (CPI) number rose by a large margin of4.8 percent, indicating inflation. PBOC recommends increasingsupply, and meanwhile, urges strengthening the investment riskmanagement system, improving financial regulatory agencies,and carefully monitoring spillover of the U.S. subprime mort-gage crisis.In general, the function of PBOC is equivalent to the

U.S. Federal Reserve System. Its administrative ranking is equiv-alent to ministries and to the China Banking Regulatory Com-mission (CBRC). Before 1979, PBOC was the only financialsystem serving all banking purposes, and primarily it operated as a

Economic Reform 139

clearinghouse for SOEs. In reality, however, it was not the centralbank in a true sense or a commercial entity conforming to the lawof the market economy. But since 1979, after a series of significantreforms, PBOC has become a true central bank. It has the powerto create regulations and supervise its state banks, complete withthe ability to separate policy-related finance and commercialfinance. It also has the cooperation of other financial institutionswith complementary services and functions.In 1984, PBOC stopped handling credit and savings to focus

on its central bank functions by conducting macrocontrol andsupervision over the national banking system. In 1994, theIndustrial and Commercial Bank of China (ICBC), the Bank ofChina (BOC), the Agricultural Bank of China (ABC), and theChina Construction Bank (CCB) became state-owned commer-cial banks. Three policy-related banks were created, namely, theAgricultural Development Bank of China (ADBC), theNational Development Bank of China (NDBC), and the ChinaImport and Export Bank (CIEB).As an example, ABC’s function is to support both rural devel-

opment and rural disaster relief. Founded in March 1955, ABCis a state-owned commercial bank serving (1) enterprises, enter-prise groups, and large-scale agricultural production basesengaged in primary agricultural production; (2) profit-earningenterprises engaged in primary agricultural production; and(3) development of rural social service systems. ABC’s clients areprimarily TVEs, supply-and-distribution cooperative commer-cial organizations, and private businesses or individuals.Although defined primarily as a commercial bank, ABC retainssome policy-lending activity in rural areas, such as agriculturaldevelopment and poverty relief lending. In 1998, ABC’s policylending amounted to 156 billion RMB, or 28 percent of theyear’s total loans (some 553.8 billion RMB). Founded inDecember 1993, the ADBC, in contrast, is officially a policybank, engaging primarily in lending to enterprises for purchas-ing and storing of grains, cotton, and oil. On a secondary front,both ABC and ADBC also operate in urban areas.


To serve a fast-developing economy, the Chinese bankingsystem had to first free itself from servicing toxic loans toSOEs. According to Professor Richard Burdkin, chair of theDepartment of Economics at Claremont McKenna College,the Chinese government was distancing itself from the SOEs.This was done through the Budget Law of 1994, which prohib-its the government from borrowing from PBOC to financeunderperforming SOEs. Before the reform, banks served asrecordkeepers for SOEs instead of being commercial entities.Fixed assets primarily came from fiscal appropriations at thetime. Economic reforms changed the role of fixed investmentin enterprises; fundraising gradually became the primarysource of funding, and state budget appropriations dwindledover time. Stocks and bonds markets have since opened up thecredit market. In 1997, SOEs were allowed to be restructuredor go bankrupt. The government issued bonds to bail out morethan 500 billion RMB of bad loans. As a result, between 1998and 2002, more than 25 million jobs in SOEs had been lost.16

Once loss-making SOEs were disbanded, the financial systemlightened its burden. Nevertheless, SOEs typically rely onstate budget appropriations and bank loans more than othertypes of firms; and this dependence is a primary hindrance toperformance.On the banking side, raising efficiency and fighting off bad

loans is no easy task. According to Dr. Chen Aimin, economistand president of Jinjiang College, three major factors limitChinese banks from effectively exercising their supervising func-tion. First, banks are prohibited from directly investing in enter-prises. The function of supervising loan performance is assumedby the creditor, not by the banks. Second, because loans con-tinue to be issued following administrative instructions, loan-making decisions can be independent from loan performance.Third, because Chinese banks are SOEs, they are not immuneto their own inefficiency. No mechanism generates appropriateincentives for the banks to diligently seek performance. As a result,Chinese banks continue to generate bad loans, despite the fact

Economic Reform 141

that improvements indeed are being made as more specialtycommercial banks with more autonomy are being created.17

The Commercial Bank Law was put into effect in 1995, set-ting up the parameters for changing the specialized state banksto state-owned commercial banks. Since 1996, the financialorganizational system with wholly state-owned commercialbanks has been transformed into modern financial enterpriseshandling public banking within the scope defined by PBOC.18

In rural China, the reform to Rural Credit Cooperatives(RCC) has been an essential part of rural agricultural as well asindustrial development. In this area, Dr. Chen Aimin and Profes-sor Junqi Liu have conducted extensive studies to reveal a treach-erous path that RCC reform has taken. During the economicboom, most banks left rural areas behind to serve large cities,resulting in a shortage of resources for RCCs.19 RCCs are part ofthree official financial institutions in rural China (the other twoare ABC and ADBC). While other state-owned commercialbanks (SOCBs), the ICBC, the Construction Bank of China(CBC), and the BOC also have branches in rural county towns,however, RCCs are closer to the daily production operations andlocal people’s lives than these other banks. RCCs can lend to allkinds of patrons, including individuals, TVEs, and privatelyowned businesses, as well as for all purposes, such as productionand consumption. Their main borrowing clients are farmers andTVEs. In more developed rural areas, the township and countyenterprises are the majority borrowers. As of 2008, about 32,869rural credit cooperatives operate across China; their outstandingloans and total deposits account for approximately 9.6 percent ofChina’s banking sector.20 The burden of financial support in thecountryside has been borne increasingly by RCCs since 1998,when the four state-owned commercial banks (that is, the ICBC,ABC, CBOC, and BOC) started to withdraw from rural areas tofocus on big cities. RCCs are the primary source of finance in thecountryside, reportedly handling 75 percent of all agriculturalloans. In Beijing, Shanghai, and Guangdong, rural credit coopera-tives have been transformed into rural commercial banks.


RCCs differ from the ABC and other SOCBs in ownershipand management. RCCs are nominally cooperative banks with acertain share of capital coming from households and supposedlythey are managed by shareholders. They are stand-alone finan-cial organizations, instead of banks within a banking networkthat can transfer liquidity and perform cross-subsidization. Theyprovide services that the state commercial banks are reluctant toprovide because of higher transaction costs, resulting from eithersmall-scale transactions or remote locations. Compared withABC, they have a larger share of time deposit that tends to makethe costs of funds higher. Moreover, they are less equipped withmanagement networking, professional advisory services, andother modern managerial and governance structures.Although they are named ‘‘cooperatives,’’ the RCCs did not

start as member-driven institutions. They first developed as apart of the government’s collectivization effort in the 1950s andwere made part of the People’s Communes and their productionbrigades. In February 1979, the People’s Communes were dis-solved; as a result, RCCs came under the management of ABC.Following the government’s initiatives of rural reform, RCCsagain were restructured to become real cooperatives. In 1996,RCCs were spun off from ABC and went directly under the reg-ulatory framework of PBOC. As such, the assets of RCCs havegrown large because of government support and patronage. As aresult, the share capital contribution from households wasalmost completely replaced by the central bank’s funds. China’sRCCs became, therefore, de facto state-owned financial institu-tions and are cooperatives in name only. Moreover, being SOEinstitutions, RCCs bear all symptoms of SOEs, in particular,they are plagued with bad loans.In operation, RCCs are required to set up county-level apex

institutions to provide a clearinghouse service for local affiliatesand collect fees for such service. Some apex institutions also han-dle financial business directly. A Law on Credit Cooperatives hasnot yet been drafted, however. PBOC appoints the RCC staff andimposes reserve requirements and interest rate restrictions. RCCs

Economic Reform 143

have certain flexibility in setting interest rates for lending, withina range of the regulated rates. To encourage competition and crea-tivity, PBOC recently announced that RCCs are allowed tocharge a maximum interest rate of twice the central bank rate,while regular banks can charge only up to 1.7 times the officialrate.While NPLs are endemic throughout China’s banking system,

the problem seems more severe with the RCCs. At the end of2002, the NPLs of the RCCs stood at 515 billion RMB (US$62billion), a staggering 37 percent of their total outstanding loanscompared with less than 25 percent for the four SOCBs. In poorprovinces, the bad loan ratio could be as high as 99 percent.Most RCC NPLs date to 1996–1997, and many are policy loansprovided in compliance with county and township governmentagendas. Loans to TVEs have had a high delinquency rate aswell. The bad loan problems and generally poor managementhave led to lowered confidence of the rural population in theseRCCs. Many borrowers would rather turn to friends for finan-cial solutions.As a result, the government, including the central bank, has

stepped up RCC reform. As a part of restructuring debt-ladenrural credit cooperatives, the CBRC, a commission set up inApril 2003 to take over some regulatory functions of the PBOC,is considering drafting a bankruptcy law for small and medium-size financial institutions. Developing RCCs into rural coopera-tive banks is an important step of the reform, which would allowthe RCCs to have a combination of a joint-stock structure andcooperative mechanisms and thus would lift many geographicand business-related restrictions previously imposed on them. In2003, the State Council approved a pilot reform of RCCs,Announcement of the Pilot RCC Reform Plan. This documentstipulates that a wide range of financial resources should beexplored on the basis of a joint-stock structure; governmentsmust not use public funds to purchase banking shares; andsound management will be essential to future RCCs.21 As partof the reform, RCCs are required to increase their share capital.


The amount of loans provided to shareholding farmers mustaccount for at least 50 percent of each RCC’s loan portfolio.Other reform actions include hardening budget constraint,reducing government intervention, facilitating professional ser-vice and advisory networks, and training personnel. To restorethe trust of the rural clientele, the RCCs are making efforts notonly to restructure their NPLs, but also to implement transpar-ent regulations and policies. To relieve poverty and promotesmall businesses in the rural sector, RCCs must improve serviceand attract funds scattered in the hands of rural households. Thegovernment and the central bank, meanwhile, must devise taxand industrial policies that encourage deposits into the RCCsand improve microfinancing directly to lenders. Many believethat RCC reform is likely to achieve good results, given theirstringent regulations with respect to management and some abil-ity in avoidance of government intervention. Moreover, sinceRCCs are faced with competition from more financial resources,both domestic and abroad, improving performance is the onlyway to survive. Finally, the new joint-stock structure providesboth monitoring and incentives for good operation.

TRANSITION OF THE SECURITIES MARKET

Investment in stock markets officially started in 1992.According to NBS, the stock market raised capital worth 9.4billion RMB or $1.7 billion (at the same year’s exchange rate).In 2007, market capitalization reached 868 billion RMB or$137.5 billion. Despite losses in recent years, China boasts thesecond-largest emerging stock market in the world, behindonly South Korea. By 2009, close to 2,000 firms have becomepublicly listed companies. As a result, two things are in need:(1) an enormous supply of capital, and (2) an efficient capitalmarket in which people can secure their savings. Analystspredict that overall China will need to invest more than$1.5 trillion to improve infrastructure alone. At the same time,the new pension system is expected to send out paychecks to

Economic Reform 145

the fast-aging population. In 2005, 7.6 percent of China’spopulation was over the age of 65, projected to hit approxi-mately 14 percent by the year 2025.22 To address these needssuccessfully and, hence, sustain the economy, China must builda reliable securities market.Currently, Chinese securities are composed of tradable

shares—A, B, and H shares (A and B shares are traded domesti-cally; H shares include shares listed abroad and nontradableshares held by central and local governments, state asset manage-ment companies, investment companies, and legal persons whoare primarily industrial SOEs). Nontradable shares couldaccount for as much as two-thirds of an SOE’s total stock, ensur-ing strong control. China’s securities markets have been in tran-sition like other sectors. Lack of transparency has been identifiedas a major drawback that generates irregular trading patterns.Professor Chen Aimin points out that by way of controlling themajority of the shares, the government may exercise a stronginfluence behind the scenes. Because of that, however, the signif-icance of market signals is dampened and the relationshipbetween the securities market and firms’ incentive structures isweakened as well.23

China began selling Treasury bonds (T-bonds) in 1981. Thedomestic bond market has since expanded significantly, both interms of participants and financial functions. Governmentbodies have been the major underwriter for shares issued by theMOF in the form of T-bonds. Domestic bond issues have beenmedium to long term (3 to 20 years) for the purpose of financ-ing government deficits. In the early 1980s, government bondsoften were promoted under political themes, such as ‘‘patrioticbonds.’’ Contributions were deducted from individuals’ monthlypay on a per capita basis. Compared with the U.S. market, Chi-nese T-bonds have not reached the level of influencing interestbenchmarks; the latter is primarily under the control of centralgovernment. The quota of bond issuance is set each year by theState Council. The Chinese government has issued bonds inoverseas markets denominated in U.S. dollars, the Japanese yen,


and euros. During the 2008–2009 financial crisis, the Chinesegovernment issued more T-bonds to finance recovery programsthan in the past. China issued billions RMB worth of govern-ment bonds in 2003 to finance the 319.8 billion RMB deficit,or 2.6 percent of the GDP. In 2008, the government issued 30billion RMB worth of bonds. Premier Wen Jiabao indicated in apress conference that there is room to issue more bonds to dealwith the 950 billion RMB central government budget deficitand the 200 billion RMB local government budget deficit in2009.24

Large SOEs tapped into the bonds market in early years ofreform. In recent years, however, they have increased issuance ofbonds to finance capital needs. The Chinese government firstallowed companies to issue bonds in 1983. In 1987, the StateCouncil published Provisional Rules on Management of Corpo-rate Bonds, later amended in 1993, which led to a fast expansionof the bond market. In the early 2000s, the government requiredcorporate bonds to be guaranteed by banks. This restriction wassoon left out when the Three Gorgeous Project Corporationissued bonds without bank guarantee in 2007. In the same year,however, PBOC’s chief Guo Xiaochan raised alert on irregularfund-raising that risked tipping the market balance. However,China’s corporate bond market continued its race to raise onetrillion yuan in 2009, most in the short to medium term.25 Cor-porate bonds make up about 5 percent of public offerings. Chi-nese bonds are traded on a secondary bond market as part of theShanghai and Shenzhen stock exchanges. Some interbank trad-ing also occurs.26

In April 2003, the CBRC was established, followed by thefounding of China Securities Regulatory Commission (CSRC)and the China Insurance Regulatory Commission (CIRC).These organizations work in coordination, while each has itsown responsibilities. This cooperation was necessary to managethe additional funding resources that were made available to pri-vate firms, whose share had risen to 30 percent of the GDP by2002. SOEs remain more accessible to loans, however, because

Economic Reform 147

of the nature of the socialist system and the fact that SOEs arestill the largest employers.The Chinese government viewed its banking system as a for-

bidden zone to foreign investors. This view has changed gradu-ally as reform has deepened. Since its WTO entry in 2001,China has gradually granted foreign banks market access. InDecember 2006, the Chinese government made an importantchange—per its fifth-year WTO commitments, it permitted for-eign banks to set up operations across China to offer services todomestic consumers. Many foreign banks applied to fully regis-ter in China to conduct RMB business with domestic clients.Several have been approved, including Citigroup, Hong Kongand Shanghai Banking Corporation (HSBC), Standard Char-tered PLC, Bank of East Asia, Wing Hang, JPMorgan Chase,Hang Seng, Mizuho, Tokyo-Mitsubishi, and United Overseas.27

Since 2006, the CBRC has made several reforms, including devis-ing a system for deposit insurance and reviewing more than 100city commercial banks. With respect to foreign banks, CBRCrequires these banks to incorporate in China rather than operatethrough branch offices; thus, foreign banks are fully bound byChinese regulatory policies. Foreign banks are required to payhigher insurance deposits to operate.Strict regulations may not always be the answer to loopholes.

On the surface, the economic reform has made the CBRC theprincipal regulatory authority over the entire Chinese bankingsystem, rendering it far more independent. Redundancy thenbecomes a haunting problem that arises to offset effectiveness.Although CBRC is the leading authority in implementing bankingreform, the PBOC, CIRC, CSRC, and the State Administration ofForeign Exchange (SAFE) have overlapping responsibilities. Policydiscrepancies are often a major source of confusion. For foreigninvestors, in particular, interpreting rules has become a dauntingand routine challenge. Bureaucracy and language barriers havemade the situation even worse. The Chinese government has latelyfloated the idea of establishing a super-coordinating agency.Whether this would be a viable solution remains to be seen.


TAXATION REFORM

Since the start of the economic reform, China’s governmentspending has been on the rise, and so too has been its budget defi-cit, or the difference between government expenditure and reve-nue. During the 1980s, deficits were relatively small. The deficitof 1989 was 15.9 billion RMB. Deficits rose markedly after the1994 tax reform. A tax law prohibiting the MOF from overdraw-ing money from the PBOC was passed in 1993. As a result, thegovernment started to finance budget deficit by issuing bonds.After the 1997 Asian Financial Crisis, the government adopted anexpansionary fiscal policy whereby the deficit increased from 58.3billion RMB in 1997 to 247.3 billion RMB in 2001.28 By 2006,the total government debt had reached 350 billion RMB.29

To finance budget deficit, the Chinese government typicallyissues government bonds. China’s T-bond sales were an averageof about 760 billion RMB each year from 2004 to 2006. Thecountry still looked to pursue other more conservative monetarypolicies to contend with the economy. T-bond issues jumped to2.35 trillion RMB in 2007, but this was due to a 1.55 trillionRMB special bond, which was issued to counterbalance excessivebank liquidity. Excluding the special issue, sales would have beenabout 800 billion RMB in 2007, which represents approxi-mately 3 percent of the year’s GDP of about 25 trillion RMB.30

While the government is unquestionably sovereign, a hiddendeficit problem is incurred by local governments. According toDr. Lin Shuanglin, professor of economics at the University ofNebraska, the debt owed by township governments has widenedseverely, and governments at local levels are not permitted to issuebonds to service their debt. A survey of 100 townships in Sichuanin 2000 indicated that 82 percent had debt outstanding, 46 percenthad debt higher than 1 million RMB, and some had debt higherthan 12 million RMB. Some government townships had used upthe budget revenue of 2015.31 The total local government debt isunknown, but the figure is estimated to be significant. One obvioussolution is to raise taxes.

Economic Reform 149

Before the economic reform, the centralized economy fol-lowed the budgetary principle of uniformity—that is, the centralgovernment is behind tax planning and spending. After 1978,tax policy had to be changed to give private enterprises incen-tives and reduce SOEs’ dependence on government budget.Hence, tax structure had to be reinvented. Overall, tax revenuehas increased dramatically along with economic boom. In 1978,the national tax was roughly 52 billion RMB. By 2006, the fig-ure jumped to about 3.5 trillion RMB.32

Tax reform went through multiple stages, the goal of whichwas to let people keep more so they would produce more. Thereality seems to have been that the taxes were repackaged, sothey would be shifted around more easily.33 The first change intax structure was made around 1979, whereby the governmentraised prices of agricultural products by 20 percent, raised gov-ernment and SOE employees’ wages, lowered enterprise taxes,and permitted enterprises to give out bonuses. Despite theresulting rise in government deficit, the economy experienced aboost. To reduce reliance of SOEs on government support, fur-ther reform was done in 1983 known as ‘‘substituting tax forprofits.’’ Under this rule, SOEs paid 55 percent in taxes andshared the after-tax profit with the state. In 1984, this systemwas modified to eliminate the sharing of the after-tax profit,such that enterprises keep the entire after-tax profit. The previ-ous uniform tax of 55 percent was replaced by 11 kinds of taxes.The incentives lie in the fact that profit and tax are separated.Additionally, enterprises that suffer losses may negotiate withthe state for a lower tax rate.In 1986, the CRS was implemented, whereby the SOE remits

a contractual share to the state and keeps the excess, which istaxed at a low rate. The catch is that the enterprise has to makeup the remittance even if it suffers a loss. The remittance level isnormally set by the state based on the previous year’s record plusan estimate of growth. The government soon found its revenuereduced, however, because of regional differences and inaccura-cies in setting remittance levels.


The current tax system, known as ‘‘Tax-sharing System,’’ wasfirst implemented in 1994 based on the reality that (1) decen-tralization had resulted in stronger local management, and (2)local business is managed more effectively by local governmentswith their own budget, and the central government could nolonger manage local economic development to achieve maxi-mum incentives and responsibilities. Additionally, it provided asolution to let local governments take more responsibility fortheir spending. The Tax-sharing System is modeled after tax sys-tems of Western countries, such as the United States, where taxesare divided into local, state, and federal taxes, in addition to salestax. The Chinese system has three taxes: state tax, joint tax(shared between local governments and the central government),and local taxes. The Chinese system has five levels: the centralgovernment, the provincial government, the city government,the county government, and the subcounty regional govern-ment. Tax distribution is based on expenditure coverage. For thecentral government, for example, its expenditures cover educa-tion, railway and highway construction, and telecommunica-tion. Thus, the corresponding proportion of tax revenue goes tothe central government. In general, the Tax-sharing System hasbeen an improvement over previous tax policies. In 2006, thetax income was approximately 3.5 trillion RMB compared with512 billion RMB in 1994. Many loopholes have been identifiedover the years, however; major weaknesses include the following:

1. Multiple levels of taxing governments result in competition among gov-ernments. Under such circumstances, there is a strong barrier to effec-tive supervision.

2. Distribution of tax remittance remains a complicated procedure that isoften unreliable.

3. Costs of tax collection are high, approximately 6 percent, whereas thecosts are less than 1 percent in Western countries.

Future reforms are expected to involve reducing governmentsthat have taxing authority, upgrading collection and distributiontraining, and adopting better technology in this area.34

Economic Reform 151

HOUSING REFORM

Before 1978, apartments were constructed by SOEs andassigned to employees based on years of service. With therestructuring of SOEs, a housing market was launched. Accord-ing to a document published by Hangseng Bank, there are threetypes of housing: public rentals, subsidized flats, and privatehousing. The government provides subsidies to low-incomefamilies, including encouraging developers to invest in low-income housing. Private housing takes the largest portion of theresidential property market in China.35

The current housing situation contrasts drastically with both theprereform era and the early postreform era. China’s housing boomcame a long way, and primarily was a result of a government push.Additionally, the housing market benefited from reforms in otherareas. Dr. Song Shunfeng, professor of economics at the Universityof Nevada-Reno, views China’s housing reform as a a beneficiaryand powerful stimulus source: Without banking reform, real estateenterprises would not have development loans, and individualscould not purchase houses with mortgages. Without the taxreform (especially property tax), China would not have had muchroom to lower the high housing prices. Without the SOE reform,separating housing provision from SOEs would have been impos-sible. Without the Open-Door Policy, no foreign funds wouldhave entered the housing market to provide capital resources or toconstruct housing directly. Therefore, China must treat housingreform as an integral part of its overall economic reform.36

In retrospect, throughout China’s housing reform, the govern-ment has provided the ultimate driving force. From 1949 to1979, China implemented a socialist system of urban housingprovision, which let the SOEs take the primary responsibilityfor housing investment, construction, and allocation. Publichousing, together with other benefits, was assigned to workers asan in-kind benefit. Housing quality was poor as it was viewed as a‘‘nonproductive’’ investment by Chinese planners and thusreceived declining investment. According to NBS data, urban


per capita living space was only 6.7 square meters or about 72square feet in 1978.Then, in 1979, China started its urban housing reform. The

goal of this reform was to establish a new system in which pro-duction, distribution, and consumption of urban housing wouldbe driven by the market. The onset was generated by the SOEreforms that made the previous housing system no longer sus-tainable. The reform went through several stages and involved avariety of programs. In 1979, China started to reform the urbanhousing sector by selling newly built public housing to individu-als at full construction cost in four designated cities: Xi’an,Liuzhou, Wuzhou, and Nanning. By the end of 1981, housingsales were extended to more than 60 cities in 23 provinces. Thisexperiment did not last long because few urban families couldafford to buy homes at full-cost rates. Later in 1982, China triedanother housing commercialization experiment in four medium-size cities (Changzhou, Shashi, Siping, and Zhengzhou) andreform strategy became a ‘‘three-three’’ scheme wherein the state,the work units, and the individual each pay one-third of the saleprice. This program ultimately did little to relieve the govern-ment’s financial problems, and work units did not want to sharethe costs. The program was shut down.To stimulate the stagnant housing market, the government

came up with a new initiative. In February 1986, the StateCouncil formed the first official agency to promote urban hous-ing reform, the Leading Group for Housing Reform. The groupimmediately recommended a program that aimed to converthidden in-kind subsidies into open monetary subsidies and tochange urban housing from a welfare giveaway to a market com-modity. Hidden in-kind subsidies were provided for low-rentpublic housing; open monetary subsidies were provided as hous-ing vouchers to pay higher rents. On average, the value of hous-ing vouchers equaled the rise in rent. In 1987, the State Councildesignated three cities (Bengbu, Tangshan, and Yantai) for thenew comprehensive reform program. This effort took the formof increasing rents and promoting house sales, and increasing

Economic Reform 153

rents and issuing housing vouchers. With these changes and theincrease in rent, many households were interested in buying ahome. By the end of 1988, for example, more than 5,000 fami-lies bought homes in Yantai, scoring a moderate progress.Housing reform entered a new stage in 1988, with the focus

of reform shifting from increasing rent to promoting homeown-ership. Unlike the scheme in the early 1980s that involved onlysales of new housing, the new strategy was to sell existing publichousing at subsidized rates. The late 1980s was also an impor-tant period in terms of lawmaking for the urban housing sector.The State Council held the First National Housing Reform Con-ference in January 1988, during which ‘‘The Proposal to Imple-ment Nationwide Urban Housing Reform by Groups and Stages’’was adopted. The State Council also issued ‘‘The Opinion onEncouragement to the Staff and Workers to Purchase Old PublicHousing Units.’’ In the same year, the Congress amended theLand Law, providing better legal protection for urban real estateand thus promoting housing development. With these changes,China began housing reform in all urban areas.Urban housing started to grow rapidly only after Deng Xiaoping’s

south tour in February 1992 where he affirmed that, despite the1989 incident, the reform would continue. Investment in real estatereached 73 billion RMB in 1992, increasing 117 percent from thelevel in 1991. In mid-1998, the Chinese government ended thewelfare urban housing system. Reform measures included endingthe allocation of welfare housing for employees, promoting mort-gage financing, developing the secondary housing market, and lib-eralizing rental rates. By the end of 1999, all Chinese citiesdiscontinued the practice of employers providing housing for theiremployees. Thus, urban housing in China has been transformedfrom a redistributive welfare good to a marketized commodity.In 2006, NBS survey shows that the per capita living space has

increased to 27.1 square meters or about 291 square feet in citiessuch as Beijing and Shanghai, and 30.7 square meters or about 330square feet in rural regions. As of now, housing prices in big citiesare rising again, after a brief decline due to the 2008–2009


global recession. The average purchasing price per square meter(11.75 square feet) hovers at the 15,000 RMB level in east coastcities including Beijing and Shanghai despite the government’srepeated warning of an overheated housing market. Manybelieve, however, that the price hikes are likely to continue,because enriched farmers and successful provincial entrepreneursare looking for a space in the capital city and other larger munic-ipalities. It is their turn to live a little, as some say.

RURAL REFORM

Land rights have been at the heart of China’s struggles through-out its history. The Communist victory was a solution by the ma-jority of the people to land rights inequality. A thorough LandReform that started in the mid-1940s and ended in the early 1950sachieved the promised egalitarian system. The Land Reform, oftenviolent due to its nature of redistributing the property of the few tothe masses, and in conjunction with Communist education, liftedpeople’s morale and hence agricultural productivity in the 1950s.However, Communism was not just about shifting property own-ership, it was also about eliminating private ownership once andfor all. The subsequent collectivization amid the Great LeapForward in 1958 resulted in the People’s Commune system for thenext 20 years. It was nevertheless a profound reform, but the short-fall was obvious. Dr. Yang Yao, professor of economics at PekingUniversity and a senior researcher at Peking University’s ChinaCenter for Economics Research, points out that although China’sagriculture in this period did not fall below the international aver-age, the commune system failed to improve the living standard ofChina’s rural population. It seriously deprived people of many basiceconomic and political rights. Therefore, it was not a surprise thatthe economic reform first started in rural areas.37

For farmers, land ownership is the core of their pursuit. Chinesefarmers are liberals, very much like American farmers, in that theyare strong supporters of a market economy. After decades of com-munal farming, farmers began to think of restoring family farming.

Economic Reform 155

The dynamism of the post-Mao era rejuvenated long-faded dreams.A number of southern villages had started to dismantle communesin the late 1970s. By 1984, the People’s Communes had been dis-banded, and the Household Responsibility System (HRS) wasinstituted, whereby land was allocated to households based onheadcount. Households could keep extra-quota grains and sell theproducts on the market. The 1984 Constitution also granted own-ership of farmland to village collectives. Thus, HRS led to a mix-ture of collective ownership and individual farming.From 1979 to 1984, the gross value of agricultural output

reached a real annual growth rate of 7.6 percent, and grain out-put increased by an annual rate of 4.9 percent. HRS worked tolift morale. By 1984, China had found for the first time in itshistory that it had a large grain surplus. More important, HRSprovided a kind of social security to the rural population, andthat was the family plot. Some scholars speculate that the familyland was actually the base for China’s cheap migrant labor,because instead of falling on urban welfare, migrant workersalways have a home to return to. Professor Yang Yao believesthat by raising the income of the farmers and solving China’sfood problem, the rural reform perhaps was the only reform thatsucceeded without any losers.38

However, HRS had its shortfalls. Professor Yang Yao indicatedthree weaknesses in particular. First, land reallocation became aconstant process due to household changes. When babies areborn or wives are married in, each new member of the commu-nity has a right to a piece of the village’s land. As a result of theconstant readjustments, farmers cannot invest in their land forthe long term. Additionally, frequent reallocations open upopportunities for corrupt village cadres to seek personal gains.Secondly, farmers’ use rights were encumbered. Local govern-ments often impose their planned crop-mix on farmers. Thirdly,given that land sales were prohibited, as it still is today, inheri-tance was seriously limited by periodic land reallocations. Landrentals were also banned in the early years but have been permit-ted since the early 1990s. However, with the increase in rural


economic activities, it was obvious that land tenure would bemore beneficial if it were more flexible.In regions with fast industrial growth or where there is a sig-

nificant supply of migrant labor, villages find ways to consoli-date land use. Certain approaches resemble the past communalsystem. For example, in Guangdong Province, villagers poolfamily land and delegate the management to a village committeethat directs land use for industrial development or for farming.The management committee is formed by representativeselected by groups of families as shareholders. Another innova-tion, originated in central China, is called fanzu daobao or‘‘reverse lease,’’ whereby households may rent their land to thevillage, which in turn rents it to tenants who tend to be migrantfarmers from less developed regions. Both kinds of operationseffectively combined individuals’ land usage rights with the ben-efit of joined efforts, and take advantage of the market mecha-nism. To avoid corrupt leaders from trading people’s land forprivate gains, which had indeed occurred at a significant level ofseverity, the National People’s Congress passed a law in 2002,The Agricultural Lease Law, to limit power of village cadres. Thelaw, promulgated on March 1, 2003, brought fundamentalchanges to land tenure. In particular, it put a stop to land reallo-cations, allowing inheritance of land rights, including the rightto transfer land use rights. Although farmers’ right to the land isone defined via the contract between them and the village collec-tive, the law nevertheless transformed land tenure into a perma-nent lease system that grants farmers de facto private ownershipof land. The government’s move is widely seen as heading in theright direction in filling the deep gap in social protectionreceived by the urban versus rural residents.Rural industrialization has been an indispensable part of Chi-

na’s economic development in the last quarter-century. Accordingto research by Yang Yao and Justin Lin, from 1978 to 1996,the number of rural enterprises increased from 1.52 million to23.36 million; and the number of workers increased from 28.27million to 135.08 million, or in terms of the percentage of the

Economic Reform 157

total rural labor force, increased from 9.5 percent to 29.8 percent.As a result, the gross rural industrial output went from 21.2 per-cent of the total gross rural output in 1978 to 77.2 percent in1995. The output value of the rural industrial sector accountedfor only 9.1 percent of the national total in 1978; after 20 years,this figure became 57.9 percent in 1997. In 1996, nonfarm incomeaccounted for 34.2 percent of all rural income as compared withonly 7.6 percent in 1978.39 NBS data show that the number ofworkers hired by TVEs had reached 150million in 2007. The signif-icance of industrialization of rural China cannot be underestimated.If the traditional Chinese civilization was created in feudalism(a land-based social system), its very basis finally has been shaken.Throughout Chinese history, periodic peasant rebellions started withland ownership discrepancies and ended with bloody land redistribu-tion, as a pattern. Each reform, however, only led to more of thesame. Industrialization is a new kind of reform, and its impacton China’s culture and society is just beginning to pan out.Several factors have contributed to the fast growth of rural

industry. According to Professor Yang Yao, the most importantfactor is the rural reform itself, which freed a large portion ofthe rural labor and enabled capital accumulation as well to runindustry. The planning era left a large unfilled market for con-sumer goods, which rural enterprises filled effectively. In coastalregions, an influx of FDI boosted TVEs. Many companies inthe Greater China Region moved their factories to the PearlRiver and Yangtze River deltas seeking cheap land and labor.40

The arrival of those companies instantly transformed tradition-ally rural villages into booming industrial towns.Compared with SOEs, rural enterprises use more labor and less

capital. According to Yang Yao’s research, per worker net capitalstock of rural enterprises never passed 20 percent of that of theSOEs in the period from 1978 to 1997. With this light capital-labor structure, rural enterprises became an important contributorto China’s export market. Their share of export was only 9.2percent in 1986; but after that year, they kept an average annualgrowth rate of 20.6 percent over the next 10 years and reached


47.9 percent of the country’s total export by 1996.41 An immedi-ate positive effect of the labor-intensive approach has been theenhanced income distribution at the local level. Provinces with alarger rural industrial sector tend to have narrower income gap orsmaller Gini coefficients. Rural industry has served as an equal-izer, reducing the rural-urban divide to a large extent. The flip-side, however, is that as polluting factories relocate to ruralregions, because of more stringent environmental regulations incities, pollution has taken a toll on the rural environment.Rural industry has not always lagged behind its urban coun-

terpart. Quite the contrary, over the years, rural industry hasbecome increasingly competitive, to the level of pushing SOEs toreform and underperforming private sectors to improve. For thetime being, the rural industrialization process has been largelyuneven. The share of industrial output in total rural output variesfrom 86 percent in Shanghai to 4 percent in Tibet. As of 2010,rural industrialization is mainly in the coastal areas and the subur-ban areas in inland provinces. The most successful areas of ruralindustrialization are in provinces located in coastal areas, wherework is more abundant relative to natural resources than in inlandprovinces. Many enterprises have moved from villages to townsand small cities to get access to better infrastructure, markets, andinformation. This trend has profound implications for urbaniza-tion, environment, and the rural society.

POLICYMAKING IN REFORM

Before 1978, policymaking was a matter of political decisionby a small group of politicians who served at the pleasure ofChairman Mao. Things got much more complex during thepostreform era. One kind of complexity lies in the growing localpower. As a result, central planning is becoming increasingly‘‘macro.’’ Lately, the ‘‘Five-Year Plans’’ have been replaced with‘‘Five-Year Projections’’ (wu nian guihua), with the intention ofleaving more space for micromanaging to local governments.The planning style has also changed. The role of ‘‘think tanks’’

is rising to a higher status. Essential government organs have their

Economic Reform 159

own group of advisors, some of which are government funded,while others are independent private firms. These think tankscover a wide range of specialty areas, from economic, political,and military issues to social disturbance handling. Key govern-ment policy research centers include the Central Party School(CPS), State Council Development Research Center (DRC), andMinisterial Policy Institutes. These institutions provide consulta-tions with respect to ideological matters. CPS, for example, offersworkshops to CCP officials and conducts research on such issuesas how to define socialism with Chinese characteristics.At a more practical level, the CAS and the China Academy of

Social Sciences (CASS) are government-funded think tanks,housing approximately 3,000 researchers each and both report-ing directly to the State Council. The China Center for Interna-tional Economic Exchange (CCIEE), established in 2009 andheaded by former China Deputy Premier Zeng Peiyan, craftspolicies related to global economic crises. The Shanghai WorldTrade Organization Affairs Consultation Center, founded in2000 and headed by former WTO negotiator Wang Xingkui,provides consultations with WTO-related matters. National-level universities and large SOE and POE firms also serve asthink tanks to government agencies. Some scholars expect thatthink tanks will proliferate and gain influence as China’s policy-making becomes more sophisticated.42

China’s economic reform has been a chain reaction whereinthe application of market mechanism has resulted in abundantproductivity in every economic corner. The interdependence ofsectors has contributed to easing the rough competition at thebeginning stage and has constantly pushed the Chinese economytoward a more balanced development. In the process, S&T hascome to the foreground amid challenges of in-depth economicdevelopment. On the ideological front, democratization is nolonger a political mercy, but a growing part of the infrastructureto the modern Chinese society. One may say with confidencethat the economic reform has brought about the most profoundchange ever in China’s history.


Chapter 6

The China Modeland Sustainability

That things do not have meaning in and of themselves butrather acquire meaning from the system they are in is an enlight-ening view of the 19th-century Swiss linguist Ferdinand DeSaussure.1 Thus, on the chessboard of 64 squares, the value ofthe knight is defined by the other pieces on the board, ratherthan by the material of which it is made. Moreover, chess playersknow well that, as the game progresses, the value of the remain-ing pieces change; the final checkmate may be the glory of ahumble pawn. Putting a Go (a game played with black and whitestones on a 19x19 line board) stone on a chessboard makes nosense, at least, not unless the rules of the game change. Thestructuralist concept reminds us of two things—in making judg-ment one must consider the context; and, systemic integration isessential to the function of an element. With this in mind, themarket economy with Chinese characteristics is a legitimateconcept.Assessing China’s economic sustainability involves identifying

China’s economic model first. The ‘‘China Model’’ has been amuch debated issue. Overall, three schools of opinions haveattracted more attention. They are (1) Washington Consensus,2

(2) Beijing Consensus,3 and (3) views of the CPS. These viewsare briefly introduced as follows.

THE CHINA MODEL IN LIGHT OF THE WASHINGTON CONSENSUS

John Williamson coined the term in 1989 in a paperdescribing a set of 10 economic policies considered by many inthe West as principles of the free-market economy. These poli-cies have been bundled with reform packages for developingeconomies and serve as criteria for policy evaluations by Westerngovernments and financial organizations. The 10 principlesinclude fiscal deficits, public expenditure priorities, tax reform,interest rates, exchange rates, trade policy, FDI (foreign directinvestment), privatization, deregulation, and property rights.Williamson indicates that Washington does not always practicewhat it preaches, and practicing what it preaches does not guar-antee prevention of corruption and fraud. Thus, the recom-mended policies would be best taken as a ‘‘moral admonitionto purity.’’Williamson’s fiscal policy stresses adoption of a fiscal disci-

pline that maintains a balanced budget. Williamson recom-mends that in the areas of subsidies, education, health, andpublic investment, government expenditures must bring peoplereal benefits, especially to the poor and disadvantaged. Misallo-cation of expenditures in these areas results in waste and corrup-tion, and thus must be avoided. In tax policies, Williamsonrecommends a broad tax base with a moderate tax margin. Withrespect to interest rate and exchange rate policies, Williamsonsupports the market orientation—that is, although adjustmentsare done to control capital flight and promote growth in trade,the rates should be fundamentally competitive. The principle ofmarket orientation underpins Williamson’s outward-orientedtrade policies in which he advocates liberalized import policiesrather than resorting to protectionism to offset export weakness.Thus, import and export must be a way of economic developmentand a solution to imbalance. Therefore, opening up the domesticmarket to foreign goods and services is recommended, because itbrings in the needed capital, technology, and goods, which eventu-ally promotes export. In the Washington model, for these ideals of


open competition to function, a thoroughly privatized systemis a prerequisite. Without private ownership, accountability andeffective management are hardly achievable. Moreover, deregula-tion is key to free competition. Above all, Williamson stressesthe power of personal property rights that are well entrenched inthe West and to which he attributes a ‘‘fundamental importancefor the satisfactory operation of the capitalist system.’’4 In sum-mary, the Washington Consensus depicts an ideal capitalist sys-tem whereby free-market competition and guaranteed personalrights to property motivate efficiency and responsibility and liftthe overall well-being as a result.In the West, the Washingtonian principles are worshipped as

they are ‘‘generally judged to have been successful within theUnited States, and it is generally assumed that it could bringsimilar benefits to other countries.’’5 Hence, the InternationalMonetary Fund (IMF) and the World Bank stick to these princi-ples as conditional to lending. Scholars who stick to Washingtonianprinciples tend to be doubtful about the sustainability of theChinese economy. For them, the Chinese are struggling with‘‘the economic impossibility of the halfway house.’’6

Notwithstanding, Williamson is quick to point out thatWashington does not typically score well in some aspects, suchas budget discipline and balanced budget. The subprime mort-gage crisis in 2008 revealed some of the drawbacks of an exces-sive deregulation. To the Chinese, a lesson learned is that thepro-regulation socialist market economy does have an advant-age. This view is backed by the fact that, due to lack of regula-tion, the U.S. national debt climbed up to $11 trillion by theend of 2008, or more than 70 percent of the U.S. GDP after abrief budget surplus in 1998. Out of this debt, China owns$681.9 billion or more than 20 percent of the foreign-ownedportion of $3 trillion.7 The lack of oversight resulted in WallStreet scandals, such as Bernie Madoff’s Ponzi scheme, and RobertAllen Standford’s investment scam,8 and the disastrous mortgage-lending irregularities. Moreover, Chinese media generally approveof the opinion that the 1997 Asian Financial Crisis and the

The China Model and Sustainability 163

2008–2009 global financial crisis have not only dampenedChina’s enthusiasm in modeling the West, but also, and moreimportant, rallied confidence in China’s own system. One articlepoints out that the Chinese have learned that there is actually anadvantage in the state-controlled currency valuation system,which has been profusely criticized by the West. In both crises,China demonstrated strengths in preventing encroachment of theworld financial crisis thanks to its currency valuation control. Forexample, one opinion holds that Western economic Darwinismpays little attention to the well-being of other countries; hence,given that the ‘‘American model is vanishing; China must learnto take care of itself.’’9

Hutton’s ‘‘Halfway House’’

The Washington Consensus constitutes a powerful theoreticalbase for those who believe that China’s economic developmentis unsustainable, because what China does is far apart from theWashingtonian ideals. An influential critic of China’s economicand political policies and a strong defender of the WashingtonConsensus, Will Hutton offers his view on China’s dilemma inhis book The Writing on the Wall—Why We Must Embrace Chinaas a Partner or Face It as an Enemy.Hutton’s skepticism is first derived from his perception of

China’s structural differences from the Washingtonian logic. Inhis view, ‘‘communism is a doctrine of revolution, class war, andauthoritarianism’’ that is not in line with the fundamental valuesof the market economy. If a market mechanism is adopted inChina, it is only of a makeshift nature. He predicts that eco-nomic contradictions, structural defects, and sheer economicwaste will lead to worsening decline in China’s economic andpolitical structures. Hutton has little confidence in the currentsystem that relies on ‘‘sage-emperor’’ President Hu Jintao andhis party-state to save the country from corruption and tostraighten out inequalities for the grassroots folks. He arguesthat the current system only works as long as the economyworks. However, economic troubles are doomed to happen


because of the ‘‘halfway house’’ nature of the economy in whichthe market mechanism is overshadowed by state control, andthis control is only for a matter of time.10

Nevertheless, the Chinese economy has grown to become thethird largest in the world, and the boom is unparalleled. So, ‘‘ifit’s so bad, how come it’s so good?’’11 Hutton’s explanation isthat the growth was generated primarily by assembly industries.Cheap labor and the Open-Door Policy led to gigantic growthin exports channeled by Hong Kong and its subcontractors inTaiwan who have the first-world infrastructure. On the otherhand, state-controlled banks drove capital accumulation in thecities, and rural China provided the much needed cheap laborfrom migration. Hutton’s view is that, short of self-sustainingentrepreneurial maturity, a sharp deceleration lies ahead. Hebelieves that reform, liberalization, and modernization are virtu-ally puppets under the control of the grand puppeteer—theparty-state—just as China’s banking system bids according tocommunist hierarchies with the SOEs enjoying the priority.Moreover, a spider web–like control system stifles competition,constantly putting a chokehold around the neck of the privatesector, while one-third of the SOE workforce sits idle.12

Despite Deng Xiaoping’s reformism and Jiang Zemin’s popu-lism, Hutton believes that China’s ideological system lacks aninfrastructure that propels genuine economic progress andappreciation for capitalist moral facets. More specifically, Chinais not a society based on such elements as liberty, pluralism, di-versity, equality, transparency, justification, free press, rule oflaw, and so on. Hutton refers to these as enlightenment legacyand attributes America’s economic success to these spiritualvalues.Therefore, the China Model is not really a valid economic

structure in Hutton’s eyes. The system lacks elegance comparedwith that of the Washington Consensus. China has grown tre-mendously in the post-Mao era; however, this growth would be ashort-lived coincidence rather than a prolonged elation, becausethere is no logic in it. Sound market capitalism involves the fuller


participation of a knowledge economy, a rigorous institutionalstructure, a welfare system, and property rights; but these ele-ments contradict China’s one-party communist rule. Huttonstates,

My argument is that China is caught in a dilemma. It is beset by moun-tainous contradictions and which sooner or later will fail, because of abanking crisis or simply a crisis of overinvestment and excess supply, orsome combination of both. The consequent social reaction will provoke apolitical crisis, with the risk that the party will resort to nationalism, andperhaps a military adventure in Taiwan, to keep the genie of protest bot-tled up.13

Hutton describes communism and nationalism as an ‘‘uneasy co-alition’’14 that may propel China to behave according to its ownterms, thus, jeopardizing the interests of the United States. Thus,while the United States should use leverage to promote capital-ism and democracy in China, it had better be prepared for anunhappy ending.The dichotomist view of either Washingtonian ideals or an

impasse is manifested with a lesser degree of pessimism in atleast two other voices, those of Callick and Shambaugh.

Callick’s ‘‘Controlled Freedom’’

Rowan Callick, a Beijing-based China correspondent for TheAustralian newspaper, does not understand why many Asian,Latin American, and African countries are admiring to the pointof emulating the China Model, which he suspects will not besustainable. Callick describes China’s economic model asfollows:

On the one hand, China copies successful elements of liberal economicpolicy by opening up much of the economy to foreign and domesticinvestment, allowing labor flexibility, keeping the tax and regulatory bur-den low, and creating a first-class infrastructure through a combination ofprivate sector and state spending. The second part is to permit the rulingparty to retain a firm grip on government, the courts, the army, the


internal security apparatus, and the free flow of information. A shorthandway to describe the model is: economic freedom plus political repression.15

Callick’s view is similar to Hutton’s in several aspects. Callickcategorizes the Chinese regime as a variation of the classicaltotalitarian communism. The difference lies in its implementa-tion of free-market economics. There is no doubt, as Callickputs it, that the mix has worked in getting its citizens richer. Infact, people are encouraged to do everything possibly imaginableto lift their standard of living. The government puts a firmhand, however, on critical economic sectors such as utilities,transportation, telecommunications, finance, and media.PBOC, for example, implements the government’s policies onexchange rates, keeps the rates in line with its political agenda,and deploys a foreign reserve of $1.3 trillion ($2.2 trillion in2009). The government uses a large pool of cheap labor fromrural areas and from restructured SOEs to control inflation.Moreover, in the international front, China has found that itsdomestic economic growth has produced a favorable spillovereffect—the Chinese market has provided space for neighboringcountries to grow, and in the process, to become enmeshed inthe China-centered economic network.Callick quotes Kevin Hassett, director of economic policy

studies at the American Enterprise Institute:

Being unfree may be an economic advantage. Dictatorships are not ham-strung by the preference of voters for, say, a pervasive welfare state. So thefuture may look something like the 20th century in the reverse. The unfreenations will grow so quickly that they will overwhelm free nations withtheir economic might.16

Callick admits that although transparent governance, independentcourts, enforceable property rights, and free information are notpresent in the Chinese system, the absence of these pillars of theWestern democracy has not triggered crisis. China, however, doeshave a convertible currency, a one-country-two-system structure, amuch better living standard than in the past, and in fact, a more


tolerant political environment. China has an impressive adaptabil-ity that is substantiated in part by the Open-Door Policy of theCommunist Party that is now willing to enroll entrepreneurs.Callick notes that the party’s policy has attracted, for example,

many overseas scholars; some are U.S. Ivy League trained. Notall returnees are ready to apply Western-style democracy, how-ever. An example Callick believes to be striking is the story ofLi Qun. After studying in the United States, and serving asan assistant to the mayor in New Haven, Connecticut, Libecame mayor of Linyi City of Shandong Province. Once inpower, Li reversed his position to guarding the Chinese systemas his peers had.Despite the economic boom, as Callick points out, China is

unfree for a number of reasons. Chinese citizens cannot form apolitical party; they cannot choose their leaders; phone calls andtext messages are screened; many Web sites are blocked or fil-tered; media are owned by the government; films and books arereviewed by agencies and sometimes by retired revolutionarycadres; sex and politics are sensitive topics; people do not trustthe courts; ordinary people have to report when a friend orfamily member comes to stay with them; files are kept on allcitizens, who cannot review their records; church schools are notpermitted; the only two legal churches that the Chinese can joinare the Catholic and the Three Selfs (Protestant) organizations;and the leaders of churches are ultimately responsible to theparty. Callick questions, ‘‘This is the China Model: half liberaland international, half authoritarian and insular. Can it last?’’17

Callick approves of Will Hutton’s opinion that China mustaccede to Enlightenment values or it will fall back again; andthat the party-state control, if it continues to build, will sooneror later accumulate enough contradictions to force itself out ofcontrol. ‘‘The clock is ticking,’’ Callick quotes Hutton’s words.18

However, he seems to be more cautious in recognizing the riskin attempting to offer a judgment call. Gordan Chang, Callicknoted, in his book The Coming Collapse of China (2001), gaveBeijing five years to correct mistakes. Instead of a doomed state,


what Chang witnessed was a China chugging along, becomingmore prosperous year by year. Moreover, leaders from the devel-oping world gathered in Beijing to learn about the ChinaModel. In 2007, 41 state heads of Africa arrived in Beijing, withAsian and Latin American leaders implementing the ChinaModel at home. Callick’s opinion is that, in the long run, Chinawill show its real face as that of a dictator. He quotes Kurlant-zick, the author of Charm Offensive: How China’s Soft Power IsTransforming the World: ‘‘As China becomes more powerful,other nations will begin to see beyond its benign face to a morecomplicated reality. They will realize that despite China’s prom-ises of non-interference, when it comes to core interests,China—like any great power—will think of itself first.’’19

In summary, Hutton’s and Callick’s views both portray theChina Model as a planning economy with the implementationof a free-market mechanism under strict control. Such a mix ismore likely to result in economic chaos sooner or later than in asustainable economy.

SHAMBAUGH’S ‘‘HYBRID MODEL OFQUASI-STATE CAPITALISM AND SEMI-DEMOCRATICAUTHORITARIANISM—SOMETIMES DUBBED THE

‘BEIJING CONSENSUS’ ’’

David Shambaugh, professor and director of the China PolicyProgram at George Washington University in Washington, D.C.,nonresident senior fellow at the Brookings Institution, and cur-rently a visiting scholar at the CASS in Beijing, defines the ChinaModel not as traditional authoritarianism, not as democracy, and notas capitalism, but rather as something in between—that is a ‘‘hybrid.’’The following observations are behind Shambaugh’s definition:

Instead of being a totalitarian party dominated by a single leader, the CCPtoday is an authoritarian party with a collective leadership. The leadersthemselves—at least those I have witnessed—are now remarkably self-assured and relatively sophisticated. Marxist-Leninist ideology plays little,if any, role in their decision-making. The policy process is more consul-tative, although still lacking in transparency. Much emphasis is put on


governance and officials at all levels undergo required training in publicadministration.20

Shambaugh remarks that the CCP is remarkably open inlearning from different countries and political systems. On theother hand, this regime was capable of quelling the TiananmenEvent in 1989. ‘‘As a result,’’ Shambaugh writes, ‘‘it is becominga hybrid party with elements of East Asian neo-authoritarianism,Latin American corporatism and European social democracy allgrafted to Confucianist-Leninist roots.’’21

The China Model certainly does work. Shambaugh is impressedwith China’s economic achievement, which includes advance-ments in biotechnology and electronics; provision of most of theworld’s cell phones, photocopiers, and DVDs; and 75 percent ofthe world’s toys. Additionally, China consumes 16 percent of theworld’s energy, 37 Chinese multinational firms figure in the For-tune 500 list, and 450 firms on that list are doing business inChina. Shambaugh points out that it is a fact, although less visible,that ‘‘China is the first major economy to recover from the globalrecession and, indeed, is leading the world out of it.’’22

Will the CCP’s ability to adapt and the nation’s continuingeconomic growth be enough to sustain the party in power indef-initely? Shambaugh’s answer is ‘‘perhaps.’’23 He has reservationsabout whether the CCP will continue to be adaptable and whetherpeople’s lives will continue to improve. Unlike some critics inthe West who are troubled by China’s hybridism, and clearlyreluctant to approve, Shambaugh’s attitude is one of an observer.He believes that because the country’s strengths have been testedduring the past 60 years, have survived all sorts of isolations andconflicts, and have allowed China to emerge stronger every time,the China Model should be given the benefit of the doubt.‘‘One thing is certain,’’ Shambaugh writes, ‘‘China will remain acountry of complexity and contradictions—which will keepChina watchers and Chinese alike guessing about its futureindefinitely.’’24


The ‘‘Beijing Consensus’’

If China’s sustainability has defied Washingtonian predictionstime and again, then, might it be that it is valid? Counteringthe Washington Consensus and its derivative theories is theBeijing Consensus coined by Joshua Cooper Ramo,25 who speaksMandarin Chinese and works as a managing director and partnerat the Beijing office of Kissinger Associates. Ramo believes that, ifpredictions fail, it will be because predictors wear tainted glasses.His theory interprets China’s economic phenomena as part of adynamic process, the essence of which would be best describedby Deng Xiaoping’s concept of crossing the river by groping thestones under the feet. Rather than a jumbled mess or a doomedfailure that Hutton perceives, Ramo sees a rapid transition andadaptations that are creative, asymmetrical, pragmatic, and ideo-logically adventurous. The whole process appears to be too fastto follow not only by foreigners but by domestic thinkers aswell. Although not everything is working and there is a pile ofcontradictions, as Ramo indicates, the Chinese definitely areturning every rock and following every path to find the right so-lution. Jiang Zeming, in his farewell to the 16th Party Congressin the fall of 2002, used the word ‘‘new’’ 90 times in a 90-minute speech.26 The Chinese are not making forced moves inresponse to outsiders’ pushes and pokes; they are enthusiasticallyfollowing internal dynamics. The Chinese are aware of the Washing-ton’s prescriptions for the world, but they simply feel more com-fortable cherry-picking according to what fits. To repeat theeconomic failures of Argentina and Indonesia would be na€�ve,and the Chinese are not willing to follow those experiences. Tounderstand China, it is best to abandon theories, because theo-ries shape the way we observe, as Ramo quotes Einstein’s words.What Ramo observes is that China’s changes must not be

measured simply with GDP figures, but with changes in qualityof life and the country’s role in the global balance of power.Thus, the prolonged rise of GDP in double-digit figures and thelow per capita GDP do not accurately reflect the essence of the


progress being made. The fact that 1.3 billion people are living a‘‘relatively comfortable life,’’ a goal set by Deng Xiaoping andachieved in 2003 featuring the annual national per capitaincome of $1,000, is the real scorecard.Ramo’s Beijing Consensus has three theorems: (1) focus on

innovation; (2) focus on sustainability and equality; and (3) focuson leveraging world hegemonic powers with relatively low-coststrategies. The first component, innovation, is most easily ob-served by outsiders.Ramo argues that the Chinese now rely on innovation and

technology to cure their growing pains. The Chinese have devel-oped a liking for a knowledge-led economy, because it has theadvantage of yielding abundant Total Factor Productivity (TFP)growth. TFP was identified by Nobel Prize winner Robert Solowin 1957 who defines the concept as ‘‘output growth not accountedfor by the growth in inputs.’’27 As such, the Chinese farmers havestepped to the frontline in adopting scientific farming; China’scomputing market is opting for the latest chips; and China’s tele-communication has skipped the copper-wire infrastructure to leapinto wireless. The Chinese are fast and determined in absorbingstate-of-the-art S&Tand in abandoning traditional clunkers.Innovation is reflected in the government’s leadership struc-

ture, as Ramo sees it. Leaders with revolutionary backgroundshave been replaced largely by those who have educational back-grounds. While only 20 percent of China’s provincial leadershad attended college in 1982, this number was 98 percent in2002. The number with postgraduate degrees grew from 12.9percent in 2001 to 29 percent in 2003; and two-thirds of theleaders under age 54 hold master’s or doctoral degrees.28 More-over, modern Chinese leaders are more adapted to Western-stylemanagement than ever. Li Rongrong, chairman of the powerfulState Asset Commission, once chastised managers with a JackWelch–like warning: ‘‘If you cannot be one of the top three inyour sector, be ready to be acquired by some other firm.’’29

Ramo believes, however, that the challenge to the system iswhether more equality could be guaranteed, because sustainability


and equality are intertwined. Chinese leaders are sober with thevarious dangers in growing GDP in double digits. However, it isthe widening gap of incomes and regional discrepancy that are ofcentral concern. With only three decades of reform, China hasbeen progressing in the direction of unequal distribution too fastand too soon, according to Ramo. ‘‘Balanced development’’ hassince become the economic moniker.Achievements in economic transition have made China a

model for developing countries. On the one hand, China hasfirmly adopted a trade-based strategy, which is reflected in itsexport orientation and FDI policy. Ramo describes this changeas: ‘‘Once practicing ‘Communism with Chinese characteristics,’China is now practicing globalization with Chinese characteris-tics.’’30 On the other hand, China maintains a tough stand insticking to self-determination based on its culture and marketdynamics rather than following Western prescriptions such asthe 10 principles of the Washington Consensus. Ramo is partic-ularly appreciative of the Chinese view that any foreign experi-ence must be localized before it can be useful. This principle wasfirst put forward during the post–Opium War era when Chineseintellectuals ventured into Western learning. An exemplaryimplementation was the Special Economic Zones (SEZ) set upin 1979 in coastal cities to experiment with Western manage-ment. The principle of controlling the national destiny provesto be an economically sound strategy, as Ramo sees: the controlof exchange rates, for example, was an important shield that pre-vented the Chinese economy from sinking into the quicksand ofthe 1997 Asian Financial Crisis. Hence, while broadly encourag-ing individualism and risk-taking, maintaining the collective spi-rit is an integral part of the Beijing Model. This is reflected inJiang Zemin’s ‘‘Three Represents’’: the party must represent thepeople, the advanced productive force, and the advanced cul-ture; and in Hu Jintao’s ‘‘Three Closeness’’: to be close to reality,people, and life. Ramo indicates, ‘‘Chinese development has acertain kind of prideful, internal energy that helps the nation’sconfidence.’’31


Self-determination is reflected in China’s diplomacy as well.Deng’s ‘‘peaceful rising’’ and Jiang Zemin and Hu Jintao’s ‘‘seek-ing friends and avoiding troubles’’ are diplomatic policies showinga consistent strategy of seizing the moment to develop the coun-try’s economy. And here lies the economic validity, as Ramo dis-covers, of China’s defense strategy: developing an asymmetricdefense system. Going asymmetric instead of mirroring the costlyweaponry production of the West, and targeting weak spots ofthe Western military systems by developing a set of asymmetricweaponry may likely be cost-effective. Such strategies may haveonly limited use in the actual warfare, but the concept is impor-tant. Ramo estimates that China’s hundreds of billions of dollarsin U.S. currency reserve could be used to do more harm than air-craft carriers that cost that much money to buy.How should the United States and other industrial nations

deal with China? Ramo argues that the ‘‘China threat’’ theory isoutdated and must be replaced by ‘‘China opportunity.’’ Thepostreform China is not the same as China of 150 years ago. AsRamo puts it, China has become the center of East Asia. Chinais seeking good neighborliness in the name of mutual trust, mu-tual benefit, equality, and cooperation. It has cultivated multilat-eral ties and endeavors to bring about free trade areas in Asia by2010. Working with China will open up a treasure trove ofopportunities. To contain or constrain China could only harmits ability to improve. An imploded Chinese economy will notbe in anyone’s interest. Ramo believes that a new frameworkshould be built beyond the ‘‘threat-opportunity binary paradigmand instead begin to build a more environmental approach toimprove relations.’’32

DEVELOPMENTAL PERSPECTIVE

Kishore Mahbubani, a former ambassador of Singapore to theUnited Nations, sees freedom growing in China where many inthe West fail to pick it up. Mahbubani writes,


The fundamental layer of human freedom is freedom from want. A humanbeing who cannot feed himself or his family cannot possibly be free. Famineis more damaging to human freedom than a politically closed society. Totell people who are struggling to stay alive that they are ‘‘free’’ because adistant despotic ruler has been removed will appear meaningless to them.In terms of their daily lives, ‘‘freedom’’ will come with liberation from thefight for survival. In this sense, the Chinese people have never enjoyedgreater human freedom.33

Mahbubani adds that along with freedom from want, Chinesecitizens also have acquired freedom of security and freedom ofchoosing one’s job, and the citizens of Beijing have never enjoyedas much personal security as they do now.34

Indeed, ample evidence supports this view that the Chineseenjoy an increasing freedom to choose their jobs. The 150 mil-lion annual migrants are but one example: the Chinese no lon-ger feel tied to the harsh working conditions of farm work. Theyare finding their way to a better life in cities. The freedom ofchoosing one’s occupation has been one of the most powerfulfactors that has raised productivity.Mahbubani points out that the freedom of travel is an impor-

tant right that the West tends to ignore. Before the reform, theChinese were tied to their birthplaces by the Hukou system.Even traveling for sightseeing was uncommon, due to financialmeans and residential restrictions. Reform has changed it all.Mahbubani relates an interesting story: In January 1979, DengXiaoping paid an official visit to the United States. He wasreceived by President Jimmy Carter, who told him that the Con-gress had passed the Jackson-Vanik Amendment in 1974, whichallowed normal trade relations only with countries that allowedfree emigration. Congress had passed this legislation in an effortto put pressure on the Soviet Union to allow free emigration ofJews. Deng listened impassively as President Carter made his pas-sionate case for the right of free emigration. When PresidentCarter finished, Deng asked him, ‘‘How many Chinese wouldyou like me to allow to emigrate to the U.S.? One million?Ten million? A hundred million? You can have as many


as you want.’’ President Carter did not push his point any fur-ther.35 NBS data show that in 2006, 10 million tourists traveledabroad spending $10 billion. By 2020, China is likely to becomethe country with the largest number of people traveling abroad,according to Xie Guozhong, senior economist of MorganStanley.36

Mahbubani points out that China lags behind in ideologicalfreedom and rule of law. Progress in these areas, as he indicates,typically takes a long time to achieve. Americans justifiably cantake pride in having the longest surviving democracy. The U.S.Declaration of Independence, written in 1776, spoke eloquentlyof the equal rights of ‘‘men.’’ Yet it took Americans almost a cen-tury after it declared independence to free those it had enslaved,and it took another century for the United States to recognizethat its black population should have the full set of civil rightspromised in the Constitution. He writes:

The Chinese people have never been freer. . . . They are much freer thanthey have ever been. Relative to their ancestors, they are the freest peopleChina has ever had. As they look ahead to their future, they are confidentand optimistic that things will improve. Can the West say the same?37

On the global stage, China actively extends its influence to sur-rounding countries of the Association of South East Asian Nations(ASEAN), which shows its openness and confidence. At theASEAN-China Summit in November 2001, Chinese Premier ZhuRongji stunned the ASEAN leaders by offering a free trade agree-ment (FTA). To demonstrate concretely that its offer was serious,China even presented unilateral concessions to the ASEAN coun-tries, such as duty-free access to the Chinese market on 600 agri-cultural products, including meat, fish, dairy products, live trees,vegetables, fruits, and nuts. A year after the proposal, the finalFTA was signed by the Chinese and ASEAN leaders at the 8thASEAN Summit in Phnom Penh, Cambodia. The documentdeclares an FTA with Brunei, Indonesia, Malaysia, the Philippines,Singapore, Thailand, Vietnam, Laos, Cambodia, and Myanmar


by 2015. China also accorded the three non-WTO ASEAN mem-bers, Vietnam, Laos, and Cambodia, most-favored-nation status.According to Mahbubani, the China-ASEAN FTA, when fullyimplemented, will constitute a common market of 1.7 billion peo-ple, with a combined GDP of $1.5 to $2 trillion.38

In Mahbubani’s view, China’s maneuver has a further goal tosecure its borders, so that it builds a safe neighborhood that willbe necessary for a prolonged domestic economic growth. This issimilar to the U.S. decision to offer Mexico trade access throughthe North American Free Trade Agreement (NAFTA), accordingto Mahbubani, in that both are driven by a cold calculation. Inthe case of the United States, Mexico possibly could send moreillegal immigrants across the border if America did notstrengthen the Mexican economy, even if it involved outsourcingjobs to Mexico. In the case of China, helping to preserve politi-cal and economic stability at its borders by strengthening theASEAN economies is a far-reaching strategic plan. Mahbubanibelieves that China is acutely aware that its steady rise could oneday wake up the United States, causing it to attempt contain-ment by forming an alliance with ASEAN countries to encircleChina. Hence, China has implemented a preemptive strategyagainst any possible U.S. encirclement.‘‘China’s soft power in Southeast Asia is now so potent,’’

Mahbubani states, ‘‘that for the first time since 1945, . . . thatASEAN countries would not be disposed to help U.S. containChina.’’39

Mahbubani believes that the United States remains on highalert when dealing with China, instead of trusting China as aregular trade partner. In 2003, the state-owned Chinese oil com-pany, China National Offshore Oil Corporation (CNOOC),tried to purchase Union Oil Company of California (UNOCAL),in competition with a U.S. oil company, Chevron. Under U.S.-drafted rules on investment, this should have been seen asa purely commercial transaction, which the United States inparticular should have welcomed because it championed theright of major U.S. oil companies to purchase oil companies


all around the world. Instead, in a dramatic reversal, the U.S.government intervened to block the sale of UNOCAL toCNOOC. This left a deep impression on Chinese leadership.40

CHINA MODEL VIEWED BY THE CENTRAL PARTY SCHOOL

Probably no one puts more emphasis on studying the ChinaModel than the CCP. On the one hand, as the leading politicalparty the CCP is under pressure to elucidate the neo-communistcause and the party’s role with respect to the market economy.Conversely, there is an increasing domestic demand to examineChina’s admirable modernization progress during the past threedecades. Additionally, China’s success in weathering two finan-cial storms while leading Western economies sank into recessionhas convinced many that China’s experience must be studied. Tofacilitate research and exchange of views, the People’s Daily hostsa dedicated Web forum at http://theory.people. com.cn with anarchive of related articles, with most of the opinions comingfrom the CPS.The 17th CCP Congress held in October 2007 characterizes

the China Model as ‘‘three one’s’’ (san ge yi), or ‘‘one banner,’’‘‘one road,’’ and ‘‘one system.’’ ‘‘One banner’’ refers to the ideo-logical principle of ‘‘upholding the banner of socialism with Chi-nese characteristics.’’ ‘‘One road’’ refers to ‘‘the socialist road withChinese characteristics;’’ and ‘‘one system’’ refers to ‘‘the Commu-nist ideological system with Chinese characteristics.’’41 YuKeping, deputy chief of the CCP Bureau of Translation, explainsthat the China Model clearly differentiates from the RussianModel and Western models with respect to ownership, politicalsystem, and ideology. China adopts a mixed-ownership system.While private ownership is expanding, the government owns nat-ural resources, such as forests, rivers, and mines. The governmenttypically exercises more influence over the economy thanWesternsystems. With respect to the political system, China doesnot implement multiparty parliamentary democracy; and itdoes not practice ‘‘responsible government’’ in the form of the


nominal division of state power. Ideologically, China adoptsMarxism as guiding principles, but it remains accessible to otherideological systems in the meantime.The 17th CCP Congress associates the ideological framework

of ‘‘three ones’’ with a guiding principle for the practice named‘‘four determinations.’’ China is determined to (1) engage in ide-ological liberalization, (2) reform and open up, (3) promoteS&T and develop a harmonious society, and (4) improve peo-ple’s material well-being by building in a comprehensive mannera ‘‘relatively comfortable life’’ (xiao kang).42

This theoretical framework is coherent, according to YuKeping, in that the system allows the government to exercise astrong influence on social stability, distribute resources, and curbextreme polarization. All this is much needed at the start of anew market economy. Additionally, all of this is managed basedon the ‘‘country’s special reality’’ (juti guoqing). As such, accord-ing to Yu, the system has led to China’s booming economy,increased its international influence, and thus, contributedgreatly to world peace.Professor Yang Yao of Peking University amended Yu’s

description of the China Model by adding that the Chinese gov-ernment has been a ‘‘neutral government’’ in reality.43 When itcomes to assessing the role of the Chinese government, probablymost people would be reluctant to describe it as a governmentof ‘‘neutrality.’’ Professor Yang Yao believes, however, that neutralgovernment is a key feature to the China Model. ‘‘Neutrality’’means that the government puts national interests above all, with-out favoring any particular section of the society and without bend-ing to short-term interests of social groups. The first evidence,according to Professor Yang, is the government’s flexibility or prag-matism. In the early 1980s, had China continued to entangle itselfin ideological debates on picking which way to go, capitalism orsocialism, the economic reform never would have taken off. DengXiaoping avoided such classical and nonsensical debates by callingon the CCP to simply focus on the economy, thus rallying people


of all backgrounds to support one practical target—achieving the‘‘relative comfort.’’The second evidence is the temporary dual-pricing system in-

stalled in 1984 to facilitate urban reform. It allowed SOEs tofirst satisfy the state quota by selling products to the state atstate-fixed prices, and then, to sell beyond-quota products onthe market at market prices. At the beginning of the economicreform when the planning economy was still on many people’smind, this makeshift policy was an inspiring deviation. This pol-icy eventually led to the booming village and township indus-tries in the 1990s. The third evidence is the in-depth SOEreform. Had the government failed to maintain neutrality, itwould not have given up its privilege in the old centralized sys-tem and forced the SOE buddies to reform or die. And, ‘‘reformor die’’ was what the government handed to SOEs.In the early 1980s, SOE employees as well as many cadres

were scared of reform, fearing the consequences of disturbed jobsecurity. The Chinese government allowed unproductive compa-nies to restructure, including going bankrupt. Tens of thousandsof people lost jobs as a result. However, according to ProfessorYang’s research, restructured companies eventually hired moreemployees than those that refused to restructure. He explainsthat the new companies were more productive and competitive,and thus they needed more workers.The gradual economic reform has deeply transformed the tra-

ditional planning economy. Many experts believe that it is thegradual but steady pace that has guaranteed continuity. Accord-ing to The Guangming Daily, market mechanisms currently con-trol 95.6 percent of retail sales, 91.9 percent of allocation ofproduction resources, and 97.7 percent of government purchaseof agricultural and related products, such that China has turnedinto ‘‘a new world market where market competition reaches thehighest intensity.’’44

A December 2008 survey conducted by the official govern-ment newspaper The People’s Daily and its affiliate People’sTribune asked 5,162 participants the question, ‘‘How do you


understand the China Model?’’45 The survey listed 12 descrip-tors for participants to rank with respect to their representationof the nature of the China Model. These descriptors are as fol-lows: creative, experimental, tolerant, gradual, reform-focused,fair and just, efficient, stable, growth-focused, self-reliant, open,and common-sharing. Participants picked ‘‘reform-focused,’’‘‘growth-focused,’’ ‘‘gradual,’’ ‘‘experimental,’’ ‘‘open,’’ and ‘‘sta-ble’’ as the most descriptive of the China Model, with ‘‘reform’’and ‘‘growth’’ taking the highest scores. Results showed that74.55 percent believed that, while the China Model is indeed avalid concept, the model is in transition and has manyimperfections.Some 63.7 percent of the participants perceive the China

Model as essentially referring to the Chinese-style market econ-omy characterized with government guidance, gradual reform,and openness to the outside world. Additionally, 56.28 percentbelieve that China’s economic achievement is primarily due to aprolonged period of social stability, gradual economic reforms,and the government’s pragmatic approach. Furthermore, 74.56percent of the participants believe that the current world finan-cial crisis will be a test to the China Model, and may further leadto its refinement. When asked ‘‘How should the China Modelimprove?’’ 81.34 percent listed the following as the first to beimproved: (1) reforming the social distribution system and nar-rowing the gap; (2) accelerating health care, education, andhousing reforms; (3) making the government more effective inareas such as public finance and public service; and (4) reducingthe current urban-rural divide and working toward urban-ruralintegration. Obviously, these priorities suggest that with theimprovement of material life people are becoming more awareof individuals’ rights. For the China Model to be an inspiringpath for other developing countries, as most participants in thesurvey wish, improving individual rights and social justice willbe critical.Despite the fact that ‘‘economic growth’’ is ranked second to

‘‘reform’’ as one of the most characteristic features of the China


Model, critics have pointed out that the fast economic growthduring the past three decades is actually seriously deficient inseveral aspects. Qiu Gengtian, a professor of the CPS, criticizesChina’s fast growth as irrational and unscientific, because it gen-erates high damage to the environment as well as to the well-being of people’s lives. As such, the economy is entangled in avicious cycle in which higher growth parallels higher costs.Eventually, these high costs will eat away much of the growth;and this is part of the reason why China’s economic boom hasbeen considered by environmentalists as ‘‘threatening.’’ Profes-sor Qiu writes:

Our economy is exemplary in both high investment and high side-effects.Overall, we have been following the traditional model left by the IndustrialRevolution, one of high investment, high production, and high pollution.Hence, our high growth bears high costs. Meanwhile, due to the fact thatChina’s production ramped up at a stunning speed within a brief periodand for a rather narrow purpose, the human nature has suffered distortionand alienation. Behind the fast economic growth, there has been no short-age of damages to morality and to the ecological environment.46

Contrary to many Chinese theoreticians who embrace the na-tionalist view and who insist on China’s specificities, ProfessorQiu recognizes global commonality both in human rights andin economic principles. Professor Qiu argues that refusing tofollow the road that other nations are pursuing by invoking theexcuse that China has special conditions will mean in effect thatChina denies its citizens the civilization that other nations al-ready have achieved.47 Professor Qiu points out that if Chinawants a sustainable economic growth, it must urgently reducecosts and implement the principle of balanced growth. At anyrate, high costs must not have a place in the China Model, inProfessor Qiu’s view.Hu Angang, a professor at Tsinghua University, believes that

the GDP accounting method must not only record growth interms of wealth increase, but also reflect damage caused by


economic activities. Thus, growth minus damage equals the‘‘Green GDP.’’ Professor Hu believes that the real GDP growthis accounted for by the Green GDP, not by the ‘‘Black GDP’’(‘‘black’’ for carbon emission). Professor Hu writes,

We believe that the Green Development is China’s way to stronger econ-omy. China must stick to green development, producing green products,making green contributions, and bringing about a green peace. Therefore,the green way is China’s way of peaceful rising.48

In an interview with Phoenix TV, Professor Hu recommendsthat by 2050 China reduce its CO2 emission by half from its1990 level. China’s current CO2 emission levels account for 17to 18 percent of the world’s total. If not well managed, this fig-ure could climb to 27 percent by 2030. Professor Hu states thatif China is not committed to reducing CO2 emissions, theworld’s efforts will fail, which may turn China into a ‘‘publicenemy of the world.’’49 On the other hand, if China activelyreduces carbon emission, China not only will benefit from pro-ducing the green GDP, but also will become a leader in thefuture green economy. Professor Hu urges the following:

We must conduct a green Industrial Revolution in which China is not onlyfor a participant, but the initiator, the leader, and most important of all,China will become a new ground breaker. By constantly making greenconsumptions, creating green-technology, putting in place green develop-ment models, this, in itself, will be a big contribution of China to themankind.50

Those who have visited China on multiple occasions mayhave witnessed changes in people’s environmental awareness. Inlarge cities, recycling has been integrated into daily life, school-children routinely engage in cleaning up the community, theKyoto Protocol features in student debates, polluting and waste-ful behaviors are openly criticized by the media, and fewer chim-neys gush dark smoke. A green environment is on everyone’s


mind. Luo Qiang, a high-level manager of Golden ConcordNon-Ferrous Metals Holdings Limited, says that China mustreform its current industrial structure from simple value-addedprocessing to a knowledge-based and high-tech-based economy.In his opinion, if this does not happen in the next 10 years,China’s environment will be seriously damaged and its resourcesexhausted, and as a result, the economy will collapse. But he ishopeful of significant changes sooner rather than later.These interpretations of the China Model reflect the reality in

a certain way. Based on these opinions, the China Model couldbe defined as the union of the following components: (1) a gov-ernment that is reform-minded, pragmatic, and capable ofstrong interventions; (2) a stable and relatively tolerant socialenvironment that provides increasing latitude for business oppor-tunities; (3) a gradual economic reform that keeps problemswithin manageable limit; and (4) a strong focus on improvingpeople’s material well-being and reducing economic gaps.

PERSPECTIVES OF SUSTAINABILITY

Since the start of the 2008–2009 global economic crisis, theChinese economy has demonstrated a great resilience. WillChina’s economy survive the impact of the current global crisis?Economic data thus far point to a positive future. Plentifulhurdles lie ahead. Indeed, there have been a few bright spots:during the first half of 2009, the stock markets in Shanghai andShenzhen regained 75 percent and 95 percent, respectively.Investment in fixed assets increased by 33.5 percent. Housingspace sold went up by 31 percent, which led a moderate recoveryin the sale of furniture and automobiles. The Consumer Confi-dence Index shows improvement from the same months in2008. The GDP grew only by 7.1 percent, the lowest rate since1992. Because China is experiencing the peak of its employ-ment, a GDP growth below 8 percent results in unemploymentpressure and other adversary effects. Production continues to exceeddemand, putting pressure on economic growth. The rise in the


stock market therefore may reflect bubbles in the market. Somespeculate that the stimulus package may have been diverted tothe stock market. A similar situation exists in the housing mar-ket in which sales oddly rose even though incomes did notchange.51

In foreign trade, negative growth continues to accrue in dou-ble digits.52 Trade with Europe, Japan, and the United Stateswent down by 29.9 percent, 23.1 percent, and 16.6 percent,respectively. Trade protectionism has been constantly on the risein Western economies, causing great damages to Chinese goods.One example is iron ore; China relies on imports for more than50 percent of its need. Because 70 percent of the world’s ironmines are controlled by Western countries, China’s cost ofimport has risen to $95 per metric ton as of July 2009, com-pared with $60 per metric ton just four months earlier, loweringprofits for the iron industry. In the meantime, demand for ironhas been decreasing because of the world recession. The situa-tion is devastating for China’s iron industry, which has a criticalrole in China’s economic recovery.53

The preliminary year-end figures released on January 21,2010, indicate that the 2009 GDP grew by 8.7 percent over2008.54 While NBS chief Ma Jiantang expressed guarded opti-mism with the future of recovery, he pointed out a number ofconcerns, one of which is signs of inflation. The CPI numberturned positive in December, raising alert on rising prices.Another is caused by the continued overheating in the housingmarket, which is now understood as a side effect of the stimuluspackage. A third concern is income discrepancy maintaining itsupward trend. Urban income increased by 9.8 percent in 2009while rural income’s rate of increase was 8.5 percent. In 2005,urban income was 3.22 times as large as rural income; accordingto Mr. Ma, that figure rose to 3.31 in 2008. The solution heproposed is to raise migrant workers’ salaries and raise the pur-chasing prices of agricultural products; both measures, however,may have an inflationary effect. Looking forward, the NBS chiefexpects the economy to maintain a steady to relatively fast pace.


The advantage of the China Model is manifested in itscapacity to mobilize national resources, allocate resources, andimplement solutions that are beyond the capacity of the currentmarket system. It is a fact that the market mechanism works thebest in affluent regions, but less so in poor regions. For example,to effectively develop remote regions, the government has to stepin with incentive policies. Because of low income levels, the highdemand for socioeconomic improvement in poor regions wouldhardly attract significant attention from the market. Only gov-ernment efforts could leverage investments to needy provinces.The strong intervention of the government has played an im-

portant role in trade recovery. In foreign trade, for example, thegovernment has renewed export tax refunds multiple times sinceJanuary 2009. In the reform of product mix, the Chinese gov-ernment has been channeling funding into both high-tech andlabor-intensive products, with an emphasis on products that arepatented with national brand names. To eliminate redundancy,the government has retired many outdated and polluting pro-duction facilities and has supported new strategic industries torise. In times of economic downturn, reducing the urban-ruralgap becomes a critical matter. Here, the Chinese governmenthas worked simultaneously on two fronts: (1) accelerating sup-port to rural regions by providing subsidies for agriculturalproducts, helping farmers find jobs in urban areas, providinghealth coverage to farmers, and integrating these measures withthe grand plan of stimulating domestic demand; and (2) reduc-ing corruption. The government achieves this through lawenforcement and through ideological campaigns hinting at pa-triotism and nationalism. Both measures have achieved results.The global recession has tested the legitimacy and popularity

of the government. Given its record of quelling the 1997 AsianFinancial Crisis, the government seems to enjoy more supportin the 21st century. Additionally, despite its many imperfections,no better economic structure comparable to the China Modelenjoys popular support, maintains an upper hand on financial


and social disturbance, and demonstrates an admirable capabil-ity of raising the living standard of 1.3 billion people. As timepasses, more developing countries find in the China Model ananswer to their sufferance from the failure of a Western financialsystem that had allowed greed to take its toll on the global econ-omy. ‘‘Enlightened self-interest,’’ coined by Adam Smith indescribing capitalism as the pursuit of profit with public benefitin mind, have lost much of its glare in China. Instead, supportis rising for more control. In the short term, the China Model,with its government intervention, social control, gradual eco-nomic reform, and social welfare programs, is likely the onlyway to sustain the Chinese economy through the globalrecession.Notwithstanding, signs of ‘‘turning inward’’ have raised con-

cerns among Western political analysts.55 While there is noapparent benefit for the Chinese government and the CCP toslow down economic reform and open-up, an adversary forceexists historically, such as hardliner nationalism that may takethe opportunity to seek expansion. However, such a trend hasalways lacked popular support.The sustainability of the China Model in the long run is

widely believed to be optimistic. In essence, its ability to succeedultimately will depend on whether China will continue with itseconomic and political reforms. More particularly, the key tosustainable growth lies in whether China could successfully con-vert its current industrial model from one of high productionand high waste to one of a knowledge-based, energy-efficient,and environment-friendly industry. Chinese industrialists have astrong commitment to making this change. The mining indus-try is a good example. Luo Qiang of Golden Concord is particu-larly concerned about the disadvantage that many Chinese metalfirms face. Foreign companies typically leave Chinese firms witha thin profit margin, simply because they possess the technology.In some cases, foreign firms transfer technologies that arebanned in their own countries, not being able to qualify for


environment standards there. As a result, foreign technologiesare not pollution free. One example Luo Qiang provided wasthe treatment of raw mining materials (iron ore, in this case).The ground mineral rocks are chemical-washed, and the processgenerates large quantities of waste debris that eventually istrucked away and dumped on farmlands, hillsides, and other‘‘empty’’ spaces; the chemical detergent then seeps into local sur-face water. He believes that China must stop making bad dealssuch as these; that China must have its own technology andhopefully a better one. On this issue of reforming China’s indus-trial model, the government and the people are united, anddetermination is strong. From this perspective of unity andunder the umbrella of the China Model, long-term sustainedgrowth is highly likely and the chance of economic collapse isunlikely.In addition to encouraging environmentally friendly indus-

tries, socioeconomic equality must be addressed. For example,ethnic tensions are high as suggested by the Xinjiang riot in July2009. China must urgently build a safety net of social securityand social welfare for its residents in rural areas and hinterlandprovinces. The legal system must be strengthened to better pro-tect individual rights. Property rights need to be furtherreformed such that farmers’ land will not be conveniently seizedby corrupt officials in their money-for-power swaps. Assumingthat progress in these areas is achievable, then, according toOECD researchers, China likely could surpasses the UnitedStates to become the biggest economy in the world in terms ofGDP by 2015, and could account for about one-quarter of theworld GDP by 2030.56

Projection of long-term economic sustainability is a broadlyencompassing effort. De Saussure’s structuralist view argues thatthe value of a component is endowed by the system. Judgmentbased on misunderstanding or lack of understanding of thebackground system leads to partiality. In assessing the sustain-ability of an economic model, one cannot afford to ignore his-tory, cultural traditions, and current development, because these


form the components of the system. Therefore, it is a risky mat-ter to apply the same standard to all systems. Thus, the opinionthat the China Model is unsustainable because it departs fromthe Washington Consensus is likely biased. It fails on thesegrounds at the least:

1. It fails to perceive that the modern Chinese economy is one of gradualtransition. As such, foreign learning may take a longer time to be an in-tegral part of the system. Here, localization is a prerequisite to appro-priate function.

2. Rooted in the Chinese tradition in which profit-seeking historicallydespised and social control the norm, the China Model may differ fromWashingtonian ideals at least in some aspects, such as the levels ofderegulation and private property ownership, and may differ for a longtime to come.

3. The Chinese system is no longer deadlocked in any ideological or eco-nomic structure. It is a dynamic process searching for optimum solu-tions. The fact that the CCP has opened up its membership toentrepreneurs proves that the communist movement is geared towarddiversity. In fact, it is a reality that the diversification of the CCP hasgenerated growing representation, despite traditional implications.Moreover, in-party diversity has the potential to give rise to politicalforces that eventually would lead to a democratic plurality, and whetherthe new political entities are named ‘‘Communist Party A’’ and ‘‘Com-munist Party B’’ is not important. It is not in the name. For one thing,the 21st-century CCP will not forego the market mechanism. It is thereto stay.

4. Ideological control exists and at times is shown in the traditional formsof brainwashing. However, China’s ideological control has taken up anew orientation—the control of extremism, including hard-line com-munism, radical nationalism, and separatism, all of which could derailthe economic progress.

On the global stage, understanding is prerequisite to makingsound decisions. Understanding may even save lives. Lao-zi (sixthcentury BCE), who founded Daoism, stressed the importance ofkeeping one’s mind open. He said, ‘‘Knowing others is wisdom;knowing the self is enlightenment.’’57 Learning from oneanother may be a better way to generate a sustainable model for


everybody, whereas a closed mind seldom helps. Yet, leaders inChina and the United States tend to adopt a defensive attitude.The following two examples support this view. The first

example is related to China’s attitude. In his speech given onJanuary 29, 2009, during the annual gathering of political andeconomic leaders in Davos, Switzerland, Premier Wen Jiabaoblamed the United States for an ‘‘excessive expansion of financialinstitutions in blind pursuit of profit,’’ a ‘‘failure of governmentsupervision of the financial sector,’’ and an ‘‘unsustainable modelof development, characterized by prolonged low savings andhigh consumption.’’58 For decades, while criticizing the U.S.model, China failed to encourage its own consumer spending,such that its underdeveloped domestic market suddenly turnedinto the center of concerns when exports collapsed in the globalrecession. As a result, the government is now using the stimuluspackage to ramp up social benefits and provide all kinds ofincentives to stimulate consumer spending.The second example deals with American attitude. Dwelling

on the triumph of market economy and overreliance on marketmechanism is a lesson that the United States has learned. Indefending the Federal Reserve’s lack of intervention, formerChairman Alan Greenspan sees human greed as uncontrollableexcept by the market mechanism itself. He would strongly dis-agree with the level of state intervention that China applies to itseconomy, as he sees little merit in raising regulation at all, buttakes the cycle of boom and bust as the deal of a great economy.Chairman Greenspan states during a CNBC interview,‘‘Nobody is going to pass a legislation to outlaw that (greed).Try it. I firmly believe in it (power of the free market), because Iknow of nothing in the evidence of alternatives. . . . It will notbe for quite a period of time, but it will occur (again), becausethe flaws in human nature are such that we can’t change them. Itdoesn’t work.’’59 The consequence is that because of regulatoryfailure, one of the worst recessions broke out and wiped outmuch of the gains earned in decades and had a worldwideimpact. The recession has led people in the United States to


reassess its economic model. Any responsible government has aduty to install effective measures of regulatory control to preventhuman flaws from taking their toll on the economy, as they didin the 2008–2009 recession.The world may have developed too fast and too soon for

many policymakers to catch up. It is unthinkable, for example,that within merely three decades China has turned from apoverty-stricken country into the third-biggest economy in theworld, and it is aggressively pursuing a green economy throughtechnology and innovation. China is transitioning further froman export country into an import country. It is unthinkable thatcommunist China and the United States are helping one anotheras they sail the waters of recession, and that China has becomethe biggest U.S. financial ally. Jim O’Neil, global head of researchat Goldman Sachs, had the following to say on China’s role inthe world economy: ‘‘The story of the global recovery here, thestory into the next decade, is the story of the emergence of theChinese consumer. It continues to astonish me how few peoplein the West realize that this is starting. This is a huge hugestory.’’60 Observations are often shaped by theories. What hashappened in China calls for a revision of the theories, for exam-ple, those of market economy and communism. New observa-tions may lead to effective policies and new opportunities; theold framework will produce more of the same.Even more unthinkable, however, is China’s unpredictability.

Even ‘‘insiders’’ of the CPS are constantly guessing. For the Chi-nese, the model belongs to the past; ‘‘the shoes must be made tofit the feet, rather than the feet be shaped to fit the shoes,’’ as anold Chinese saying goes. Deng Xiaoping phrased this in a formalway: ‘‘There are no fixed models, and there can’t be any. Stickingto a set path will only result in falling behind or even failure.’’61

The Chinese learned this truth after following Confucianism formore than 2,000 years, communism for more than 50 years,and capitalism for three decades. None of these models are freefrom costly deficiencies. What is to be done, then, is to set agoal, carefully work toward it, and not worry about the model.


The process of the economic transition has reflected this mental-ity all along. Letting the citizens live a better life and live withmore dignity will be the country’s priority in the years to come,as Premier Wen Jiabao expressed in his 2010 New Year’s wishes. Infact, a stable, peaceful prosperous, and versatile China benefits thewhole world. Yet, looking ahead, crossing the river of challengeswill not be an easy task. The waves are high; the world will bewatching China’s every step with the utmost interest.


Notes

CHAPTER 1

1. ‘‘National Economy: Steady and Fast Growth in 2008,’’ NationalBureau of Statistics, January 22, 2009, http://www.stats.gov.cn/english/newsandcomingevents/t20090122_402534173.htm (accessed September23, 2009).

2. David Dollar, ‘‘New PPPs Reveal China Has Had MorePoverty Reduction Than We Thought,’’ March 4, 2008, http://blogs.worldbank.org/eastasiapacific/new-ppps-reveal-china-has-had-more-poverty-reduction-than-we-thought (accessed October 17, 2009).

3. Hu Jintao, ‘‘Full Text of Hu Jintao’s Speech at 2005 FortuneGlobal Forum,’’ People’s Daily, May 16, 2005, http://english.people.com.cn/200505/17/eng20050517_185302.html (accessed June 7, 2009).

4. ‘‘Women Enjoy Good Employment Environment—The TertiarySector Sees Relatively Fast Growth,’’ Shandong Bureau of Statistics, June26, 2008, http://www.stats.gov.cn/ (accessed July 25, 2008).

5. The State Council, ‘‘Decision of CCP Central Committee andState Council on Ramping up Tertiary Industry,’’ Xinhua Net, June16, 1992, http://news.xinhuanet.com/ziliao/2005-02/17/content_2586400.htm (accessed June 3, 2009).

6. Allison Cui and Kheehong Song, ‘‘Understanding China’sMiddle Class,’’ China Business Review (January-February 2009): 39.

7. Ibid.

8. ‘‘Passenger Car and Motorcycle Fuel Consumption and Travel,’’U.S. Bureau of Transportation, http://www.bts.gov/publications/national_transportation_statistics/html/table_04_11.html (accessed July21, 2008).

9. Associated Press, ‘‘China Surpasses US in 2009 Auto Sales,’’NPR.org, January 8, 2010, http://www.npr.org/templates/story/story.php?storyId=122353603 (accessed January 19, 2010).10. Jonathan Unger, ‘‘China’s Conservative Middle Class,’’ in Global

Studies—China, ed. Suzanne Ogden, 12th edition (New York: McGraw-Hill Companies, 2008), 125.11. Ma Jiatang, ‘‘National Economy: Steady and Fast Growth in

2008,’’ National Bureau of Statistics, January 22, 2009, http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20090122_402534173.htm (accessed February 23, 2010).12. Ian Johnson and Loretta Chao. ‘‘Painful Lunar New Year for

China’s Migrant Workers,’’ January 23, 2009, http://online.wsj.com/article/SB123265353594507099.html (accessed January 28, 2009).13. Chen Xiwen, ‘‘Press Conference Regarding the Number 1

Document of 2009,’’ Bureaus of Finance and Economy andAgricultural Administration of the PRC, CCTV, February 2, 2009.14. Don Lee, ‘‘Migrant Factory Workers at a Loss as China’s

Economy Slumps,’’ Los Angeles Times, January 23, 2009, http://www.latimes.com/business/la-fi-chinamigrant23-2009jan23,0,3404505.story (accessed January 28, 2009).15. Louisa Lim and Renee Montagne, ‘‘China’s Economy Slows to

6.8 Percent Last Quarter,’’ Morning Edition, NPR, January 22, 2009,http://www.npr.org/templates/story/story.php?storyId=99721501 (accessedJanuary 24, 2009).16. Reuters, ‘‘China Approves Universal Healthcare Plan, 850

bln RMB Expenditure,’’ Thomson Financial News, January 21,2009, http://www.forbes.com/feeds/afx/2009/01/21/afx5948841.html(accessed February 1, 2010).17. Chen Xiwen, ‘‘Press Conference Regarding the Number 1

Document of 2009,’’ February 2, 2009.18. ‘‘U.S. Exports to China: 2000–2008,’’ U.S.-China Business

Council, March 25, 2009, http://www.uschina.org/public/exports/congressional/2000_2008/ (accessed June 7, 2009).

194 Notes

19. ‘‘U.S. Exports to China: 2000–2008,’’ U.S.-China BusinessCouncil, March 25, 2009, http://www.uschina.org/public/exports/congressional/2000_2008/2008_top_us_state_exporters_to_china(accessed June 7, 2009).20. John Ward, ‘‘Chinese Health Care Market Is Focus of U.S. Trade

Mission,’’ U.S. International Trade Administration, http://trade.gov/press/publications/newsletters/ita_0608/china_0608.asp (accessed July25, 2008).21. ‘‘Paulson Urges More China Talks,’’ CNN–Washington, DC,

October 21, 2008, http://cnnwire.blogs.cnn.com/2008/10/21/paulson-urges-more-china-talks/ (accessed October 22, 2008).22. Lu Hong, ‘‘Reporting Premier Wen Jiabao during the

International Trip,’’ People’s Daily, http://www.people.com.cn/GB/shizheng/1024/2289584.html (accessed June 7, 2009).23. China Daily, ‘‘New Poverty Line Raises Number of Poor,’’

China.org, December 23, 2008, http://www.china.org.cn/business/news/2008-12/23/content_16992948.htm (accessed June 7, 2009).24. Xiao Jingjian, ‘‘Consumption Patterns and Statistics of Living

Conditions,’’ in China Today—An Encyclopedia of Life in the People’sRepublic, ed. Jing Luo (Westport, CT: Greenwood Publishing,2005), 93.25. Xinhua News Agency, ‘‘Engel Coefficient Declining in Urban

Beijing,’’ China.org, April 13, 2007, http://www.china.org.cn/english/China/207089.htm (accessed April 7, 2009).26. Emily Chang, ‘‘Fast Food Reigns in China,’’ CNN–Beijing,

June 7, 2009, http://www.cnn.com/video/#/video/world/2009/06/05/chang.ctw.china.fast.food.cnn (accessed June 7, 2009).27. Ed Wing, ‘‘Engel Coefficient Not Efficient in Measuring

Chinese People’s Livelihood,’’ December 4, 2006, http://www.newsgd.com/culture/culturenews/200612040085.htm (accessed April 7, 2009).28. Gordon G. Liu, ‘‘Health Care Reform,’’ in China Today—An

Encyclopedia of Life in the People’s Republic, ed. Jing Luo (SantaBarbara, CA: Greenwood Publishing, 2005), 246–247.29. Zhou Tingyu, ‘‘City/Township Resident Health Insurance

System Likely to Be Broadly Implemented in 2009,’’ Xinhua Net,February 21, 2009, http://www.china.com.cn/policy/txt/2009-02/21/content_17313412.htm (accessed June 9, 2009).

Notes 195

30. James A. C. Sinclair, ‘‘China’s Healthcare Reform,’’ China BusinessReview Online (July-August 2009), http://www.chinabusinessreview.com/members/0907/sinclair.html (accessed February 1, 2010 [subscriptionrequired]).31. The State Council Information Office, ‘‘The State Council’s

Opinions on Deepening Healthcare System Reform,’’ China.org, April18, 2009, http://www.china.org.cn/government/scio-press-conferences/2009-04/09/content_17575378.htm (accessed August 9, 2009).32. ‘‘Implementation Plan for Immediate Priorities in Healthcare

System Reform,’’ The Ministry of Health, April 7, 2009, http://www.moh.gov.cn/publicfiles/business/htmlfiles/mohzcfgs/s7846/200904/39876.htm (accessed August 9, 2009).33. Qianlong News, ‘‘10 Hundred-Millionaire Party Members

Taking the Lead in Getting Rich,’’ Financeun.com, August 19, 2008,http://financing.financeun.com/news/2008819/1613009982_0.shtml(accessed June 10, 2009).34. Editorial, ‘‘CNNIC Declares Important Internet Network

Events of 2008,’’ CNNIC, April 22, 2009, http://www.cnnic.net.cn/html/Dir/2009/04/22/5578.htm (accessed May 7, 2009).35. Staff writer, ‘‘There Were 555 Million Internet Game Users,’’

People’s Daily, March 25, 2009, http://paper.people.com.cn/rmrb/html/2009-03/25/content_218745.htm (accessed May 7, 2009).36. Su Wanming, ‘‘Focus on Migrant Workers: From a Migrant

Labor to NPC Representative,’’ China Labor Market, September 5, 2006,http://www.lm.gov.cn/gb/employment/2006-09/05/content_131630.htm (accessed May 7, 2009).37. Nicolas Kristof, ‘‘The Educated Giant,’’ New York Times, May

28, 2007, http://select.nytimes.com/2007/05/28/opinion/28kristof.html?_r=1 (accessed May 4, 2009).38. Tang Hui, ‘‘Tang Ruiren and Her Mao’s Family Kitchen,’’

Xiangtan Evening, September 1, 2009, http://www.xtda.gov.cn/HTML/2009/9/2693.html (accessed December 28, 2009).39. Kishore Mahbubani, The New Asian Hemisphere: The Irresistible

Shift of Global Power to the East (New York: Public Affairs, 2008),56.40. Xiaoping Deng, Selected Works of Deng Xiaoping (Beijing:

People’s Publishing House, 1993), 3:321.41. Reference: CNN, ‘‘Chinese Premier Zhu Rongji: Differing on

Human Rights,’’ April 14, 1999 (accessed February 21, 2010).

196 Notes

42. Staff writer, ‘‘China Hails Three-Billion-Dollar Oil Deal withIraq,’’ Energy Daily: The Power of Earth and Beyond, August 28,2008, http://www.energy-daily.com/reports/China_hails_three-billion-dollar_oil_deal_with_Iraq_999.html (accessed August 28, 2008).43. Joshua Cooper Ramo, The Beijing Consensus (London: The

Foreign Policy Center, 2004), 53.44. Hu Jintao, ‘‘Why China Loves Globalization,’’ June 7, 2005, http://

www.theglobalist.com/StoryId.aspx?StoryId=4606 (accessed February 1,2010).

CHAPTER 2

1. Xinhua News Agency, ‘‘China’s GDP Grows 9 Percent in2008,’’ China.org, January 22, 2009, http://www.china.org.cn/business/news/2009-01/22/content_17169174.htm (accessed May 30, 2009).

2. Editorial, ‘‘China’s GDP Growth Rate Was 9 Percent in 2008,Annual CPI Went Up by 5.9 Percent,’’ People’s Daily, January 22,2009, http://finance.people.com.cn/GB/1037/8712210.html (accessedMay 16, 2009).

3. Financial News, Central China Television, June 20, 2009. Seealso ‘‘The Ministry of Environmental Protection Monitors Two IllegalDams on the Jinsha River,’’ China.com, June 19, 2009, http://www.china.com.cn/news/env/2009-06/19/content_17982785.htm (accessedJune 20, 2009).

4. Staff writer, ‘‘Focus: Economy—Economic Recovery in theWorks?’’ China Business Review Online (May-June 2009): http://www.chinabusinessreview.com/public/0905/economic-recovery.html (accessedMay 16, 2009).

5. Daily Business News, ‘‘Financial Storm Dampens EmploymentPerspective: Migrant Workers Return Home Earlier from ManyProvinces and Cities,’’ Yahoo!, November 14, 2008, http://biz.cn.yahoo.com/08-11-/137/s9z5.html (accessed May 16, 2009).

6. Ibid.7. Guo Xue for Xinhua News Agency, ‘‘Toy Tycoon Collapses;

Workers Seeking Back Pay; Dongguan County Government AdvancesPayment,’’ October 17, 2008, http://china.huanbohainews.com.cn/system/2008/10/19/010178224.shtml (accessed May 19, 2008).

8. Reuters, ‘‘China’s Rate Decisions Depend on Own Data—Zhou,’’December 18, 2008, http://www.reuters.com/article/naturalResources/idUSPEK21971720081218 (accessed June 20, 2009).

Notes 197

9. Michael Pettis, ‘‘China’s RMB Appreciation Is Going to SlowTemporarily,’’ July 26, 2008, http://www.rgemonitor.com/asia-monitor/253112/rmb_appreciation_is_going_to_slow_temporarily (accessed June20, 2009). See also Russell Hsiao, ‘‘China Wrestles Its Moment ofOpportunity,’’ Asia Times, October 29, 2008, http://www.atimes.com/atimes/China_Business/JJ29Cb01.html (accessed June 20, 2009).10. Chen Jihong, ‘‘A Survey on Problems of Migrant Workers

Who Returned Home Due to the Financial Storm,’’ Yingshan CountyEmployment Office, December 9, 2008, http://www.ysjyxx.cn/E_ReadNews.asp?NewsID=121 (accessed May 16, 2009).11. Pieter Bottelier, ‘‘China’s Economic Downturn: Employment

Is the Critical Issue,’’ China Brief 9, no. 3 (March 7, 2009), http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=34456&tx_ttnews%5BbackPid%5D=414&no_cache=1 (accessed May16, 2009).12. Geng Zhaojun and Guo Qibang, ‘‘A Report on Losses of Chinese

Companies during the Financial Crisis,’’ October 30, 2008, http://Money.163.com/08/1030/17/4PH4VK3B00251LJJ.html (accessed May25, 2009).13. Ibid.14. ‘‘Wen Jiabao’s Press Conference of This Morning to Chinese and

Foreign Journalists,’’ Eefoo Net, March 13, 2009, http://news.eefoo.com/cjxw/cjdd/200903/13-1268683.html (accessed May 17, 2009).15. Willy Lam, ‘‘Beijing’s Stimulus Plan: Preemptive Crisis

Management,’’ China Brief 8, no. 22, November 24, 2008, http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=34165&tx_ttnews percent5BbackPid%5D=168&no_cache=1 (accessedMay 19, 2009).16. ‘‘Major Foreign Holders of Treasury Securities,’’ U.S. Treasury,

http://www.treas.gov/tic/mfh.txt (accessed May 19, 2009).17. ‘‘Value-Added of the Industrial Enterprises above Designated

Size Expanded from January to April,’’ National Bureau of Statisticsof China, May 13, 2009, http://www.stats.gov.cn/english/newsandcomingevents/t20090513_402558516.htm (accessed May 18, 2009).18. ‘‘Economists Claim That China’s Economy Scale Will Surpass

Japan by End of Year: Part III,’’ People’s Daily, http://finance.people.com.cn/GB/70392/9312757.html (accessed May 18, 2009).

198 Notes

19. ‘‘Economists Claim That China’s Economy Scale Will SurpassJapan by End of Year: Part I,’’ People’s Daily, http://finance.people.com.cn/GB/1045/153585/9312743.html (accessed May 18, 2009).20. Zhang Yi, ‘‘Stimulus Plan Revives Domestic Market, Leading

to 6 Major Positive Changes,’’ Xinhua Net, May 18, 2009, http://finance.people.com.cn/GB/9320603.html (accessed May 18, 2009).21. ‘‘Economists Claim That China’s Economy Scale Will Surpass

Japan by End of Year: Part II,’’ People’s Daily, http://finance.people.com.cn/GB/70392/9312756.html (accessed May 18, 2009).22. ‘‘Economists Claim That China’s Economy Scale Will Surpass

Japan by End of Year: Part V,’’ People’s Daily, http://finance.people.com.cn/GB/70392/9312759.html (accessed May 18, 2009).23. David Barboza, ‘‘China Urges New Money Reserve to Replace

Dollar,’’ New York Times, March 23, 2009, http://www.nytimes.com/2009/03/24/world/asia/24china.html (accessed June 12, 2009).24. Xu Jieyun Cui Ye, ‘‘Experts Differ on Second Wave of Financial

Crisis: Third and Fourth Waves Are Possible,’’ Shanghai Academy ofSciences, http://www.sass.org.cn/newsarticleshow.jsp?dinji=52&sortid=1524&id=35018 (accessed May 17, 2009).25. Chen Jian, ‘‘Be Vigilant on Second Wave of Financial Storm,’’

Shanghai Committee of China National Democratic ConstructionAssociation, May 15, 2009, http://www.mjshsw.org.cn/new_look.asp?mingjian_id=4020 (accessed May 17, 2009).26. Financial News, China Central Television, June 22, 2009.27. ‘‘Focus: Economy—Economic Recovery in the Works?’’ China

Business Review (May-June 2009), http://www.chinabusinessreview.com/public/0905/economic-recovery.html (accessed May 19, 2009).28. Ibid.29. Ibid.30. Ibid.31. NBS, ‘‘Press Conference by Ma Jiantang, Commissioner of

National Bureau of Statistics, on the Economic Situation of 2009,’’January 21, 2010, http://stats.gov.cn/tjdt/gjtjjdt/t20100122_402615835.htm (accessed January 23, 2010).32. Associated Press, ‘‘Stocks Fall as China Clamps Down on Bank

Lending,’’ http://cbs3.com/business/stocks.market.dow.2.1434857.html(accessed January 23, 2010).

Notes 199

CHAPTER 3

1. Renee Montagne and Anthony Kuhn, ‘‘Will Beijing’s EffortsClear Air for Olympics?’’ Morning Edition, NPR, July 29, 2009,https://www.npr.org/templates/story/story.php?storyId=93018383(accessed on June 23, 2009).

2. Xinhua News, ‘‘Official: Air Quality for Olympics Beijing’sBest in a Decade,’’ August 29, 2008, http://2008.sina.com.cn/en/js/2008-08-19/15027635.html (accessed June 23, 2009).

3. Ibid.4. ‘‘Beijing Fulfills Commitment to Air Quality for Hosting

Olympics,’’ Beijing Daily, August 26, 2008, http://www.beijingdaily.com.cn/beijingnews/200808/t20080826_479235.htm (accessed June23, 2009).

5. ‘‘China Data: The Environment,’’ China Business Review(January-February 2008): 20–32.

6. Zhiming Zhao, ‘‘Environmental Protection, Policies and Practices,’’in China Today—An Encyclopedia of Life in the People’s Republic, ed.Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:155–158.

7. Ibid.8. Xia Mengqun, ‘‘Beijing Set to Collect Pollution Fees, State

Emission Standards to Be Followed,’’ Beijing Times, January 31,2009, http://auto.sina.com.cn/news/2009-01-31/0920453469.shtml(accessed June 14, 2009).

9. China Environmental News, ‘‘Provinces Adopt Tougher Measuresto Stop Automobile Exhaust Pollution,’’ China.com, April 20, 2009,http://www.china.com.cn/environment/2009-04/20/content_17633750.htm (accessed June 14, 2009).10. Keith Bradsher, ‘‘China Is Said to Plan Strict Gas Mileage Rules,’’

New York Times, May 27, 2009, http://www.nytimes.com/2009/05/28/business/energy-environment/28fuel.html (accessed August 31, 2009).See also ‘‘Green Power Takes Root in the Chinese Desert,’’ July 2, 2009,New York Times, http://www.nytimes.com/2009/07/03/business/energy-environment/03renew.html (accessed October 15, 2009).11. Environmental Protection Law, 1989, http://www.china.org

.cn/english/environment/34356.htm (accessed March 26, 2009).12. Law on Prevention and Control of Environmental Pollution

by Solid Waste, 1995 (amended 2005), http://www.gov.cn/ziliao/flfg/2005-08/05/content_20932.htm (accessed March 26, 2009).

200 Notes

13. Law on Prevention and Control of Atmospheric Pollution,1995 (amended 2000), Law http://www.asianlii.org/cn/legis/cen/laws/pacoap494/ (accessed March 26, 2009).14. Law on Prevention and Control of Water Pollution, 1996,

http://www.china.org.cn/english/environment/34325.htm (accessed March26, 2009).15. Law on Prevention and Control of Pollution from

Environmental Noise, 1997, http://www.asianlii.org/cn/legis/cen/laws/pacopfen632/ (accessed March 26, 2009).16. Energy Conservation Law, 1998 (amended 2008), http://new

.hbsyepb.gov.cn/Detail.aspx?id=182 (accessed March 28, 2009).17. Renewable Energy Law, 2006, http://www.gov.cn/ziliao/flfg/

2005-06/21/content_8275.htm (accessed March 28, 2009).18. Administrative Measures on the Control of Pollution Caused

by Electronic Information Products, 2007, http://english.mofcom.gov.cn/aarticle/policyrelease/domesticpolicy/200605/20060502132549.html(accessed March 28, 2009).19. Circular Economy Law, 2008, http://www.mep.gov.cn/law/law/

200809/t20080901_128001.htm (accessed March 28, 2009).20. Yan Sun, ‘‘Corruption, Growth, and Reform: The Chinese

Enigma,’’ Current History (September 2005), http://web.nps.navy.mil/~relooney/00_New_112.pdf (accessed February 1, 2010), Research LibraryCore.21. Public Service Law 1984, http://www.sxxdj.gov.cn/article_show

.asp?id=56 (accessed July 3, 2009).22. Wang Lin, Anti-corruption—AWar between Rule of Law and Rule

of Man (Guangzhou, China: Zhongshan University Press, 2008), 30.23. Editorial, ‘‘Wait to See How Many Government Officials

Fall after the Collapsed Building,’’ July 2, 2009, http://opinion.nfdaily.cn/content/2009-07/02/content_5318921.htm (accessed July 3, 2009).24. Yan Sun, ‘‘Corruption, Growth, and Reform,’’ 258.25. Will Hutton, The Writing on the Wall—Why We Must Embrace

China as a Partner or Face It as an Enemy (New York: Free Press, 2006), 121.26. ‘‘Verdict by The People’s High Court on Chen Xitong’s

Case,’’ GoDist.com, http://www.godist.cn/History/4003.shtml (accessedSeptember 12, 2008).27. Craig S. Smith, ‘‘Senior Chinese Official Sentenced to Death

in Corruption Case,’’ New York Times, August 1, 2000.

Notes 201

28. David Barboza, ‘‘Ex-Chief of China Food and DrugUnit Sentenced to Death for Graft,’’ New York Times, May 30,2007.29. ‘‘Final Sentencing: Death Penalty with 2-Year Delay,’’ Legal

Daily, January 21, 2009, http://www.legaldaily.com.cn/zmbm/2009-01/22/content_1025397.htm (accessed June 23, 2009).30. Yan Sun, ‘‘Corruption, Growth, and Reform,’’ 259.31. Ji Jianming, ‘‘Tracking Down the Falling Path of High-Level

Official Liu Zhihua,’’ Chinanews.com, February 10, 2009, http://www.chinanews.com.cn/kong/news/2009/02-10/1557436.shtml (accessed June24, 2009).32. Keith Jarett and Lie Huihan, ‘‘Understanding China’s

Civil Service,’’ China Business Review (May-June 2009), http://www.chinabusinessreview.com/members/0907/jarrett.htm (accessed February1, 2010 [subscription required]).33. Ibid.34. Ibid.35. Wang Lin, Anti-corruption—A War between Rule of Law and

Rule of Man.36. Walt Bogdanich and Jake Hooker, ‘‘From China to Panama, a

Trail of Poisoned Medicine,’’ New York Times, May 6, 2007, http://www.nytimes.com/2007/05/06/world/americas/06poison.html?scp=1&sq=from%20China%20to%20panama&st=cse (accessed September 18,2008). See also Legal Daily, http://www.legaldaily.com.cn/0705/2008-10/19/content_963365.htm (accessed November 2, 2008).37. ‘‘Tainted Milk Powder Sickens 1,253 Babies in China,’’ China

Daily, September 15, 2008, http://www.chinadaily.com.cn/china/2008-09/15/content_7028268.htm (accessed September 15, 2008).38. ‘‘China Quality Chief Quits over Milk Scandal,’’ CNN–Beijing,

September 22, 2008, http://www.cnn.com/2008/WORLD/asiapcf/09/22/china.tainted.milk/index.html (accessed September 22, 2008).39. Patti Waldmeir in Shanghai and Kathrin Hille in Beijing, ‘‘China

Milk Scandal Duo Sentenced to Death,’’ FT.com, January 23, 2009,http://www.ft.com/cms/s/0/fc134a1c-e8ee-11dd-a4d0-0000779fd2ac.html?nclick_check=1 (accessed January 29, 2009).40. Fang Zhouzi, ‘‘Protein Booster Had Long Been a Trade

Secret,’’ September 17, 2008, http://news.qq.com/a/20080917/000866.htm (accessed June 24, 2009).

202 Notes

41. ‘‘ ‘High Level of Melamine’ in Two Cadbury Products,’’ CNN–Hong Kong, October 5, 2008, http://www.cnn.com/2008/WORLD/asiapcf/10/05/china.milk/index.html (accessed October 5, 2008).42. Peng Yining, ‘‘US Anti-Graft Law Pricks Chinese Conscience,’’

Huanqiu Shibao (Global Times), June 30, 2009, 12–13.43. Ibid.44. Suzanne Fox, ‘‘China’s Changing Culture and Etiquette,’’ China

Business Review (July-August 2008), http://www.chinabusinessreview.com/public/0807/fox.html#top (accessed July 10, 2008).45. Yan Sun, ‘‘Corruption, Growth, and Reform.’’46. Gu Ruizhen, ‘‘China’s Private Enterprises Grew by 15% to

4.94 Million, Weighting 65% of GDP,’’ Xinhua Net, January31, 2007, http://finance.sina.com.cn/g/20070131/19113300494.shtml(accessed September 19, 2008).47. Du Wenjuan, ‘‘China Dairies See Investors Dump Stocks,’’

China Daily, September 23, 2008, http://www.chinadaily.com.cn/china/2008-09/23/content_7052470.htm (accessed September 23, 2008).48. Xinhua News Agency, ‘‘CNN Apologizes for Jack Cafferty’s

Remarks on China,’’ China Daily, May 15, 2008, http://www.chinadaily.com.cn/china/2008-05/15/content_6688594.htm (accessedSeptember 23, 2008).49. Willy Lam, ‘‘CCP Campaign for a New Generation of ‘Red and

Export’ Officials,’’ China Brief, June 24, 2009, http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews[tt_news]=35170&tx_ttnews[backPid]=25&cHash=a0aad095c4 (accessed June 25, 2009).50. Wang Lin, Anti Corruption—A Duel between Rule of Man and

Rule of Law, 213–215.51. Wei Cheng, Zhongguo Nongmingong Diaocha (A Survey of

Migrant Workers) (Beijing: Law Press China, 2008), 9.52. Ibid., 6553. Ibid., 83.54. Ibid., 79.55. Ibid., 64.56. Russell Hsiao, ‘‘CCP Provincial Committees’ Reports Highlight

Growing Wealth and Urban-Rural Inequality.’’ China Brief 9, no. 2,January 22, 2009, http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews%5Btt_news%5D=34139&tx_ttnews%5BbackPid%5D=168&no_cache=1 (accessed May 16, 2009).

Notes 203

57. Ibid., 43.58. Xinhua Net, ‘‘China Sees Soaring Population,’’ China Economic

Net, October 29, 2006, http://en.ce.cn/National/Rural/200610/29/t20061029_9179748.shtml (accessed September 26, 2008).59. Wei Cheng, Zhongguo Nongmingong Diaocha, 46–50.60. Hu Jintao, ‘‘Speech at the 17th CCP Congress,’’ March

25, 2008, http://www.whetc.com/xgc/Article_Show.asp?ArticleID=243(accessed June 26, 2009).61. Wei Cheng, zhongguo nongmingong diaocha, 44.62. Ibid., 11.63. Ibid., 103–107.64. Ibid., 109.65. Ibid., 29–30.66. Ibid., 59.

CHAPTER 4

1. ‘‘A Guideline to Short- and Long-term Science andTechnology Development (2006–2020),’’ The State Council of thePeople’s Republic of China, February 9, 2006, http://www.cas.cn/html/Dir/2006/02/09/13/70/88.htm (accessed December 26, 2008).

2. Hu Jintao, ‘‘Report at 17th CCP Party Congress,’’ October 15,2007, http://news.xinhuanet.com/english/2007-10/24/content_6938749.htm (accessed December 17, 2008).

3. ‘‘Hu Highlights China’s Progress, ‘Large Gap’ in Sci-TechDevelopment,’’ People’s Daily, June 23, 2008, http://english.people.com.cn/90001/90776/90785/6435413.html (accessed December 17,2008). See also Anthony Faiola and Zachary A. Goldfarb, ‘‘China TopsJapan in U.S. Debt Holdings; Beijing Gains Sway over U.S. Economy,’’Washington Post, November 19, 2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/11/18/AR2008111803558.html (accessedDecember 19, 2008).

4. ‘‘Premier Wen Stresses Steady, Relatively Fast Growth, Controlof Inflation,’’ People’s Daily, July 21, 2008, http://english.people.com.cn/90001/90776/90785/6454201.html (accessed July 21, 2008).

5. Joseph Schumpeter, The Theory of Economic Development(Cambridge, MA: Harvard University Press, 1934).

6. ‘‘OECD Finds That China Is Biggest Exporter of InformationTechnology Goods in 2004, Surpassing US and EU,’’ Organisation

204 Notes

for Economic Co-operation and Development, http://www.oecd.org/document/8/0,3343,en_2649_33757_35833096_1_1_1_1,00.html(accessed December 20, 2008).

7. John G. Spooner and Michael Kanellos, ‘‘IBM Sells PC Groupto Lenovo,’’ Cnet News, December 8, 2004, http://news.cnet.com/IBM-sells-PC-group-to-Lenovo/2100-1042_3-5482284.html (accessedDecember 24, 2008).

8. Application Center for National Science and TechnologyProjects, http://program.most.gov.cn/ (accessed December 27, 2008).

9. Duan Zhiwen, Transformation of Modern China’s S&T Culture(Hangzhou: Zhejiang University Press, 2006), 166–173.10. ‘‘A Guideline for Short- and Long-term Science and

Technology Development (2006-2020),’’ The State Council of thePeople’s Republic of China, February 9, 2006, http://www.cas.cn/html/Dir/2006/02/09/13/70/88.htm (accessed December 26, 2008).11. Introduction to Key National S&T Projects, http://gongguan.

jhgl.org/important12.htm (accessed June 29, 2009).12. 863 Program Web site, www.863.org.cn (accessed June 29,

2009).13. China Spark Program, http://www.cnsp.org.cn/ (accessed June

29, 2009).14. China Torch Program, http://www.ctp.gov.cn/ctp-eng/index

.htm (accessed June 29, 2009).15. 973 Program, http://www.973.gov.cn/English/Index.aspx (accessed

June 29, 2009).16. Key National S&T Industrial Program, http://www.most.gov

.cn/eng/programmes1/200610/t20061008_36198.htm (accessed June29, 2009).17. National S&T Program for Social Development, http://

newyork.china-consulate.org/chn/kjsw/zgkj/t31157.htm (accessed June29, 2009).18. Regulations Regarding National Technology Innovation

Management, http://ctixm.smexm.gov.cn/2002-10/20021029165411.htm (accessed June 30, 2009).19. Recommendations Regarding Improvement of the Knowledge

Innovation Program, http://ctixm.smexm.gov.cn/2002-10/20021029165411.htm (accessed June 30, 2009).20. Knowledge Innovation Fund, www.innofund.gov.cn (accessed

June 30, 2009).

Notes 205

21. Organization for Economic Co-operation and Development,OECD Reviews of Innovation Policy—China Synthesis Report, OECD,2007, http://www.oecd.org/dataoecd/54/20/39177453.pdf (accessedFebruary 1, 2010).22. David M. Lampton, ‘‘The Growth of Chinese Power and Its

Implications,’’ (opening speech given at The People’s Republic ofChina at 60: Internal and External Challenges—An InternationalConference, Bucknell University, Lewisburg, PA, October 1–2,2009).23. Martin Schaaper, ‘‘Measuring China’s Innovation System,

National Specificities and International Comparisons’’ (Science,Technology, and Industry working paper 2009/1, Organization forEconomic Co-operation and Development), http://www.oecd.org/sti/working-papers (accessed July 29, 2009).24. Ibid.25. Chang Jiang Scholars Program, http://www.changjiang.edu

.cn/news/16/16-20070319-136.htm (accessed December 27, 2008).26. Martin Schaaper, ‘‘Measuring China’s Innovation System.’’27. Organization for Economic Co-operation and Development,

OECD Reviews of Innovation Policy—China Synthesis Report, OECD,2007, http://www.oecd.org/dataoecd/54/20/39177453.pdf (accessedFebruary 1, 2010).28. Lenovo Company History, http://www.pc.ibm.com/ca/

about_lenovo/companyhistory.html (accessed May 31, 2009).29. CNBC, ‘‘The People’s Republic of Profit,’’ Hulu.com, 2008,

http://www.hulu.com/watch/74337/cnbc-originals-made-in-china-the-peoples-republic-of-profit#x-0,vepisode,1 (accessed May 31,2009).30. New Oriental Education & Technology Group Web site,

http://english.neworiental.org/Default.aspx?tabid=3483 (accessed May31, 2009).31. Baidu, Inc., Company Profile, Yahoo!, http://finance.yahoo

.com/q/pr?s=BIDU (accessed May 31, 2009).32. CNBC Original Production, ‘‘The People’s Republic of Profit,’’

CNBC, 2008, http://www.hulu.com/watch/74337/cnbc-originals-made-in-china-the-peoples-republic-of-profit#x-0,vepisode,1 (accessed May 31,2009).33. Ibid.

206 Notes

34. CNBC Original Production.35. The People’s Daily Online, ‘‘3.48% of GDP Invested in

Education Last Year,’’ November 30, 2009, http://english.peopledaily.com.cn/90001/90781/90879/6828063.html (accessed January 26, 2010).36. Zhao Ana, ‘‘There were 10.2 Million College Entrance

Examination Takers, or 400,000 Fewer Than 2008,’’ People’s Daily,June 3, 2009, http://www.jyb.cn/gk/gksx/200906/t20090603_278766.html (accessed July 15, 2009).37. Guangzhou Daily, ‘‘Most Provinces Saw Fewer College

Applicants, Non-Traditional Candidates on the Decline, too,’’Xinhua Net, June 1, 2009, http://www.yn.xinhuanet.com/topic/2009-06/01/content_16681027.htm (accessed July 15, 2009).38. David Faber, House of Cards, CNBC Original Documentary

Television Program, CNBC, February 12, 2009.39. China Trade Mark Law (Amended), Standing Committee of the

National People’s Congress, China.org, January 7, 2008, http://www.chinaorg.cn/zcfg/zcfg/2008-01/07/content_5161986.html (accessed July10, 2009).40. ‘‘China Revokes Weige Dedicated Function Patent,’’ Youth

News, July 13, 2004, http://news.sina.com.cn/c/2004-07-13/10043690437.shtml (accessed January 1, 2009).41. Erin Ennis and Robert Alaimo, ‘‘China’s 2006 IPR Review,’’

China Business Review (March-April 2007): 16–18.42. ‘‘Weige Patent Deemed Effective, Domestic Companies May Not

Duplicate,’’ Beijing Law Evening News, October 28, 2007, http://news.163.com/07/1028/03/3RS21Q910001124J.html (accessed January 1,2009).43. Pfizer–China, ‘‘Chinese High Court Validates Pfizer Viagra

Use Patent,’’ September 7, 2007, http://www.pfizer.com.cn/htmls/news/english/200797173900.htm (accessed January 1, 2009).44. Erin Ennis and Robert Alaimo, ‘‘China’s 2006 IPR Review,’’ 17.45. ‘‘Beijing Court Opens Copyright Violation Case Brought by

482 Graduate Students against Wanfang Data,’’ China PublicationNews, September 23, 2008, http://www.cnbm.net.cn/information/info25049538.html (accessed February 23, 2010).46. He Chunzhong, ‘‘Who Is Devouring the Hard Work of Our

Dissertations?—Thousands of Dissertations Are Investigated in aCopyright Violation Case,’’ China Youth News, November 27, 2008,

Notes 207

http://www.mediawatch.cn/GB/channel8/31/200811/27/1370.html(accessed January 4, 2009).47. An Rong Shi Yan, ‘‘Verdict Reached on the Violation of 482

MA and Ph.D. Theses—Court Orders Compensation Paid to 361Plaintiffs,’’ China Court, October 17, 2008, http://rmfyb.chinacourt.org/public/detail.php?id=122970 (accessed January 26, 2010).48. Huang Lei, ‘‘Influence of GPA Membership on China’s

Economy,’’ January 7, 2010, http://www.jjxww.com/html/show.aspx?id=161247&cid=21 (accessed February 1, 2010).49. Martin Schaaper, ‘‘Measuring China’s Innovation System,

National Specificities and International Comparisons,’’ STI WorkingPaper 2009/1, OECD, http://www.oecd.org/dataoecd/15/55/42003188.pdf (accessed February 1, 2010).50. Ibid.51. NBS, Statistical Yearbook, 2008.52. Schaaper, ‘‘Measuring China’s Innovation System, National

Specificities and International Comparisons,’’ 58.53. ‘‘Interview of President Chen Talks about Education

Management,’’ Youku.com, June 20, 2008, http://v.youku.com/v_show/id_XMzIwNzE3Mjg=.html (accessed July 15, 2009).54. ‘‘Research Assistant Hiring System: From Life Tenure to

Contractual Hiring in Higher Education,’’ January 28, 2010,Guangming Daily, http://www.edu.cn/gao_jiao_news_367/20100128/t20100128_445819.shtml (accessed February 20, 2010).55. ‘‘Life Tenure Vanished at Shanghai University,’’ November 30,

2001, http://www.edu.cn/gao_jiao_news_367/20060323/t20060323_20386.shtml (accessed February 20, 2010).56. ‘‘The Birth of China’s Postdoctoral System,’’ China Postdoctor,

http://www.chinapostdoctor.org.cn/program/issue/pop_win.asp?id=1842(accessed October 22, 2009).57. ‘‘Statistics of Enrollment of Postdoctors in 2007,’’ China

Postdoctor, http://www.chinapostdoctor.org.cn/program/issue/pop_win.asp?id=5511 (accessed October 22, 2009).58. Ibid.59. ‘‘Comparison of Chinese and American Postdoctoral Systems,’’

China Postdoctor, http://www.chinapostdoctor.org.cn/program/issue/pop_win.asp?id=2074 (accessed October 22, 2009).

208 Notes

60. Li Yanying, ‘‘Establish a Secure Personnel System, Seek Talents,but Not ‘Jail’ Talents,’’ Guangming Daily, May 19, 2005, http://theory.people.com.cn/GB/40540/3400313.html (accessed October 22, 2009).

CHAPTER 5

1. Thomas P. Lyons, Economic Integration and Planning inMaoist China (New York: Columbia University Press, 1987).

2. Yi Feng, ‘‘Central Planning,’’ in China Today—An Encyclopediaof Life in the People’s Republic, ed. Jing Luo (Westport, CT:Greenwood Publishing, 2005), 1:62.

3. Aimin Chen, ‘‘State-owned Enterprises,’’ in China Today—AnEncyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport,CT: Greenwood Publishing, 2005), 2:585–586.

4. Ibid.5. Yi Ming, ‘‘China’s Private Enterprises Grew by 15 Percent to

459,000 Companies, Contributing 65 Percent of GDP,’’ June 3, 2008,http://www.interscm.com/news/data/200806/03-3864.html (accessed July16, 2009).

6. Editor, ‘‘Liu Yonghao: Seize Opportunity, Get Ready,’’ Mxm,December 17, 2003, http://www.51tr.com/articles/107164866043438-2.html (accessed October 4, 2009).

7. Geely Holding Group, ‘‘Major Company Events,’’ http://www.geely.com (accessed March 18, 2009).

8. Hu Jintao, ‘‘Report at 17th Party Congress,’’ Xinhua Net,October 15, 2007, http://news.xinhuanet.com/english/2007-10/24/content_6938749.htm (accessed December 17, 2008).

9. Peter Fairly, ‘‘China’s Coal Future,’’ Technology Review (January-February 2007): 56–61.10. Jason Yin, ‘‘Energy Industries,’’ in China Today—An

Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport,CT: Greenwood Publishing, 2005), 1:148–150.11. Fairly, ‘‘China’s Coal Future.’’12. Xinhua News Agency, ‘‘Shenhua Group’s Coal-to-oil Project

Goes into Production in May,’’ February 2, 2009, http://www.cs.com.cn/gz/04/200902/t20090227_1771930.htm (accessed January28, 2009).

Notes 209

13. Tingting Si, ‘‘Shenhua Shows the Way to Make Gas from Coal,’’China Daily, January 1, 2009, http://www.chinadaily.com.cn/bizchina/2009-01/22/content_7419616.htm (accessed March 21, 2009).14. China Financial Stability Report 2008, The People’s Bank

of China, http://www.pbc.gov.cn/english//detail.asp?col=7000&ID=4(accessed March 29, 2009).15. By September 2009, China’s foreign exchange reserves had

reached $2.27 trillion [Liu Shengjun, ‘‘How to Better Use ForexReserves,’’ January 13, 2010, http://www.chinadaily.com.cn/opinion/2010-01/13/content_9311658.htm (accessed January 28, 2010)].16. C. K. Richard Burdekin, ‘‘Banking and Financial System

Reform,’’ in China Today—An Encyclopedia of Life in the People’sRepublic, ed. Jing Luo (Westport, CT: Greenwood Publishing,2005), 1:52–55.17. Aimin Chen, ‘‘Corporate Governance,’’ in China Today—An

Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport,CT: Greenwood Publishing, 2005), 1:95.18. Commercial Bank Law of the People’s Republic of China, 1995,

http://www.fdi.gov.cn/pub/FDI_EN/Laws/Banking/t20060620_51997.jsp (accessed April 1, 2009).19. Aimin Chen and Junqi Liu, ‘‘Rural Credit Cooperatives

(RCCs),’’ in China Today—An Encyclopedia of Life in the People’sRepublic, ed. Jing Luo (Westport, CT: Greenwood Publishing,2005), 2:522–525.20. ‘‘Country Partnership Strategy, 2009–2010,’’ Asian Development

Bank, http://www.adb.org/Documents/CPSs/PRC/2008/CPS-PRC-2008-2010.pdf (accessed May 10, 2009).21. ‘‘Announcement of the Pilot RCC Reform Plan,’’ PBC

Yichun Branch, October 19, 2009, http://xxgk.yichun.gov.cn/xxgk/rmyh/xxgk/fgwj/0202/2008-10/200810191416319539.html (accessedMay 10, 2009).22. David Strongin, ‘‘Tapping into China’s Securities Industry,’’ China

Business Review (May-June, 2006), http://www.chinabusinessreview.com/members/0605/strongin.html (accessed April 8, 2009).23. Aimin Chen, ‘‘Corporate Governance,’’ 1:95.24. Wen Jiabao, ‘‘Press Conference Transcript,’’ March 13, 2009,

http://news.eefoo.com/cjxw/cjdd/200903/13-1268683.html (accessedApril 8, 2009).

210 Notes

25. Lu Jianxin, ‘‘Timeline-Major Events in China’s CorporateBond Market,’’ April 3, 2009, http://www.reuters.com/article/idUSSHA26539620090403 (accessed January 29, 2010).26. Chen Ji and Stephen Thomas, ‘‘China’s Bond Market Matures,

Slowly,’’ China Business Review (January-February, 2005), http://www.chinabusinessreview.com/members/0501/bonds.html (accessed April 8,2009).27. ‘‘China Data: Foreign-Invested Financial Institutions,’’

Chinese Business Review (November-December 2007): 40.28. Shuanglin Lin, ‘‘Domestic Government Debt,’’ in China

Today—An Encyclopedia of Life in the People’s Republic, ed. Jing Luo(Westport, CT: Greenwood Publishing, 2005), 1:125.29. China Statistic Yearbook, 2007, Online Edition, http://www

.stats.gov.cn.30. Liu Jie and Cheng Yunjie for Xinhua News, ‘‘No ‘Crowding

Out’ Seen in China’s Treasury Bond Sales Plans,’’ Xinhua Net, March 17,2009, http://news.xinhuanet.com/english/2009-03/17/content_11027435.htm (accessed April 3, 2009).31. Shuanglin Lin, ‘‘Domestic Government Debt,’’ 1:125.32. China Statistic Yearbook, 2007.33. Shuanglin Lin, ‘‘Fiscal Policy and Tax Reforms,’’ 193–195.34. Wu Liujie, ‘‘Problems with the Tax-sharing System and

Recommendations for Strategies,’’ China Accounting Net, March 9,2009, http://www.chinaacc.com/new/287_291_/2009_3_9_wa4780555221193900225960.shtml (accessed April 4, 2009).35. Thomas Shik and Joanne Yim, ‘‘Mainland China’s Housing

Market Outlook,’’ September 9, 2008, http://www.hangseng.com/ermt/eng/fxmv/pdf/ecof_e_sept08.pdf (accessed April 9, 2009).36. Song Shunfeng, ‘‘Housing Reform,’’ in China Today—An

Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport,CT: Greenwood Publishing, 2005), 1:256.37. Yao Yang, ‘‘Land Policy,’’ and ‘‘Rural Industrialization,’’ in

China Today—An Encyclopedia of Life in the People’s Republic, ed.Jing Luo (Westport, CT: Greenwood Publishing, 2005), 1:345–348;2:525–527.38. Ibid.39. Justin Lin and Yang Yao, ‘‘Chinese Rural Industrialization in

the Context of the East Asian Miracle,’’ in Rethinking the East Asian

Notes 211

Miracle, ed. Joseph Stiglitz and Shahid Yusuf, Ch. 4 (World Bankand Oxford University Press, 2001).40. Ibid.41. Yang Yao, ‘‘Rural Industrialization,’’ in China Today—An

Encyclopedia of Life in the People’s Republic, ed. Jing Luo (Westport,CT: Greenwood Publishing, 2005), 2:525–527.42. Staff writer, ‘‘The Role of China’s Think Tanks in Policymaking,’’

China Business Review (July-August, 2009): 11.

CHAPTER 6

1. Ferdinant de Saussure, Course in General Linguistics (London:Open Court Publishing Company, 2000).

2. John Williamson, ‘‘What Washington Means by Policy Reform,’’Peterson Institute for International Economics, November 2002,http://www.iie.com/publications/papers/paper.cfm?researchid=486(accessed February 7, 2009).

3. Joshua Cooper Ramo, The Beijing Consensus (London: TheForeign Policy Centre, 2004).

4. Williamson, ‘‘What Washington Means by Policy Reform.’’5. Ibid.6. Will Hutton, The Writing on the Wall—Why We Must

Embrace China as a Partner or Face It as an Enemy (New York: FreePress, 2006), 135.

7. ‘‘Major Foreign Holders of Treasury Securities,’’ U.S. Departmentof Treasury, http://www.treas.gov/tic/mfh.txt (accessed February 7, 2009).

8. Agencies, ‘‘Standford Scandal Spreads,’’ China Daily, February 21,2009, http://www.chinadaily.com.cn/world/2009-02/21/content_7499139.htm (accessed February 26, 2009).

9. ‘‘Italian Media: China Stops Worshipping Western FinancialSystem,’’ Chinanews.com, February 23, 2009, http://www.chinanews.com.cn/gj/hwkzg/news/2009/02-23/1574693.shtml (accessed February25, 2009).10. Hutton, The Writing on the Wall, 114.11. Ibid., 149.12. Ibid., 116.13. Ibid., 314.14. Ibid., 215.

212 Notes

15. Rowan Callick, ‘‘The China Model’’ In Global Studies—China, ed. Zhu Zhiqun, 13th ed., 140–148 (McGraw-Hill HigherEducation, 2010).16. Ibid., 142.17. Ibid., 144.18. Ibid., 146.19. Ibid., 147.20. David Shambaugh, ‘‘China at 60: The Road to Prosperity,’’

Time, September 28, 2009, http://www.time.com/time/magazine/article/0,9171,1924366-4,00.html (accessed October 8, 2009).21. Ibid.22. Ibid.23. Ibid.24. Ibid.25. Joshua Cooper Ramo, The Beijing Consensus (London: The

Foreign Policy Centre, 2004).26. Jiang Zemin, ‘‘Report to the 16th Party Congress,’’ People’s

Daily, http://www.people.daily.com.cn.27. Solow, Robert. ‘‘Technical Changes and the Aggregate

Production Function’’ in Review of Economics and Statistics 39(August 1957): 312–320.28. Cheng Li, ‘‘Educational and Professional Backgrounds of

Current Provincial Leaders,’’ China Leadership Monitor no. 8(2003): 3.29. Barry Naughton, ‘‘The State Asset Commission: A Powerful

New Body,’’ China Leadership Monitor no. 8 (2003): 5.30. Joshua Cooper Ramo, The Beijing Consensus (London: The

Foreign Policy Centre, 2004), 33.31. Ibid., 33.32. Ibid., 59.33. Kishore Mahbubani, The New Asian Hemisphere: The

Irresistible Shift of Global Power to the East (New York: PublicAffairs,2008), 134.34. Ibid., 135.35. Ibid., 137.36. ‘‘China Will Have the Most Tourists Traveling Abroad

in Asia,’’ National Travel Bureau, http://www.nre.cn/index.php/action_viewnews_itemid_8507.html (accessed April 20, 2009).

Notes 213

37. Mahbubani, The New Asian Hemisphere, 144.38. Ibid., 230.39. Ibid., 232.40. Ibid., 39.41. Yu Keping, ‘‘The China Model and Ideological Liberation,’’

CCP Translation Bureau, November 19, 2008, http://theory.people.com.cn/GB/49150/49152/8365627.html (accessed May 25, 2009).42. Xinhua Net, ‘‘Theory of Socialism with Chinese Characteristics:

Latest Results of Integrating Marxism with Chinese Reality,’’ People’sDaily, November 8, 2007, http://politics.people.com.cn/GB/1026/6501851.html (accessed July 25, 2009).43. Yao Yang, ‘‘The China Model and the Neutral Government,’’

People’s Daily, October 13, 2008, http://theory.people.com.cn/GB/49154/49155/8162904.html (accessed May 25, 2009).44. Chang Xiuze, ‘‘China Model and Diverse World Development,’’

Guangming Daily, August 19, 2008, http://theory.people.com.cn/GB/49154/49155/7687604.html (accessed May 26, 2009).45. Ai Yun, ‘‘Over 70 Percent of the Public Recognize that Financial

Crisis Will Test China Model,’’ JRJ. Com, December 19, 2008, http://finance.jrj.com.cn/2008/12/1914223115689.shtml (accessed May 26,2009).46. Qiu Gengtian, ‘‘China Model and the Road to Low Cost

Development,’’ People’s Daily, August 1, 2008, http://theory.people.com.cn/GB82288/122865/122866/7600380.html (accessed May 26,2009).47. Ibid.48. Hu Angang, China’s Way of Rising (Beijing: Peking University

Press, 2007), 55.49. Qiu Zhenhai, ‘‘Hu Angang: Black Development Will Be

Disastrous to the World,’’ An interview on Phoenix TV, Ifeng.com,November 11, 2008, http://news.ifeng.com/opinion/phjd/zh/200811/1106_1925_866154.shtml (accessed May 29, 2009).50. Ibid.51. Zhu Xinwu, ‘‘Commentary on the Economy of the First Half

of 2009, Part 1: Climbing up the Slope, Steadiness Is Key,’’ ChinaInformation News, July 21, 2009, http://stats.gov.cn/tjfx/ztfx/2005sbnjjsp/t20090721_402573601.htm (accessed July 25, 2009).

214 Notes

52. Gao Yuan, ‘‘Commentary on the Economy of the First Half of2009, Part 2: Stabilize Foreign Trade and Get Ready for a Long TermStruggle,’’ China Information News, July 22, 2009, http://stats.gov.cn/tjfx/ztfx/2005sbnjjsp/t20090722_402573947.htm (accessed July 25,2009).53. Wu Laixiong, ‘‘Commentary on the Economy of the First Half

of 2009, Part 3: Protecting the Economy from Unusual Fluctuationsof Primary Industrial Products,’’ China Information News, July 24,2009, http://stats.gov.cn/tjfx/ztfx/2005sbnjjsp/t20090724_402574735.htm (accessed July 25, 2009).54. Ma Jiantang, Press Conference, January 21, 2010.55. Fareed Zakaria, ‘‘What’s Really at Stake in Google vs. China?’’

January 21, 2010, http://www.cnn.com/2010/OPINION/01/21/zakaria.google.china/index.html (accessed January 28, 2010).56. Angus Maddison, Chinese Economic Performance in the Long Run,

2nd ed., rev. 960–2030 (Development Center of OECD, 2007), 93,http://books.google.com/books?printsec=frontcover&vid=ISBN9789264037625&vid=LCCN2008359134#v=onepage&q=&f=false.57. Feng Gia-fu and Jane English, Lao Tsu Tao Te Ching: Thirty-

three (New York: Vintage, 1972).58. Jason Dean, James T. Arredy, and N. G. Sarena, ‘‘Chinese

Premier Blames Recessions on U.S. Actions,’’ January 29, 2009,http://online.wsj.com/article/SB123318934318826787.html (accessedJuly 25, 2009).59. David Faber, House of Cards, CNBC, February 12, 2009.60. Squawbox: Interview with Jim O’Neil, CNBC, October 8,

2009, http://www.cnbc.com/id/15840232?video=1288018067?play=1 (accessed October 24, 2009).61. Deng Xiaoping, ‘‘Put an End to the Past and Start the

Future, May 16, 1989,’’ in Selected Works of Deng Xiaoping (Beijing:People’s Press, 1993), 3:292.

Notes 215


Bibliography

BOOKS

Bergsten, Fred C., Charles Freeman, and Nicholas R. Lardy. China’sRise: Challenges and Opportunities. Washington, DC: PetersonInstitute for International Economics, 2009.

Deng, Xiaoping. Selected Works of Deng Xiaoping. Beijing: ForeignLanguages Press, 1994.

Gifford, Robert. China Road: A Journey into the Future of a RisingPower. New York: Random House, 2008.

Huang, Yasheng. Capitalism with Chinese Characteristics: Entrepre-neurship and the State. New York: Cambridge University Press,2008.

Lampton, David M. The Three Faces of Chinese Power: Might, Money,and Minds. Berkeley: University of California Press, 2008.

Luo, Jing. China Today—An Encyclopedia of Life in the People’sRepublic. 2 vols. Westport, CT: Greenwood Publishing, 2005.

———. Over a Cup of Tea—An Introduction to Chinese Life andCulture. Lanham, MD: University Press of America, 2004.

Mahbubani, Kishore. Beyond the Age of Innocence, Rebuilding Trustbetween America and the World. New York: Public Affairs, 2006.

Ramo, Joshua Cooper. The Age of the Unthinkable: Why the NewWorld Disorder Constantly Surprises Us and What We Can Do aboutIt. New York: Little Brown and Company, 2009.

Shambaugh, David. China’s Communist Party: Atrophy and Adapta-tion. Berkeley: University of California Press, 2009.

WEB SITES

The following Web sites were accessed on August 10, 2009.

General Resources

ANU College of Asia and the Pacific-Asian Studies WWW VirtualLibrary

http://coombs.anu.edu.au/WWWVL-AsianStudies.html

Asian Development Bankhttp://www.adb.org/

China Business Reviewhttp://www.chinabusinessreview.com/

China Business World—Exhibitions & Trade Showhttp://www.cbw.com/business/exhib/info

China Economic Reviewhttp://www.chinaeconomicreview.com/

China Quotahttp://www.chinaquota.com/EN/index.asp

China Sitehttp://www.chinasite.com/

China Success Storieshttp://www.chinasuccessstories.com/

China Todayhttp://www.chinatoday.com/

China.comhttp://english.china.com/

Chinabooks.comhttp://www.chinabooks.com/cart/home.php

Council on Foreign Relationshttp://www.cfr.org/

The Economist Country Briefings–Chinahttp://www.economist.com/countries/china/

218 Bibliography

The Economist Intelligence Unithttp://www.eiu.com/index.asp?rf¼0

Harvard China Reviewhttp://harvardchina.org/

Human Rights Watchhttp://www.hrw.org/

IMF China Pagehttp://www.imf.org/external/country/CHN/index.htm

John Fairbank Memorial Chinese History Virtual Libraryhttp://www.cnd.org/fairbank/

South China Morning Posthttp://www.scmp.com/portal/site/SCMP/

U.S.-China Business Councilhttp://www.uschina.org/

World Bank China Pagehttp://www.worldbank.org/

World Trade Organizationhttp://www.wto.org

Government Web Sites

American Chamber of Commerce in Chinahttp://www.amchamchina.org/

Central Intelligence Agencyhttps://www.cia.gov/

China Central Televisionhttp://www.cctv.com/default.shtml

China Courthttp://www.chinacourt.org/

China Dailyhttp://www.chinadaily.com.cn/

China Education and Research Networkhttp://www.cernet.edu.cn/

China Insurance Regulatory Commission (Chinese language only)http://www.circ.gov.cn/web/site0/

Bibliography 219

China Securities and Regulatory Commissionhttp://www.csrc.gov.cn/n575458/index.html

China Trade Remedy Informationhttp://www.cacs.gov.cn/

China’s Five-Year Planshttp://www.china.org.cn/english/features/guideline/156532.htm

ChinaRural.orghttp://www.chinarural.org/

Department of Commercehttp://www.commerce.gov/

Department of Statehttp://www.state.gov/

Export-Import Bankhttp://www.exim.gov/

Law Info Chinahttp://www.lawinfochina.com/

Ministry of Agriculture of the PRC (Chinese language only)http://www.agri.gov.cn/

Ministry of Commerce of the PRChttp://english.mofcom.gov.cn/

Ministry of Communication of the PRC (Chinese language only)http://www.moc.gov.cn/

Ministry of Finance of the PRChttp://www.mof.gov.cn/mof/

Ministry of Foreign Affairs of the PRChttp://www.fmprc.gov.cn/eng/

Ministry of Human Resources and Social Security of the PRChttp://www.mohrss.gov.cn/Desktop.aspx?PATH¼rsbww/sy

Ministry of Industry and Information Technology of the PRChttp://www.miit.gov.cn/n11293472/index.html

Ministry of Science and Technology of the PRChttp://www.most.gov.cn/

National Bureau of Statistics of Chinahttp://www.stats.gov.cn/english/

220 Bibliography

National Development and Reform Commissionhttp://www.sdpc.gov.cn/

The National People’s Congresshttp://www.npc.gov.cn/

The People’s Dailyhttp://english.peopledaily.com.cn/

People’s Bank of Chinahttp://www.pbc.gov.cn/english/

PRC Embassy in Washington, D.C.http://www.china-embassy.org/eng/

State Administration of Foreign Exchangehttp://www.safe.gov.cn/model_safe/index.html

State Administration of Radio, Film and Televisionhttp://www.sarft.gov.cn/

State Administration of Taxationhttp://www.chinatax.gov.cn/n8136506/index.html

State Intellectual Property Officehttp://www.cpo.cn.net/

Thomas, U.S. Legislative Informationhttp://thomas.loc.gov/

U.S. Department of Agriculturehttp://www.usda.gov/wps/portal/usdahome

U.S. Embassy in Chinahttp://beijing.usembassy-china.org.cn/

U.S. Trade and Development Agencyhttp://www.ustda.gov/

Xinhua News Agencyhttp://www.xinhua.org/

Bibliography 221


Index

*Note: t represents tables and f represents figures in index entries

A share, 109, 146accident insurance, 22, 23Administrative Measures on the

Control of Pollution Caused byElectronic Information Products,2007, 57

Agricultural Bank of China (ABC),140, 142, 143

Agricultural Development Bank ofChina (ADBC), 140, 142

agricultural modernization, 91Association of Southeast Asian Nations

(ASEAN), 31, 176, 177automobiles export, 42

B share, 146backpacking travelers, 7bad loans, 118, 130, 142 143, 144;

Chinese banks limitation of, 141–42Baidu.com, Inc., 105, 108–9Balanced development, 160, 173bank losses, 38, 39tBank of China (BOC), 39t, 140, 142banking reform, 139–48

banking systems: policy discrepanciesof, 148

basic medical insurance schemes, 21Beijing: annual per capita household,

16t; banking reform in, 142; ‘‘DriveOne Day Less (per week),’’ 53;education in, 110; farmers’migration, 78; as host of Olympics,49–50; and migrant workers, 76; percapita living space in, 154; onpollution control, 52–53;relationship with neighboringcountries, 30; relationship with U.S.,30; security in, 174–75; spending ofresidents, 18, 19; and technologyventure, 89; as trillionaireprovince, 77

Beijing Consensus, 161, 169–72Beijing Consensus (Ramo), 31Bergius approach, 137‘‘brain drain,’’ 120budgetary principles, uniformity in, 150building socialism, with Chinese

characteristics, 127

Bureau of Agricultural Administration,12, 13

burning coal, energy, 135Bush era: relationship with China, 30business travelers, 7

Cai Fang, director of Demographicsand Labor Economics ResearchCenter at the Academy of SocialSciences of China: in removingHukou system, 82

Callick’s ‘‘Controlled Freedom,’’166–69

capital market, 92, 93, 109, 145capitalism, 10, 51, 91, 134, 165, 166,

169, 179, 187, 191car sales, 8, 43carbon dioxide (CO2) emission, 52,

136Central Party School (CPS), 64, 160,

161, 178, 182, 191; China Model,178–84

Chen Jian, economist: explanation ofmultiple-wave theory, 45; six stepsequence, 45–46

Chen Xitong, mayor of Beijing, incorruption case, 61–62

Cheng Kejie, former vice chairman ofthe National People’s Congress, inbribery case, 62

China-ASEAN FTA, 176–77China Banking Regulatory

Commission (CBRC), 139, 147,148; and regulation of PBOC, 144

China Center for InternationalEconomic Exchange (CCIEE), 160

China Construction Bank (CCB), 140China Import and Export Bank

(CIEB), 140China Insurance Regulatory

Commission (CIRC), 147China Model, 161; Beijing Consensus,

161, 171–74; Callick’s ‘‘ControlledFreedom,’’ 166–69; components of,184; developmental perspective,

174–78; failure of, 189; Hutton’s‘‘Halfway House,’’ 164–66;improvements of, 181; Shambaugh’sModel, 169–70; sustainabilityperspective, 184–92; viewed byCentral Policy School, 178–84; andWashington Consensus, 162–64

China National Offshore OilCorporation (CNOOC): andUNOCAL (Union Oil Company ofCalifornia), 177

China National Petroleum Corp(CNPC), 31

‘‘China opportunity’’ theory, 174China Postdoctor, 122–123;

comparison with American system,123–24

China Securities RegulatoryCommission (CSRC), 147

China Torch Program, 100, 106.See also Torch Program

China’s economic model: Callick’sviews on, 166–69

China’s GDP, versus U.S. GDP, 33China’s new procurement policies: with

the WTO’s GovernmentProcurement Agreement (GPA), 119

China’s S&T framework, limitationsof, 109–10; competition, 113–14;education, 110–13; IPC protection,114–17

Chinese Academy of Engineering(CAE), 89

Chinese Academy of Science (CAS),89, 105, 160; ‘‘Hundred TalentsProgram,’’ 104; National KnowledgeInnovation Experiment Program of,101

Chinese Academy of Social Sciences(CASS), 160, 169

Chinese Communist Party (CCP), 3,10, 160; and Confucianism, 170;against corruption, 71; towarddiversity, 189; in economicprosperity, 9, 24

224 Index

Chinese leaders: attitude duringrecession, 42; education of, 172

‘‘Chinese renaissance,’’ 82Chinese system, levels of, 151Chongqing: annual per capita

household, 16t; economic structuralreform in, 131

Circular Economy Law, 2008, 58–59civil service corruption, 59–65Cold War: territory sector, rise of, 3Commercial Bank Law, 142Communism, 3, 10, 24, 59, 125, 155,

166, 167, 173, 189, 191–92; andWestern economies’ reliance on,43–44

competitive corruption, 63Confucian-Daoist ethics, 59Confucianism, 59, 112, 191Consumer Confidence Index, 184Consumer Price Index (CPI), 48; and

inflation, 139Contract and Responsibility System

(CRS), 25, 80, 129, 150corruption, 58–59; civil service

corruption, 59–65; factors for, 59;grassroots-level corruption, 65–68;gray areas, 68–70; and growth,70–71

cost-sharing solution, 20–21cultural traditions, for economic

sustainability, 188–89current development, for economic

sustainability, 188–89

Daoism, 189Daqing Oil Field, 136The Decision of Accelerating S&T

Progress, 95The Decision of Reforming the S&T

Framework, 94The Decision of Strengthening S&T

Innovations, Developing High-techand Industrialization, 95–96

The Decision of the CCP CentralCommittee and the State Council

on Ramping up Tertiary Industry:Article 1, territory sectordevelopment of, 5; Article 4, onemployment opportunities, 6; Article5, on living conditions, 6

The Decision on Issues Regarding theImprovement of the Socialist MarketEconomic System, 96–97

defense modernization, 91defensive attitude: American attitude,

190–91; China’s, attitude,190

Deng Xiaoping: and economic reform,1, 16, 95–96, 129; and ‘‘HouseholdResponsibility System,’’ 28; andOpen Door Policy, 130–31; andrelative comfort, 17; in risingeconomy, 29; and S&T, new era for,91; and socialist market economy, 9;on urban housing, 154

‘‘Developing the Northwest,’’ economicmovement, 15

diplomatic adeptness, for economicgrowth, 31

direct investments, Chinese bankslimitation of, 141

domestic stability, socialist marketeconomy, 29

double-digit growth, 1, 12, 47, 48‘‘Drive One Day Less (per week),’’ 53‘‘Driven Businesspeople,’’ in middle

class, 7, 8

‘‘Early Heavy Buyers,’’ in middle class,7, 8

economic crisis, 10–11, 12, 13, 39,74, 186

economic polarization, 4–5economic reform, 125–26; banking

reform, 143–45; and China’s plan,52; country’s productivity, 1; byDeng Xiaoping, 126; economicstructural reforms, 127–33; energyindustry, revamping of, 135–39;housing reform, 152–55; industrial

Index 225

reform, 134–35; policymaking inreform, 159–60; rural reform,155–59; securities market, transitionof, 145–48; taxation reform, 149–51

economic structural change: reasonsfor, 4

economic structural reforms, 127–33economic structural shift, 5–6education modernization, 110;

communicative skill, 111; improvingproblem-solving skill, 110–11;increasing creative thinking, 111;understanding cultures, 112

education: and economic growth, 23,27, 85

863 Program (1986), 92, 99–100, 101,103. See also National High-TechDevelopment Program

Einstein’s words, aptness for BeijingConsensus, 171

Energy Conservation Law, 1998(amended 2008), 56

energy consumption, 98; and CircularEconomy Law (2008), 57–58; andEnergy Conservation Law, 1998(amended 2008), 56; energy supply,shortage of, 137; structure of, 136

energy industry, revamping of, 135–39energy saving, 133; 11th Five-Year Plan

(2006–2010), 99; and CircularEconomy Law (2008), 57–58; SOEsversus POEs, 86–87

energy source: annual fuel production,138; coal into synthetic oil, 137–38;coal reliance of, 136; consumptioncategories, 136–37; consumptiondemand, 137; industrial water reuseof, 138–39; natural gas, fortransportation, 136; and oil price,138

Engel’s Coefficients (EC), 15; on foodexpenditures, 19; on livingconditions, 17–18

‘‘enlightened self-interest,’’ 187

entrepreneurs: rise of, 23–32; and CCP,133; and competition, 113–14;encouraging of, through education,96–97; as innovative system, 91–92,105; in POE definition, 132; andSpark Program, 100; andurbanization, 81–82

environmental consequences, 49, 52Environmental Protection Law, 1989,

53–54; Article 24, on pollutioncontrol, 53

equal distance diplomacy, 30equality, 4–5; in Beijing Consensus,

172; fighting for, 26; Hutton’s viewon, 165; in reformation, 188

erectile dysfunction (ED); sildenafilcitrate, 115–16

export market: contributors to, 158;losses, 39

export sector, exposure to U.S.submarine market, 34–35

fanzu daobao (reverse lease), 157farming technology, expansion of: on

rural China, 4first atomic bomb (1964), 126first satellite (1969), 126Fischer-Tropsch approach, 137Five-Year Projections, 159–60flipping stocks, 61, 92floating population: and migrant

population, 78‘‘forced rebalancing,’’ 47foreign trade: to GDP, 131;

government’s role, 185; growth of,11; and international economicdevelopment, 42; negative growth,185; and R&D, 114; and traderecovery, 186

foreign trade sector: growth of, 11Fortune Global Forum, 2–3Four Asian Dragons: and Shanghai’s

export, 44‘‘four determinations,’’ 179

226 Index

‘‘Four Modernizations,’’ 91. See alsoagricultural modernization; defensemodernization; industrialmodernization; S&Tmodernization

free-market economics, 29, 167, 169Fujian: annual per capita household,

16t; ‘‘Minjiang River ScholarProgram,’’ 104; as trillionaireprovince, 77

Funding for S&T Small and Medium-Size Enterprises, 102–4

Gansu: annual per capita household,16t; economic structural reform in,131; and trillion mark, 77

Geely Corporation, 133‘‘gender-equal’’ sector, 4Germany, coal-liquefaction technology,

137global economic crisis, 73–74, 184; on

economy of, 10–11global financial crisis, 1, 11, 32, 48;

and Asian financial crisis, 33,163–64; and banking system, 130;and China’s manufacturing firms,44; and natural calamity, 71;transitional economic structures, 43

global recession, government’s role in,186–87

‘‘Google of China,’’ 108. See alsoBaidu.com, Inc.

Government Insurance Program (GIP),20

government projects, priority fields, 40grassroots-level corruption, 65–66Great Cultural Revolution

(1966–1976), 9, 28, 51, 90–91,126, 129

Great Leap Forward, 19, 51, 128, 134,155

Green GDP, 64–65, 183gross domestic product (GDP): under

Energy Conservation Law, 1998(amended 2008), 56; and import

and export ratio, 11; and purchasingpower parity (PPP), 1

Guangdong: annual per capitahousehold, 16t; banking reform in,142; leader in GDP growth, 77;rural reform in, 157; ‘‘ZhujiangRiver Scholar Program,’’ 104

Guangzhou: invasion, from othercountries, 75; and migrant workers,76; and railway passengers, 35

guanxi (connection): and corruption,68–69; in market competition,113–14; in younger generation,69–70

The Guideline of Mid- to Long-TermDevelopment of Science andTechnology 2006–2020, 97–98; goalsof, 98

Guizhou: economic condition in, 131;education in, 110

H share, 109, 146halfway house, 163, 164, 165Han Dynasty (206 BCE–220 CE), on

education, 112health care system, 20; for retired

population, 20high-level corruption cases, 61–63high-tech exports, rising of, 104–5high-tech products, export of, 89history, for economic sustainability,

188–89home appliance sales, 43hosing space, 19–20Household Responsibility System

(HRS), 156; shortfalls of, 156–57housing reform, 152–55; home

ownership, 154; new initiative of,153–54; on urban housing, 153;urban housing reform, 153

Hu Angang, professor at TsinghuaUniversity: on abolishing HukouSystem, 80; views on China’s GDP,182–83; views on urbanization, 73

Index 227

Hu Jintao, President: next phase ofdevelopment, 79

Hubei: as trillionaire province, 77Hukou System, 79–80, 82, 175Hunan: as trillionaire province, 77‘‘Hundred Talents Program’’ of the

CAS, 104Hutton’s ‘‘Halfway House,’’ 164–66Hybrid Model of Quasi-State

Capitalism and Semi-DemocraticAuthoritarianism, 169–70

income gaps, 15, 159; in eastern andwestern regions, 16t; and fast foodbusiness, 19; rural and urban life,comparison of, 18–19

Industrial and Commercial Bank ofChina (ICBC), 140

industrial modernization, 91industrial reform, 134–35inflation, 1, 9, 42, 48, 135; and

consumer price index (CPI), 139;and SOEs, 167; signs of, 185

innovation: and government’sleadership structure, 172; andintellectual property, 87; PremierWen Jiabao’s views on, 85–86;President Hu Jintao, 86

innovation nation, 83; educationmodernization, 110–13; marketcompetition, 113–14

innovative companies, sprouting of, 105;Baidu.com, Inc., 108–9; Lenovo,105–7; New Oriental Education andTechnology Group, 107–8

intellectual property rights (IPR), 32,88, 90; improving of, 96; protectionof, 114–17; to protect registeredproducts, 94

international business connections,31

International Monetary Fund (IMF),163

interpersonal relationships, 68

Jackson-Vanik Amendment (1974),175

Japan, energy consumption, 136Jason Chi, former president of Lucent

China, in corruption case,68–69

Jiangsu: annual per capita household,16t; leader in GDP growth, 77

joint tax, 151‘‘jumping into the sea,’’ 91

Kevin Hassett, economic policy:Callick’s views on, 167

Key National S&T Industrial Program,101

Korean War (1951–1953), 134

Labor Insurance Program (LIP), 20Lao-zi (sixth century BCE), 189–90Law on Prevention and Control of

Atmospheric Pollution, 1995(amended 2000), 54–55; Article 37,on control measures, 55

Law on Prevention and Control ofEnvironmental Pollution by SolidWaste, 1995 (amended 2005), 54;Article 17, in recycling, 54

Law on Prevention and Control ofPollution from EnvironmentalNoise, 1997, 55–56; Article 3,ambiguous, 56

Law on Prevention and Controlof Water Pollution, 1996, 55;Article 14, on preventing pollutantdischarge, 55; Article 15, on feepaying, 55

Law on Public Service: Article 53,prohibition from profit-sharingscheme, 60

Legend Group, 105–6. See also LenovoLehman’s Brothers: U.S. mortgage-

backed securities (MBS), 38leisure travelers, 7Lenovo, 105–7. See also Legend Group

228 Index

Li Fuxiang, director of China’s StateAdministration of Foreign Exchange,in illegal trade, 62

Liaoning: annual per capita household,16t; economic structural reforms in,127–28

Liu Zhihua, former deputy mayor ofBeijing, in bribery case, 62

loan-making decisions, Chinese bankslimitation of, 141

local taxes, 151Longkaikou Dam project, on Jinsha

River, 34low-cost housing, 47–48Ludila Dam project, on Jinsha River,

34

Mao Zedong, 4; and China’s economy,85; and Communism, 125–26; andeducation, 110; era (1949–1978),turmoil for S&T, 85, 90–91; heroworship of, 28; post-Mao era, 156,165

market economy, with Chinesecharacteristics, 127

market mechanism: in economictake-off, 3

MasterCard Worldwide, Asia Pacific:on middle class income, 6–7

middle class, 6–10: political tendencieson, 9

migrant population: and floatingpopulation, 78

migrant workers, 35mining industry, sustainability of, 187Ministerial Policy Institutes, 160Ministry of Agriculture (MOA), 89Ministry of Commerce (MOC), 64,

65, 90Ministry of Finance (MOF), 89, 146,

149Ministry of Industry and Information

Technology (MIIT), 89; in creatingInternet policies, 90

Ministry of Personnel (MOP), 90Ministry of Science and Technology

(MOST), 89, 90, 92‘‘Minjiang River Scholar Program,’’

104modernization and urbanization, 76Monitor Group, 7multiple-wave theory, 45, 46

National Bureau of Statistics (NBS), 2f,3; data on S&T, 88; on grossdomestic product (GDP), 1; onhigh-tech export, 104; on importand export, 11; on patentapplication, 87; per capita annualhousehold, 16t; per capita annualincome, 15f; on private carownership, 8; on stock market, 145;on studying abroad, 121f; abouttechnical school graduates, 113f; ontourists, 176; on urban areas, 72

National Development and ReformCommission (NDRC), 56–57, 94,89, 90, 138

National Development Bank of China(NDBC), 140

‘‘National Distinguished YoungScholars Program,’’ 104

National Essential Drug List (NEDL),22

National High-Tech DevelopmentProgram, 99–100. See also 863Program

National Key Basic Research Program,100. See also 973 Program

National Knowledge InnovationExperiment Program, 101–2

‘‘National Natural Science Foundation’’(1986), 92

National S&T Innovative Program,101

national S&T program, system of, 99;China Torch Program, 100; Fundingfor S&T Small and Medium-Size

Index 229

Enterprises, 102–4; Key NationalS&T Industrial Program, 101; keytechnology R&D program, 99;National High-Tech DevelopmentProgram (863 Program), 99–100;National Key Basic ResearchProgram (973 Program), 100;National Knowledge InnovationExperiment Program, 101–2;National S&T Innovative Program,101; National S&T Program forSocial Development, 101; SparkProgram, 100

National S&T Program for SocialDevelopment, 101

National Science Foundation of China(NSFC), 89, 104; ‘‘NationalDistinguished Young ScholarsProgram,’’ 104

‘‘neutral government,’’ 179;government’s flexibility, 179–80;in-depth SOE reform, 180;temporary dual-pricing system, 180

The New Asian Hemisphere(Mahbubani), 29

New Oriental Education andTechnology Group, 107–8

New Rural Cooperative MedicalInsurance (NRCMI), 21

973 Program, 100, 101. See alsoNational Key Basic ResearchProgram

1989 Tiananmen Event, 9, 107,120

1997 Asian Financial Crisis, 34, 44,149, 163–64, 173, 186

1997–1998 Asian Financial Crisis,11, 33

Ningxia: annual per capita household,16t; economic structural reform in,131; and trillion mark, 77

nonperforming loans (NPLs), 38, 46,130, 144, 145

nontradable shares, 146

Obama, Barack: mass ideologicalcampaigns, 46; in saving China’sasset, 42; on wind turbines, 53

‘‘oil diplomacy,’’ 136oil price, 138‘‘one banner,’’ 178‘‘one country two systems,’’ 91‘‘one road,’’ 178‘‘one system,’’ 178one-country-two-system structure,

167–68one-party Communist rule: and

‘‘halfway house,’’ 165Open-Door Policy: by Deng Xiaoping,

130–31open mind, 189–90‘‘Opening the Great West,’’ 131‘‘Opinions on Deepening Healthcare

System Reform,’’ 21Opium War, 9, 125out-going economy, rise of, 10–14

‘‘patriotic bonds,’’ 146peaceful rising: Deng’s view, 174;

socialist market economy, 29Peng Xizhe, director of the Institute of

Social Development and PublicPolicy at Fudan University: views onurbanization, 81

pension, 20, 22, 72, 145People’s Bank of China (PBOC):

comparison with U.S. FederalSystem, 139–40

people’s living conditions, rise of,15–19; housing space, 19–20; socialwelfare, 20–23

‘‘people-owned enterprises.’’ See state-owned enterprises (SOEs)

personal property rights, power of, 163Pfizer Inc.: and trademark cases, 115policy-lending, 118policymaking in reform, 159–60political reforms: by Deng Xiaoping,

128

230 Index

pollution, 49–53; AdministrativeMeasures on the Control ofPollution Caused by ElectronicInformation Products, 2007, 57;Circular Economy Law, 2008,58–59; Energy Conservation Law,1998 (amended 2008), 56;Environmental Protection Law,1989, 53–54; Law on Preventionand Control of AtmosphericPollution, 1995 (amended 2000),54–55; Law on Prevention andControl of Environmental Pollutionby Solid Waste, 1995 (amended2005), 54; Law on Prevention andControl of Pollution fromEnvironmental Noise, 1997, 55–56;Law on Prevention and Control ofWater Pollution, 1996, 55;Renewable Energy Law, 2006,56–57

population growth: on economicgrowth, 16–17; and environment,51–52

postdoctoral research centers,122–23

poverty-stricken country, 191power-money trade, 60–61; and

high-level corruption cases, 61–64;improving transparency, 64

Premier Wen Jiabao: about Beijing’srecovery plan, 40; on domesticmarket, 41; views on innovation,85–86

President Hu Jintao: on country’s goal,2; views on economic growth,31–32; views on innovation, 86

primary sector (agriculture), 3, 127,130

private housing, 152private owned companies (POEs),

23–24; definition of, 134; andKorean War (1951–1953), 134; andnational projects, 87; and SOEs,

discrimination of, 132–33, 160; andSOEs, in urban areas, 127

property rights, for farmers, 188Provisional Rules on Management of

Corporate Bonds, 147psychological trauma, and

unemployment, 37–38public rentals, 152purchasing, power, parity (PPP)

theory, 1

Qinghai: annual per capita household,16t; economic structural reform in,131; education in, 110; and trillionmark, 77

Qiu Gengtian, a professor of the CPS;views on China’s growth, 182

‘‘Quality-Oriented, the,’’ in middleclass, 7, 8

Ramo, Joshua Cooper, 171; theoremsof Beijing Consensus, 172

rapid urbanization: on rural China, 4real estate development, 36, 46‘‘Red capitalists,’’ success stories, 24; of

Chen Tianqiao, 25; of Lu Guanqiu,24–25; of Lu Zhigang, 24; of TangRuiren, 27–29; of Wang Yuancheng,25–27

Renewable Energy Law, 2006, 56–57renminbi-dollar peg, 11‘‘Republic of Profits,’’ 24retired population: health care system

for, 20rising price, impact on economy, 2Robert Solow: Total Factor Productivity

(TFP), definition of, 172Rural Credit Cooperatives (RCC):

history of, 143; operation of,143–44; reform of, 142; to ruralcooperative banks, 144; and SOCBs,143

rural industrialization, 157–58; factorsof, 158

Index 231

rural reform, 155–59; HRS, shortfallsof, 156–57; land rights inequality,155

rural troubles, causes of, 13rural-urban divide, 77, 78, 82

S&T framework transition, 93–94;Break-Ice (1985–1992), 94–95;Localization (1999–2003), 95–96;Market Integration (2003–2006),96–97; Reassuming Direction(2006–2020), 97–98; Weight-trimming (1993–1998), 95

S&Tmodernization, 91‘‘safeguarding 8 percent,’’ 47safety net, 35, 41, 47, 188‘‘sage-emperor,’’ President Hu Jintao,

164–65Scandal of Sanlu Milk Powder, 66–67science and technology (S&T): for

economic growth, 85–89; ineconomic take-off, 3; in humanresource management, 119–24;national programs, 99–104; policiesand innovative system, 87, 89–93; asproductive force, 86

secondary sector (manufacture andconstruction industries), 3, 127, 130

securities market, transition of, 145–48‘‘seeking friends and avoiding

troubles,’’ 174self-determination, in China’s

diplomacy, 173, 174service sector dominance: in developed

economies, 5Shambaugh’s Model, 169–70Shandong: annual per capita

household, 16t; leader in GDPgrowth, 77; migrant workforce in,26

Shanghai, 78; annual per capitahousehold, 16t; banking reform in,142; education in, 110; farmers’migration, 78; and Hukou System,

79; and migrant workers, 76; percapita living space in, 154; and ruralreform, 159; stock market in, 147,184

Shaanxi: annual per capita household,16t; economic structural reform in,131

Shenhua Group, 138Shenyang Smelter and the Shenyang

Cable Factory case, 127–28Sichuan: annual per capita household,

16t; earthquake hit on, 13, 71;economic structural reform in, 133;‘‘Sichuan Scholar Program,’’ 104;taxation reform in, 149; and trillionmark, 77

sildenafil citrate, 115–16single-party ruling system, and

corruption, 58–59small and medium-size enterprises

(SMEs): and bankruptcy, 35–36;new funding mechanisms, for banks,118; S&T human resourcemanagement, 119–24; in securingloans, 117–18

‘‘smart growth,’’ 64–65. See also GreenGDP

‘‘Smarts, the,’’ in middle class, 7, 8Smith, Adam, ‘‘enlightened self-

interest,’’ 187social discrimination, 4–5, 80social welfare, 5, 20–21, 64, 80, 188socialist market economy, 9, 29,

43–44, 91Socialist Transformation Campaign,

134socioeconomic equality, 188Soviet model: and China’s industrial

development, 134Spark Program (1986), 92, 100Special Economic Zones (SEZ),

173State Administration of Foreign

Exchange (SAFE), 148

232 Index

State Automobile Emission Standards,52; Green Sticker vehicles, 53

State Council Development ResearchCenter (DRC), 160

State Intellectual Property Office(SIPO), 90

State Planning Commission, 127state tax, 151state-owned commercial banks

(SOCBs): Construction Bank ofChina (CBC), 142; ICBC, 142

state-owned enterprises (SOEs), 128;Gross Value of Industrial Output(GVIO), 128–29; loans to, 141; andPOEs, discrimination of, 133–34,160; and POEs, in urban areas, 127;reform of, 4; restructuring of, 61

Statistics Bureau of Shandong: ongender equality, 5

strategic investments, 41–42Strike Hard Campaigns, anticorruption

campaign, 61, 114subsidized flats, 152Sun Lijian, view on economic crisis,

44–45Sun Zhongshan: founder of Republic

of China, 9‘‘sunset industry,’’ 135

Tang Dynasty (681 CE–960 CE), oneducation, 112

Tang Guoqiang, International TradeResearch Center of the StateCouncil: on international andnational economic environment, 42

Tao Wang predictions: and economicgrowth, 48; and media observations,35; on safety net, 47; on stimulusplan of work, 46

taxation reform, 149–51; first stepchanges in, 150; substituting tax forprofits, 150; Tax-sharing System, 151

Technology Spreading Program (1990),92

10 Things to Avoid, 37–38tertiary sector (service industries), 127,

130; middle class, 6–10; rise of, 3–6textiles export, 42‘‘think tanks,’’ 159–60Three Gorgeous Project Corporation,

147‘‘three one’s’’ (san ge yi), 178‘‘Three Represents,’’ 173; Jiang Zemin’s

theory of, 10Tian Wenhua, former head of Sanlu, in

adulteration case, 67–68Tianjin: annual per capita household,

16tTianjin Chemical Plant, and pollution,

52Tibet: annual per capita household,

16t; economic structural reform in,131; industrial output in, 159

‘‘to be rich is glorious,’’ 91Torch Program (1988), 92. See also

China Torch ProgramTotal Factor Productivity (TFP), 172town and village enterprises (TVEs),

140, 142, 158; loans to, 144; andtoy industry contract, 36

toy industry, 36trade recovery, government’s role, 186trade sector, growth of, 13–14Trade-Related Aspects of Intellectual

Property Rights (TRIPS Agreement),114

traditional planning economy,transforming of, 180

travelers class, 7. See also middle classTreasury bonds (T-bonds), 146; to

finance budget deficits, 149; andfinance recovery programs, 147

‘‘Trend Followers,’’ in middle class, 7, 8trillionaire provinces, 77Troubled Asset Relief Program (TARP),

45Tsung-Dao Lee, Nobel Prize laureate,

122

Index 233

‘‘two-bombs-and-one-star project,’’ 892006 Action Plan on IPR Protection,

114–15

uneasy coalition, 166unemployment insurance, 22, 23unemployment pressure: ease of, 12–13Unger, Jonathan, views on: middles

class political stance, 10unpredictability, of China, 191urban air quality, 50–51Urban Employed Basic Medical

Insurance (UEBMI), 21urban industry, against rural industry,

159Urban Resident Basic Medical

Insurance (URBMI), 21, 22urban water pollution, 51urbanization, growth of, 72–83; and

economic development, 83; andindustrialization, 73; and migration,72–73; quitting farming, reasons for,76–77; ‘‘Village in the city’’ (VITC),74–75; Wen Tiejun’s view on, 76

urban-rural gap, government’s role in,186

U.S. Declaration of Independence, 176U.S.-China Business Council:

exporters’ to China, list of, 14t

Value Seekers, in middle class, 7, 8Viagra, 115

Wanfang Data Co., Ltd.: Dissertationsof China, 116–17

Wang Guiping, cough syrup, 65–66Wang Xuebing, former president of

Bank of China, in fraudulence case,62

Washington Consensus, 161; 10principles of, 162, 173; Callick’s

‘‘Controlled Freedom,’’ 166–69; andChina Model, 162–64; Hutton’s‘‘Halfway House,’’ 164–66;Shambaugh’s Model, 169–70

Wen Tiejun, head of the Institute ofRural Development of the People’sUniversity in Beijing; on slumdeterioration, 75; on urbanizationand ecological environment, 76

Williamson, John, fiscal policies,162–63

World Bank, 163world economy, China’s role in, 191

Xinjiang: annual per capita household,16t; economic structural reform in,131; ethnic tensions in, 188

Yan Sun, views on corruption, 59Youngtze River Scholars Program

(YRSP), 103–4Yunnan: annual per capita household, 16t;

economic structural reform in, 131;revamping energy industry in, 138

zero tolerance, 75Zhejiang: annual per capita household,

16t; in trillion business, 77Zheng Xiuyu, former chief of China

Food and Drug Unit, in briberycase, 62

Zhou Chunshan, director of Urbanand Regional Research Center ofSun Zhongshan University: inremoving Hukou system, 82

Zhu Rongji, view on internal affair,30–31

Zhu Xiaohua, vice governor of thePeople’s Bank of China, infraudulence case, 62

Zhujiang River Scholar Program, 104

234 Index

About the Author

Jing Luo is a professor in the Department of Languages and Cul-tures at Bloomsburg University of Pennsylvania. He received BAand MA degrees from Peking University and a PhD from ThePennsylvania State University. Luo was chief editor and contribu-tor of China Today—An Encyclopedia of Life in the People’s Repub-lic, and author of Over a Cup of Tea—An Introduction to ChineseLife and Culture.

Business and Technology in China by Jing Luo

Documents

zhongguo nongmingong

ap photoandy

ap photogreg

san ge yi

mao zedong

civil service

tibetan autonomous

real estate