Empire of Lies

by Guy Sorman

  The leaders of Shanghai thought that all they had to do to become another Hong Kong was to copy Hong Kong’s high-rise architecture. But, as the chairman of the Hong Kong and Shanghai Banking Corporation (HSBC) said, “Hong Kong is both a city and a culture.” Hong Kong is more “comfortable” than Shanghai because the rule of law prevails and the judiciary and the press are free. Unable to shake off the legacy of communist China, Shanghai is still very much an urban jungle. The market economy, many believed, followed the principle of the survival of the fittest, and bankers were a law unto themselves. The fact is, however, that bankers prefer Hong Kong’s rule of law to the Shanghai jungle. So except for the façade, nothing has changed. Shanghai is as it was before 1990—the industrial township of Mao Zedong’s dreams.

  After the 1949 Revolution, the communists decided to punish the citizens of Shanghai, which had been a cosmopolitan financial center, by pushing them into heavy industry. Even today, one has only to move away from the wharf at the Bund, the European face of city, miraculously preserved, to see a few cable lengths from the river the drab world of factories: immense industrial zones for building steel, communications equipment, chemicals, and automobiles, the four pillars of the Shanghai economy. This is the real Shanghai. The city directly manages these industries, none of which has been privatized. They employ half the working population and account for most of the city’s finances. Shanghai lives off its industries, not its services. Employment and the budget are the prime concerns of the local government, which pays scant attention to so-called creative sectors such as fashion and the service industries.

  It is said that the state-owned industries in Shanghai are well managed, affording much satisfaction to the advocates of socialism while casting the liberals in a state of disarray. Are they really that well managed? Since the Nineties, the Shanghai government has called in foreign consultants to improve production technology. Yet these enterprises have no say in the number of people they employ and are generally overstaffed. The local government makes such decisions because employment guarantees social stability in Shanghai, a factor that one cannot measure in economic terms alone. Furthermore, the state-owned industries enjoy monopoly status, with the local authorities making sure, for a variety of reasons, that no Chinese or foreign competitor disturbs them. The relative efficiency of Shanghai industry is thus all the more difficult to verify.

  Shanghai and Hong Kong are worlds apart. The assembly lines, textiles, and electronics that made Hong Kong affluent have relocated to China and other Asian countries since the Eighties. What remains in Hong Kong are consulting, marketing, and financial services, which employ more people with a higher level of skills and a greater earning capacity.

  Is it just a question of a delayed start for Shanghai? The city’s future is an open question. China is certainly large enough to accommodate two financial cities, Hong Kong and Shanghai, just as Frankfurt and London coexist in Europe. What Shanghai lacks, though, is a stable legal and business climate, the comfort factor identified by the HSBC chairman. And there is no indication that things are about to change in the near future.

  In fact, change seems less likely in Shanghai than in other Chinese cities because it is even more closely watched by security agents and the Propaganda Department. In Beijing and Guangzhou, some journalists, writers, and lawyers manage to get past the police net and have their say, but in Shanghai, the merest hint of dissident behavior is enough to put one behind bars. Shanghai is the most repressive city in China. Several student and worker movements, some democratic, others not, started here. It was here that the Communist Party took root in 1925. For this reason, the current leaders do not permit any freedom of expression. Of all the cities I visited in the Year of the Rooster, Shanghai was the only one where I could not meet a single dissident. No sooner had I telephoned people whose names I knew, than security agents monitoring the Internet and telephonic communication would place them under house arrest. Shanghai has lost out to Hong Kong, because the government persists in its preference for heavy industry and clamps down on all forms of freedom. Shanghai is nothing but a façade of modernity erected by the Party, which pursues its vision of what the China of tomorrow should look like. Foreigners on a hurried visit tend to lose their critical faculties the moment they land in China. They gaze, wonderstruck, at the façade erected for their benefit.

  Investing in China?

  Attracting capital from the West is absolutely vital for the Chinese economy. Without the massive inflows of foreign capital, China cannot develop. The question is whether foreign firms are getting good returns on their investments in China. So far, whenever they are asked about the profitability of their China ventures, which is often, CEOs or their bankers maintain a studious silence. Accounting procedures offer one good reason for this reticence. Products manufactured in China by multinationals are part of an international production chain: designed in the West or Japan, they are assembled in China, packaged elsewhere, and sold somewhere else. In these circumstances, it is hard to isolate the Chinese contribution.

  Actually, the main cause for the discomfiture of foreign investors in China is that their ventures are not really making a profit. They feel that they must have a presence in China, if not for immediate gain, then for future returns. And so one has to be in China for the sake of being in China. According to an HSBC manager, when a businessman enters the Chinese market, he tends to lose all sense of discrimination. He thinks the country is an exception in which the rules of sound financial management do not apply. It is also true that his Chinese counterparts try to get around the rules. Honesty has not been factored into the Chinese economic model: accounts are fudged, contracts are not binding, justice is linked to status, corruption is the norm, and there is scant respect for intellectual property. As if to prove that it was not immune to this madness, HSBC, too, decided to throw caution to the wind. In 2005, it went ahead with the first Western acquisition of holdings in the notoriously badly managed Chinese banks, sinking under the weight of bad debts. A spate of acquisitions followed. They all say the same thing: China is too vast a market to ignore. Companies must position themselves strategically if they want to sell to the burgeoning Chinese middle class, which will soon adopt Western consumer habits. What will happen if the Chinese gamble does not pay off? Insurance companies will reimburse some Western firms. Other firms that put their China operations in the “politically risky investment” category will simply pass the burden on to the taxpayers of their own countries. But, of course, these scenarios will never come to pass, we are told. It will not be long before the vast Chinese market starts playing by the rules, and the Communist government becomes a normal state.

  Every investment contains an element of uncertainty. But the craze for the Chinese market defies all logic. Rational considerations are abandoned altogether. China watchers are of two kinds: the believers and the nonbelievers. Though both depend on the same unreliable sources of information, the believer will tell you that things are getting better with each passing day, while the nonbeliever will say that nothing has changed at all. So you either have a rosy picture or a gloomy one; there are no shades of gray. The passion for China is absolute, and when one believes, one doesn’t question.

  The European economic press is just as mesmerized, overawed by the size and the promise of the Chinese market. It does not analyze the successes and failures to date. Why are Italian exporters more successful in China than the French? Do the Italians work more effectively, or do their Chinese partners play a role? Do the French and Italians follow different methods? Finding answers to these questions will tell us something not just about the behavior of Europeans in China but also about the Chinese themselves. Until then, China will remain terra incognita.

  Are the bankers and Western businessmen, who are investing their shareholders’ money in China abusing the trust placed in them? Western shareholders, swayed by what they read in the press, want to be trendy and have a presence in China. The moment a company s
tarts doing business with China, its share price goes up. And firms with no presence in China become marginalized. The prudent investor—and there are a few—is not likely to be among the delegation accompanying a European head of state on a visit to China.

  CHAPTER SIX

  Skewed Development

  Mao Yushi is one of China’s most lucid economists. This is reason enough for the public security militia to keep him under permanent surveillance. He worries not about himself but about the waste of public money. Four men, and sometimes two cars, are stationed in front of the building where he lives. Then there are the men who tail him whenever he goes out. It all seems so silly. He is nearly eighty and not about to run away.

  Like all independent intellectuals in China—they are a dying breed—Mao Yushi leads a simple life. He lives in a run-down building in Beijing, a rambling edifice built in the Sixties, freezing in winter and sweltering in summer. The tiny apartment that he shares with his wife overflows with books, souvenirs, and plastic tubs to collect the rainwater that seeps through the roof. He could live far more comfortably if he worked for the Party. The government is happy to buy off intellectuals, a much cheaper way of neutralizing them than round-the-clock surveillance. It is also effective. Most of the old rebels have become “experts” who stick to their discipline. Perhaps the word “intellectual” in the sense that we understand it is a misnomer. Comparing China with the West, the novelist A Cheng, who lived for several years in the United States before returning to Beijing, says that there are many literates in his country but few intellectuals.

  In fragile health and a little hard of hearing, Mao Yushi has no illusions about his inability to overthrow the Communist Party. When he intervenes publicly, he is neither aggressive nor revolutionary. His is a gentle brand of sarcasm. In 2004, around the fifteenth anniversary of the Tiananmen repression, he wrote a letter to the head of state suggesting that those responsible for the massacre acknowledge their role and ask forgiveness from the Chinese people. This would be the best way to put behind them a painful episode and move ahead, he proposed; any delay would only exacerbate hatred. Cosigned by other liberal intellectuals, Mao Yushi’s letter circulated on the Internet and was taken up by the foreign press, but to no avail. The leaders of mighty China were not in the habit of being told what to do, no matter how gently. In 2005, he offended the authorities again, publishing a collection of his articles under the title Give Freedom to Ones You Love. The censors were not amused, and the publisher had to withdraw the book from circulation. Mao filed a case against the publisher, because filing a case against the Propaganda Department itself is impossible. The publisher lost. Is the rule of law gaining ground in China or is it just illusion? Winning the case was meaningless, as Mao Yushi’s book is not available anywhere. Books no longer burn in China; they just vanish.

  What economic miracle?

  Mao Yushi is even more provocative when he says that economic development in China is not a miracle but an illusion.

  Isn’t he happy with the country’s 9 to 10 percent annual growth rate? He would be, if he were sure that the figure were accurate. But since statistics are the sole prerogative of the government, there is no way of ascertaining their veracity. And since the government has never been known for its truthfulness, any information that it gives must be taken with a grain of salt. Between 1960 and 1980, it abandoned data collection altogether. When the exercise was taken up again in 1980, there were many incongruities. In 1990, for example, the authorities said that 95 million hectares were under cultivation—in other words, 0.08 hectares per capita, a figure even lower than Bangladesh’s. This raised the specter of famine, for it appeared impossible that China could feed its people with that little land. Satellite pictures revealed the error, and in 2000 the figure was raised to 130 million hectares. In fact, it is 150 million. The Party had deliberately underestimated the amount of land under cultivation to suggest that China had achieved spectacular gains in agricultural productivity. This is just one of the countless instances of manipulated figures.

  So Mao Yushi did his own calculations, spotting discrepancies and missing figures along the way. (When numbers get uncomfortable, official statisticians simply omit them.) To get a true picture, Mao went over the fudged statistics year by year and arrived at a growth rate of about 8 percent per annum. This is a healthy rate, due principally to the mechanical shift of the unproductive or idle peasant population to industry. It is comparable with the growth rates of Japan and Korea during their takeoff phases. But it can hardly be called a miracle; further, when seen in isolation, it has no meaning. First, one would need to subtract all the negative effects of Chinese development: widespread damage to the environment, soil depletion, pollution and its resultant epidemics, and the collective, individual, and social crisis caused by mass migration. Mao Yushi, considered by economists to be a pioneer in the field, reckons the annual amount of environmental destruction to be about 10 percent of the total production. As experts outside China do not dispute, this should logically be deducted from China’s wealth.

  Mao Yushi acknowledges that no development can take place without a large-scale rural-urban shift and that a certain amount of damage to the natural environment is inevitable. But he questions the government’s savagery, and he thinks that the current growth is not sustainable. Natural bottlenecks—scarcity of energy, of raw materials, of water—will interfere. Raw materials and energy can be imported, but not water, which is now a rare commodity in China—and there is no attempt at water management. Because water is free, it is wasted and polluted, and goes untreated. The Chinese government does not view purification plants as useful investments. As a result, hundreds of millions of Chinese have no access to drinking water, and many die.

  In addition to recalculating the growth rate and deducting its negative impact, Mao Yushi has questioned the nature of Chinese growth. Many of the goods produced in China are worthless, either because there is no market for them or because they are substandard. This is particularly true of public companies. About 100,000 such enterprises continue to run in the old Maoist style, producing because they have to justify their existence and achieve the targets set by the Party. Once an enterprise meets or exceeds its target, its responsibility is over. It doesn’t matter what happens to the goods that it has produced. The public firms’ objective is simply to provide employment to those whom the Party cannot dismiss or redeploy to other activities.

  I ask Mao how such companies can survive in a market economy. But China is not a market economy, Mao retorts. Most public-sector companies have no real accounting system, so there is no way of ascertaining their profitability. In any case, the banks will bail them out. The Party gives the banks a list of people to whom loans are to go for political or personal reasons, with instructions that they are not to ask for repayment.

  All this will change, I’m told, when I’m in Beijing. Banks will function strictly along commercial lines. But so far, it has not happened. Political considerations take priority over everything else, explaining the large number of buildings, both residential and business, that are more often empty than not, and the roads and airports that serve little or no purpose. The profits of growth, especially export earnings, are squandered on such unproductive investments, which in the long run generate neither wealth nor employment. The fact that investment decisions are based on political considerations, not the market, constitutes the central flaw of the Chinese economy, and, according to Mao Yushi, it is partly responsible for the high unemployment rate. The Party maintains a discreet silence, preferring to emphasize the high growth rate.

  Twenty percent unemployed

  Unemployment has been limited to 3.5 percent. At least that’s the official figure, announced at the beginning of each year. The real figure is incalculable. The hundred-million-strong floating population—migrants who travel from place to place, going wherever they can find work or returning to their villages—are neither employed nor unemployed. The same holds true for m
illions of idle peasants who are either wholly or mostly landless. If they had the freedom to work in the city, they would. So are 20 percent of the Chinese unemployed? It seems plausible. Unemployment affects not just the poor. Two-thirds of China’s engineers, university degree holders, cannot find work commensurate with their qualifications even three years after they finish their studies. Their unemployment has to do with the nature of China’s development, which is based on the massive deployment of unskilled labor rather than the development of research and the service sector, which require more educated manpower. Is it any wonder, then, that so many engineers and technically qualified people leave for the United States and Canada?

  As a result, despite of a high growth rate, there is still a dearth of jobs because profits are invested in unproductive ventures. Foreign investment does not generate much employment, either, since overseas companies prefer to set up high-productivity units requiring little labor. And export firms in the textile and IT sectors recruit mostly untrained girls on short-term contracts. There are no jobs for poor peasants, students, or workers laid off by the public factories.

  What does Mao Yushi suggest? Nothing original; only that China follow the path of Japan, Taiwan, Singapore, Hong Kong, and Korea—all countries that managed to make good. If export earnings are well spent, employment will follow growth. Developing medium-size towns makes more sense than concentrating capital on the east coast and creating unmanageable agglomerations. In the final analysis, the solution is to invest in human resources, education, and health care, which would reduce social tension and enable China to move from primitive capitalism to sustained development. The first Asian “tigers” based their economies on the quality of their human resources; the Chinese government believes in exploiting labor. Is anyone ready to take up Mao Yushi’s ideas? No, because economic organization is only a reflection of political organization. An urban class dominates the country, bureaucrats run the Party, the peasants have no say, and hence the interests of the establishment dictate economic choices.