Empire of Lies

by Guy Sorman

  Chinese banks: ticking time bombs

  What does Mao Yushi think is in the cards for China’s economy? Bankruptcy, he says, because banks keep making loans that will never be paid back. The banks are in no immediate danger, because the money coming in far exceeds the money being lent out. A healthy cash position acts as a buffer. In the recent past, though, there have been some scares—especially in Guangzhou in 2002, when depositors learned that the manager of their bank had run away with the cash box. But the Central Bank stepped in immediately, supplying fresh money to allay fears. On the whole, the Chinese show a surprising degree of confidence in their banks, admits Mao Yushi, which is how they can go on granting loans on the Party’s instructions without worrying about the risks.

  When will the bubble burst? Not as long as the world market supports Chinese growth, foreign investors remain attracted to China, and the Chinese continue to keep their savings in banks and post offices. Savings nationwide constitute a huge amount, stable because people have little choice. After ruining many an investor, the Shanghai stock exchange is no longer an option; the export of capital is prohibited by law; investment opportunities outside the bank are almost nonexistent; real estate, the only alternative, requires a very high level of investment. So Chinese investors either put their money in the bank or invest in the soaring real-estate market, which, with millions of apartments and offices still lying vacant, could go bust at any moment. If, by some chance, a war or epidemic turned the world away from China or if the Chinese became nervous about their savings, the ensuing panic would wipe out the banks, plunging the country into disaster. The Chinese, says Mao Yushi, can accept losing some or all of their freedom, but if they lose their savings, they will never forgive the Communist Party. The Party knows this and is doing its best to stave off bankruptcy.

  In 2005, Chinese banks began a series of reforms to bring their practices gradually into line with Western standards. Foreign banks willingly invested in the modernization plan, hoping to use Chinese banking networks to sell a whole range of new products, including credit cards and attractive investment schemes, to a 100 million prosperous Chinese. The question is whether Chinese banks are reformable. The subject may appear technical, but it lies at the heart of the Communist system.

  The central government needs better-managed banks that can finance rational activities, because if the banks went bankrupt and the investors lost their money, the Party would collapse. But if banks functioned rationally, they would no longer be at the beck and call of the local Party bosses to whom no bank can currently refuse a loan. The loans prop up unproductive local firms that provide jobs and perks. Without the loans, the cadres would lose their influence and public-sector jobs would dry up. Students would suffer, too: banks would stop giving them loans, knowing that they would never return the money. As things stand, they dare not ask these future cadres to honor their debts. Reforming the banking system is thus fraught with danger. There could be a student revolt, thousands of loss-making enterprises could close down, and the local bosses could become toothless.

  How will the Party reconcile these conflicting pulls and pressures? Will it be able to avoid bankruptcy by adopting more rational policies, and at the same time guarantee social stability by maintaining the local chiefs’ power to grant loans? Who will be hit first: local cadres, students, the new unemployed, or the financial system? Chinese leaders and foreign investors keep their fingers crossed. If capital keeps flowing in, growth continues, and small investors remain compliant, the contradictions will disappear on their own because of a plentiful cash supply. Mao Yushi is right: the Party’s future depends on the future of the banks.

  The elusive middle class

  Isn’t China moving spontaneously toward democracy? Hasn’t growth created an independent middle class that will clamor for greater political freedom?

  Mao Yushi does not think so. What exists is a class of “parvenus” whose purchasing power depends on proximity to the Party rather than education or enterprise. They consist mainly of bureaucrats and high-ranking officials who, by virtue of their office, are entitled to all kinds of favors and perks. The fortunes of this pseudo-middle class are closely linked to the Party’s. Except for a handful of genuine individual entrepreneurs, the parvenus work in public administration, the army (an economic power in itself), state enterprises, and firms de jure private but de facto owned by the Party, its legion of cadres, and the army. There are the apparatchiks and the “entrepreneurchiks”—entrepreneurs by the grace of the Party!

  A variety of fringe benefits, legal and illegal, helps this new class maintain its lifestyle. The administration and public enterprises pick up the tabs for almost all the parvenus’ imported luxury cars, two-thirds of their mobile phones, and three-fourths of their restaurant bills, as well as their entertainment, expense accounts, call girls, study trips abroad, and lavish spending at Macao and Las Vegas casinos. The absence of safe private property increases the parvenus’ dependence on the Party. Most people have only occupation rights—on land, in an apartment, or in an enterprise. Property is a gray zone, leaving its occupants in a permanent state of uncertainty. For instance, apartment owners in a collective housing block have real ownership rights, but the building is constructed on a plot granted for a limited period to the contractor by the state, the army, or the local government. No one can say what will become of the apartment owners when the lease expires. Because ownership is so uncertain, the entrepreneurchiks are always looking for ways to become rich overnight and stash their money abroad. Foreign investors, however, are more disposed to take long-term risks, either because they are covered by insurance or because they feel less threatened by the government than do the Chinese.

  Getting a loan and not repaying it is a specifically Chinese way of amassing wealth. Loans are easily available for those who have connections, which the Chinese call guanxi. A 5 percent commission, however, has to be paid to the people at the bank (it goes directly into their pockets) and 15 percent to the local Party cadres for getting the loan approved. In principle, the money is to be invested in real estate or industry. How it is actually used is a different matter altogether. Apart from an initial 20 percent, the debtors don’t have to repay anything as long as they continue to enjoy the Party’s patronage. The fact that the Party can withdraw these advantages at any time helps in curbing dissidence but raises doubts about the mechanistic theory that the Chinese economy is generating a middle class that will necessarily ask for democracy. This Korean scenario of one thing leading to another seems improbable in China. Parvenus do not form a civil society. Dependent as they are on the political establishment, they are hardly likely to press for the democratization of a regime that ensures their prosperity.

  The dependency is not just material. My personal view is that the educational system is instrumental in fostering it. Students must never question the teacher. Theirs is not to think and argue but to listen and learn by rote. Discussion and originality receive no encouragement. This failure to develop critical thinking is as detrimental to the cause of democracy as material dependence on the Party.

  Transition: a convenient explanation

  “Your criticism is valid, but we are in a transitional phase”—the standard argument that the authorities put forward. They do not need a Mao Yushi or a Western observer to point out the flaws of Chinese development. They are fully aware of its weaknesses and conveniently lump them together under the general category of “transition.”

  Mass migrations and the human suffering that they cause—epidemics, prostitution, and bad investments—are supposedly symptoms of transition. Development, I am told time and time again, is the panacea for all evils; with development, things will sort themselves out. This is a convenient ploy to preclude embarrassing questions. Any attempt to delve further means being branded an enemy of China or an ignoramus, unaware of realities on the ground. It is impossible to have a reasonable discussion with cadres and officials; there seems to be a real ideologi
cal barrier. The current set of Chinese leaders is self-righteous and considers criticism either silly or prompted by ulterior motives. Those who support the market economy unconditionally share this “it will all work out” optimism, even in the face of everything going wrong.

  Michael Bernstam, a well-known economist with the Hoover Institution at Stanford University, has studied the shift of old totalitarian regimes to a market economy and concluded that educational and health infrastructure was often well developed in the period of despotism. Cuba, the Soviet Union, and Mao’s China invested heavily in these areas, the showcases of their regimes. Though society was like a prison, people were relatively healthy and educated, and life expectancy increased. No sooner had these countries embraced the market economy than nonproductive investments—schools and hospitals—began to suffer, sacrificed for industry. So health and education declined. We have to wait for the transition to end, Bernstam argues, before a new threshold of development can be reached, enabling governments to reinvest in health care and education. Already in China, the more fortunate are paying for their health care and education, and the schools and hospitals that they use are much better than the ones that the Communist regime used to provide free of charge.

  Bernstam applies the same logic to the environment. In an authoritarian society and a stagnant economy, the environment remains stable. During the transitional phase, development causes destruction; once this phase is over, however, society and firms once again have the means to protect the environment, save water and energy, and reduce pollution through costlier techniques of production.

  The American economist, an icon of unfettered markets, is in agreement with the Chinese strategists. In short, he is asking us to choose between stagnating in good health and developing at a risk. There are winners and losers in both cases, but they are not the same. Since there can’t be only winners, someone must act as the referee. The question is who. In China, it is the Communist Party. In India, the only country currently comparable with China, arbitration is democratic.

  China and India: a comparison

  Why India? Comparing China and India is a recent phenomenon that began during the Year of the Rooster. These two neighboring countries have always been alien to each other. Fifteen centuries ago, for example, when Buddha’s disciples went from India to China, the Chinese so transformed their message that it resembled Daoism more than Buddhism. In the Sixties, the Himalayan region saw a few military skirmishes, the sole purpose of which was to reassure the Communist army of its superiority. Other than that, there has been little contact, each country following its separate path. India chose conservatism, China revolution. Until the end of the twentieth century, zero growth and mass poverty were the result in both. The fall of the Soviet Union and the demonstration of the market economy’s superiority served as a wakeup call for both countries almost simultaneously. Rajiv Gandhi converted his people to liberalism in 1989, Deng Xiaoping his in 1992. The Indians and the Chinese embraced globalization at the same time, with its constraints on the one hand and its efficiency on the other.

  In their race to development, China appears to have taken the lead, recording an average growth rate of 9 percent as against India’s 6 percent. In terms of per-capita income, too, the Chinese, who started at the same level as the Indians, have become twice as rich in the space of fifteen years: $1,200 per annum on average, compared with $600. But this is an overall figure. It fails to take into account the unequal distribution of incomes. Nor does it reflect noneconomic values, such as democracy, freedom of religion, and respect for life.

  Chinese growth is fueled to a great extent by foreign investors (often Chinese). Why do they prefer China over India by a wide margin? China lets them get rich fast. The Communist Party speeds up formalities, makes available a compliant workforce, and does not care about social rights and the environment. This is the advantage of an authoritarian regime. India is a democracy where citizens have rights, which makes everything so much slower. In the long run, India is more predictable, but China offers quick profits.

  The Chinese also have a formidable propaganda machine at their disposal. Large Western firms are vying with one another to take part in China’s “great economic adventure.” To express the slightest doubt about the Chinese market is to be dubbed a loser and an enemy of China even by certain sections of the Western press.

  Until 2005, no Chinese economist expressed interest in India, and few Indians paid any attention to China. Awareness developed after the Indian economist and Nobel Prize winner Amartya Sen studied China. In exchange, Chinese delegations set out to discover India. Sen’s study led him to conclude that China is ahead of India only if one uses inaccurate statistics. The Chinese found in India an alternative model of development.

  China as seen from India

  Can India and China be compared? Comparisons based on a single factor like growth rate, ignoring historical and civilizational differences, are meaningless. What is interesting, however, is the sudden need felt by both countries to look at each other afresh, and the new thinking to which this could give rise. Amartya Sen challenged China’s much-vaunted growth rate. A growth rate that does not take into account the human factor, he told the Chinese, is skewed. Now, the average life expectancy in China has not increased; in fact, it is declining in the western provinces. Education, health, and the environment have been the casualties of a purely quantitative approach to growth. Conversely, people are living longer in India, regardless of which part of the country or strata of society they belong to, even though initially, life expectancy there was lower. In 1979, when China launched its economic reforms, the Chinese lived fourteen years longer than the Indians, on average. They had the benefit of a widespread basic health system, nonexistent in India. Twenty-five years later, life expectancy remains the same in China, whereas in India it has gone up from fifty-seven to sixty-four years. In some Indian states, especially Kerala, it has reached seventy-four, much higher than the average in China. Child mortality in Kerala is now 33 percent lower than in China, where there has been hardly any change.

  The sex ratio is another important human indicator, because it indicates the extent of female infanticide and respect for human life. Here again, India is better placed than China: 107 females per 100 males in India, as against 94 in China. In Kerala, the ratio is the same as in Western Europe.

  Amartya Sen’s optimism needs to be qualified, however. Specific cases and averages are misleading in countries as diverse as India and China. One can argue, for instance, that Kerala is not representative of the whole of India. And the life expectancy in Shanghai and Beijing is higher than in Kerala. But the overall pattern is clear: the quality of life, as defined in terms of life expectancy, child mortality, and sex ratio, is improving faster in India, a democracy, than in China.

  Certainly China is growing rich, but if we consider the human factor, is it really developing? And while India is developing slowly, will it not make progress faster?

  It all depends on what we understand by the terms “development” and “progress.” Amartya Sen believes that human indicators are a better way to measure progress than the growth rate. Isn’t this a philosophical choice, more reflective of the ethos of a people? What shapes our conception of development: culture or democracy? Is it because debate is forbidden in China that health care and education have been sacrificed at the altar of the market economy? It is always the poor, the most numerous, who suffer. But whereas the poor in China have no voice, in India they vote and the media are ever vigilant. Indian politicians cannot afford to alienate them: they need their votes. Thus values like family, tradition, and religion are preserved. They may not be quantifiable, but they contribute to general well-being. Cultural and spiritual values find no place in China’s march forward. A poor person in India with the same income as a poor person in China may be richer, in fact, because he still has his religion and his traditions. One has preserved what the other has been deprived of.

  Indians
are happy with the qualitative approach because it gives them an excuse for their indolence. But it also worries a few Chinese.

  India as seen from China

  Chen Xin, an economist at the Academy of Social Sciences in Beijing, is one of those who are worried. Ever since his visit to India, he looks at China differently.

  Before 1989, the Academy was the “liberal” laboratory of the regime. It was here that the privatization of state-owned companies and the opening of the Chinese economy to the world market were conceived. After the student revolt, which academics had supported, old scholars were sidelined to make way for a new, more cautious, generation of researchers. Listening to what they have to say gives one a sense of the limits the Communist Party places on thinking.

  Chen Xin is a symbol of the new wave; he speaks reasonable English and does not wear a tie, which for a Chinese intellectual is tantamount to dissidence. We are alone in his office. This, too, is unusual, since normally there is a third person on hand to keep an eye on things and take notes while serving tea. For a moment, I think this is an indication of greater freedom. Then I realize that I am being naïve. The note takers of the past, who transcribed even the most humdrum of conversations, have been replaced by cameras. The censors have acquired technical savvy.

  Chen Xin visited India and concluded that India was developing at the same pace as China. It was not practically feasible, he felt, for the people of both countries, about 3 billion human beings, to achieve Western standards of living simultaneously. Let us suppose that growth in both countries rises, and each Indian and Chinese person acquires a car and other Western luxuries. This would lead to a practical and environmental impasse. Even if one could find ways and means to reduce energy and raw material consumption radically, there would still not be enough to satisfy the demand of both Asia and the West. The world would become a giant parking lot. At present, China has only one car for every seventy inhabitants, in comparison with America’s one car for every two. Yet Beijing and Shanghai are already congested with traffic. Will it be possible to meet the needs of Chinese or Indian consumerism at the expense of the Western consumer? Chen Xin does not think so. He doubts Westerners will ever curtail their energy consumption and share resources with Chinese and Indian consumers. In any case, the United States currently dominates the world’s raw-material and energy markets, and will not hesitate to put a brake on growth in China and India the moment it feels that they are lowering American standards of living.