The Party: The Secret World of China's Communist Rulers

by Richard Mcgregor

  Even by the standards of China’s explosive growth, the expansion of the Chinese dairy industry had been astonishing in the previous decade. Pushed by a government which saw health benefits from the addition of dairy products to the Chinese diet, consumption of such products doubled in the five years from 2001, and revenues grew at an even faster pace. Mengniu (‘Mongolian Cow’), the largest firm, which received investment from Goldman Sachs and Morgan Stanley and a business plan designed by McKinsey & Co. before listing on the Hong Kong stock market, had revenues of $5.9 million in 1999. By 2007, the once small private company in Inner Mongolia had became a certified national champion of Chinese industry, with sales of $3.1 billion. As the company liked to say: ‘Even though he is a cow, he runs with the speed of a rocket!’

  Sanlu was another fast mover. Under Tian Wenhua, its then new chairwoman, Sanlu had pioneered the practice of outsourcing milk production in 1987, something the rest of the industry in China would later rush to emulate. Sanlu lent cows to farmers, who repaid the debt by delivering milk back to the company via a huge network of collection stations and middlemen. In return Sanlu collected a management fee. Instead of producing milk, the company transformed itself from a small local dairy into a milk-marketing giant.

  For fifteen straight years, Sanlu was the top seller of formula in the country, making it the largest taxpayer in Shijiazhuang, an invaluable asset for a city otherwise struggling to attract industry and investment on a par with China’s premier metropolises. In Chinese corporate parlance, Sanlu was a collective, an enterprise in which the managers and workers owned the shares, usually under the political supervision of the local communist party and government. In 2005, with its competitors closing in, Ms Tian forged an alliance with Fonterra, the world’s number one dairy exporter, from New Zealand, which offered state-of-the-art technical expertise, to cement its place as an industry leader.

  Diligent and frugal, and unusually untainted by allegations of personal corruption, Tian had been vaulted into the party elite by the company’s commercial success. As early as 1983, the All-China Women’s Federation had named Ms Tian a ‘March Eight Red Flag Bearer’. The titles of the scores of other official awards that followed underlined the value the Party put on her business success. She was named a ‘National Worker for Children with Distinguished Contributions’, and an ‘Excellent People’s Public Servant’ from Hebei province. In 2005, she became the ‘Most Respected Entrepreneur of the Chinese Dairy Industry’. Ms Tian also sat on the Chinese People’s Political Consultative Committee, a party-controlled body that met in Beijing each year concurrently with the annual session of China’s legislature.

  It was the two positions embossed on her name card that captured her conflicting loyalties most clearly. Ms Tian was the chairwoman of Sanlu, and also the head of the company’s communist party committee, a second, more elevated, position, which bound her to a different set of rules from those governing mere corporate executives. As chairwoman, she reported to the Sanlu board. As party secretary, she reported to what in China is often euphemistically referred to as a ‘higher authority’, to her seniors at the next level up in the Party itself.

  Ms Tian’s experience in the dairy industry, combined with the expertise of Sanlu’s new shareholder, Fonterra, should have readied the joint venture to handle the food scandals then engulfing Chinese industry. Sanlu certainly had had no shortage of forewarning of the industry’s problems. In early 2004, thirteen babies had died in the poor central province of Anhui after being reared on fake milk formula. The victims were called ‘big-headed babies’, because their heads swelled while their bodies wasted away. Incident after incident followed. Soon after, seventeen-year-old rice was found in shops being sold as freshly harvested. Shanghai’s largest dairy company was discovered reprocessing milk already past its expiry date. In 2007, cats and dogs began falling ill and dying in the US after eating Chinese-made pet food. Toothpaste from China containing an antifreeze chemical was blamed for killing scores of people in Panama.

  The foreign criticism that rained down on China after these international incidents left the government floundering to fashion a coherent response. The impulse of some senior officials, raised in a Communist Party infused with an anti-imperialist ethos, was to lash back. ‘Some foreign media, especially those based in the United States, have wantonly reported on so-called unsafe Chinese products,’ said Li Changjiang, the head of the agency responsible for monitoring food imports and exports. Mr Li complained that foreigners were turning ‘white into black’, but his fulminations masked deep anxiety in the central government about food safety. Late in 2007, the government sent as clear a signal as the state could muster on the issue. It executed the head of the State Food and Drug Administration, Zheng Xiaoyu, after he was convicted of taking bribes from pharmaceutical companies seeking government approval to market their products. Almost as soon as it was sent, though, the message amplified by the rare execution of a cabinet-level official was drowned out by the Party’s overriding priority at the time, to expunge negative news in the lead-up to the Olympics.

  More than one commentator has compared rapidly industrializing China with the satanic mills of Dickensian Britain and ‘the jungle’ of Upton Sinclair’s 1906 novel of the same name exposing the horrors of Chicago’s meatpacking industry. Chinese food scandals bore an eerie similarity to the problems that beset the west during its own rapid industrialization. In China, as in the US and Europe a century or so beforehand, government regulators could not keep pace with the wealth, pollution and corruption generated by an exponential take-off in economic growth and the societal transformation that trailed in its wake. There was one important difference between China and the west–the Party, and the way it handcuffed the media.

  In the US, muck-raking reporters made their careers by exposing the sins of robber-baron capitalism. In China, journalists in an increasingly commercial media nurture similar instincts, but they face a near-insurmountable obstacle, in the form of the propaganda department, in trying to follow their leads through. The powerful party department had long ago turned the Jeffersonian ideal of an informed citizenry on its head. According to its founding ethos, the media existed to serve the Party. The citizenry ran second. In the year of the Olympics, the department was not just concerned that exposés might cause unrest and damage the local economy. At a time when China would be in the international spotlight as never before, an uncontrolled media threatened to do even worse, by embarrassing the Party and the nation.

  The propaganda department began its pre-Olympic tightening of the existing reporting restrictions in late 2007, well in advance of the games. In a baleful coincidence, the first complaints about Sanlu’s formula had begun to trickle in to the company in Shijiazhuang at precisely the time the new restrictions were coming into force. The complaints recorded by the company’s customer service line would be consistent for the next eight months. Parents who fed their babies the Sanlu formula said their infants’ urine had begun to turn red. As their kidneys deteriorated, some babies were not able to pee at all.

  The cause was a chemical compound called melamine, used to make plastic and glues, as well as fertilizer because of its high nitrogen content. To the burgeoning middlemen in the Chinese dairy market, who collected the milk from individual farmers before passing it on in bulk to companies like Sanlu, melamine was known by a creepier name. They called it ‘protein powder’. Chinese manufacturers had used melamine to artificially inflate the apparent protein content of wheat gluten in pet food exported to the US, which had led directly to the deaths of many cats and dogs which were fed it. Milk suppliers began to use the same trick in late 2007. Under pressure to shave costs in a market and meet new nutrient standards imposed after the ‘big-headed babies’ scandal, the suppliers were looking for a way to increase their margins. The outsourcing Ms Tian had pioneered years before and which had then been copied by competitor companies had come back to haunt the industry. Sanlu, and other dairy companies, had
ceded control over the quality of their products to unscrupulous middlemen focused solely on price.

  On the front stage of business and party life throughout this period, Sanlu seemed to be thriving. In late 2007, CCTV, China’s national broadcaster, hailed Sanlu for its high-grade milk products in its weekly Quality Made-in-China programme. Laudatory articles about the company continued to pop up in the media through the rest of the year and 2008, even as more and more babies fell ill. Many of the articles were effectively paid advertisements, written by Sanlu’s in-house PR representatives, but appeared as ordinary stories written by staff correspondents. As late as 6 August a Sanlu public relations officer, passing himself off as a journalist, reported in the People’s Daily and on China’s most popular news portal, Sina.com., that the company had been honoured as one of the brands that ‘had changed China’ in the past thirty years. Sanlu’s PR efforts, an exemplary display of the close ties between wealthy companies and the party-controlled media, garnered it many advantages. After passing muster with the central government’s Food Safety Bureau for three years in a row, Sanlu’s milk formula in 2008 was no longer even being tested by the authorities for potential contaminants.

  Backstage, out of sight, however, the picture of healthy products and happy babies was falling apart. The alarm bells inside Sanlu had been going off for months. The initial complaints about sick babies in late 2007 had been ignored, but they continued to mount. In February, the father of a young girl in Zhejiang who posted details of her inability to pee on a website removed the posting after Sanlu gave him free milk powder. In July, a local television station in Hunan tried to side-step the pre-Olympics reporting regulations by featuring shots of Sanlu products in a report on a sudden rise in kidney stones among babies, without mentioning the company in the accompanying voiceover. The same month in Guangdong, southern China, the editor of the Southern Weekend,, a well-known investigative weekly, discovered twenty babies had been hospitalized after consuming Sanlu’s formula. The propaganda department, on patrol through its local affiliates for negative news ahead of the games, blocked the story altogether. ‘For reasons that everybody knows, we were not able to investigate the case at the time because harmony was needed everywhere,’ the editor, Fu Jianfeng, wrote later in a guilt-tinged post on his blog. ‘I was deeply concerned because I sensed that this was going to be a huge public health catastrophe, but I could not send reporters to investigate.’

  By late July, Sanlu had had its own tests verified by a provincial government laboratory. The results, when they came back, on 1 August, were alarming. Of sixteen batches sent, fifteen had potentially poisonous levels of melamine. The tests not only landed Ms Tian with a dilemma of corporate responsibility and public health. More than anything, as a senior party member, her problem had become acutely political. The Party’s directives pulled her in different, conflicting directions. Ms Tian was obliged to follow the law against producing and selling dangerous goods, but as party secretary of the company, she also had overriding political responsibilities. The most important short-term political task, dictated by Beijing, was to ensure the Olympics were a success. Just before the games, the propaganda department had strengthened its reporting restrictions again with a directive that Sanlu and Shijiazhuang could not have failed to notice. Point eight of a twenty-one-point missive issued in early August was explicit: ‘All food safety issues…are off limits.’ A week away from the Olympics, a public recall of Sanlu’s formula and an admission that babies drinking it had been poisoned would have created an uproar at home and abroad, devastated Sanlu’s business and destroyed the party careers of company executives and city officials.

  On 2 August, only a few hours after Ms Tian had closed the emergency meeting of Sanlu executives, the company’s board was hurriedly called together on a Saturday morning in a telephone hook-up. The sole director from Fonterra available at short notice, a company veteran by the name of Bob Major, told colleagues that the board agreed after hours of debate to his demand for a full recall of milk products. A few hours later, he was rung back at his home in Shanghai and told the Shijiazhaung authorities had overruled the board. Fonterra prepared minutes detailing its understanding of the board’s decision for a full consumer recall of milk products. Sanlu sent back its own record, containing what it now insisted was a record of the meeting’s decision in favour of a limited trade recall. Both sides refused to sign the other’s board minutes.

  There was little doubt whose view would prevail. Sanlu’s original decision, taken at the late-night conclave ahead of the board meeting, stood on the orders of the Shijiazhuang city government. The board, in theory the sole lawful decision-making body for the company, had simply been bypassed, its deliberations rendered irrelevant. As the Legal Daily commented later: ‘It was precisely at this [late night] meeting [on 1 August] that [the executives] miscalculated the situation, and passed a series of wrong decisions and sent Sanlu on its fateful journey to the end.’

  With the Olympics in mind, the vice-mayor in charge of product safety in Shijiazhuang laid down the cover-up strategy in starkly political terms to Sanlu. Keep the problem secret, he said. Make sure the media does not make a fuss. Stop angry consumers from travelling to Beijing with complaints. If all else failed, he concluded, using a pithy Chinese expression: ‘Block people’s mouths with money.’ Sanlu immediately sought out the city’s propaganda department, writing to it to ask for help in ‘co-ordinating’ the media. ‘This is to avoid whipping up the issue and creating a negative influence in society,’ the letter said. Then, the company added some cyber-insurance for itself, with the strengthening of a so-called ‘protection agreement’ it had previously purchased from the search engine Baidu, China’s Google. Baidu had long finessed its internet searches for the Chinese government, to block commentary critical of the Communist Party. It sold the same service to commercial clients, in the case of Sanlu for rmb 300 million, to limit or screen out searches linking the company’s products to sick babies and melamine. (Baidu later denied selling this agreement.)

  More than a week into the cover-up and four days into the Olympic games, Sanlu’s public relations division was still pumping out positive news items. A Sanlu release posted on the national food industry’s website reported the company was handing out free milk powder for babies born on the day of the opening ceremony. ‘Sanlu milk powder says “Let’s Go!” to the babies of the Olympics,’ the article said. ‘Let’s use high technology, high standards and high nutrition Sanlu milk powder to say “Let’s go!” for the future of China!’ It wasn’t until 9 September that someone blew the whistle loud enough for the central government to hear it. After a delay of weeks while Fonterra agonized over what it should do, the New Zealand government directed its ambassador in Beijing to inform the Chinese government of the tainted milk. The full product recall, and the massive fallout, began immediately.

  When Xinhua announced a few days later that Ms Tian had been sacked, the official news agency made no bones about who had taken the decision. The large headline said her sacking was ‘an organizational matter’ for the Hebei provincial party committee. Almost as an afterthought, at the end of the 500-character dispatch, Xinhua noted that Ms Tian had also been removed by the company’s board in ‘accordance with regulations and procedures’. The board had in fact had no role in her removal. After the party body had sacked Ms Tian and announced her removal, company executives said the board had been hastily convened in a late-night telephone hook-up to rubber-stamp the decision. One Fonterra executive commented later: ‘They were always making decisions, but then asking themselves: “How do we make this legal?”’

  The Sanlu board had been shunted aside by the Shijiazhuang party committee in the panicky cover-up in August a month earlier. In the midst of a full-blown political crisis, the central and provincial party authorities which had taken charge of the case had blithely sidelined it again.

  The first thing I noticed about the room booked as a meeting-place for parents of ch
ildren made ill by the Sanlu formula were the sketches stuck on the wall. From a distance, they looked like typical children’s drawings, simple, skeletal-like stick figures with big smiles, alongside the outlines of the sun and flowers. A nice touch, I thought. Perhaps they had been done by sick children as they were being nursed back to health, as a kind of positive therapy. A closer look told a different story. One drawing showed two women holding hands, with the scrawled caption: ‘I love my mummies.’ Another, with two men, was captioned: ‘Gay is good.’

  The room in a two-star hotel complex in west Beijing said much about the odds the parents and their lawyers faced in suing Sanlu and the government. Government buildings in cities and towns throughout China are built on a grand scale on prime real estate, in-your-face symbols of the power of the state, with grand vestibules and ornate meeting rooms, all designed to awe invited visitors. The people who take the state on, like lawyer Li Fangping, have to exist on more modest resources. For the meeting with aggrieved parents that day, Li borrowed a gay drop-in centre for the evening, hidden away on the thirteenth floor of a rundown, two-star hotel. Li’s activism, like that of the gay people who sheltered at the centre, had forced him to the margins of Chinese society.