The Fat Years

by Koonchung Chan

  Little Xi and Fang Caodi sat grimly with their arms folded.

  “Of course the people were going to suffer and be hungry during this crisis, and, besides, such recessions have always been a cyclical phenomenon of capitalism in the past; they would last a year or two, and after getting through them, everything would return to normal. But this latest crisis was like the great depression of the 1930s, and it might have lasted for a decade or more. The government couldn’t just ride it out; they had to go into action. My main point is that stability is always the number-one priority, but stability is not the ultimate goal—we need stability in order to accomplish great things. Therefore, in extraordinary times or emergency situations, we have to order a crackdown. We have to beat the grass to frighten the tigers. After that, while the effects of the crackdown are still in play, we are free to implement new policies.”

  The Chinese model

  According to He Dongsheng, the crackdown was the second phase of the “Action Plan for Achieving Prosperity amid Crisis.” The third phase was to put forth a set of five new policies.

  Number One: Twenty-five percent of all the balance of every National Bank savings accounts was to be converted into vouchers for use in China only. One-third of these had to be spent within ninety days, and two-thirds within six months. Beyond that time limit they would no longer be valid.

  The Chinese people’s excessive savings were one of the reasons for insufficient domestic demand. Personal savings equaled more than 20 percent of the nation’s annual GDP, and business savings were more than 30 percent. When the foreign economic environment was bad, people with surplus cash held on to their money and spent even less. With everyone doing this, how could the economy avoid recession? Merely lowering bank interest rates and moral suasion were no longer enough to make the Chinese people spend their money. The government had to rely on coercive measures of the sort Western countries would not dare dream of.

  The greatest thing about this government order was that it was so simple to enforce. All the banks are computerized, so it was easy to cut into the savings accounts. The second virtue of this policy was that it affected only people who had money. It primarily impacted the urban middle or moderately well-off classes who had “got rich quick” in the Reform era. These included civil servants, professionals, white-collar workers, staff in government enterprises, small-business entrepreneurs, and pensioners. The government could easily get away with making them spend 25 percent of their savings on themselves in order to stimulate the national economy and help China make it through the crisis. Consumers and businesses all started spending money.

  The third benefit of this policy was that it did not need the National Treasury to allocate major funds or follow Keynesian “job creation” to turn the recession around. At the very least it would successfully jump-start the engine of an economic growth driven by domestic demand. This policy was estimated to have increased the GDP by at least five percentage points. The urban population with savings was busy trying to decide where to spend the vouchers and on what commodities or services.

  Number Two: Since demand had been created, it had to be supplied. The second set of new policies was to repeal over three thousand regulations governing the manufacturing and service sectors, making it easier for private capital to invest in business, relaxing credit policies for companies catering to domestic demand, and encouraging entrepreneurship.

  At the same time, the function of government was transformed in accordance with the slogan: “The officials retreat and the people move in.” The government removed the restrictions on all businesses except those involving national security and government monopolies.

  “Now anyone can start a publishing company,” said He Dongsheng, looking straight at Lao Chen. “You can just publish your books without a government-issued book number.”

  “But all books still have to be sent in for approval,” countered Lao Chen, “and many subjects are still forbidden.”

  “But at least today there are private publishers everywhere,” said He Dongsheng. “There are even Chinese and foreign joint-venture publishing companies, all in complete accord with WTO requirements.”

  These policies were extremely effective. In a short time, it looked like everyone in China was in business. Everybody was talking business regardless of age, sex, location, or trade; everybody was trying to make money, looking for talented employees, or being sought out themselves, searching for raw materials or for people to buy or sell some resource. The Chinese people, you know—just give them a chance to do something and they can make a great success of it.

  It was almost a miracle how quickly Guangdong, Jiangsu, and Zhejiang’s underused industrial capacity was changed over from manufacture for export to production for the domestic market. New products and new services flooded the market in the space of a couple of months. In six months, China successfully transformed itself from an economy dependent on investment and exports to one driven by domestic demand.

  How successful were these policies? asked He Dongsheng rhetorically.

  Then he continued: The target for the first phase was to return to the situation of the 1980s, when domestic demand made up half of the GDP, and this goal was accomplished. The optimum target, however, was to equal the situation of the United States before the 1970s, when internal consumption was 60 percent of their GDP, ideal for a large country. After that the Americans went overboard by relying too much on domestic consumption. They let it go over 70 percent of the GDP, they had insufficient investments and exports, debt was excessive, and private individuals had no savings—all this leading to big trouble.

  In many areas China can be self-sufficient and doesn’t need to rely too much on exports to foreign countries; in other words, from now on China does not have to be overly influenced by the fluctuations of the U.S. dollar. China’s domestic demand has so far been raised from 35 percent of its GDP only to close to 50 percent. Investment and foreign trade still account for more than 50 percent, and China is still investing too much in capital construction and real estate. Also, after the world economy recovers, the foreign-trade proportion of GDP will still increase slightly, but in general terms the domestic-demand proportion has been significantly readjusted upward. As people’s wages are raised and with good returns on business investments, taxes will also be increased accordingly. China will have successfully eliminated the threat of a domestic economic recession that existed before these policies, and also rectified the most serious structural bias in the economy since the beginning of Reform and Openness.

  And the policies killed two birds with one stone because with the rise and expansion of new businesses everywhere the unemployment problem in both urban and rural areas was solved.

  Number Three: During this period many peasants returned to the cities and, taking advantage of the labor shortage, moved into well-paid jobs. But what did the peasants who stayed behind do? They, too, were busy taking care of their own property.

  The third set of policies enhanced peasants’ property rights to their farmland. This move had been discussed for years. One of the chief motives behind this policy was to divert the peasants’ attention from any grievances and maintain social stability in a time of economic crisis. And, as expected, the peasants all got busy taking care of their private property.

  “What about privatization?” Little Xi asked with accusation in her voice.

  He Dongsheng himself was not exactly certain whether the farmland should have been privatized. The privatization experiences of other countries had not been completely positive, but he could not change anybody else’s opinion on the matter. One thing was certain and it left him without an argument: the peasants fully supported the privatization policy. “After this China can never go back again,” he said rather wistfully.

  Number Four: This was a period of great enthusiasm throughout the country. It looked like it was pretty chaotic, but it was a necessary and constructive chaos.

  What this chaos meant, though,
was that having liberated the nation’s forces of production and activated people’s economic enthusiasm, the leadership’s next most important task was to guard rigorously against fraud and the sabotage of government policies by corrupt officials. The “severe and rapid” crackdown of three weeks earlier had first neutralized the power of many criminal elements, including gangsters, hooligans, human traffickers, and gangs of pickpockets and beggars. While the memory of the early crackdown was still fresh, three new targets were announced: crackdowns on graft and corruption, on manufacturing fake products, and on spreading misinformation. This announcement put the fear of death into everybody.

  The Communist Party is most proficient at swatting flies. Rounding up a few usual suspects and summarily executing them does a lot to intimidate the local officials; it makes them toe the line and thus achieves the desired goal. As long as the local administrations improve somewhat, officials will not dare conspire to defraud the government. With that, the first three sets of new economic policies had comparatively better odds for success.

  Number Five: He Dongsheng was in favor of a market economy, but he didn’t believe the market was infallible, and he certainly didn’t believe in laissez-faire economics. He knew that at certain points the government had to step in. The above four sets of policies created real aggregate demand and stimulated a corresponding level of production to meet it. There was a great increase in the circulation of money and in the amount of credit available in the market, and there were temporary shortfalls in some commodities and services. Even if there was no wild speculation, simply letting the market regulate itself was bound to give rise to inflation. Commodity prices would experience irregular upward swings, and if this developed into hyperinflation, it would put enormous pressure on this stage of economic reform, perhaps even bringing it to a halt. So the government had to implement price controls.

  “I believe that this was the most controversial aspect of the ‘Prosperity amid Crisis’ plan,” said He Dongsheng. It was also the policy that required the greatest amount of technical expertise to implement. Those scholars who had been brainwashed by Western economic ideas would probably have a negative conditioned reflex when they heard the dreaded words “price control.” He Dongsheng was self-taught in economics, and he had originally had the same reaction to the idea of price control. It was not until recent years, after he’d immersed himself in the study of Western economic history, that he discovered that in the last century developed Western countries had on several occasions successfully implemented large-scale price-control policies; and these were all capitalist countries. His eyes were certainly opened when he read how Walther Rathenau had successfully managed the economic plan of the German Empire during the First World War period. During the Second World War, the Third Reich had also successfully combined aspects of capitalism and a planned economy.

  “Most encouraging,” said He Dongsheng, “were President Franklin Roosevelt’s Second World War economic policies, including price controls, that not only supported an enormous military expenditure but also allowed the United States to free itself from the Great Depression that had bedeviled the nation for twelve years.”

  The economist John Kenneth Galbraith served at the time as deputy head of the Office of Price Administration with a staff of some sixteen thousand employees. Before becoming president of the American Economic Association in 1972, Galbraith wrote a book on price-control policies, and in the 1970s during a period of economic stagflation, he again advocated them. All Western economists are not, then, opposed to price-control policies. It is just that in the last forty years, the ideas of the Chicago School of market fundamentalists had so much influence that no one remembered that price control is a good strategy for regulating a market economy. In France right up to the 1980s, 40 percent of economic activity was still regulated by price controls.

  This was the breakthrough He Dongsheng had made in his understanding of economics. After that, he combined his new knowledge with China’s actual circumstances and tried to sell his ideas to his other comrades. Fortunately, many Chinese officials had just emerged from the socialist command economy, and were willing, on the surface at least, to accept a market economy. In their heart of hearts, however, they were elated to hear about price-control policies. In a period of economic transition, price controls were actually a necessity; they would assist the market, and save this newly emerged market from self-destruction, but would not usurp the functions of a mature market economy.

  None of the officials in He Dongsheng’s Price Control Group were dyed-in-the-wool ideologues. The core members of the group were technocrats in their fifties who had accumulated the price-control experience of thirty years of Reform and Openness. They had recruited a large number of the best students of statistics and econometrics from China’s premier universities to set up a database and develop software for a nationwide network of a kind not available in an earlier age of planned economy. This made it possible for producers and consumers throughout the world to go online and locate the most up-to-date price-control information.

  Price controls make real prices transparent. They are intended to allow businesspeople to make money and encourage them to produce, but prevent them from entertaining ideas of speculation, hoarding, and profiteering.

  What should be regulated, what should not be regulated, and what is the influence on supply and demand? These are the things that have to be handled just right in order to inhibit major fluctuations in prices. Even more necessary is relinquishing control at just the right time to allow the market’s own regulatory mechanism to take over.

  This sort of large-scale regulatory feedback system implemented in China was a startling revelation to the initially skeptical foreign media. To put it bluntly, even a more authoritarian dictatorial government would be able to implement this “command economy for a new age” by employing twenty-first-century automated information and calculation systems. Price controls provided a kind of armed escort to smooth the path of China’s latest large-scale economic reform.

  “In the world today,” said He Dongsheng, his voice beginning to break, “China is truly the only country that could accomplish all five of these policy changes at the same time.”

  While the global economy was in great difficulty, and Western countries were in shambles, this was China’s opportunity of the century. An originally almost moribund top leadership had in a very short time transformed the social and political crisis caused by an economic meltdown into a golden opportunity. All of which made the rest of the world accept the idea of China’s ascendant prosperity. At the Party Congress the following year, the top-leadership transition proceeded smoothly. He Dongsheng admitted he didn’t do as well as he had hoped. His plan to be promoted to secretary in the Central Party Secretariat came to nothing, and he was merely promoted from an alternate to a full member of the Politburo; he was now an old veteran of three leadership changes. On the first anniversary of the “Action Plan for Achieving Prosperity amid Crisis,” He Dongsheng had wryly congratulated himself: “He Dongsheng, you did brilliantly.”

  A century-old dream comes true

  Fang Caodi and Little Xi were quite stupefied by this lecture, and they still had many questions they wanted to ask about that week of anarchy, but they were swept along by He Dongsheng’s monologue. He Dongsheng went to the bathroom, came back, drank another glass of water, and carried on speaking even more bombastically.

  Fang Caodi and Little Xi didn’t deny that in the last two years China’s economic situation had been good, but they believed that the political situation had become much worse. China was moving further and further away from constitutional democracy. They complained that everyone seemed to be satisfied with the status quo.

  “Everyone seems to be perennially happy,” said Little Xi.

  Then Lao Chen spoke up. “I was one of those people,” he said. Before meeting Little Xi again, he’d thought that China’s present society was perfectly harmonious. Every day he was moved
by his own sense of happiness. It was Lao Chen’s turn to hold forth now.

  Not long ago he thought that Taiwan and Hong Kong were leading, and that mainland China was trailing behind, but now he felt quite the opposite was the case. Everyone used to criticize the mainland for being poor and backward, but then suddenly they started loudly proclaiming that China’s Golden Age of Ascendancy had arrived. For so many years intellectuals had said that the Western system was superior, and the whole world looked up to the United States, Japan, and Western Europe, but then in unison they suddenly changed their tune, and now the whole world was learning from or emulating China.

  He Dongsheng interrupted and resumed his speech. He was still tied to his chair. His captors had no intention of unleashing him. “Of course there are some elements of misconception here that cannot withstand an empirical, item-by-item consideration,” he said. “For example, China’s per capita income is very far behind that of developed countries, environmental degradation is rampant, honest government is not to be found, human rights are not guaranteed, and freedom of speech is restricted. China has so many people, though, that its overall strength is always astonishing, and its rise is an incontestable fact. The Chinese media frequently report that in this area China is number one in the world, or in that area China is in the first rank. Not being completely clear about all that, the average Chinese person these days believes that China leads the world in everything.”

  In the past, foreign manufacturers had complained that China kept the value of its renminbi artificially low in order to subsidize Chinese exports, and that this created unfair competition. Western labor organizations also criticized China for exploiting its workers to maintain the preferential cost of its exports, thus lowering the living standards of workers all over the world. Now that China no longer relies on depressing export prices, the renminbi can appreciate in value, and Chinese people can buy more imported goods and go abroad as tourists, or even purchase foreign businesses. Incomes have risen across the board, companies are making good profits, and the state’s tax revenue has gone up accordingly. With this extra revenue, education, health insurance, and social security can all be improved, and China can redouble its efforts to combat environmental degradation.