Examination of Witnesses (Questions 65-79)
DR LINDA
YUEH, PROFESSOR
JUDE HOWELL
AND PROFESSOR
YONGNIAN ZHENG
8 MARCH 2006
Q65 Chairman: May I welcome our first
of many witnesses this afternoon? I apologise to the three of
you for keeping you waiting for a few minutes, but we have had
a lot of business to deal with. May I begin by asking an introductory
question? When you respond could you say a little about yourself
and the work that you are doing, so that we have a sense of what
is appropriate for the questions? I know that you are specialists
in different aspects of China and obviously we do not require
all three of you to answer on every subject. It would help us
if we were able to move through a number of subjects but, nevertheless,
if you feel that you want to come in on a question please do so.
Can I begin by asking you about the situation in terms of this
phenomenal economic growth in China? Is that going to continue
at such a high rate of 9% per annum? Is the Chinese Government
actually in control of the economic growth? We note that they
have just recalculated their statistics with regard to a major
upward adjustment of their gross domestic product figures, and
I would be interested to know how you see this developing in the
future. Dr Yueh?
Dr Yueh: I will start with an
introduction first. I am Linda Yueh. I am an economist and I study
the economy of China. I am affiliated to the London School of
Economics and the University of Oxford. My view on China's growth
is that there are very good signs that growth is sustainable in
the coming years, but there are also a number of structural issues
in the Chinese economy which have to be resolved through progressively
harder sets of reforms to sustain that growth. Specifically, I
am referring to the challenges raised by dismantling the state-owned
system which derive from the period of central planning, and I
am also referring to the issues associated with a developing country—so
issues such as imperfect credit markets, or lacking credit information.
These are issues of development that many developing countries
face, and China essentially has to face both sets: the sets of
transition issues and development issues. That being said, it
has managed to grow remarkably well in the past 27 years since
economic reform started. GDP approximately doubled every eight
years or so, at a growth rate of 9% per annum. It is a phenomenal
rate of growth. Given that per capita GDP is still less than US$2,000,
China still has quite a way to go before it is a medium-level
developed country and has exhausted the early spurt from growth.
Is the Chinese Government in charge of the process? The entire
reform path has been characterised by decentralisation. Much of
China's economic reform, therefore, started with allowing regions
to experiment; creating Special Economic Zones; allowing different
provinces to take a lead on experimenting with market forces.
That process is indeed still continuing, but the challenge for
the government now is whether they will be able to maintain this
type of decentralised growth approach when the policy issues of
governance become increasingly more difficult as the economy becomes
more marketised.
Professor Zheng: I would like
to make a point. I am a political scientist. With regard to your
question whether the government needs to control the economy,
I think that now the government tends to control the economy less
and less. The main sources of China's economic growth are from
both the external side and the internal side. On the internal
side there are still many domestic sources. China is now producing
lots of engineers. Also, in the next few decades in China the
age structure will still be very favourable for high economic
growth. The dynamics of China's economic growth is from the new
system, the new institutions and the private sector. The private
sector is now becoming larger than the state sector. As Linda
mentioned, because of rapid decentralisation all provinces are
competing with each other. I think that no one can stop this kind
of local competition, which of course promotes economic growth.
The problem now for the Chinese Government is how to manage economic
growth. Actually, in recent years the role of the government has
been how to control high growth, not to promote high growth, because
there are a lot of constraints—an energy crisis, and all
kinds of things. Lately, the new government has been trying to
exercise the so-called macro economic control to slow down economic
growth to a reasonable rate. I feel that in the next decade high
growth will be maintained, because there are lots of social or
economic issues which have to be solved by growth and development.
Q66 Sir John Stanley: I would like
to ask you for your assessment of the political impact of this
very rapid rate of industrialisation. We have all been reading
accounts of social unrest taking place in China which, in part,
seems to be related to the Chinese authorities carrying out enforced
acquisition of land and paying inadequate compensation, as seen
by the farmers—in most cases very poor farmers—owning
the land. There were widespread reports about the riots that took
place in Huaxi in Zhejiang province last April, when the government
were trying to take over a substantial amount of land in order
to construct 13 chemical plants. I noted that in Clifford Coonan's
article in the Independent yesterday, which was written
from Zhejiang province in China, he says, "Last year, 87,000
serious disturbances to public order were recorded, a rise of
almost 7%". He also reported that the central government
had come down hard on the Zhejiang provincial government, and
that they "took the rare step of punishing eight officials
from Dongyang and Huaxi in December for failing to `preserve social
harmony'". Could you give us your view? Given the huge pace
of industrialisation and the enforced acquisition of land, what
is likely to be the continuing political impact of this with regard
to the huge numbers of people in China who are dependent on continuing
to be able to farm?
Professor Howell: Maybe I will
start off. My name is Jude Howell. I am from the London School
of Economics and the Director of the Centre for Civil Society.
I am a political scientist like my colleague here, and have worked
on China for over 20 years. I also lived in China in the 1980s
and, like probably everybody here, I am a frequent visitor to
China. I think that the economic reforms, the pace of change and
the rapid growth are putting enormous pressures on society and
governance. One of the issues that the new leadership and previous
leaders have been concerned about is the growing inequality: across
generations, between rural and urban areas, and across different
sectors of society. This is an issue of deep concern to parts
of the central leadership. This is why we are seeing a shift in
central government policy, away from a unique focus on rapid growth
to what is called a "balanced" approach to development,
a people-centred development, which is trying to take account
of some of these contradictions in processes of rapid economic
growth and social change. The issue of land requisition is a very
important one. I do not have the exact statistics with me, but
I would say that in China people are becoming less dependent on
farming as their main source of income. There is a surplus of
labour in rural areas, hence a huge migration of many young and
middle-aged migrant rural people to urban areas in search of employment.
Therefore, land is an issue and land requisition is one of the
issues around which people are protesting. Other issues around
which protests have been taking place relate to the back-payment
of wages for migrant workers in many of the factories, particularly
in the construction industry—which, again, the central government
have taken heed of and have been trying to address. Another issue
is in relation to the situation of laid-off workers in China and
pensioners who, for various reasons, have not been receiving their
dues according to the regulations. All of these different tensions
have been the source of various protests, many of which, of course,
are not recorded formally. So the figure of 87,000 is probably
a good underestimate of the level of protest.
Professor Zheng: I think that
the land issue-led protests are somehow inevitable in China, because
China is now undergoing rapid industrialisation and urbanisation.
To make progress, I think that no one can stop the process of
urbanisation and industrialisation, which of course triggers off
land issues. The problem is the way the government deal with the
issue. In China, the system is highly decentralised. China has
laws and regulations, but enforcement is always a problem—a
big problem. Local government—you have mentioned Zhejiang,
and in other places—does not follow the regulations and
the laws made at the centre. Nevertheless, as Professor Howell
mentioned, the top leadership has realised the seriousness of
the issue and is now trying to make a policy shift, to give policy
priority to farmers, migrants and rural workers. There will be
huge difficulties ahead for the leadership but, nevertheless,
some sort of progress is underway.
Q67 Mr Horam: Can I come back to
what Dr Yueh said? It was very clear, because you distinguish
between, on the one hand, the problems inherent in running down
communist state-owned systems, state-owned companies and, on the
other hand, the sorts of issues which any developing country will
face—transitional problems and problems of that kind. Coming
back to the state-owned bit, that has been run down quite a lot
and the consequences are clear for unemployment, and also for
the collapse of the social systems which they very often funded.
Has that a lot further to go and will it go much further in the
next four or five years?
Dr Yueh: There is still quite
a way to go before China has effectively reformed its state-owned
system. It has made quite a lot of progress in, effectively, privatising
small state-owned enterprises; but the medium and the large ones,
for the very reasons that you state, are difficult to reform.
So parts of them have become corporatised, meaning that there
are shares which are issued in those firms and which are floated
on the two stock exchanges in China.
Q68 Mr Horam: Is one of the reasons
for those large organisations not being privatised the power issue?
The government want to keep control, fundamentally.
Dr Yueh: Yes, I think that one
recurring question in China on this topic is to what extent is
China intent on maintaining control of key industries—this
"national champion" policy, which has gone global since
the mid-1990s.
Q69 Mr Horam: What is your view about
that?
Dr Yueh: My view is that I do
not think it is yet clear. We do not know where China is headed,
but it is quite apparent that they are very keen to promote industries
which are competitive at home and competitive abroad, so that
China can manage the process of globalisation. At the same time,
they recognise the inherent inefficiencies in having state ownership
generating a profit constraint, which does not tend to be binding
for these firms because they do not have to perform well: they
are owned and supported by the state. It means that these SOEs
have the potential to be inefficient, and large numbers of them
are. That is seen in terms of the lack of competitiveness of the
large and medium state-owned enterprises, resulting in their inability
to look after their workers, and then the difficulty of reforming
these enterprises because of the associated social welfare and
full employment objectives that these SOEs maintain. This is the
current situation. Since the mid-1990s there has been a great
effort towards reforming SOEs and, in the last couple of years,
there has been a push towards full privatisation of the listed
companies.
Q70 Mr Horam: Do you think that will
happen?
Dr Yueh: I think that they have
attempted to undertake privatisation through what is known as
"share issue privatisation". Currently, the stock exchanges
in China are not fully tradable, meaning that the state controls
about two-thirds of the shares on both stock exchanges. Therefore,
the listed SOEs are not private companies, where all of their
shares can be traded and the market dictates the valuation of
shares. The government attempted to release all of the non-tradable
shares onto the market. It was not successful on the very first
attempt last year, primarily because there was not a feeling that
there are sufficient standards for corporate governance, transparency,
accountancy standards, etc. to give the markets confidence that
this type of privatisation will bring value to the shares. They
have now stepped back, and they are going to do this in stages.
They will ultimately make these companies private—or "private"
as in the shares are listed publicly and owned—but the big
question which remains is what will happen to many of their parent
companies, since many of the major companies in China are not
listed. Whether those will be privatised, or what form they will
take going forward—meaning will they be primarily government-owned—is
not clear yet.
Q71 Mr Pope: I want to ask about
the political effects of fairly rapid economic progress. It seems
to me that, if you have a rapidly growing middle class, rapidly
growing access to the internet—I think that China has the
second largest number of registered internet users after the USA—this
is bound to force some political change or, at the very least,
it is bound to create conflict. As people become wealthier, as
they have greater access to information, they will be very dissatisfied
with the status quo and it will lead to tension with the ruling
elite. I wonder if you would like to give us your views on how
that will pan out over the next five to ten years.
Professor Zheng: It is a good
question. As you mentioned, the rapid socio-economic development
has generated enormous pressure for China to make political changes;
for example, the internet. Of course, the government still exercises
very tight control over the internet. Nevertheless, because of
the huge population of internet users, it is increasingly difficult
for the government to exercise that tight control. The internet-based
or internet-facilitated social protest is now becoming more and
more frequent, especially over lots of domestic issues. As I understood,
many social protests are now facilitated by the internet. So some
sort of change must take place. The problem is how the government
is dealing with the change. The government dislikes bottom-up
social changes. That is why the government will do everything
to control social protests and social movements. But I think the
government is taking initiatives in trying to introduce some sort
of reform from the top. For example, in some areas the government
has opened more social participation, allowing NGOs to grow to
take over some government functions. Also, as you mentioned, China
now has a sizeable middle class. Most of them are new private
entrepreneurs. That is why two years ago, the Communist Party,
the ruling party, legitimated capitalism and allowed capitalists
to join the party—which previously was unimaginable, because
the whole purpose of communism was to destroy capitalism or capitalists.
The government, or the party, has been quite pragmatic. On the
one hand, it exercises social control, very tight control, to
prevent bottom-up social change and, on the other hand, takes
initiatives to accommodate socio-economic changes.
Q72 Mr Pope: Can I look at this from
another angle? I think that is quite interesting in terms of how
the growing middle class relate to the political process. Could
I look at how the poorest in society are facing up to this challenge?
It seemed to me that unemployment in the cities could be quite
high in some areas. That in itself is an unusual phenomenon, for
an economy which has not really had urban unemployment because
of the way the state controlled the economy. Now, as it embraces
a capitalist mode of production, it inevitably forces some people
out of work, at the same time as people are migrating into the
cities. That in itself must also have some fairly dire political
consequences. If there is a growing and emboldened middle class
and, at the same time, a growing number of urban dispossessed,
that seems to me to be a recipe for political difficulty.
Professor Zheng: That is exactly
the dilemma that the Chinese government is now facing. As Professor
Howell was saying, NGOs and business associations are now very
powerful. They have got themselves organised and they can influence
government policies. On the other hand, farmers, migrant workers
and rural workers are not allowed to be organised. The trade union
is a part of the state and it does not speak for the workers.
The farmers do not have their own organisations. That is why there
are a lot of social protests, because their interests are not
articulated; their interests cannot be represented in the government's
policymaking process. The previous government under Jiang Zemin
and Zhu Rongji gave the highest priority to newly rising social
classes. Now, with the annual session of China's National People's
Congress, or China's parliament, going on, there are many new
policy initiatives and the government is paying a lot of attention
to farmers and the workers. But I am still not sure whether these
new policy initiatives will work out, because less privileged
social groups are not self-organised, even though they are paid
attention to now.
Q73 Mr Pope: This rapid expansion
in the number of NGOs and locally based organisations—is
this effectively a kind of safety valve for the government, so
that people can express themselves through a locally based NGO
in a way that they could not five or ten years ago?
Professor Zheng: I think that
it depends on different areas. In some areas, like social services
and poverty reduction, the government allow NGOs to play a substantial
role; but in other areas, like human rights, religion and politics,
NGOs are still not allowed. So it depends on different policy
areas.
Q74 Sandra Osborne: Could I take
you back to the economy, in relation to energy? China has a huge
energy consumption and the government have an aim of trying to
encourage energy efficiency, with a doubling of consumption by
2020, but at the same time wanting to quadruple growth in the
economy. How can that happen? How could they manage to do that:
manage to achieve energy efficiency at the same time as this huge
growth?
Dr Yueh: China is not particularly
energy-efficient. It is less energy-efficient than even most of
developing Asia. So from that perspective—improving efficiency—there
are technologies which could allow it to better use the energy
that it has. This also extends to building infrastructure which
could improve the efficiency of delivery. The quadrupling of the
growth rate is based on a trend growth of about 9%. You could
imagine that GDP growth will plough ahead, due to the other factors
that I have mentioned, and energy becomes a possible constraint,
but it is not a constraint that might come into effect very soon.
China is concerned about energy efficiency; it is concerned about
having sufficient energy sources, as we have seen in its overseas
investments; but China itself has a large reserve of coal. So
part of it is efficiency; part of it is making sure that it does
not become a constraint; but part of it is that, because it has
a lot of coal, there is a great deal of pollution which is associated
with current energy use. That is why they are pushing to improve
energy use, but it may be some time yet. China is likely to grow
and achieve a per capita income of US$ 3,000 by 2020. That would
be an achievable level, given the current energy and infrastructure
within the country at the moment.
Q75 Chairman: Dr Yueh, you said in
the paper that you have sent to us, which was very helpful, that
there were problems with the legal, regulatory systems. What needs
to be done in that area to deal with the problem of the banking
sector in particular, and the bad loans and the potential threat
that poses? Is there a danger that, although you are optimistic
about sustained long-term growth, there could be some serious
problem arise because of bad loans, the banking system, and the
regulatory framework not being strong enough? Is there a potential
for some disaster?
Dr Yueh: I should clarify that
I am always cautiously optimistic about China! I can see the potential
but I can also see the numerous issues and obstacles which could
impede growth if adequate reforms are not undertaken. The reforms
are getting harder, and the banking sector one is a good one to
show why reforms today have to be both more complex but also broader
in scope. It is not feasible to reform the banking sector, for
instance, unless you look at both the economic and the legal sides
of reform. On the economic side, the banking sector official statistics
state that the amount of non-performing loans is falling, but
the underlying problem of non-performing loans is structural to
the economy. State-owned banks have non-performing loans accumulated
through policy-directed lending to state-owned enterprises. They
support the state-owned enterprises for the reasons that we mentioned.
Unless the government is able to undertake reforms that create
jobs, create a social safety net, improve the competitiveness
of SOEs, and cut off the flow of non-performing loans stemming
from the close relationship of the state-owned banks to the state-owned
enterprises and the state, then even if the stock of non-performing
loans falls, the flow is likely to continue. That is the economic
side. Of course, many transition economies undergo banking crises.
It is a very difficult point of transition. On the legal side,
stepping back for a moment, China has always encouraged a dual-track
reform process. It allows a market sector to develop alongside
a non-market sector. So one of the ways in which China would like
to improve the banking and the financial sectors is to allow essentially
private banks—non-state institutions—to increase their
share in the entire lending system. This makes the state-owned
banks' not-very-attractive portfolio shrink in relative size;
but the difficulty of this approach—which worked with food
prices and various other reforms early in the process—is
that you need to have legal, regulatory, information, credit,
assessment, risk, all of these types of structures in place before
you could have a well-functioning private financial and banking
sector, driven by interest rates and driven by risk and profitability.
They would have to undertake both types of reforms before this
sector makes me more optimistic rather than less.
Q76 Mr Hamilton: Doctor, you said
earlier that you envisage the per capita income growing to US$
3,000 by 2020. I am not sure who will be best able to answer this
question, but do you feel that the present dominance of the Communist
Party, the total control by the Chinese Communist Party, will
be challenged further by civil unrest as the country grows richer?
Will there be a demand for genuine democracy, or are people satisfied
that their economic improvement and the circumstance of their
personal wealth increasing as China's economy grows is sufficient
recompense for the lack of any kind of true democratic choice?
Professor Howell: I might come
back to the point about the middle classes, because I think that
there is a tension there between having an interest in politics
and political change and an interest in consumption. I think that
we can see in many developed countries a far greater interest
in consumption than in formal politics. There are considerable
tensions that arise through the increasing wealth of certain sectors
of society in China, including the middle classes. Whether that
translates automatically into greater demands for democracy is
very difficult to predict. I do not think it is inevitable that
in 20 years' time China will become a multi-party democracy. Certainly
we have seen that there have been initiatives to demand greater
democracy in China, as we saw in 1989 and also the foundation
of the Democracy Party in China in 1998, which was of course quickly
prohibited. I think that what we will see is increasing contestation
of the boundaries of authoritarianism in China. Therefore, we
see middle-class activists, working-class activists, farmer activists,
pushing at these boundaries more and more, and also changes in
approach towards these protests from the top and at the local
level. I think that this will be a very contradictory process:
of, on the one hand, a process of repression and continuing coercion
and, on the other hand, of small-scale initiatives to allow people
greater room to articulate their demands. A fundamental problem
is the lack of any institutional mechanisms for the articulation
of demands. The old system of liaising between the government
and society were the old mass organisations like the trade unions,
the Women's Federation and the Communist Youth League. We are
seeing that, in the process of transition, they also have to struggle
with transition. In the case of the All-China Federation of Trade
Unions, this is particularly challenging. For many years they
have ignored the interests of migrant workers and have suddenly,
slowly, begun to wake up to this in the last few years. In the
case of migrant workers, for example, it is very difficult for
people to organise themselves and, when they do, very often such
organisation is quickly repressed. In terms of political change
in the future, I think that we will see increasing contestation
of the boundaries of what is possible, with cycles of repression,
coercion, coupled with increasing pushing of those boundaries
from different groups in society. If I were to share my own personal
experience, China is considerably more open now than 20 years
ago in terms of the ability of people to speak their minds, and
so on; but there are still many remaining concerns about the ability
to organise, the right to associate, human rights, and so on.
Q77 Mr Hamilton: Is anybody else
going to come back on that?
Professor Zheng: You mentioned
the middle class. I think that the role that the middle class
plays in Chinese politics is quite complicated. On the one hand,
of course, the middle class demands political participation. So
we have seen that the capitalists' and private entrepreneurs'
property rights are protected by the constitution. They can join
the party and they have party membership. On the other hand, this
middle class also needs protection from the communist state and
its power, because the majority of Chinese people are still farmers
and workers. The new rich actually need the authoritarian state
to protect their interests. This is the current situation. There
are now a lot of debates going on in China about whether the regime,
the political system, should be opened up wider for political
participation. I do not think that will happen. As in the case
of Singapore, having a middle class does not necessarily mean
western-styled democracy. There is still a huge gap between middle
class and liberal democracy. My second point is that China is
likely to take political reform or democratisation, ideally from
the top. I have learnt that the government has established a "constitutional
reform consultant committee" to talk about how the NPC, the
National People's Congress, and other organizations can have more
elements for political participation, interest representation,
and so on. China has practised rural democracy at the village
level for many years, and now at the township level—that
is the basic level of the administration. Township elections are
also taking place on an experimental basis in many places. Another
thing the party is doing is to introduce the so-called intra-party
democracy, and the major party cadres are elected by party members.
In China, the Communist Party now has more than 68 million party
members. That is quite a lot. If the party can have some sort
of intra-party democracy, that is also making progress. The problem
for China's democratisation is not whether China will be democratic
but whether you can have a so-called liberal democracy, a Western
type of liberal democracy, under a one-party system. That is the
most difficult part. I think that, for the party to survive within
this new socio-economic development, some sort of democracy must
be introduced, just as the leadership is doing now.
Professor Howell: Perhaps I may
add that the Communist Party is quite adept at transforming itself
and it has been very good at absorbing different groups in society.
So we see the opening of the party to entrepreneurs. It has been
very interesting that, with the village elections in China, a
good number of candidates who have stood for village committee
positions in the village elections have not been party members.
However, this has also been a very good strategy to rejuvenate
and resuscitate the Communist Party at the most basic level because,
where a non-Communist Party candidate has become the village chair,
they are quickly approached—often successfully, sometimes
not—to become a party member. In this way, at the most basic
level, the Communist Party is able to re-legitimise itself. This
is particularly important where, for example, the previous incumbents
were considered by local people to be corrupt or dishonest. The
village elections have proved a very effective way of getting
turnover and then absorbing such people into the party. I think
that we should be aware of that also in relation to the middle
class.
Q78 Mr Hamilton: Can I check on one
fact that Professor Zheng gave? Did you say 68 million party members?
Professor Zheng: That is right.
Q79 Mr Hamilton: I think the British
Labour Party would be delighted if they had that many!
Professor Zheng: Also, I have
to mention that the majority of party members are now professionals
and technocrats, middle class people. Previously, under Mao, the
majority were workers and farmers. Now China is learning from
the Singapore model to transform the party into an elite party.
China has a huge population, but 68 million is still quite a lot.
Professor Howell: I should add
that 16% of those are women.
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