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26 August 2002 Coming to the party: Transparency in the political and economic life of ChinaIn June 2002 there was a news report about villagers in central China protesting the misappropriation of pension funds by corrupt Party officials. Protests of this kind are now endemic in China. What was especially interesting about this one was the report that the villagers in question had been arrested and charged with leaking state secrets. This tale goes to the heart of what is wrong in contemporary China. Yet the scale and implications of what is wrong do not seem to be very widely understood. I propose to address this issue of what is wrong in China, its implications, and what I suggest we call the ‘transparency dilemma’ that now confronts political leaders of even the most responsible kind in China. China is still widely seen as the engine-room of economic growth in the Asian region and the rising superpower of the 21st century. Global analyst Donald Straszheim declared in a recent report that ‘Prospects for economic growth and business and investment opportunities are better in China than in any other nation in the world by a large margin’. Development guru Laurence Brahm wrote in the Acknowledgements to his new book Zhu Rongji and the Transformation of Modern China (2002) that ‘China’s model worked’ where transformations based on the Washington Consensus did not. China’s entry into the WTO this year has been heralded as a major breakthrough in its economic reform. Its GDP is said still to be increasing at a rapid clip of seven to eight per cent annually, albeit from a low base. Its gigantic population is widely seen as the market of the future. There is still talk of China overtaking first the becalmed Japan and then the Enron and Andersen tainted United States within what Malcolm Fraser last year called ‘a foreseeable time frame’ of ten to fifteen years. The reality is rather more sobering, as several astute analysts around the world reveal. China’s economic reform process has been extremely uneven, bringing with it what might politely be called ‘complications’ that could bring the whole system crashing down in the quite near future. Simon Pritchard of the South China Morning Post recently described the Chinese economy as ‘bursting with black holes’. Respected China economist Thomas Rawski of the University of Pittsburgh has argued, over the past twelve months, that China’s official GDP figures are massively misleading. Evidence from China’s real economy, he argues, suggests that growth cannot have been more than 2.2 per cent annually since 1998 and might even have been negative.
Investment houses have also weighed in. A few months ago, Goldman Sachs’ Hong Kong office produced the first of a five-part report on myths about China. This first instalment, written up in the International Herald Tribune, pointed out that contrary to the widespread hype about China’s achievements over the past twenty years or so, its share of world output has increased only marginally, from two per cent to 3.5 per cent in that time. By comparison, Japan’s share jumped tenfold during its high growth period, to 1987, and that of the East Asian tiger economies (South Korea, Taiwan, Hong Kong and Singapore) fivefold during the twenty years to 1995. It is not generally known that Goldman Sachs was itself quite badly burned by excessive China hype in the early 1990s and drastically cut back its commitments there, through its Hong Kong office, in 1994–95. The arguments of two recent books on the future of the Chinese economy are worth considering in this context. Joe Studwell, editor of the China Economic Quarterly, has just published a book called The China Dream: The Elusive Quest for the Greatest Untapped Market on Earth (2002). Studwell argues that China’s crypto-capitalist corrupt communism has taken the country to the brink of a massive financial crisis, which could bring the roof down on the era of rapid growth and perhaps also, quite deservedly, on the Chinese Communist Party. The title of long-time Shanghai-based Chinese American lawyer Gordon Chang’s book makes his agreement painfully clear: The Coming Collapse of China (2001). Looking at China on the eve of its entry into the WTO, Chang saw ‘symptoms of decay’ everywhere: uneconomic state-owned enterprises, ‘hopelessly insolvent’ state-owned banks, rampant deflation, ‘mountains of obsolete inventory’ scarring balance sheets, stagnant foreign investment, pervasive corruption, and foreign currency in flight. In the face of these enormous challenges, Chang argues, the Party ‘seeks stability above all else’, thereby preventing ‘the change that could save the People’s Republic’. However, to evaluate both the power of their arguments and China’s future prospects, we need to be able to pinpoint where, precisely, Chang and Studwell see the crisis as likely to be triggered. Reports of problems are not sufficient unless we can identify a mechanism that will turn problems into a crisis and the crisis into a meltdown or collapse. Like a great many authors, both Chang and Studwell present a blend of story and argument that leaves the reader quite a bit of work to do in delineating the structure of the argument, its key claims, and the really important pieces of evidence on which those claims are based. There is no doubt, however, that both of them see China’s financial institutions as the Achilles’ heel of the vaunted economic prospects Straszheim and Brahm still believe lie ahead for China. For Chang the trigger is accession to the WTO, because, he argues, it will expose the incompetence, insolvency, and institutional corruption behind China’s façade of miraculous economic success and there will be nowhere for the Party to hide. However, for Studwell, all that will be needed to trigger a meltdown is a domestic crisis of confidence, ‘which could be precipitated by any number of events’. The key here is that for practical purposes, all China’s financial institutions are state-owned and they’ll all go together when they go. Studwell concludes that:
If—and let me underscore the conditional here—if the Chang/Studwell diagnosis that China is on the brink of a financial meltdown is correct, it would be very easy to leap to the conclusion that China will topple over the brink, as they predict. Yet it might not. Indeed, just to the extent that they have their facts right and persuade others of the danger—particularly China’s leaders—they open up the possibility of intelligent measures being taken to save China from toppling over the brink they’ve identified at its feet. The pivotal claim in the Chang/Studwell argument is that everything now depends on the Chinese government being able to avoid a run on the banks by its hundreds of millions of robbed and cheated citizens. If they knew how desperately insolvent the whole system is, the citizens would panic and a classic run on the banks would bring the house down—that is, topple China over the brink. If they are kept in the dark, the psychology of panic can be avoided—for the time being. Yet, unless the underlying problems are addressed, sooner or later the panic will come and the fall will then be all the greater. China’s political and financial systems are anything but transparent. They are hopelessly opaque. As a direct consequence, economic reform has bred corruption and financial mismanagement on a scale so staggering as to make Enron, WorldCom and the debauching of Andersen completely trivial by comparison, serious though these cases are. Consequently, even the most responsible and competent leaders in China—and they are in rather short supply—face an acute dilemma. While the truth is concealed, panic can be avoided, if only just. But reform will also be politically next to impossible. Yet if the truth is admitted, there will not be time for reform before panic sends the system over the brink, with incalculable economic and political consequences. Greater transparency might have helped avoid the situation getting as bad as it has, but here’s the rub: greater transparency now would almost certainly trigger panic, a run on the banks and the collapse of China’s financial system. However, even if the main claims by Chang and Studwell are granted, we should not assume that the future is foreordained. Rather, we should ask ourselves, where they could be mistaken in some crucial point of detail or reasoning, such that all the conditions they refer to exist, but China will, somehow, not go over the brink. In an essay published five years ago, I challenged the then rampant view that China’s high growth rates would be sustained indefinitely and would propel it to Middle Kingdom status all over again. I did not, however, offer a straight-forward counter-prediction and this is crucial. Rather, I pointed out the various intellectual pitfalls entailed in Linear Ascent Model (LAM) thinking, which touted China’s rise to economic and geo-political primacy as a rival to the United States. I indicated that even very basic reflection showed how problematic the LAM was. There were, I argued, various possible futures for China, suggesting four ‘ideal types’ (in the Weberian sense): Mutation, Maturation, Metastasis, and Militarisation; each dependent on ‘a multitude of variables which will interact in complex and shifting ways’. Chang and Studwell argue for what I called Metastasis—the collapse of the undertaking to modernise a unified China. I still see this as one possible—not foreordained—future. It is the nature of futures that they are not predictable in set ways. Why? Because human beings learn and reflexively, if not always rationally, respond to new information or changes in their environments. In this case, a cross-examination of the Chang/Studwell argument would have to look at the possibility of learning-based interventions or external variables impacting on the set of assumptions buttressing the core proposition.
The situation in which China’s leaders find themselves presents them with what I have called a transparency dilemma. In the field of international relations in which I was trained, we talk about nation states having security dilemmas. In addressing concerns about the intentions of their neighbours or major international states, modern nation states are prone to become entrapped by such dilemmas. Mistrusting a potential enemy, they hedge their bets in such a way as to trigger reciprocal mistrust that becomes mutually reinforcing, until it results in arms races and even conflicts. The transparency dilemma facing China’s leaders is this: if they open up the information system, they run a serious risk of triggering the very crisis such an opening up would be intended to avoid. If they do not open up the system, their problems are very likely to worsen and the dilemma will deepen. We have seen a similar dilemma at work throughout the 1990s, as the insolvency of the state-owned enterprises (SOEs) has been covered over by requiring the banks to bail out the enterprises—only to render the banks insolvent as well. Why did the Chinese authorities do this? Partly because they feared that bankrupting the SOEs would throw millions of state enterprise workers into unemployment and onto the streets, triggering a social upheaval. Now the dangers of upheaval are multiplied. That’s what Chang, Studwell and others are starting to draw attention to. It is well worth pondering. While China’s political system remains as secretive and authoritarian as it does, as fearful of its own people and as resistant to both open public debate and political reform as it is, the chances of learning-based adjustment are not robust. But if the result is a financial meltdown, we could see a massive backlash in China of a chaotic and irrational nature, rather than simply rational institutional reform. These are decidedly non-trivial issues. It is time that they were better and more widely understood. If you want to understand them better, you might want to begin by reading Joe Studwell’s Chasing the China Dream and then cross-checking his crucial claims and inferences. REFERENCESBrahm, L. 2002, Zhu Rongji and the Transformation of Modern China, Wiley Asia, Singapore. Chang, G. 2001, The Coming Collapse of China, Random House, New York. Monk, P. 1997, ‘Variations on the LAM: Plotting China Futures’, Quadrant, vol. 41, no. 10, pp. 46–50. Rawski, T. 2001, ‘What’s Happening to China’s GDP Statistics?’, China Economic Review, vol. 12, no. 4, pp. 347–54. Studwell, J. 2002, The China Dream: The Elusive Quest for the Greatest Untapped Market on Earth, Atlantic Monthly Press, New York. Paul Monk is senior fellow with the Australian Thinking Skills Institute in Melbourne. He is a former senior intelligence analyst, who headed China analysis for the Defence Intelligence Organisation (DIO) in the mid 1990s. He is now Honorary Research Fellow in Asian Studies at both Melbourne University and La Trobe University, and Visiting Fellow in Strategic Studies at the Australian National University. This commentary is a revised version of an address to Transparency International, hosted by Freehills, in Melbourne, on 25 July 2002. View other articles by Paul Monk:
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