~September 1999~

After Beidaihe : The Failure of Mr. Zhu's Economic Baton

Following a tradition from the Mao era, the Communist Party provides a shady seaside resort at Beidaihe for politburo members to conduct their annual mid-year policy review. At this annual seaside retreat, Mainland China's President Jiang Zemin has encountered a series of thorny problems, from devaluation and relations with Taiwan, to the issue of Falun Gong, a kind of spiritual exercise. Faced with so many exceedingly difficult challenges, the Beidaihe retreat is never much of a vacation. Dramatically on 12 August, the state media reported a major policy address by Jiang Zemin, which mentioned neither Taiwan nor Falun Gong. Instead, he spoke about economic reform. Thus, we can look for clues about what was decided.

Painful economic transition

After Prime Minister Zhu Rongji's April trip to the United States, his position appeared to have weakened, because opponents blamed him for having promised too many concessions in exchange for China's membership of the World Trade Organisation (WTO). In addition, Mr. Zhu's policy of restructuring China's inefficient state-owned enterprises has led to rising unemployment. In spite of so many disadvantages, Prime Minister Zhu Rongji's way of reform does not appear to have been abandoned. On the contrary, Mr. Zhu has consolidated his power and position and has received President Jiang Zemin's endorsement.

Nevertheless, as the New York Times reported on 14 August, some Chinese experts believe that Mr. Jiang is "juggling so many balls in the air at one time," including issues such as Falun Gong, the crisis in the Taiwan Straits, economic reform and so on, draws public attention away from the most difficult problem - the crisis in the Taiwan Straits. However, this also implies that Mr. Jiang, facing opposition to reform within the Chinese leadership, has been strengthened by the fragile state of the economy. Under pressure, Mr. Jiang is forced to claim to the outside worldthat he is standing behind Prime Minister Zhu Rongji, to show that he endorses the WTO bid and the reform of state-owned enterprises. Mr. Jiang does not expect to see Mr. Zhu lose his job this summer, since this would deliver a negative signal abroad and would damage the fragile economy even further. As an article in The Times asks, "Who Wants Zhu's Job"- economic problems in China are too troublesome to deal with, so Mr. Zhu's job has become a "hot potato.?

According to many studies about China's economy, since 1996 the economy has entered a phase of decline and over-supply. The situation is getting worse and worse, especially the slowdown in domestic demand resulting from the Asian financial crisis and the massive unemployment which has led to social unrest due to the reform of state-own enterprises. The decline in domestic demand and the increasing unemployment rate will bring down economic performance even further, and cause a vicious circle. Moreover, when the problem of Taiwan becomes too serious to be a means of trading-off dissatisfaction with unemployment or the uneven distribution of income, the only choice for Mr. Jiang is to strive to solve the economic problem.

Since the second half of 1996, central government has lowered interest rates seven times in succession, implemented an expansive fiscal policy and a looser monetary policy, and has started to encourage loans to boost consumption, but unfortunately these policies do not work. Except for short-term growth in the stock market, however, there has been no stimulating effect on the fragile economy. The government is too exhausted to blow the bubble of a tired economy, because the problems of chronic over-supply and declining domestic demand are embedded in the economic structure.

Because of a series of loose policies on its economic development, the Chinese Government has continuously increased public spending. It is estimated that this year central government's fiscal deficit will be over 100 billion Renminbi (RMB--the currency of China). The volume of money issued will reach 150 billion RMB, and this will push the pressure for price increases. These adverse factors will become direct or indirect forces urging devaluation of the RMB.

The dilemma of devaluation

At the Beidaihe meeting the Chinese Government reiterated their determination to maintainthe currency's exchange rate against the US dollar, but the deterioration of economic performance due to structural problems has created pressure to devalue the RMB. In fact the implementation of an expansive fiscal policy and looser monetary policy will increase the pressure to devalue.

Over-supply due to intensive production in China has created a big pressure for the devaluation of RMB. Most countries in Asia are nervous about China devaluing the RMB. The Asian financial crisis in 1997 started from cutthroat competition, and caused the "race to the bottom? Eventually, the situation will result in "the race to devalue". Last year, mainland China's government promised not to devalue the RMB and this has won international respect with regard to the Asian financial crisis. However, as mentioned before, it is likely that China will find an excuse to devalue RMB if the economy faces more serious difficulties.

If China's economy undergoes a depression, forcing the RMB to devalue, the next crisis of global capitalism will be triggered. It is time to re-think the regime of global capitalism.

Written by Ting-feng Wu & Yi-chi Chen

Field Notes: The Myth of Gross Domestic Product

Since the mid-1980s, Mainland China has not only attracted huge foreign direct investment (FDI), but has also become the global factory. Thus, the essential principle of economic development in China relies heavily on the model whereby foreign capital exploits cheap labour. In such kind of development model, then Gross Domestic Product (GDP) or the Gross National Product (GNP) is regarded as the only measurement. When we use GDP to evaluate the economic performance, China's achievement is dazzling. However, this is a one-sided version of the development and growth story in China. Let's read the other version of development.

The Truth

Over the last twenty years, there have been two main 'engines' behind high growth rates in Mainland China. The first one is the export opportunities transferred from countries with high labour costsother is the capability and demand of the people set free from a command economy. In other words, the first engine implies that labour costs should be kept low to maintain export opportunities. Low wages and lack of labour standards to protect workers are twin brothers to enterprises. On the basis of this mentality, behind China's stunning economic growth are workers full of sad stories.

The second engine implies that all goods and services are given a price tag, and become commodities. People must pay for these commodities. For instance under housing reform, publicly-owned housing is being privatised and more housing loans are being made available for property investment. When people pay for their housing, all of this money will be continuously pushing up GDP. Beneath the brilliant GDP statistics, however, the burdens of workers and poor people remain unchanged, or even are heavier than those in the past.

Primitive accumulation

These two engines are already almost exhausted. Migrant workers from the poorer and farther provinces have been the basis for the next round of economic growth. Following the commodity economy penetrating the self-sufficient economies of rural areas, peasants are driven off the land and move to the urban areas. So now there are many "mobile" workers (former peasants) who are seeking work, roving around as modern nomads. The situation is more prevalent in the coastal provinces, which were the first to undergo economic reform and opening up.

CASE HISTORY: The story of Yingder County

Yingder County is one of the poorest counties in Guangdong Province. It is a rural area. Most of the people living in Yingder are peasants. The Guangdong Provincial Government suddenly wants to build a dam in Yingder. Their excuse is that in coming years there will be a lack of water-supply for the citizens in Guangzhou city, capital of Guangdong province.

Actually, the dam is not for the citizens, but for the industries in Guangdong. When the policy is enforced, most peasants living in Yingder county will be forced to move to another area. Dam building destroys self-sufficiency in the community. All of the goods for day to day living become commodities. Then the citizens must sell their labour to employers to earn money to buy the basic necessities. Thus nervous younger people leave their hometowns and join the labour market. It is the beginning only of workers?suffering stories.

In Karl Marx's terminology, the process is called "primitive accumulation." Through this process, cheap labour flows in a steady stream from rural areas to factories in coastal provinces. In an unequal labour market workers do not have any power to bargain with employers to improve their working conditions. Because workers can easily be replaced, the capitalists are not afraid of high turnover rates of workers. The high turnover rate of workers also implies that the working conditions are too terrible to bear. This is a common situation in factories. In this respect, we can regard the coastal provinces as a huge "Export Processing Zone." As Marx said, this process is one of "fire and blood."

Typically, when economic growth is high, policy mistakes or corruption can be absorbed or diluted by economic growth. However, when growth is low, existing problems will come to the surface leading to dissatisfaction among the people, especially the unemployed, causing social unrest. The export-led approach of development has dominated economic policy for twenty years in China, veiling the cost of development. Following the Asian financial crisis, China's economy is gradually becoming frail, and we can see a lot of suffering stories of workers in the coastal provinces. This moment seems to provide us with a good opportunity to analyse the development experiences in Mainland China. Workers and the poor totally bear the cost of development. There is no way for us to embrace such a development model without reservation. The lesson from the theory of Deng Xiaoping is not the "trickle down," but "trickle up."

Written by Yi-chi Chen

Yi-chi Chen is a researcher of the Hong Kong Christian Industrial Committee mainly on Taiwanese investment.

Ting-feng Wu,PhD candidate, Sociology, DongHai University, Taiwan