March 1, 2006

WHERE'S X WHEN YOU NEED HIM? (via Luciferous & Fred Jacobsen):

The Dark Side of China’s Rise: China’s economic boom has dazzled investors and captivated the world. But beyond the new high-rises and churning factories lie rampant corruption, vast waste, and an elite with little interest in making things better. Forget political reform. China’s future will be decay, not democracy (Minxin Pei, March/April 2006, Foreign Policy)

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

To most Western observers, China’s economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing’s brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption, and widening inequality. Dreams that the country’s economic liberalization will someday lead to political reform remain distant. Indeed, if current trends continue, China’s political system is more likely to experience decay than democracy. It’s true that China’s recent economic achievements have given the party a new vibrancy. Yet the very policies that the party adopted to generate high economic growth are compounding the political and social ills that threaten its long-term survival. [...]

ptimistic visions tend to ignore the neo-Leninist regime’s desperate need for unfettered access to economic spoils. Few authoritarian regimes can maintain power through coercion alone. Most mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military, and business interests. In other words, an authoritarian regime imperils its capacity for political control if it embraces full economic liberalization. Most authoritarian regimes know that much, and none better than Beijing.

Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives. The corporate reforms implemented since the late 1990s—designed to turn wholly state-owned firms into shareholding companies—haven’t made a dent in patronage. In large- and medium-sized state enterprises (ostensibly converted into shareholding companies, some of which are even traded on overseas stock markets), the Communist Party secretaries and the chairmen of the board were the same person about half the time. In 70 percent of the 6,275 large- and medium-sized state enterprises classified as “corporatized” as of 2001, the members of the party committee were members of the board of directors. All told, 5.3 million party officials—about 8 percent of its total membership and 16 percent of its urban members—held executive positions in state enterprises in 2003, the last year for which figures were available.

An incestuous relationship between the state and major industries can doom developing countries, and China is more susceptible than most. The combination of authoritarian rule and the state’s economic dominance has bred a virulent form of crony capitalism, as the ruling elites convert their political power into economic wealth and privilege at the expense of equity and efficiency. The state’s economic dominance preserves systemic economic inefficiency as scarce resources are funneled to local elites and bureaucratic constituencies. The World Bank estimates that, between 1991 and 2000, almost a third of investment decisions in China were misguided. The Chinese central bank’s research shows that politically directed lending was responsible for 60 percent of bad bank loans in 2001–02. The problem persists today. Chinese economic planners revealed in early 2006 that 11 major capital-intensive manufacturing industries were overproducing. For example, the country’s steel industry, the world’s largest, has 116 million tons (or about 30 percent) of excess capacity.

State enterprises are also miserably unprofitable. In 2003, a boom year, their median rate of return on assets was a measly 1.5 percent. More than 35 percent of state enterprises lose money and 1 in 6 has more debts than assets. China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans.

Party membership and business acumen do not often go together. Because of the party’s fixation with high growth, government officials are rewarded for delivering, or appearing to deliver, precisely that. This incentive structure fuels a massive misallocation of capital to “image projects” (such as new factories, luxury shopping malls, recreational facilities, and unnecessary infrastructure) that burnish local officials’ records and strengthen their chances of promotion. The results of these mistakes—gleaming office complexes, industrial parks, landscaped highways, and public squares—tend to impress Western visitors, who view them as further proof of China’s economic prowess.

The Chinese economy is not merely inefficient; it has also fallen victim to crony capitalism with Chinese characteristics—the marriage between unchecked power and illicit wealth. And corruption is worst where the hand of the state is strongest. The most corrupt sectors in China, such as power generation, tobacco, banking, financial services, and infrastructure, are all state-controlled monopolies. None of that is unprecedented, of course. Tycoons in Russia, after all, have looted the state’s natural resources. China, at least, boasts genuine private entrepreneurs who have built prosperous companies. But China’s politically connected tycoons have cashed in on China’s real estate boom; nearly half of Forbes’ list of the 100 richest individuals in China in 2004 were real estate developers.

Various indicators, pieced together from official sources, suggest endemic graft within the state. The number of “large-sum cases” (those involving monetary amounts greater than $6,000) nearly doubled between 1992 and 2002, indicating that more wealth is being looted by corrupt officials. The rot appears to be spreading up the ranks, as more and more senior officials have been ensnared. The number of officials at the county level and above prosecuted by the government rose from 1,386 in 1992 to 2,925 in 2002.

An optimist might believe that these figures reveal stronger enforcement rather than metastasizing corruption, but the evidence suggests otherwise. Dishonest officials today face little risk of serious punishment. On average, 140,000 party officials and members were caught in corruption scandals each year in the 1990s, and 5.6 percent of these were criminally prosecuted. In 2004, 170,850 party officials and members were implicated, but only 4,915 (or 2.9 percent) were subject to criminal prosecution. The culture of official impunity is thriving in China.

What’s worse, corruption is now assuming forms normally associated with regime decay. Corruption involving large numbers of officials used to be rare. Now it’s rampant. Regional data suggest that large-scale corruption rings account for 30 to 60 percent of all the cases of graft uncovered by authorities. In some of the worst instances, entire provincial, municipal, and county governments were found to be tainted. In Heilongjiang Province, a corruption scandal involved more than 400 local officials, including the former governor, the former organizational chief of the party’s provincial committee, a vice governor, the chief prosecutor, the president of the provincial high court, and eight of the province’s 13 party bosses. According to official reports, in Shenyang (the capital of Liaoning Province), Fuzhou (the capital of Fujian Province), and more than 30 other counties and prefectures, groups of senior local officials, including party chiefs and mayors, have been on the payroll of organized gangs involved in murder, extortion, gambling, and prostitution.

As ominous as the corruption itself is what these scandals are beginning to reveal about the government’s legitimacy. In their confessions, corrupt officials often blame their misdeeds on a loss of faith in communism. There is anecdotal evidence that senior party officials have taken to consulting fortune-tellers about their political careers. The ruling elite in China, it appears, is drifting and insecure. Fearful about what the future may hold, some officials do not want to wait even a few years to turn their power into wealth. In 2002, almost 20 percent of the officials prosecuted for bribery and nearly 30 percent of those punished for abuse of power were younger than 35. In Henan Province in 2003, 43 percent of local party bosses caught up in corruption were between 40 and 50 years old (as compared with 32 percent older than 50). China has seen its future leaders, and a disproportionate number of them are on the take. [...]

China’s neo-Leninist regime has formidable resources—but much more serious defects. State-directed investment, made to secure the political loyalty of key constituencies and advance personal careers, will prevent China from realizing its economic potential. The corruption of the state will likely deepen. The deterioration of the public health infrastructure and education systems will generate social tensions and mass alienation, thus eroding the party’s base of support and increasing its vulnerability to the economic or political shocks that will inevitably come.

China has already paid a heavy price for the flaws of its political system and the corruption it has spawned. Its new leaders, though aware of the depth of the decay, are taking only modest steps to correct it.

One of the peculiarities of China is that conservatives, who should most clearly comprehend its myriad problems -- from communism to corruption to demographic decline to ethnic and religious tension -- remain hypnotized by their faith that a market of a billion people has to be a good thing.

Posted by Orrin Judd at March 1, 2006 8:27 AM

neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital

I guess policy wonks get paid by the number of labels they can invent, but "neo-Leninism?"

How about plain old "fascist." The above is a near perfect dictionary definition, though I suppose a "central committee" is a slight structural difference.

The real threat isn't their economic might, but their increasing belligerence.

Posted by: Bruno at March 1, 2006 9:20 AM

And this should surprise you? Conservatives, outside of Wall Street, are fully aware of the problems.Inside the investment banking community, opinions are colored by greed and wishful thinking. Left-wing economists are looking for a new 'third way' and write off many of the defects cited. What's going on in China used to be called 'fascism' or state capitalism, the original 'third way.'

Posted by: Tom C.,Stamford,Ct. at March 1, 2006 9:24 AM

Conservatives uniformly pimped for most favored nation status and the rest.

Posted by: oj at March 1, 2006 9:30 AM


The problem is that they aren't fascist. Fascist regimes tend to allow considerable freedom in the business sector and refurbish traditional coun terweights to the state, eventually turning over power once the Left is crushed and there's a stable footing for democracy. China is socialist (or National Socialist).

Posted by: oj at March 1, 2006 9:32 AM

"China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans."

The US came reasonably close to this in 1985-1986, during the simultaneous collapse of farmland prices, commodities, and oil prices. An overheated economy on both coasts propped up the growth rate for a long time.

Posted by: Brad S at March 1, 2006 9:46 AM

China's money is as good as anyone else. Wanting to trade is not always the same as a poltical endorsement.

Posted by: Tom C.,Stamford,Ct. at March 1, 2006 9:48 AM

Treating China like a normal state is no different than treating the USSR or Nazi Germany like one.

Posted by: oj at March 1, 2006 9:53 AM


Hard to disagree.

Posted by: Tom C.,Stamford,Ct. at March 1, 2006 10:16 AM

I don't think China's actively making war, fomenting subversion or liquidating inconvenient populations.

Posted by: Ali Choudhury at March 1, 2006 10:24 AM

Where are its children? When is the vote? what right does it have to threaten Taiwan?

Posted by: oj at March 1, 2006 10:27 AM

From a manufacturing point of view, the company I work for has begun pulling assets out of China and taking them to Mexico, Brazil, and India primarily because the state sanctioned theft in China has finally begun to cut too deep into the bottom line to justify the savings of Chinese labor. As more interests are built up in Mexico and India corporations are learning that these alternatives are more profitable and reliable than doing business in China.

Posted by: Shelton at March 1, 2006 10:46 AM

"Where are its children?"

Same place as all the aborted children in the West?

"When is the vote?"

Well, it isn't a democracy, but then neither are a lot of countries.

"what right does it have to threaten Taiwan?"

It was part of the imperial Chinese domain (to which the PRC views itself as the legitimate successor) from 1683 to 1895 when the Japanese conquered it.

Posted by: Ali Choudhury at March 1, 2006 11:07 AM


Interesting. It's only a matter of time until the whole fraud comes crashing down. Hopefully, it won't be too bloody.

Posted by: Tom C.,Stamford,Ct. at March 1, 2006 11:11 AM

Ali, the Japanese did not conquer Taiwan; China ceded it to Japan -- spoils of war: Sino-Japanese War, 1895. True, Taiwan can be said to have been conquered twice in history, once by the original Han settlers from Fujian province; this would be analogous to America being conquered by the first European settlers. The second time was by the Nationalist Chinese circa 1947 (see 2-28 Incident). The presence of 2-28 Park in downtown Taipei symbolizes Orrin's earlier point about Fascists ceding power to democracy once Communism/tyranny is defeated, all while allowing economic freedom.

As for China actively making war, one need only consider Taiwan. Liquidating inconvenient populations? Besides the ocassionally inconveninet Han Chinese, Tibetans and Uighers spring to mind.

Posted by: Brother Qiao at March 1, 2006 11:36 AM

oj, is "X" a reference to "Dr X" the Chinese Alchemist in Neal Stephenson's "The Diamond Age"?

Posted by: S at March 1, 2006 11:40 AM

No, there's a mysterious commenter here, "X," who makes more sense about China than any analyst you'll ever read and way more than me. I can't get him to e-mail me or I'd just post stories like this with his comments instead of mine.

Posted by: oj at March 1, 2006 11:48 AM

S - The "X" presumably refers to George Kennan's pseudonym in his famous Foreign Affairs essay.

As for China making war, it is the motive force behind North Korean and Iranian nukes and is encouraging Iran and Syria to wage terrorist warfare against the US. It may not wish to confront us directly at the moment, but it's allied with those who are.

That said, trade with China is good, it promotes the elements in Chinese society (some in the government) who prefer cooperation to conflict, and ultimately weakens the socialist state.

We have to fight vigorously against nuclear proliferation among China's proxy states to avoid letting our military position become weak and vulnerable to terrorism.

Posted by: pj at March 1, 2006 11:49 AM


So it is perpetrating a Holocaust, is illegitimate politically, and is fomenting war, no?

Posted by: oj at March 1, 2006 12:26 PM

Yes, I remember that 'X' (who I would bet real money was Chinese, but I've been wrong before).


So what distinguishes those transitional fascists (Chile, Spain) from the nastier (Nazi, Ba'ath) sort? Theories of national-racial superiority?

Posted by: Mike Earl at March 1, 2006 12:27 PM

Franco, Pinochet and their authoritarian company were just reacting to the rise of nihilistic/rationalist parties and trying to preserve the countervailing institutions: church, monarchy, landed classes, military, etc. They considered themselves to be only dealing with an emergency, not establishing a new and permanent system, and looked forward to turning power back over ASARP.

Lenin, Hitler, Castro, Kim, Saddam and fellow totalitarians thought their regimes permanent and correctly recognized that every prior institution in society was an enemy that had to be crushed.

Posted by: oj at March 1, 2006 12:38 PM

I mostly agree with OJ on that. More than permanence, though, is conservativism vs. radicalism. The fascists OJ likes are the ones who are conservative, looking to preserve what is or recently was. The fascists OJ doesn't like are the radicals, the millenialists who will forge a "new order" among men.

Posted by: Annoying Old Guy at March 1, 2006 3:33 PM


They don't get into Nazi\Commie territory until they perpetrate an immensely destructive global war.

Posted by: Ali Choudhury at March 1, 2006 3:46 PM

Interesting; here's a big-L Libertarian (actually, in his own description, an anarchist) who agrees with OJ on this point. He recently referenced this older piece in an article where he opinied that a reemergance of European fascism, while regrettable and still avoidable, is by no means a worst-case scenario.

Posted by: Mike Earl at March 1, 2006 5:02 PM


They killed 60 million Chinese and untold koreans, tibetans, Vietnamese, etc.

Posted by: oj at March 1, 2006 9:01 PM

"China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans."

The US came reasonably close to this in 1985-1986, during the simultaneous collapse of farmland prices, commodities, and oil prices.

Add in to that in the US the effect of the tax reform, which removed a bunch of tax loopholes. This was a good thing, but a bunch of loans had been made to cover real estate that was really money-losing but a good value to own "for tax purposes." Remove the tax loopholes and suddenly that worthless real estate was just that. This certainly worsened the S&L crisis, even though it was a good thing for long-term economic growth by redirecting capital into things that actually made money.

Posted by: John Thacker at March 1, 2006 10:24 PM

If you allow the conquests of the Manchus (who were not Chinese) to constitute what territory China can legitimately occupy, then various nations are at risk. That was their excuse for invading Tibet. Now it's Taiwan. Next may be Mongolia, Korea, and parts of the Russian Far East as well. Perhaps after China swallows up Taiwan, like it has with Tibet, it can move on to one of the others. Defeating opponents in detail is a good military axiom.

And of course, China has historic claims to other places as well. I wonder when it will demand the resumption of tributary status of much of SE Asia.

If China has legitimate claims to Taiwan, then Vienna can reinstitute the Austro-Hungarian empire, the Turks can rule the Balkans, and Ukraine, Finland, the Baltics, and Poland should surrender their autonomy to Russia. If any of those countries made the demands that China does, the world would see them as an aggressor.

Posted by: Chris Durnell at March 2, 2006 3:48 PM