The Price of China's Economic Development

Power, Capital, and the Poverty of Rights

Zhaohui Hong

• Publisher: The University Press of Kentucky
• Year: 2015
• Print ISBN: 9780813161150
• eBook ISBN: 9780813161174
• Topic: Economics
• Subtopic: Chinese History
• Index: Economics

The People's Republic of China has experienced significant transformations since Deng Xiaoping instituted economic reforms in 1978. Subsequent leaders continued and often broadened Deng's policies, shifting the nation from agrarianism to industrialism, from isolation to internationalism, and from centralized planning to market-based economics. As the world strives to understand the nation's rapid development, few observers have comprehensively examined the social and cultural price of the economic boom for the majority of the Chinese people.

Zhaohui Hong assesses the sociocultural consequences of these reforms in this provocative study. He contends that modern China functions as an oligarchy or plutocracy ruled by an alliance of political power and private capital where the boundaries between the private and public sectors are constantly shifting. This "power-capital institution" based on three millennia of Confucian ideology and decades of Maoist communism exercises monopolistic control of public resources at the expense of civil society and social justice for the majority of citizens.

The Price of China's Economic Development urges policymakers to alter their analytic lens. While industrial and commercial development is quantitatively measured, Hong argues that social progress should be assessed qualitatively, with justice its ultimate goal and fair allocation of resources and opportunity as the main index of success. This sophisticated analysis introduces English speakers to the varied and significant work of contemporary Chinese scholars and substantially enriches the international dialogue.

I

The Power-Capital Institution
The Haves

1

Economy

The Marriage between Power and Money

One of the key consequences and prices of China’s economic development after 1978 was the emergence of the power-capital economy during the 1980s. This combination of political power and economic capital had taken shape by 2002, when Jiang Zemin’s China came to an end.¹ This new composite, superseding the key elements of the original forms of political power and economic capital, functions as a self-governing, self-determining, and self-regulating entity.

A distinctive phenomenon, China’s power-capital economy has increasingly engaged the attention of scholars in various academic fields, including economics, political science, sociology, and history. Collectively they have attempted to address a series of interrelated questions: What factors have contributed to the formation of such an unusual institution? What are the main explanations for its distinctive patterns and functions? What are the key differences between the power-capital economy, the planned economy, and a market economy? Is this power-capital economy evolving into a mainstream market economy or is it producing another barrier to further Chinese modernization? Meanwhile, as a logical product of the power-capital economy, a power-capital group has played an effective role in shaping and reshaping the power-capital economy. What are the economic impacts of the power-capital group? To what extent is the power-capital group intertwined with the power-capital economy? Is this power-capital group a main contributor or a key obstacle to Chinese economic development? China’s power-capital economy is a key reference in evaluating the price of China’s economic development and, furthermore, in understanding the possible direction of China’s development in the future.

MAPPING CHINA’S POWER-CAPITAL ECONOMY

One of the critical ingredients of the power-capital economy is, of course, power. In general, “the two essentials of power are motive and resource,” and “the two are interrelated. Lacking motive, resource diminishes; lacking resource, motive lies idle. Lacking either one, power collapses.”² In Maoist China (1949–1976), Chinese officials monopolized most of the country’s economic and political resources, but in light of the planned economy and tough regulations against corruption, they did not have sufficient motive to use their political resources to acquire economic capital.³ In Deng’s China (1978–1997), government officials’ incentives to get involved in economic activities increased dramatically as a result of the various reform policies. However, at that time the government generally and theoretically prohibited officials from engaging in profit-making businesses, thus discouraging any attempts to capitalize on political power to generate economic benefits, despite the fact that trade-offs between power and money were often secretly taking place. Those who had administrative authority engaged in a “gray economy” with a sophisticated margin that blurred the line between legal and illegal activities.⁴ Entering into post-Deng China (1997–), both motives and resources of “power marketization” have reached a historical zenith, which has in turn shaped the formation and development of the power-capital economy.⁵

In addition to motives and resources, another principle of power is that “power is first of all a relationship. . . . It is collective, not merely the behavior of one person.” Obviously, political power symbolizes power holders and economic capital represents power recipients while integrating both power and capital into a singular entity. Both have similar intentions to pursue their common goals. Therefore, “power deals with three elements in the process: the motives and resources of power holders; the motives and resources of power recipients; and the relationship among all these.” To be sure, the resources of power holders “must be relevant to the motivations of the power recipients.”⁶ For instance, if those officials who control the quota of rare materials in China desire to trade their power for money, their intention must correspond with the intentions of those who need the resources.

Understanding the concepts of power, power holder, and power recipient is helpful in searching for the origin of the power-capital economy. The formation and development of the power-capital economy are highly relevant to the transition from a state economy to a free-market economy, which is often characterized by a lack of effective means to regulate the distribution and use of state-owned resources. Consequently, the “visible foot” of power may successfully manipulate the “invisible hand” of the market.⁷ When the power-capital economy is dominant, the most important factor in economic competition becomes power rather than the market, resources, human capital, and technology. It is worth noting that in Maoist China, official rankings often determined the level of power, for the higher the office that one held, the more power one would have, but this system did not necessarily translate into economic profit. In post-Deng China, by contrast, official ranking has been replaced by power status, as one’s actual power rather than one’s official position serves as a key factor in market competition.⁸ Not all officials are necessarily rich, but those who are rich are almost invariably powerful. At present, those who were political elites under the old, planned economy have become economic elites under the power-capital economy.⁹

One of the main characteristics of the power-capital economy is its unfair process of capital accumulation.¹⁰ This kind of economy and its attending power-capital groups have both benefited from four historical opportunities that opened during China’s institutional transition in the 1980s and the 1990s. First, the dual-price system, which was designed to manage planned prices and market prices at the same time, opened the door wide to institutional corruption after 1985. The same goods do not always sell for the same price due to the two different pricing systems. The dual-price system was first applied to the electronics industry, such as color TVs, and it was extended to productive materials, such as iron and steel, before it affected monetary rates.¹¹ This “creative” price system produced revenue of more than 100 billion yuan in 1988 alone, but 70 percent of that was taken by individuals.¹²

Second, the reform of the property-share system and the stock market provided another opportunity to lend legitimacy to transactions between power and money. Many state-owned enterprises manipulated this reform by offering “a share of power” to local officials in order to get discounted land and facilities.¹³

Third, power-capital groups also benefited from the establishment of numerous joint-venture corporations involving state-owned enterprises and foreign capital since the early 1980s. Managers of state-owned enterprises usually undervalued their assets in return for receiving “free shares” from foreign companies as a form of bribery. This, of course, reduced the value of Chinese shares in the joint-venture firms. More than 5,000 of the 8,550 Chinese stated-owned enterprises did not go through any valuation of their capital before participating in the joint ventures, resulting in a loss of 46 billion yuan in 1992 alone. In this way, China’s state-owned enterprises lost as much as 500 billion yuan in assets between 1982 and 1992.¹⁴

Finally, land speculation delivered another “free lunch” to the power-capital groups between 1987 and 1992. Until February 1983, there were more than six thousand economic development districts above the county level, which occupied more than fifteen thousand square kilometers of land, most of which was arable. The result of the privatization of these districts was a reduction of a total of 10 million mu of the country’s arable land altogether. Most of this land was released by administrative power instead of through public bidding, and most of the released land became idle without effective utilization, which cost the state 80 billion yuan annually.¹⁵

In addition to understanding the role of the aforementioned policies in spawning and promoting the power-capital economy, it is also necessary to examine the membership of the power-capital groups. The officials who controlled resources, the management of public lands, the limited quotas of rare materials, and other valuable assets constituted one of the major power-capital groups. Benefiting from the monopolization of land, resources, and bank loans, their way of transferring their power to capital was through bribery and rent seeking. For instance, in 2000, due to bribery and embezzlement, China lost as much as 3.74 billion yuan in revenue, which accounted for 0.04 percent of GDP.¹⁶ Consequently, the power-capital groups have gradually spread from the upper class to the upper middle class, as demonstrated by exceptionally large amounts of “gray” income: 6,200 billion yuan in 2011, which was 12 percent of GDP. The growth of gray income represents the extensive scope of corruption in China.¹⁷

The second group consisted of those who held key positions in state-owned enterprises. Their main method of profit making was to take part of the assets of the state-owned enterprises and set up their own independent branches. While claiming or exaggerating the deficits of the state-owned enterprises on the one hand, they actually created huge profits for their own private companies on the other, with the use of state-owned enterprise property and resources. Up to the end of 2000, 51 percent of the “reformed” state-owned enterprises had successfully eliminated or abandoned their bank loans, which amounted to as much as 185.1 billion yuan, or 2.07 percent of GDP in 2000.¹⁸

The “agent of transaction” between power and money was a third power-capital group. This group was generally composed of retired government officials at all levels and some current officials’ relatives who abused their personal connections in order to change power into capital. The “bonus” that they received from providing this “middleman service” enabled them to strike a gold mine overnight.

The fourth group comprised those who worked in overseas state-owned enterprises. Engaging in extensive smuggling and using state funds for land speculation and stock investment, they established some independent overseas financial kingdoms. For instance, according to incomplete statistics, the annual value of smuggling ranged from 30 to 40 billion yuan, or 0.4–0.5 percent of GDP in 2000.¹⁹ Up to 2000, those who belonged to this power-capital group numbered about 45 million. By contrast, those who represented economic capital and intellectual capital numbered only 4.4 million and 7 million, respectively.²⁰

Generally speaking, these power-capital groups had three ways of connecting power and capital. The first was to make money by abusing existing power. The so-called one family with two systems model serves as an example: while one family member had political power, another one was involved in business, thus effectively linking power and capital. This reflected the family-centered nature of Chinese culture, which tended to integrate political and economic resources within a family.²¹

The second method was to seek power through monetary bribery, that is, businesspeople offering bribes in exchange for privileges while establishing their connections with government officials. Interestingly enough, many foreign companies had adapted to the Chinese way of cultivating connections by setting up a branch “public relations” office that engaged in intense competition with Chinese corporations for connection building.²² Indeed, “you can’t change China, China changes you.”²³

The third way was to seek money or power by pawning one’s knowledge. Some intellectual elites, taking advantage of their “intellectual capital,” successfully established their cooperation with “borrowed” political power. Ironically, this kind of intellectual rent seeking effectively improved the image of the power-capital institution by lending an aura of legitimacy to corruption, because intellectuals are generally perceived to be the “pure breed” of the society, with idealistic notions of justice, truth and morality.²⁴ As a result, China lost more than 14.5–14.9 percent of its GDP between 1999 and 2001 due to corruption and rent seeking conducted by the power-capital groups.²⁵

The aforementioned four historic developments provided unprecedented opportunities for rent seeking, and the four main groups formulated their own models for a convenient marriage between power and capital. The emergence of the power-capital economy is closely linked to corruption, which seems to be an integral part of Asian culture.²⁶ A common interpretation is that the absence of a system of checks and balances and the lack of freedom of the mass media render it impossible to counter Chinese corruption. Institutional corruption has been deemed a fatal factor in eroding the very foundation of the Chinese Communist government and in leading to its eventual collapse.²⁷ However, this conventional theory has been challenged by the fact that the Chinese Communist Party is in no danger of an imminent demise; on the contrary, it is enjoying an “economic miracle,” relative social stability, and political resilience.²⁸ Furthermore, it is evident that in democratic Japan, South Korea, India, Singapore, and the Philippines, corruption is far from being eliminated.²⁹ This fact alone indicates that corruption is not necessarily related to the type of political system, and political democracy may not be corruption-free. As such, it is necessary for us to seek more deeply seated cultural explanations for corruption and the power-capital phenomenon in China.

The extensive corruption ...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Dedication
• Contents
• Introduction. A Tale of Two Chinas: Power-Capital China and Rights-Deprived China
• Part I. The Power-Capital Institution: The Haves
• Part II. The Poverty of Rights: The Have-Nots
• Conclusion: The Linkage between the Power-Capital Institution and the Poverty of Rights
• Acknowledgments
• Notes
• Selected Bibliography
• Index